Davis v. Fresno Unified School Dist. ( 2023 )

IN THE SUPREME COURT OF
CALIFORNIA
STEPHEN K. DAVIS,
Plaintiff and Appellant,
v.
FRESNO UNIFIED SCHOOL DISTRICT et al.,
Defendants and Respondents.
S266344
Fifth Appellate District
F079811
Fresno County Superior Court
12CECG03718
April 27, 2023
Justice Jenkins authored the opinion of the Court, in which
Chief Justice Guerrero and Justices Corrigan, Liu, Kruger,
Groban, and Evans concurred.
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
S266344
Opinion of the Court by Jenkins, J.
Plaintiff Stephen K. Davis sued the Fresno Unified School
District (the District) and Harris Construction Co., Inc. (the
Contractor), alleging that defendants entered into a lease-
leaseback construction agreement in violation of various
statutes and common law rules. The lawsuit raises numerous
legal questions and has a lengthy procedural history. However,
we granted review to address a single question: “Is a lease-
leaseback arrangement in which construction is financed
through bond proceeds rather than by or through the builder a
‘contract’ within the meaning of Government Code section
53511?” We conclude that the specific lease-leaseback
arrangement at issue here is not a “contract[]” within the
meaning of Government Code section 53511 (section 53511). A
local agency contract is subject to validation under section 53511
if it is inextricably bound up with government indebtedness or
with debt financing guaranteed by the agency. To satisfy this
standard, the contract must be one on which the debt financing
of the project directly depends. The lease-leaseback
arrangement at issue here does not satisfy this standard
because the underlying project was fully funded by a prior sale
of general obligation bonds, and payment of the debt service on
the bonds was from ad valorem property taxes. Therefore,
payment did not depend on the lease-leaseback arrangement or
even on completion of the project. In light of this conclusion, we
affirm the judgment of the Court of Appeal.
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
I. FACTS
On March 6, 2001, voters within the District approved
Measure K, authorizing the District to sell bonds to raise money
for improvements to school facilities. On November 2, 2010,
voters within the District approved Measure Q, authorizing
additional bonds for the same general purpose. The ballot
measures were broadly worded, listing hundreds of projects at
numerous school sites. They did not require the District to
complete all the listed projects, and they did not specify details
about individual projects or how the necessary agreements with
architects and builders would be structured. On October 13,
2011, the District sold $55,570,914.90 in Series G general
obligation bonds (Measure K) and $50,434,849.50 in Series B
general obligation bonds (Measure Q). To pay the debt service
on the bonds, the District pledged receipts from certain levies of
ad valorem taxes on property within the District. The total
purchase price for the Series G bonds was $55,570,914.90. The
total purchase price for the Series B bonds (which included a
larger original issue premium than the Series G bonds) was
$52,148,790.01. Therefore, on the closing date of October 13,
2011, the District received nearly $108 million in immediately
available funds. For federal tax reasons, it was advantageous
to the District to proceed quickly with the planned school facility
improvements, spending the money received from sale of the
bonds.
In September 2012, the District entered into a
$36.7 million deal with the Contractor for the construction of a
new middle school on land the District owned at 1100 East
Church Avenue in Fresno. The deal was structured as a lease-
leaseback arrangement under Education Code section 17406.
Under that arrangement, the District leased its land to the
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Opinion of the Court by Jenkins, J.
Contractor for $1 (the Site Lease). The Contractor then
constructed the new school facilities on the land and leased the
land and the new facilities (still under construction) back to the
District (the Facilities Lease). The Facilities Lease obligated the
Contractor to build the new school facilities in accordance with
“Construction Provisions” that were detailed in a 56-page
document attached as an exhibit to the lease, and it obligated
the District to make monthly “Lease Payments” that reflected
“the value of the construction service work performed” during
the month in question, less a five percent “retainage.” 1 The
Contractor was obligated to complete the construction within
595 days, and the total price for the project was not to exceed
$36,702,876. Under the agreement, the final lease payment had
to be made within 35 days of the recordation by the District of a
“Notice of Completion,” indicating completion of the
construction, and both the Site Lease and the Facilities Lease
terminated once that final lease payment was made, with the
District gaining title to the site and the newly constructed
facilities.
The Site Lease and Facilities Lease were both executed on
September 27, 2012, and the notice of completion was recorded
by the District on December 4, 2014, stating that the work had
been completed on November 13, 2014.
1
The withholding of “retainage” until construction of the
entire project is complete is a standard practice in the
construction industry. Retainage is usually five or 10 percent of
the amount otherwise due. (See United Riggers & Erectors, Inc.
v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082, 1087–1088;
Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28,
55; Yassin v. Solis (2010) 184 Cal.App.4th 524, 533–534;
McAndrew v. Hazegh (2005) 128 Cal.App.4th 1563, 1566–1567.)
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Opinion of the Court by Jenkins, J.
II. PROCEDURAL HISTORY
Plaintiff owns real property and pays taxes within the
Fresno Unified School District. In addition, plaintiff is the
president of Davis Moreno Construction, Inc., a Fresno-based
contractor that has handled construction projects for school
districts. (See Davis v. Fresno Unified School Dist. (2015) 237
Cal.App.4th 261, 273, fn. 4 (Davis I).) Plaintiff brought this
action on November 20, 2012, asserting that the construction
arrangement between the District and the Contractor was
invalid and seeking, among other things, an order requiring the
Contractor to pay back to the District money payments it had
received under the Facilities Lease. On March 19, 2013,
plaintiff filed a first amended complaint, which is the operative
complaint. The trial court sustained demurrers to that
complaint, entered judgment for defendants, and plaintiff
appealed. The Court of Appeal then reversed and remanded.
After further proceedings, the trial court eventually granted
defendants’ motion for judgment on the pleadings, a motion
asserting that the lawsuit became moot when the construction
of the new school facilities was completed and the leases
terminated. Plaintiff again appealed, and the Court of Appeal
again reversed. The Court of Appeal’s second judgment of
reversal is now before us on review.
The main issue in the second appeal is whether plaintiff’s
lawsuit became moot when the leases terminated. The trial
court agreed with defendants that the lawsuit was exclusively a
reverse validation action brought under the validation
provisions of the Code of Civil Procedure (see Code Civ. Proc.,
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Opinion of the Court by Jenkins, J.
§ 860 et seq.),2 and consistent with settled law, the trial court
ruled that a reverse validation action — which is a proceeding
in rem — becomes moot when the contract at issue has been
fully performed (see Wilson & Wilson v. City Council of Redwood
City (2011) 191 Cal.App.4th 1559, 1579–1581). The trial court
rejected plaintiff’s argument that the lawsuit was not moot
because the validation statutes were only one of several theories
of standing under which he was bringing his lawsuit. The trial
court reasoned that when the validation statutes apply, they are
a party’s exclusive remedy. (See Code Civ. Proc., § 869; see also
Friedland v. City of Long Beach (1998) 62 Cal.App.4th 835, 849–
850 (Friedland).)
