Government Liability Update

Filing Declaratory Relief Action Regarding Right to Compensation under Contract, without First Presenting Claim, Did Not Bar Contractor from Later Presenting Claims and Adding Damages Causes of Action

In Stronghold Engineering Incorporated v. City of Monterey, published November 3, 2023, the Sixth District Court of Appeal reversed a summary judgment granted to the defendant city.  The city and the plaintiff entered into a contract to renovate city property.  The parties signed a change order extending the contract term.  As part of the change order, the plaintiff agreed to waiver certain items of compensation for changes.  A dispute arose between the city and the plaintiff about interpretation of this language.  Without first presenting a claim for damages to the city, the plaintiff filed suit against the city with a single cause of action requesting declaratory relief.  The plaintiff requested a judicial determination that according to the change order the “City must compensate Stronghold for due compensable or excusable delays in time and money for any changes made by or caused by the City to the Project that negatively impact the critical path.”  The complaint did not pray for monetary compensation.  It alleged that because it did not seek damages, no claim was necessary.  The city demurred on the ground that no claim had been presented.  The trial court sustained the demurrer with leave to amend.  Multiple amendments followed.  While the suit was pending, the plaintiff presented three claims for damages to the city, arising out of disputes concerning change orders.  After the claims were rejected, the plaintiff filed a Fourth Amended Complaint containing causes of action for breach of contract, seeking damages, along with a cause of action for declaratory relief.  The trial court granted the city's motion for summary judgment.  The court granted summary judgment, reasoning that in the original complaint the declaratory relief action was, in essence, a claim for money or damages; and that the failure to present a claim before the lawsuit was filed barred the entire action.

The appellate court disagreed.  Although the original complaint mentioned "compensation," it sought only declaratory relief, not money or damages.  The original complaint did not seek or attempt to show entitlement to damages of any kind.  Toobtain a money judgment the plaintiff would need to further establish—either by change order or through a breach of contract action—that a particular delay was compensable under the contract and the first change order, as interpreted in the declaratory judgment.  Any future claim for money or damages based on the judicial interpretation the plaintiff sought in the declaratory relief action would require an advance claim for damages to the city.  That is what happened.  But those claims were not necessary for a request to the court to define the parties' rights and duties under a written agreement, versus a judgment that applies that interpretation to a specific factual scenario.  If the latter would potentially create an award of damages, it would require a claim.  Because the initial complaint did not require a claim, the court erred in sustaining the demurrer to it and then granting summary judgment.

Alter-Ego Theory of Liability May Be Applied to Public Entities

In Cam-Carson, LLC v. Carson Reclamation Authority, published August 23, 2022, the Second District Court of Appeal, Division 8 reversed dismissal of a lawsuit after demurrer.  The plaintiff, a commercial real estate developer, contracted with the defendant city and the defendant reclamation authority (a joint powers authority created to oversee environmental remediation on the subject site) to develop a 40-acer site.  The plaintiff alleged that the city and authority engaged in gross mismanagement and malfeasance that disrupted the project, causing damages to the plaintiff of over $80 million.  Under the agreement between the plaintiff and the authority, the authority was responsible for constructing remedial systems, build offsite improvements.  The authority allegedly mismanaged the project.  The plaintiff alleges causes of action for breach of contract against the authority, and against the city and a successor interest to a redevelopment agency as alter egos of the authority; and breach of the implied covenant of good faith and fair dealing against the city and authority, and the city defendants as alter egos.  The trial court sustained the city's and successor agency's demurrer to the complaint, on the ground that the city was not a party to the contract, and there were insufficient allegations of alter ego liability.

The appellate court ruled there were sufficient allegations of alter ego liability in the complaint.  The court rejected the argument that alter ego liability, as a matter of law, cannot apply to public entities.  The city formed the authority to pursue remediation of the side, and one of the goals was to protect the city from any liability that would arise to the landowner.  Under the alter ego theory, if government entities are operated with integrated resources in pursuit of a single business purpose, and one of them so dominated the finances, policies, and practices of the other that the latter had no separate existence of its own, but was merely a conduit through which the former conducted its business, then alter ego liability may exist if an inequitable result would otherwise follow.  The complaint alleged facts that, if proved, would allow a court to conclude that the elements of alter ego liability were met here.  The demurrer to the bad faith cause of action was error not only because it was based on the trial court's rejection of the alter ego theory, but because it did not consider the allegations that the development agreement, to which the city was a party, was breached.

