Earlier this week, the First District Court of Appeal published its opinion in California Taxpayers Action Network v. Taber Construction, Inc. (May 2, 2017, A145078) 2017 [WL 1684123] (“Taber”). Taber is a continuation of the legal battle over lease-leaseback agreements for construction of school facilities that has played out in California appellate courts since 2015. The decision addresses two critical issues affecting the validity of lease-leaseback agreements: financing and conflicts of interest.
The lease-leaseback project delivery method is authorized by Education Code section 17406. This method permits a school district to lease land to a developer, and the developer constructs or improves a facility on the site. After the construction is complete, the developer leases the facility back to the school district until the lease payments are paid.
In Taber, a group of taxpayers challenged a lease-leaseback agreement between a school district and developer. The taxpayers alleged that the agreement was invalid because it did not “provide for financing of the school facility project over time.” (Taber, supra, [2017 WL 1684123], at *2.) Additionally, the taxpayers alleged that the developer’s prior preconstruction services for the school district created a conflict of interest that prohibited the developer from later being awarded the lease-leaseback agreement. The trial court dismissed the taxpayers’ suit for failure to state a claim. The taxpayers appealed the dismissal.
The Court of Appeal affirmed the dismissal of the taxpayers’ claim challenging the validity of the lease-leaseback agreement for lack of financing, but reversed dismissal of the conflict of interest claim.
The Taber court acknowledged a split among California appellate courts. In Davis v. Fresno Unified School District (2015) 237 Cal.App.4th 261, 284, the Fifth Appellate District reasoned that the primary purpose of Education Code section 17406 was to provide financing for school construction and, therefore, a lease-leaseback agreement “must include a financing component.” One year later, in McGee v. Balfour Beatty Construction, LLC (2016) 247 Cal.App.4th 235, 244, the Second Appellate District rejected the addition of a financing requirement because it was “not based on the plain language of the statute.”
The Taber court sided with McGee, explaining that Davis “went far beyond the language of section 17406 in adopting ill-defined additional factors to determine whether the leaseback portion of a lease-leaseback agreement is a ‘true’ lease and imposing a requirement that the contractor provide financing for the project.” (Taber, supra, [2017 WL 1684123], at *6.) Therefore, the taxpayers’ argument that the lease-leaseback agreement was invalid because the agreement lacked financing failed, since this was not a requirement of the statute.
- Conflict of Interest
Both Davis and McGee held that an independent contractor providing preconstruction services to a school district could constitute an “employee” of the district, under Government Code section 1090, for the purpose of evaluating conflicts of interest in a civil case. (Davis, supra, 237 Cal.App.4th at pp. 300-01; McGee, supra, 247 Cal.App.4th at p. 249.) The Taber court agreed with this analysis. The taxpayers had alleged that, while providing preconstruction services, the developer was in a position to influence the school district’s decisions on the project, including on the subsequent lease-leaseback agreement. Although the Court of Appeal did not reach whether the allegations were true, the allegations alone were sufficient to state a claim of conflict of interest so the Taber court reversed the trial court’s dismissal.
Since no appellate district can overrule another appellate district, the split of authority will remain unless this issue is taken up and resolved by the California Supreme Court. A California school district considering using the lease-leaseback project delivery method should be aware that its county’s superior court may continue to apply Davis and require a financing component—and may do so no matter where the superior court is located.
As for the conflict of interest issue, this is now the third appellate decision to hold that conflict of interest prohibitions can apply in at least some instances to an independent contractor providing preconstruction services to a school district. However, this may not apply to future lease-leaseback agreements because the current version of Education Code section 17406 gives school districts and developers the ability to avoid conflicts of interest, namely including preconstruction services in the lease-leaseback agreement. (Ed. Code, § 17406, subd. (b)(1).)