On appeal, plaintiff argued that the first amended
complaint “was both an in rem validation action and an in
personam disgorgement action based upon multiple legal
theories,” and plaintiff asserted that the action was not moot as
to his disgorgement claims. The Court of Appeal agreed,
reversing the trial court. (Davis v. Fresno Unified School Dist.
(2020) 57 Cal.App.5th 911, 941–942 (Davis II).)
In support of its conclusion that plaintiff’s action was not
moot, the Court of Appeal first considered whether the operative
complaint had adequately alleged an in personam taxpayer
action (Code Civ. Proc., § 526a) in addition to an in rem
validation action (Code Civ. Proc., § 863). (See Davis II, supra,
57 Cal.App.5th at pp. 930–936.) As the Court of Appeal noted,
the complaint refers to the lawsuit as an “in rem proceeding”
based on Code of Civil Procedure section 863, but it also refers
to the lawsuit as a “suit filed by a taxpayer,” and it requests in
2
For convenience, we collectively refer to these provisions
of the Code of Civil Procedure as “the validation statutes.”
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Opinion of the Court by Jenkins, J.
personam relief that is not available in an in rem proceeding.
Accordingly, the Court of Appeal concluded that plaintiff had
adequately alleged standing to sue based on both a reverse
validation theory and a taxpayer theory. (Davis II, at pp. 933–
936.) The Court of Appeal then proceeded to consider whether
the validation statutes were plaintiff’s exclusive remedy,
precluding recovery on plaintiff’s taxpayer theory. Rather than
addressing that issue on the merits, however, the court assumed
that the validation statutes would be plaintiff’s exclusive
remedy if they were applicable, and it held that the validation
statutes did not apply. (Id. at pp. 939–942.)
As the Court of Appeal explained, the validation statutes
establish a general procedure for testing the validity of public
agency actions, but the validation procedure is not available
unless some other statute authorizes its use in a particular
context. The Court of Appeal noted that the sole basis for
defendants’ contention that the validation statutes applied in
this case was Government Code section 53511. (Davis II, supra,
57 Cal.App.5th at p. 939.) The court examined section 53511,
and it rejected defendants’ argument that the language of that
section encompassed the lease-leaseback arrangement at issue
here. (Davis II, at pp. 940–941.) Absent a statutory basis to
support a reverse validation claim, the Court of Appeal
concluded that plaintiff could not assert a viable claim under the
validation statutes — which of course meant that those statutes
could not be plaintiff’s exclusive remedy. (Id. at p. 941.)
Having found the validation statutes inapplicable, the
Court of Appeal concluded that plaintiff’s taxpayer action (Code
Civ. Proc., § 526a) should have survived defendants’ motion for
judgment on the pleadings. (Davis II, supra, 57 Cal.App.5th at
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pp. 941–942.) It therefore reversed the trial court’s judgment.
(Id. at pp. 944–945.)
We granted defendants’ petitions for review. We conclude
that the lease-leaseback arrangement at issue here is not a
“contract[]” within the meaning of section 53511, and therefore
we agree with the Court of Appeal that the validation statutes
do not apply. Accordingly, we affirm the judgment of the Court
of Appeal.
III. DISCUSSION
Our analysis begins in part III.A., with background
information regarding the use of lease-leaseback arrangements
to construct school facilities in California. Then, in part III.B.,
we discuss the validation provisions of the Code of Civil
Procedure. In part III.C., we turn to section 53511, concluding
that the lease-leaseback arrangement at issue here does not
qualify as a contract for purposes of section 53511, and therefore
the validation statutes do not apply. Finally, in part III.D., we
reject defendants’ arguments to the contrary.
A. History of Lease-leaseback Construction in
California
The state Constitution imposes restrictions on local
government debt. Specifically, such debt may not exceed the
total annual income and revenues of the local entity in question
without satisfying specified voter-approval requirements. (See
Cal. Const., art. XVI, § 18, subd. (a).) This court held, however,
in City of Los Angeles v. Offner (1942) 19 Cal.2d 483, that the
cumulative amount payable under a multiyear lease is not a
debt for purposes of the Constitution’s debt limitation —
provided, that is, that the local entity receives appropriate
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
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consideration in each year for the lease payments it makes
during that year.
In 1957, 15 years after our decision in City of Los Angeles
v. Offner, supra, 19 Cal.2d 483, the Legislature enacted the
provision of the Education Code that is at the heart of this
proceeding, authorizing school districts to use lease-leaseback
arrangements as a way of financing the construction of school
facilities. (See Stats. 1957, ch. 2071, § 1, pp. 3683–3687.) The
lease-leaseback provision is now codified in Education Code
section 17406 (section 17406).3 Under section 17406, a school
3
As of the date defendants entered into the lease-leaseback
arrangement at issue here, former section 17406 provided: “(a)
Notwithstanding Section 17417, the governing board of a school
district, without advertising for bids, may let, for a minimum
rental of one dollar ($1) a year, to any person, firm, or
corporation any real property that belongs to the district if the
instrument by which such property is let requires the lessee
therein to construct on the demised premises, or provide for the
construction thereon of, a building or buildings for the use of the
school district during the term thereof, and provides that title to
that building shall vest in the school district at the expiration of
that term. The instrument may provide for the means or
methods by which that title shall vest in the school district prior
to the expiration of that term, and shall contain such other
terms and conditions as the governing board may deem to be in
the best interest of the school district. [¶] (b) Any rental of
property that complies with subdivision (a) shall be deemed to
have thereby required the payment of adequate consideration
for purposes of Section 6 of Article XVI of the California
Constitution.” (Stats. 1996, ch. 277, § 3, p. 2126.) This
provision was first enacted as Education Code former section
18355. (Stats. 1957, ch. 2071, § 1, p. 3683.) In 1959, it was
renumbered as former section 15705. (Stats. 1959, ch. 2, § 1,
pp. 1086–1087.) Then, in 1976, it was renumbered as former
section 39305. (Stats. 1976, ch. 1010, § 2, p. 3167.) Finally, in
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district may lease its land to a builder (or some related entity)
for $1 per year, and the builder then constructs a building or
buildings on that land. Typically, the builder is compensated by
leasing the land and the newly constructed school facilities back
to the school district for a period of several years after
construction is complete, receiving regular lease payments
under that multiyear lease. (See Ed. Code, § 17417.) Finally,
when both leases terminate, title to the land and the new
facilities vests in the school district. (Id., § 17406.) In this way,
the school district obtains costly improvements to its school
facilities and pays for them over the course of many years, but
it does so without entering into a debt obligation that would
require voter approval. In essence, the school district shifts the
financing of the construction project to the builder (or some
related entity), who in order to secure that financing, is free to
assign to a lender its right to receive lease payments from the
school district. (See, e.g., City of Desert Hot Springs v. County
of Riverside (1979) 91 Cal.App.3d 441, 444–445.) Thus,
consistent with the provisions of section 17406, even though a
school district may end up making payments directly to a lender,
from the district’s perspective, the payments are lease payments
and not debt service.
Significantly, section 17406 does not merely provide a
method by which a school district can avoid the state
Constitution’s debt restrictions; it also allows a school district to
avoid competitive bidding requirements otherwise mandated by
1996, it was given its present number. (Stats. 1996, ch. 277, § 3,
p. 2126.)