Attorney Fees Cannot be Recovered under an Indemnity Provision That Is Void because the Agency Had No Authority to Enter Into It

In San Luis Obispo Local Agency Formation Commission v. Central Coast Development Co., published May 5, 2022, The Second District Court of Appeal, Division 6 reversed an award of attorney fees against the plaintiff agency.  A developer and a city applied to the plaintiff agency for a permit to annex a parcel of property.  The application included an indemnity agreement obligating the applicant to defend, indemnify, hold harmless and release the agency from any proceeding brought to attack the agency's action on the proposal.  The agency denied the annexation application.  The city and developer sued the agency.  The agency won.  It billed the city and developer for its attorney fees and costs.  They refused to pay.  The city sued the developer to recover fees and costs extended in the suit against the agency.  The agency cross-complained against the city and developer for fees and costs.  The cross-complaint was based on the indemnity provision.  The trial court granted the city and developer judgment on the pleadings against the agency.  The agency appealed.  While the appeal was pending, the city and developer moved for attorney fees based on Civil Code section 1717.  The trial court granted the motion and awarded fees and costs to the city and developer.  The appellate court then affirmed the trial court's decision regarding the  indemnity agreement.  It ruled that the indemnity agreement was not supported by consideration and that the agency had no statutory authority to impose an indemnity agreement as a condition of the agency's statutory duty to consider the application.  The agency then appealed the order granting attorney fees. It asserted that the indemnity agreement is void as an an illegal and ultra vires contract.

The appellate court agreed.  When a public agency is not authorized to make an agreement, the agreement is void and the public agency may neither enforce nor be liable on the contract.  It follows that the agency is not liable for attorney fees based on section 1717.  Section 1717 is based on contract.  The result should be no different than with contracts that are void for illegality.

Because State Law Did Not Clearly Establish Contractor Had Property Interest in Municipal Contract, City Attorney Entitled to Qualified Immunity to Due Process Claim for Recommending Ending Contract

In DePaul Industries v. Miller, published September 28, 2021, the 9th Circuit Court of Appeals reversed denial of qualified immunity to a defendant city attorney in a suit under 42 U.S.C. section 1982.  The plaintiff contracted with the city to provide unarmed security at city buildings.  The plaintiff was a qualified nonprofit agency for persons with disabilities, or QRF, under an Oregon law that requires cities to contract with QRFs in certain circumstances.  An employee of the plaintiff sued the city for alleged retaliation, and the plaintiff declined to defend and indemnify the city under an indemnification clause in the contracts.  When the contracst ended, the city elected to modify its security services by requiring that the security service employees be armed.  The plaintiff was the only QRF in the county providing unarmed security services.  The city decided not to renew the plaintiff's contracts, and awarded them to another security service.  The plaintiff sued the city and various city officials, including the city attorney, in their individual and official capacities.  One claim alleged the city attorney violated the plaintiff's substantive and procedural due process rights.  The city attorney moved for summary judgment based on qualified immunity.  The district court decided that the plaintiff had a clearly established property interest in its contracts with the city, and that a reasonable jury could conclude that the city used a pretext to cancel the contracts.

The 9th Circuit held that the district court erred, because the plaintiff's property interest in the contracts was not clearly established.  The Oregon QRF statute is not clear about whether it creates a protected property interest in annually renewable city contracts.  No Oregon court had considered the question.  Two cases cited by the district court were district court opinions that did not address QRFs at all.  The 9th Circuit noted its hesitancy to rely on district court decisions for the qualified immunity analysis.  Because the plaintiff did not have a clearly established property right to be protected by due process, the city attorney was entitled to qualified immunity.

City Did Not Waive Claim Timeliness by Offering Rate Refund Program

In Daneshmand v. City of San Juan Capistrano, ordered published February 16, 2021, the Fourth District Court of Appeal, Division 3 affirmed judgment in favor of the defendant city.  In a prior lawsuit, the trial and appellate court ruled that tiered water rates in effect February 1, 2010 through June 30, 2014 were not proportional to the cost of providing water service.  On June 16, 2015, the city approved a water rate fee refund program under which ratepayers who paid more than the water rate within their class between August 28, 2013 and June 30, 2014 would receive a partial refund of their rate.  In exchange, the recipient signed a release of further refund claims against the city.  A first claim for damages by plaintiffs was served on the city September 30, 2015, and a second on December 4, 2015.  The claims were denied as untimely and not within the refund program.  The parties stipulated to a bench trial to determine whether the one-year claim presentation deadline in Government Code section 911.2 and the statute of limitations barred the plaintiffs' claims.  The court determined the claims were untimely, barring the plaintiffs' claims.

