The California Supreme Court has denied petitions to review Davis v. Fresno Unified School District (2015) 237 Cal.App.4th 261. As a result, the Court of Appeal decision will remain good law in California.
On June 1, 2015, a California Court of Appeal held, for the first time, that for a lease-leaseback transaction to be valid, the leases must be “genuine.” The Court explained that a “genuine” lease is one that contains a financing component and a lease term, during which the district occupies and uses the improvement.
Additionally, the Court found that Government Code section 1090’s prohibition on conflicts of interest applied to the lease-leaseback transaction, and that this prohibition could be extended to a corporate consultant retained by a public entity. Thus, the taxpayer could allege that the contractor had acted in violation of the prohibition.
The Fresno Unified School District (District) and the lease-leaseback contractor, Harris Construction Co., Inc., filed petitions for review with the California Supreme Court. The District, the California Association of School Business Officials, and the Associated Builders and Contractors of San Diego, Inc. filed requests for an order directing “depublication” of the Davis opinion.
On August 26, 2015, the California Supreme Court denied both petitions to review the Davis decision and denied the three requests for an order directing depublication of the Davis opinion.
The California Supreme Court’s denial of both the petitions for review and the requests for depublication means that the Davis opinion can be cited as precedent. Currently, however, there are other lease-leaseback actions making their way through the courts. It is likely that these other actions, especially those in different appellate districts, may result in conflicting rulings, at which point the California Supreme Court may decide to consider the issues presented in Davis.
It should be noted that the Davis decision only addresses the issue of whether the plaintiff, Davis, has stated legal causes of action. Now that the decision on those questions is final, the case shall proceed to the discovery phase in the trial court where, ultimately, the factual issues will be adjudicated. In view of other recent developments in the law, particularly with regard to the conflict of interest issue (please see our recent bulletin, Vol. 2015, No.11), it is unclear whether the plaintiff will prevail on his claims.
Related: AB 975 Set Aside for Now
AB 975 is a bill aimed at protecting school construction contractors from complete disgorgement of payment if their lease-leaseback transaction is declared void. Specifically, the bill provides for the contractor to receive the reasonable cost of labor, equipment, materials and services furnished before the date when the transaction has been declared void. As of August 25, 2015, AB 975 has been set aside and will not be pursued during this legislative session.
If you have any further questions, please contact a DWK attorney.
For more information regarding conflict of interest, please see “Court Affirms School District Consultants Are Subject To Conflict Prohibitions.”
For more information regarding lease-leaseback, please see “Financing Now Required for Lease-Leaseback Agreements.”