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state law.4 Moreover, some districts use lease-leaseback
arrangements for the latter purpose alone. Under this
approach, there is no multiyear leaseback of the completed
project to the school district after construction is complete, and
therefore there is no builder financing of the project. The lease
payments by the school district compensate the builder for
construction services performed during the period that the
payment covers, and when the project is complete, the lease
payments cease.
The Courts of Appeal have reached conflicting decisions as
to whether this manner of structuring a lease-leaseback
arrangement is consistent with section 17406 (compare Davis I,
supra, 237 Cal.App.4th 261 [§ 17406 applies only to builder-
financed projects, not projects that are independently financed
by the school district] with California Taxpayers Action Network
v. Taber Construction, Inc. (2017) 12 Cal.App.5th 115 [rejecting
that conclusion] and McGee v. Balfour Beatty Construction, LLC
(2016) 247 Cal.App.4th 202 [same]), but that split of authority
is not before us. Instead, the narrow question we decide here is
whether a validation action under the validation statutes (Code
Civ. Proc., § 860 et seq.) is the appropriate procedural vehicle for
challenging the validity of a lease-leaseback project that is
4
The Legislature has shown some concern about the fact
that lease-leaseback arrangements are exempt from competitive
bidding. Section 17406 was amended in 2016 (after the project
at issue in the present case was complete) to impose a
competitive bidding requirement, effective January 1, 2017 (see
Stats. 2016, ch. 521, § 2), but that amendment also included a
sunset provision, meaning that the law would revert to its pre-
2017 form on July 1, 2022 (see Stats. 2016, ch. 521, § 3). In 2021,
the sunset provision was extended to July 1, 2027. (See Stats.
2021, ch. 666, § 5.)
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independently financed by the school district. The resolution of
that question turns on whether such a lease-leaseback
arrangement qualifies as a “contract[]” for purposes of section
53511.
B. Validation Actions
An action under the validation statutes permits a public
agency to obtain a judgment upholding its handling of an agency
matter. (Code Civ. Proc., § 860.)5 We discussed the history of
the validation procedure in Bonander v. Town of Tiburon (2009)
46 Cal.4th 646. There we said: “By 1961, the California codes
contained a patchwork of provisions governing validation
proceedings, with each set of provisions dedicated to a different
statutory scheme. In that year, the Legislature sought to
replace this patchwork with a general validation procedure.
(Stats. 1961, ch. 1479, §§ 1–3, pp. 3331–3332.) This procedure,
which the Legislature codified as Code of Civil Procedure
sections 860 through 870, does not, in itself, authorize any
validation actions; rather, it establishes a uniform system that
other statutory schemes must activate by reference.”
(Bonander, at p. 656.) Therefore, if no statute authorizes use of
the validation statutes to test a particular type of agency matter,
then the validation statutes do not apply.
Significantly, validation actions are not always brought by
the agency involved in the matter. Code of Civil Procedure
5
Code of Civil Procedure section 860 provides: “A public
agency may upon the existence of any matter which under any
other law is authorized to be determined pursuant to this
chapter, and for 60 days thereafter, bring an action in the
superior court of the county in which the principal office of the
public agency is located to determine the validity of such matter.
The action shall be in the nature of a proceeding in rem.”
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section 863 authorizes private parties to bring validation
actions, and the private party is often seeking to invalidate the
matter in question. Code of Civil Procedure section 863 provides
in relevant part: “If no proceedings have been brought by the
public agency pursuant to this chapter, any interested person
may bring an action within the time and in the court specified
by Section 860 to determine the validity of such matter.” (Italics
added.) Actions brought by private parties under section 863
are sometimes called reverse validation actions.
A validation action is “a proceeding in rem” (Code Civ.
Proc., § 860), which means that the judgment binds all persons
and entities having an interest in the agency matter in question.
It also means, however, that in a validation action, the plaintiff
cannot obtain injunctive relief against a party to the action, for
such relief would be in personam. (See City of Ontario v.
Superior Court (1970) 2 Cal.3d 335, 344 (City of Ontario);
Friedland, supra, 62 Cal.App.4th at p. 843.) Moreover, when
the validation statutes apply, they supersede other mechanisms
by which an interested private party might seek to challenge the
same agency matter. This preclusion of alternative remedies is
necessary if the validation statutes are to serve their purpose of
once and for all determining the validity of the agency matter.
Thus, Code of Civil Procedure section 869 provides in relevant
part: “No contest except by the public agency or its officer or
agent of any thing or matter under this chapter shall be made
other than within the time and the manner herein specified.”
In City of Ontario, we interpreted this provision as
insulating agency matters from challenge once the short
limitations period for bringing a validation action has passed.
We said: “The practical consequence of [the validation statutes]
should be clearly recognized: an agency may indirectly but
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effectively ‘validate’ its action by doing nothing to validate it;
unless an ‘interested person’ brings an action of his own under
[Code of Civil Procedure] section 863 within the 60-day
[limitations] period, the agency’s action will become immune
from attack whether it is legally valid or not.” (City of Ontario,
supra, 2 Cal.3d at pp. 341–342.) Courts have regularly applied
this principle, using enforcement of section 863’s 60-day
limitations period to reject challenges to a wide variety of agency
matters. (See, e.g., Santa Clarita Organization for Planning &
Environment v. Castaic Lake Water Agency (2016) 1 Cal.App.5th
1084, 1097 (Santa Clarita) [citing cases].)
Despite this rule precluding alternative remedies
whenever the validation remedy is available, several courts
have held that when an interested party brings a timely
validation action, it can join other claims, including a taxpayer
action brought pursuant to Code of Civil Procedure section 526a.
(See Regus v. City of Baldwin Park (1977) 70 Cal.App.3d 968,
972; see also Coachella Valley Water Dist. v. Superior Court
(2021) 61 Cal.App.5th 755, 771; McLeod v. Vista Unified School
Dist. (2008) 158 Cal.App.4th 1156, 1166–1167 (McLeod).) What
is less clear is the extent to which a joined taxpayer action may
relate to the same subject matter as the validation action, thus
allowing the successful plaintiff to augment the in rem relief
available under the validation statutes with the in personam
relief available under section 526a. Several Court of Appeal
decisions have held that the joined taxpayer action may not
relate to the same subject matter as the validation action, thus
making the validation remedy exclusive as to matters that are
subject to validation. (See Friedland, supra, 62 Cal.App.4th at
pp. 848–849; see also McGee v. Torrance Unified School Dist.
(2020) 49 Cal.App.5th 814, 827–828 (McGee); Katz v. Campbell
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Union High School Dist. (2006) 144 Cal.App.4th 1024, 1033–
1034.)
The trial court in this case aligned with the view that the
validation statutes are a party’s exclusive remedy as to matters
that are subject to validation, thus precluding plaintiff’s request
for in personam relief. The Court of Appeal, however, did not
reach that question. Instead, the Court of Appeal assumed that
the validation statutes, if applicable, would have had such a
preclusive effect (Davis II, supra, 57 Cal.App.5th at p. 939), and
it concluded that the validation statutes did not apply. We now
turn to that issue.