The appellate court ruled that the trial court's findings that the claims were untimely was supported by substantial evidence.  Because a claim for damages from overpayment ordinarily commences when the overpayment is made, the one-year deadline for the claims started running on the due date for the last invoice reflecting the water rates--August 19, 2014.  The deadline for the claims was therefore August 19, 2015.  The claims were presented after that date.  Although the plaintiffs raised the issue of equitable tolling on appeal, they forfeited the issue by not raising it in the trial court.  The city did not waive the one-year claim deadline by allowing ratepayers to participate in the refund program until October 1, 2015, or by approving individual claims that were presented without participating in the program.  Waiver requires either an actual intention to relinquish a right, or conduct so inconsistent with any intent to enforce the right as to induce a reasonable belief that it has been relinquished.  Substantial evidence supported the trial court's conclusion that the city did not intend to relinquish its right to bar late claims that were outside the refund program; its stated intent in initiating the program was to "do the right thing."  The city did not act inconsistently with its rights; it approved claims only to the extent they sought a refund for overcharges during the same period covered by the refund program (August 2013 through June 2014) and denied claims that sought refunds outside that period.  By initiating the refund program, the city extended the time to seek refunds in exchange for the waiver of further claims; when it received individual claims after the October 1, 2015 cutoff, it rejected them as untimely.  The trial court correctly determined that the refund program did not reopen the time to present claims, because it was separate from the standard process by which claims were served and resolved.

 

Conflict-of-Interest Statute Did Not Prevent Independent Contractor from Participating in Both Preconstruction Services and Construction

In California Taxpayers Network v. Taber Construction, Inc., published November 27, 2019, the First District Court of Appeal, Division 2 affirmed summary judgment in favor of the defendant contractor in a lawsuit brought under Government Code section 1090.  A school district intended to hire a firm to complete a project to modernize the HVAC for multiple schools.  The project would be performed in two stages.  In the first stage, the firm would enter into a preconstruction services agreement to work with district staff, the program manager, and the architect to provide a guaranteed maximum price for the project.  In the second stage, the district would enter into a lease/leaseback agreement with the contractor.  After the contractor entered into the preconstruction services agreement and then the lease/leaseback agreement, the taxpayers group alleged that the contractor had violated section 1090 because its agreements in the first stage precluded it from entering into the contract in the second stage.

The court of appeal ruled that the trial court properly rejected that interpretation of section 1090.  An independent contractor may violate section 1090, but only if it was entrusted with acting on behalf of the government.  For instance, a person who was hired as an officer or employee with the responsibility of contracting on behalf of an entity and then rehired as an independent contractor with the same responsibilities would be subject to section 1090.  But participation in the preconstruction services agreement phase did not preclude the contractor from entering into the lease/leaseback agreement in the second phase.  The contractor was not hired to engage in or advise on public contracting on behalf of the school district.  The district did not hire the contractor to choose a firm to perform the second phase contract; it hired the contractor to perform both phases.  That did not violate section 1090.

Conflict-Of-Interest Statute and Competitive-Bidding Statutes Apply to Personal Services Contracts between Public Entities and Independent Contractors

In Strategic Concepts, LLC v. Beverly Hills Unified School District, published May 10, 2018, the Second District Court of Appeal, Division 6 reversed a judgment, entered after jury trial, that awarded the plaintiff LLC millions in damages for breach of contract. A district employee who administered the planning, construction, and maintenance of the District's school facilities persuaded District officials to change her position from employee to consultant.  She entered into a contract with the District under which her duties remained the same, but her $113,000 salary was replaced by a $130 per hour rate with a maximum compensation of $170,000 per year.  The maximum was not enforced, and the LLC she formed was paid $1.3 million per year in two consecutive years.  The contract was replaced by another one with no limit on compensation.  She pushed through a bond measure that named her company as a consultant, with no other bids taken.  The District then took the position that the contract was void under Government Code section 1090, which forbids conflicts of interest.  The LLC's founder was prosecuted for a criminal violation of section 1090 and found guilty, but her conviction was reversed on appeal, with the court ruling that for purposes of criminal law section 1090 does not apply to independent contractors.  The LLC and its founder sued the District.  The District cross-complained, asserting section 1090 and violation of the competitive-bidding statutes at Government Code section 4525 et seq.  The trial court granted nonsuit on the section 1090 claim, concluding the statute did not apply.  The founder withdrew as plaintiff, leaving the LLC.  The court instructed the jury that section 1090 did not apply.