C. Section 53511
In proceedings below, defendants relied exclusively upon
section 53511 to support their contention that the validity of a
lease-leaseback arrangement like the one at issue here falls
within the ambit of the validation statutes. Section 53511
provides in full: “(a) A local agency may bring an action to
determine the validity of its bonds, warrants, contracts,
obligations or evidences of indebtedness pursuant to [the
validation statutes]. [¶] (b) A local agency that issues bonds,
notes, or other obligations the proceeds of which are to be used
to purchase, or to make loans evidenced or secured by, the
bonds, warrants, contracts, obligations, or evidences of
indebtedness of other local agencies, may bring a single action
in the superior court of the county in which that local agency is
located to determine the validity of the bonds, warrants,
contracts, obligations, or evidences of indebtedness of the other
local agencies, pursuant to [the validation statutes].” (Italics
added.)
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When as here we are interpreting a statute, “ ‘ “ ‘[o]ur
fundamental task . . . is to determine the Legislature’s intent so
as to effectuate the law’s purpose. We first examine the
statutory language, giving it a plain and commonsense
meaning. . . . If the language is clear, courts must generally
follow its plain meaning unless a literal interpretation would
result in absurd consequences the Legislature did not intend. If
the statutory language permits more than one reasonable
interpretation, courts may consider other aids, such as the
statute’s purpose, legislative history, and public policy.’
[Citation.] ‘Furthermore, we consider portions of a statute in
the context of the entire statute and the statutory scheme of
which it is a part, giving significance to every word, phrase,
sentence, and part of an act in pursuance of the legislative
purpose.’ ” ’ ” (Brennon B. v. Superior Court (2022) 13 Cal.5th
662, 673.) “ ‘The interpretation of a statute presents a question
of law that this court reviews de novo.’ ” (Segal v. ASICS
America Corp. (2022) 12 Cal.5th 651, 662.)
Although one plausible reading of the language of section
53511 is that any and all local agency “contracts” are subject to
validation under the validation statutes, the Court of Appeal
below did not interpret section 53511 so broadly. Rather, the
court plausibly concluded that the reference to “contracts” in
section 53511 refers only to contracts that are of the same type
or that share the same subject matter as the other items listed
in the section. Because the other items all relate to government
indebtedness, the Court of Appeal reasoned that the word
“contracts” in section 53511 refers only to contracts that relate
to government indebtedness or, at least, to the financing of local
agency projects. (Davis II, supra, 57 Cal.App.5th at p. 940.) The
Court of Appeal therefore concluded that a lease-leaseback
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arrangement like the one at issue here, one that does not
operate as a mechanism for financing a government
construction project, is not a “contract[]” for purposes of section
53511. And it follows from that conclusion that section 53511
does not authorize the use of the validation statutes in this case.
(Davis II, at p. 941.)
Because the term “contracts” in section 53511 is
ambiguous in this way, we must employ the usual methods of
statutory construction to determine the Legislature’s intent
with respect to that provision. The threshold question we must
decide is whether, under section 53511, any and all local agency
contracts are subject to validation or whether, under that
section, only a particular type of local agency contract is subject
to validation. Then, if we conclude that only a particular type of
agency contract is subject to validation under section 53511, we
must consider what that type is and whether it includes the
lease-leaseback arrangement at issue here.
1. Does the word “contracts” in section 53511 mean
any and all local agency contracts?
The threshold question is not seriously disputed by the
parties, who are generally willing to concede that the term
“contracts” in section 53511 does not refer to any and all local
agency contracts. This absence of dispute is because we
addressed the question in dictum in City of Ontario. What we
said in City of Ontario is persuasive, and it bears repeating here
at length: Section 53511 “lists, as matters for validation under
[the validation statutes], ‘bonds, warrants, contracts, obligations
or evidences of indebtedness’ (italics added). There is no
limitation or qualification on the word ‘contracts,’ and it would
therefore appear to include a multipurpose municipal contract
such as the Ontario Motor Stadium Agreement. Yet the
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legislative history of the statute suggests a contrary result.
First, the Legislative Counsel’s digest of the bill proposing
section 53511 characterized the measure as one allowing ‘a local
agency to bring an action to determine the validity of evidences
of indebtedness.’ Second, section 53511 was enacted as part of
chapter 3 of part 1, division 2, title 5, of the Government Code.
Chapter 3 is entitled ‘Bonds,’ and deals exclusively with the
power of local agencies to sell their bonds, replace defaced or lost
bonds, and pledge their revenues to pay or secure such bonds. If
section 53511 was intended to be a provision of general
application, logically it should have been placed in article 4
(‘Miscellaneous’) of chapter 1 (‘General’) of the same part, in
which a group of such unrelated matters are collected. Third,
the key language of section 53511 — ‘bonds, warrants,
contracts, obligations or evidences of indebtedness’ — was taken
directly from section 864 of chapter 9; under well-known canons
of statutory interpretation, it should ordinarily be given the
same meaning as it had in the earlier statute. But as a perusal
of the companion 1961 legislation reveals, when chapter 9 was
adopted it was made applicable only to such matters as the
legality of the local entity’s existence, the validity of its bonds
and assessments, and the validity of joint financing agreements
with other agencies. If section 53511 was intended to reach any
and all contracts into which an agency may lawfully enter, the
restricted language of section 864 was inappropriate for that
purpose. Finally, that language is peculiarly inapt for
expressing such a general meaning in any event, as it lists the
word ‘contracts’ in the midst of four other terms which all deal
with the limited topic of a local agency’s financial obligations.”
(City of Ontario, supra, 2 Cal.3d at pp. 343–344.)
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
In City of Ontario, we did not need to decide the
applicability of the validation statutes, because it was enough
for us to hold that the question was “ ‘complex and debatable’ ”
(City of Ontario, supra, 2 Cal.3d at p. 345), justifying the trial
court’s discretionary decision to excuse the plaintiffs’
noncompliance (see id. at pp. 345–346). Nonetheless, what we
said in City of Ontario is convincing. We do not believe that the
Legislature intended any and all contracts that a local agency
might enter into (miscellaneous supply contracts, employment
contracts, etc.) to be subject to validation under the validation
statutes, which would mean that they would need to be
challenged within 60 days (Code Civ. Proc., § 863) or become
forever insulated from attack. Validation actions typically apply
to public agency matters that by their nature call for an
expedited and final determination as to their validity. The need
for that sort of expedited validation exists, of course, in the case
of agency-issued bonds, because such bonds are far more
marketable if their validity can be judicially confirmed in a final
judgment. (See Friedland, supra, 62 Cal.App.4th at p. 843;
Walters v. County of Plumas (1976) 61 Cal.App.3d 460, 468
(Walters).) By contrast, it would be extraordinary for the
Legislature to adopt a law applying the validation statutes to
any contract a local agency might execute, irrespective of the
need for expeditious resolution of the contract’s validity (see City
of Ontario, at pp. 341–342), and we conclude that the
Legislature did not do so. (See Kaatz v. City of Seaside (2006)
143 Cal.App.4th 13, 42, fn. 35 [citing cases holding that various
routine local agency contracts are not subject to validation].)
The more reasonable approach, therefore, is to apply the
rule of noscitur a sociis, according to which, a specific item in a
statutory list of items is qualified by the overall type or subject
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
matter characterizing the list as a whole. (See Kaatz v. City of
Seaside, supra, 143 Cal.App.4th at p. 40.) Thus, the word
“contract[]” in section 53511 is defined by the subject matter of
the other items in the list, which is, of course, government
indebtedness. It follows that under section 53511, only
contracts that somehow relate to government indebtedness are
subject to validation, but the particulars of that necessary
relationship remain to be determined. We now turn to that
issue.
2. What contracts sufficiently relate to government
indebtedness to bring them within the scope of
section 53511?
At places in their briefs, defendants press a broad
argument that every local agency contract that is funded by the
proceeds of a sale of agency bonds is, for that reason alone,
related to government indebtedness and therefore subject to the
validation statutes under section 53511. At other places,
however, defendants make several more specific arguments
focusing on the special nature of schools and the complexities of
federal tax law. We address defendant’s more specific
arguments in part III.D., post, but we reject at the outset
defendants’ broad argument that every local agency contract
that is funded by local agency bonds is subject to validation.
Under that interpretation, even minor contracts, such as a
contract to resurface a roof, install a fence, or pave a parking lot,
would be subject to validation, provided that government
indebtedness funded the contract. A minor contract of the sort
just described might not even come to the public’s attention
during the 60-day limitations period that applies to validation
actions (Code Civ. Proc., § 863), and by the time the public
learned of the contract, the contract would already be insulated
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
from attack, making it possible for local public agencies to award
such contracts with minimal accountability. Therefore,
California case law suggests that a tighter degree of
interdependence between a local agency contract and
government indebtedness is necessary for the contract to come
within the scope of section 53511.
Several courts have framed the pertinent inquiry by
asking whether government indebtedness is “inextricably bound
up with” the contract in question. (Graydon v. Pasadena
Redevelopment Agency (1980) 104 Cal.App.3d 631, 646
(Graydon); see McLeod, supra, 158 Cal.App.4th at p. 1169;
California Commerce Casino, Inc. v. Schwarzenegger (2007) 146
Cal.App.4th 1406, 1430, 1432 (California Commerce Casino);
Kaatz v. City of Seaside, supra, 143 Cal.App.4th at p. 45.) More
specifically, in those situations where the contract is not itself a
contract of indebtedness, courts have focused on whether it is a
contract on which the debt financing of a local agency project
directly depends. The latter category includes, for example,
local agency contracts that serve to guarantee a debt incurred
by a third party. (See Friedland, supra, 62 Cal.App.4th at pp.
843, 845 [local agencies’ guarantees, necessary to allow public
benefit corporation to obtain project financing, were subject to
validation under § 53511]; Walters, supra, 61 Cal.App.3d at pp.
466–468 [county loan guarantees, necessary for private
franchisees to finance heavy equipment needed to operate
county waste disposal system, were subject to validation under
§ 53511].) In addition, the category includes local agency
contracts that are intended to generate the funds from which a
government debt will be paid. (See California Commerce
Casino, supra, 146 Cal.App.4th at pp. 1424–1433 [legislative
ratification of gaming compacts, where state bonds would be
20
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
paid using revenue from the compacts, was subject to validation
under Gov. Code, § 17700, which uses parallel language to
§ 53511]; Meaney v. Sacramento Housing & Redevelopment
Agency (1993) 13 Cal.App.4th 566, 576–577 (Meaney)
[interagency agreement to use redevelopment tax increment to
pay for courthouse construction was subject to validation under
§ 53511]; Graydon, supra, 104 Cal.App.3d at pp. 645–646
[redevelopment agency’s contract for construction of
underground parking garage, where garage was financed with
bonds to be paid from tax increment generated by retail center
of which the garage was an essential component, was subject to
validation under § 53511].)6
We agree generally with these Court of Appeal decisions
and their articulation of the standard that governs whether a
local agency contract comes within section 53511. In our view,
a local agency contract does so if it is inextricably bound up with
government indebtedness or with debt financing guaranteed by
6
Several of these cases involve tax increment financing.
We described such financing in Amador Valley Joint High Sch.
Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208:
“Redevelopment bonds are secured by a pledge of so-called ‘tax
increment’ revenues generated by increases in the assessed
value of the redeveloped property. [Citations.] . . . ‘In essence
[the state Constitution] provides that if, after a redevelopment
project has been approved, the assessed valuation of taxable
property in the project increases, the taxes levied on such
property in the project area are divided between the taxing
agency and the redevelopment agency. The taxing agency
receives the same amount of money it would have realized under
the assessed valuation existing at the time the project was
approved, while the additional money resulting from the rise in
assessed valuation is placed in a special fund for repayment of
indebtedness incurred in financing the project.’ ” (Id. at p. 239.)
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
the agency. To satisfy this standard, the contract must be one
on which the debt financing of the project directly depends.
Without attempting to exhaustively describe every type of local
agency contract that might come within the scope of section
53511, we conclude that the lease-leaseback arrangement at
issue here does not do so.
A traditional lease-leaseback arrangement — one that
shifts the financing of a public project to the contractor (or a
related entity) through long-term lease payments that the
contractor (or related entity) can assign to a third party
lender — has some features that might be cited in support of an
argument that the arrangement is a contract for purposes of
section 53511. Most importantly, a traditional lease-leaseback
operates in practice as a financing mechanism. We need not
(and do not) decide here whether a traditional lease-leaseback
arrangement is a contract for purposes of section 53511, but it
is important to note that the lease-leaseback arrangement at
issue here did not involve a long-term lease that operated in
practice as a financing mechanism. Rather, the cost of the
District’s new middle school was fully funded by the sale of
general obligation bonds that preceded the lease-leaseback
arrangement by nearly a year,7 and the lease-leaseback
arrangement was to that extent analogous to an ordinary
purchase contract for the acquisition of goods or services, a type
of contract that is not subject to validation under section 53511.
(See, e.g., Santa Clarita, supra, 1 Cal.App.5th at p. 1099
[agency’s cash-financed stock purchase was not subject to
7
Under section 53511, the District was free to bring a
validation action to confirm the validity of its bonds, thus
ensuring their marketability.
22
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
validation under § 53511]; Kaatz v. City of Seaside, supra, 143
Cal.App.4th at pp. 40–42, 47–48 [city’s purchase of property
from federal government using funds from developer, followed
by sale of same property to developer, was not subject to
validation under § 53511]; Smith v. Mt. Diablo Unified School
Dist. (1976) 56 Cal.App.3d 412, 418–421 [computer purchase
contract was not subject to validation under § 53511]; Phillips v.
Seely (1974) 43 Cal.3d 104, 111–112 [attorney hiring agreement
was not subject to validation under § 53511].)