The appellate court concluded that section 1090 did apply.  In People v. Superior Court (Sahlobei) (2017) 3 Cal.5th 230, the California Supreme Court held that the term "employees" in section 1090 included independent contractors with duties similar to public employees.  The trial court therefore erred in granting nonsuit on the section 1090 claim.  The trial court also failed to give the District's requested instruction on the competitive bidding statutes.  That was also error.  Finally, because the contract with the LLC included a termination-for-convenience clause, if the LLC can prove breach of contract on remand, its damages are limited to compensation for services performed and expenses incurred to the date of termination, lost profits for 120 days after termination, and the equivalent of three months' payment.

Although California Public Employment Is Statutory Rather Than Contractual, Public Employees May Bring Federal Claims for Contract-Related Discrimination

In Flores v. City of Westminster, published October 11, 2017, the 9^th Circuit Court of Appeals affirmed a judgment after jury trial holding current and former police chiefs liable for alleged racial discrimination and retaliation under 42 U.S.C. section 1981.  Section 1981 prohibits discrimination in the making and enforcement of contracts by reason of race, including color or national origin differences.  The plaintiff officers alleged that they were discriminated and retaliated against because they were Latino.  The defendant chiefs argued that the district court should have dismissed the section 1981 claims, because under California law the employment relationship between the state and its civil service employees is governed by statute, not contract.  They further argued that they could not be held liable under section 1981 because the employment relationship was between the defendant city and the officers, rather than between the chiefs and the officers.

In an issue of first impression, the 9^th Circuit concluded that section 1981 applies to California public employment.  California state courts have established that a public employer who performs services while a statutory provision creating terms and conditions of employment is in effect obtains a right, protected by the contract clause, to require the public employer to comply with the prescribed condition.  California law therefore weighs in favor of allowing public employees to bring section 1981 claims.  Further, reading California law to bar all public employees from bringing section 1981 claims would hinder the preeminent federal interest in preventing racial discrimination.  The chiefs’ argument that any section 1981 claim lies only against the city fails because case law permits individual liability under section 1981.

Contractor's Attempt to Enforce Alleged Oral Contract with County Through Promissory Estoppel Lacks any Reasonable Basis, Justifying CCP 1038 Fee Award

In Ponte v. County of Calaveras, ordered published August 15, 2017, the Third District Court of Appeal affirmed both a summary judgment granted to the defendant county and an award of attorney fees to the County under Code of Civil Procedure section 1038.  The plaintiff contractor alleged that he performed work on a land failure on county property under an oral agreement with a county employee.  County ordinances required public contracts to be put out for bid and to contain a fixed payment.  The alleged oral contract met neither criterion.  The plaintiff contended he had a cause of action against the county for promissory estoppel, and that there is an emergency exception to the county's contractual requirements.  He further alleged that he should not be subjected to a fee award under section 1038 because under the circumstances he believed in good faith in his claims.

The appellate court rejected these arguments.  Promissory estoppel cannot be asserted against a public entity to bypass rules that require contracts to be in writing or be put out for bids, rules that reflect a public policy to preclude oral contracts or other exposures to liability, including claims of promissory estoppel.  The plaintiff was unable to identify any authority supporting his argument that emergencies provide an exception to this rule, or that private parties may declare a public emergency.  Nor was this an exceptional case that would warrant applying estoppel against a public entity in the interests of justice, since applying estoppel would undermine the public contract rules set forth by ordinance, designed to prevent oral contract claims.  The award of fees under section 1038 was proper, because to avoid paying fees under section 1038 when a public entity wins summary judgment and moves for fees, a plaintiff must show that the action was brought or continued with both subjective good faith and objective reasonable cause.  The plaintiff argued that he believed in good faith that he should be paid for his work.  But he failed to show that any reasonable attorney would have thought his claim tenable.  He therefore failed to show objective reasonable cause. 

A Guilty Plea Is Not a Contract with the Prosecuting County

In Brown v. County of Los Angeles,  published August 29, 2014, the Second District Court of Appeal, Division 4, affirmed the dismissal on demurrer of a "contract fraud" cause of action against the defendant county.  In 1987, the plaintiff, allegedly 16 at the time, pled guilty to second degree murder.  In 2012, he filed a civil suit against the county, contending that the plea bargain was a contract, that he was coerced into signing, and that the "contract" violated Civil Code sections 38 and 1556 (which bar minors and persons "entirely without understanding" from contracting).  He sought millions in damages, and a declaration that his plea was void.  The court held that civil actions may not be used to challenge the validity of criminal judgments.  Further, civil statutes that govern contracts in general do not govern plea bargains.  The Penal Code and due process govern plea bargains.