Here, nothing in the documents connected to the approval
and sale of the District’s bonds suggested any link to or
dependence upon the validity of the lease-leaseback
arrangement now before us. These documents made no specific
mention of the project that is the subject of the lease-leaseback
arrangement, let alone how contracts related to the project
would be structured. Likewise, nothing in the lease-leaseback
documentation was concerned with the financing of the project.
The Site Lease entailed the letting of the District’s valuable real
property for a term exceeding two years for the nominal sum of
$1; it did not enable the District to finance anything. As for the
Facilities Lease, although it was a contract that was critical to
the construction of the District’s new middle school, it was not a
contract that was critical to the financing of that construction.
Rather, as noted, the financing of the project was in place nearly
a year before the Facilities Lease was even executed. On
October 13, 2011, the District received nearly $108 million, and
according to the District’s own documentation, it was those
funds that were used to make the lease payments for the present
project. We conclude, therefore, that the lease-leaseback
arrangement was not a contract on which the debt financing of
23
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
the project directly depended and that it did not come within the
scope of the term “contract[]” for purposes of section 53511.
D. Defendants’ Arguments
Defendants press several more specific arguments for why
the lease-leaseback arrangement at issue here was sufficiently
related to government indebtedness to qualify as a contract for
purposes of section 53511. We address those arguments below.
First, defendants argue that a lease-leaseback
arrangement must be subject to swift validation under the
validation statutes, for otherwise doubt about the validity of the
arrangement will negatively impact the marketability of the
bonds the school district sells to finance its planned construction
project. On this ground, defendants contend that the lease-
leaseback arrangement at issue here was “inextricably bound up
with” government indebtedness. (Graydon, supra, 104
Cal.App.3d at p. 646; see McLeod, supra, 158 Cal.App.4th at p.
1169; California Commerce Casino, supra, 146 Cal.App.4th at
pp. 1430, 1432.)
This argument would have more persuasive force if the
bonds in question were financing the construction of an entity
that was going to produce revenue for the District. In that
scenario, the anticipated revenues could be used to pay the debt
service on the bonds and prompt completion of the construction
project and receipt of the revenues could arguably affect the
marketability of the bonds. (See Graydon, supra, 104
Cal.App.3d at p. 645 [“The ability of the Agency to pay its bonds,
dependent in large part upon the flow of tax increment monies
resulting from the completion of the retail center, was thus
directly linked to the award of the questioned contract [for
construction of the underground parking garage that would
24
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
serve the retail center]”].) But here, there is no indication that
the school facilities were revenue generating in the same way
that a commercial redevelopment project would be, and, in any
event, there was no plan to pay the debt service on the District’s
bonds with revenue that would become unavailable if
completion of the new middle school facilities was somehow
delayed. Rather, the District planned to pay the debt service
using the receipts from levies of ad valorem property taxes,
money that would be available regardless of whether the new
school facilities were ever completed.
The Contractor argues that top-quality schools often
correlate to higher property values, thus generating an increase
in tax revenues, and in that sense, debt service on the District’s
bonds would be paid from new tax revenue that would become
unavailable if the school construction project were delayed. We
disagree. As a preliminary matter, though top-quality schools
might correlate to higher property values, there are many
possible reasons for this correlation that are not necessarily
related to the construction of school facilities itself. Moreover,
the bonds that the District issued to fund the project at issue
here were not tax increment bonds. Therefore, regardless of
whether completion of the project would generate an increase in
tax revenues, there was no direct relationship between project
completion and the marketability of the District’s bonds.8
Indeed, even if the project were somehow delayed, the debt
service on the bonds would still be paid from ad valorem taxes
on property within the District, and therefore the bonds were
marketable. Thus, the lease-leaseback arrangement at issue
8
This reasoning applies both to the initial marketability of
the bonds and to their subsequent marketability.
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
here was not “ ‘inextricably bound up with’ ” the District’s bonds.
Moreover, under the Contractor’s argument, every debt-
financed local agency project would be subject to the validation
statutes, because every such project is intended to improve the
quality of life in the area and will therefore indirectly increase
property values. As already discussed, that rule stretches
section 53511 too far.
Second, the District urges a broad interpretation of section
53511 under which a local agency contract is subject to
validation if questions about the contract’s validity (and the
possibility of litigation to resolve those questions) might impair
agency operations. For this standard, the District relies on
Walters, supra, 61 Cal.App.3d 460 and Friedland, supra, 62
Cal.App.4th 835, but an examination of those cases illustrates
why the District’s interpretation is wide of the mark. Although
those cases did discuss possible impairment of agency
operations, each of those decisions ultimately determined that
the validation statutes applied because the contracts in question
guaranteed the debt financing of the project.
Walters involved a county plan to use private franchisees
to operate the county’s waste disposal system. But without loan
guarantees by the county, the franchisees were not able to
obtain third party financing for the purchase of the necessary
heavy equipment. Therefore, the county provided such
guarantees, subject to the condition that in the event of a default
by the franchisees, the county would gain title to the financed
equipment. (Walters, supra, 61 Cal.App.3d at pp. 463–464.) A
county taxpayer then brought a lawsuit that, among other
things, challenged the validity of the loan guarantees, and the
trial court dismissed the entire suit. The Court of Appeal
affirmed dismissal of the specific cause of action that challenged
26
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
the loan guarantees. It held that the guarantees were
“contracts” for purposes of section 53511, and therefore they
were subject to the validation statutes. Hence, the taxpayer’s
challenge needed to have been brought as a validation action,
and it was not. (Walters, at pp. 468–469.)
In the course of deciding the Walters case, the Court of
Appeal made the following general comment about public policy:
“[T]he essential difference between those actions which ought
and those which ought not to come under [the validation
statutes is] the extent to which the lack of a prompt validating
procedure will impair the public agency’s ability to operate.”
(Walters, supra, 61 Cal.App.3d at p. 468, italics added.) The
District takes this statement as the operative standard
governing application of the validation statutes, arguing that
litigation over lease-leaseback arrangements like the one at
issue here will impair agency operations, and therefore the
validation statutes apply.
But the Walters court did not rely solely on its statement
of public policy as the rationale of its decision. Instead, the court
focused, as we do here, on whether the loan guarantees were
critical to the debt financing of the county’s waste disposal
system. The court said: “We feel that the possibility of future
litigation [over the county’s loan guarantees] is very likely to
have a chilling effect upon potential third party lenders, thus
resulting in higher interest rates or even the total denial of credit,
either of which might well impair the county’s ability to
maintain an adequate waste disposal program. Accordingly, we
hold that [the validation statutes] are applicable . . . .” (Walters,
supra, 61 Cal.App.3d at p. 468, italics added.) In short, the loan
guarantees were subject to validation because the debt
financing of the county’s waste disposal operation depended on
27
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
those guarantees, not merely because the absence of validation
might somehow impair the county’s operations. (See Kaatz v.
City of Seaside, supra, 143 Cal.App.4th at p. 44 [“while having
a prompt validating procedure to permit a public agency to
operate without impairment may be a significant rationale for
the validation statutes’ application to agency action as provided
in the statutes . . . , this rationale should not be transformed into
a test for determining the type of agency action encompassed by
Government Code section 53511” (italics added)].)
The decision in Friedland, supra, 62 Cal.App.4th 835 is to
the same effect. In Friedland, a series of local agency
agreements were held to be “contracts” for purposes of section
53511 — and therefore subject to the validation statutes —
because they involved agency guarantees of a debt obligation
incurred by an independent public benefit corporation that was
building an aquarium. (Friedland, at pp. 838–840.) The public
benefit corporation anticipated paying off the debt from the
aquarium’s operating revenues, but to make the bonds less
risky, several local agencies provided security in the event the
aquarium revenues proved insufficient, and without that
security, the financing of the project would have been in
jeopardy. (Id. at p. 838.) Because the contracts guaranteeing
the debt obligation were critical to the successful debt financing
of the aquarium project, the Court of Appeal held that section
53511 applied and that the contracts were subject to the
validation statutes. (Friedland, at p. 845.)
Both Walters and Friedland stand for the proposition that
a local agency’s guarantee of a debt incurred by some other
entity falls within section 53511’s use of the term “contract[]” if
the guarantee is necessary to secure the debt financing of a
project that benefits the local agency. But that circumstance is
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
not present here. As explained, payment of the debt service on
the District’s bonds does not depend on the lease-leaseback
arrangement now under review. As for the District’s broader
reading of Walters and Friedland, under which the validation
statutes apply whenever litigation over a contract might
somehow impair agency operations (see Walters, supra, 61
Cal.App.3d at p. 468; Friedland, supra, 62 Cal.App.4th at p.
843), nothing in the text of section 53511 supports that broad
rule, and no case has adopted it as the basis of its decision. (See
Kaatz v. City of Seaside, supra, 143 Cal.App.4th at pp. 43–44
[rejecting the broad reading of Walters and Friedland].)
Third, defendants argue that whenever proceeds from the
sale of public agency bonds fund an agency contract, federal tax
law creates the necessary degree of interdependence between
the contract and government indebtedness, thus bringing the
contract within the scope of section 53511. Defendants point out
that local government bonds offer federal tax benefits to
bondholders, meaning in practice that the issuing agency pays
a lower interest rate than it would otherwise have to pay. In
order to qualify for those federal tax benefits, however, the
issuing agency cannot arbitrage the proceeds of the bond sale
(i.e., invest the proceeds at a rate that exceeds the rate the
agency is paying on the bonds). (See 26 U.S.C. § 148.) An
exception is made for temporary investments of bond sale
proceeds, but this exception “applies only if the issuer
reasonably expects to satisfy the expenditure test, the time test,
and the due diligence test.” (26 C.F.R. § 1.148-2(e)(2)(i) (2023).)9
9
These tests require (1) that 85 percent of the net sale
proceeds be allocated for expenditure within three years of the
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
Defendants argue that protracted litigation over a lease-
leaseback arrangement like the one at issue here might lead to
delay that would cause a school district to invest its bond sale
proceeds for a longer period than the temporary period
permissible under federal tax law, thus calling into question the
tax-exempt status of its bonds. In defendants’ view, the mere
possibility of this occurrence will make the bonds less
marketable, and therefore the marketability of its bonds is
inextricably bound up with the validity of the lease-leaseback
arrangement.
In evaluating defendants’ argument, we first note that
under federal tax law, an issuing agency need not actually meet
the requirements of the expenditure, time, and due diligence
tests so long as it reasonably expects to do so. (See 26 C.F.R.
§ 1.148-2(b)(1) (2023) [“the determination of whether an issue
consists of arbitrage bonds under section 148(a) is based on the
issuer’s reasonable expectations as of the issue date regarding
the amount and use of the gross proceeds of the issue” (italics
added)]; see also Weiss v. S.E.C. (D.C. Cir. 2006) 468 F.3d 849,
851 (Weiss).) Hence, practically speaking, the tax-exempt status
of the issuing agency’s bonds would not be in jeopardy so long as
the agency reasonably expected to satisfy the federal tax law
requirements when it issued the bonds and thereafter proceeded
in good faith. Moreover, if delays ever occur due to
circumstances beyond a local agency’s control, the agency can
issue date (the expenditure test), (2) that the issuer enter into a
binding obligation within six months of the issue date to expend
five percent of the net sale proceeds (the time test), and (3) that
the issuer proceed with due diligence toward completion of the
project (the due diligence test). (See 26 C.F.R. § 1.148-2(e)(2)(i)
(2023).)
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
simply withdraw the bond sale proceeds from high-yielding
investments, and it can rebate any arbitrage profit to the federal
government, thus maintaining the tax-exempt status of its
bonds. (See 26 U.S.C. § 148(f).)10 Therefore, there was no real
risk that delays in the construction project at issue here would
affect the tax-exempt status of the District’s bonds.
It is true, of course, that when a bond-funded project is
delayed, a public agency will have to forgo income from high-
profit investments of the bond proceeds. However, that
contingency is one among many that might affect the overall
cost of a capital improvement project, and it is unlikely to
discourage bond purchasers who, regardless of unexpected
increases in project costs, will be paid using receipts from levies
of ad valorem property taxes.
The District also relies on the facts of Weiss, supra, 468
F.3d 849,11 which, according to the District, demonstrate that
taxpayer litigation, and the delays occasioned thereby, can
sometimes alter the federal tax-exempt status of municipal
10
In its “Certificate as to Arbitrage,” the District averred
that it would comply with federal tax law regardless of any delay
of its planned construction projects. It said: “Proceeds of the
Bonds and interest earnings and gains thereon, if any,
remaining in the Building Funds following the 3-year
Temporary Period will be invested at a yield not in excess of the
yield of the Bonds . . . or yield reduction payments under Section
148 of the Internal Revenue Code of 1986, as amended . . . , will
be made to the federal government with respect to such
investment after the end of the 3-year Temporary Period.”
(Italics added.)
11
The District relies on the facts rather than the holding of
Weiss because Weiss concerned an issue different than the one
before us.
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
bonds. To obtain a fuller statement of Weiss’s facts, the District
urges us to consider the Security and Exchange Commission’s
“Initial Decision” in that case. (See In the Matter of Ira Weiss
and L. Andrew Shupe II (Feb. 25, 2005) S.E.C. Initial Dec. No.
275 [as of
April 27, 2023], all internet citations in this opinion are archived
by year, docket number, and case name at
http://courts.ca.gov/38324.htm.)
The facts of Weiss, in our view, have no purchase on the
issue we confront here. In Weiss, a school district in
Pennsylvania issued bonds for the purpose of constructing
specified improvements to school facilities within the district,
but after investing the bond sale proceeds at a profit, the school
district board did not proceed in good faith. Instead, the board
became distracted by an array of issues, including the decision
to replace a popular football coach, the hiring of a new
superintendent, the dismissals of two employees, a lawsuit
brought by a student accused of cheating, the hiring of various
principals and school administrators, and the cancer illness of a
board member. As a result of these distractions, the school
district failed to proceed with the planned construction project,
although it continued to earn a profit from its investment of the
bond sale proceeds. Hence, the Internal Revenue Service
determined that the school district had issued taxable arbitrage
bonds. (See In the Matter of Ira Weiss and L. Andrew Shupe II,
supra, S.E.C. Initial Dec. No. 275.)
We see little in the facts of Weiss that supports the
argument defendants make here. Those facts merely
demonstrate that after a school district has issued school
construction bonds, its deliberate failure to proceed with the
construction project, despite investing the bond sale proceeds at
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
a profit, can cause the bonds to lose their tax-exempt status.
(See 26 C.F.R. § 1.148-2(c) (2023).) In Weiss, one (among many)
of the events that distracted the Pennsylvania school district
was a lawsuit, but the lawsuit had nothing to do with the
planned construction project, nor did the lawsuit require a delay
in that construction. Thus, the facts of Weiss do not support the
broad rule advanced by the District here, that litigation over a
bond-financed school construction project, forcing delays that
are beyond the school district’s control, can cause the bonds to
lose their tax-exempt status despite the good faith efforts of the
school district to proceed with the project and despite the timely
rebate to the federal government of any improper arbitrage
profits.
The District also argues that bond counsel will not be able
to render an unqualified opinion regarding the tax-exempt
status of a public agency bond issue if there is the possibility
that litigation might delay the planned construction project.
There are two answers to this argument. First, the bonds that
were used to finance the present project were sold nearly a year
before the lease-leaseback arrangement was even executed, and
bond counsel was nonetheless able to render an opinion
regarding the tax-exempt status of the bonds. Therefore, the
possibility of future litigation over projects that the bonds would
finance was apparently not a concern to bond counsel. Second,
the possibility of litigation-related delays exists with respect to
virtually every bond-funded public agency project, and as
discussed, federal tax law can be satisfied despite such delays.
(See, e.g., 26 U.S.C. § 148(f) [permitting rebates to the federal
government].) Hence, the District’s argument proves too much.
Under the District’s argument, virtually any contract that is
funded by the proceeds of a public agency bond sale would come
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DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
within the validation statutes. As discussed, that rule stretches
section 53511 too far.
Fourth, the District argues that the Court of Appeal’s
holding in McLeod, supra, 158 Cal.App.4th 1156 supports its
contention that the validation statutes apply to the lease-
leaseback arrangement at issue here. McLeod, however, is
readily distinguished. McLeod involved a challenge to a school
district’s decision to issue bonds for a purpose different from the
purpose presented to the voters when the voters approved the
bonds. The ability of the school district to finance its planned
construction project directly depended on the validity of that
disputed decision. Indeed, the school district in McLeod
asserted — without disagreement from the plaintiffs — that
“ ‘every single day that this case has not been decided . . .
impairs the ability of the District to go to the bond markets and
get the funding to complete the [high school] construction.’ ”
(McLeod, supra, 158 Cal.App.4th at p. 1169.) Not so here.
Plaintiff is not challenging the validity of the District’s decision
to issue the bonds that funded the construction project at issue
here. Rather, plaintiff is challenging the District’s use of a
section 17406 lease-leaseback arrangement where the lease-
leaseback arrangement does not involve a long-term lease and
where the construction project is independently financed from a
bond sale that the District has already completed. McLeod is
simply not on point.
Fifth, defendants cite McGee, supra, 49 Cal.App.5th 814,
in which the Court of Appeal addressed the precise question we
are deciding, concluding that where a lease-leaseback
arrangement is independently financed through the issuance of
district bonds, the bonds are inextricably bound up with the
validity of the lease-leaseback arrangement, and therefore the
34
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
lease-leaseback arrangement is subject to the validation
statutes. In our view, McGee did not meaningfully consider the
nature of the relationship between the school district’s bond
financing and the agreement in question in that case.
Therefore, we disapprove McGee v. Torrance Unified School
Dist., supra, 49 Cal.App.5th 814 insofar as it addresses the
precise issue we decide here. We express no opinion regarding
the other issues decided by the court in that case.
Finally, the Contractor makes a policy argument that is
unrelated to the text of section 53511. The Contractor correctly
notes that education has a special status in California, and the
Contractor emphasizes the particular need school districts have
for quick validation of lease-leaseback arrangements like the
one here, thus protecting such arrangements from attacks
brought by disgruntled contractors who were not selected for the
project. The Contractor further warns that because of the
holdings of Davis I and Davis II, school districts are already
abandoning lease-leaseback arrangements like the one at issue
here (i.e., ones that are independently financed), and they will
continue to do so. To demonstrate the scope of this issue, the
Contractor quotes the amicus curiae letter of the Long Beach
Unified School District. That letter states: “The Long Beach
Unified School District is the fourth largest public K–12 school
district in the state . . . . [¶] The Long Beach Unified School
District is currently executing approximately $3.0B in campus
improvement projects approved and funded by local general
obligations bonds. . . . The District considers the Lease-
Leaseback delivery model to be a valuable method to bring
timely & cost effective projects to our students.”
The Contractor’s arguments raise legitimate and weighty
policy concerns to which we are not unsympathetic. Yet,
35
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
whether the people of the state are best served by a method of
school construction that avoids competitive bidding, favors long-
term partnering relationships with contractors, and allows for
quick validation of construction deals, insulating such deals
from subsequent attack, or whether, by contrast, the people are
best served by a method of school construction that favors price
competition among contractors and avoids favoritism, is a policy
question best left to the Legislature. The legal issue before us
is the scope of the term “contracts” in section 53511, and for the
reasons explained, that term does not in our view include lease-
leaseback arrangements like the one at issue here.
36
DAVIS v. FRESNO UNIFIED SCHOOL DISTRICT
Opinion of the Court by Jenkins, J.
IV. CONCLUSION
Because section 53511 is the only theory defendants relied
on below for asserting that plaintiff was obligated to bring his
present challenge as a validation action and because the lease-
leaseback arrangement at issue here is not a “contract[]” for
purposes of section 53511, we agree with the Court of Appeal
that the validation statutes do not apply. The Court of Appeal
also concluded that plaintiff’s first amended complaint
adequately alleged a taxpayer action under Code of Civil
Procedure section 526a, and we did not grant review to consider
that aspect of the court’s decision, therefore the litigation can
proceed based on that theory of standing. We affirm the
judgment of the Court of Appeal and remand the matter to that
court for further proceedings consistent with this opinion.
JENKINS, J.
We Concur:
GUERRERO, C. J.
CORRIGAN, J.
LIU, J.
KRUGER, J.
GROBAN, J.
EVANS, J.
37
See next page for addresses and telephone numbers for counsel who
argued in Supreme Court.
Name of Opinion Davis v. Fresno Unified School District
__________________________________________________________
Procedural Posture (see XX below)
Original Appeal
Original Proceeding
Review Granted (published) XX 57 Cal.App.5th 911Review Granted (unpublished)
Rehearing Granted
__________________________________________________________
Opinion No. S266344
Date Filed: April 27, 2023
__________________________________________________________
Court: Superior
County: Fresno
Judge: Kimberly A. Gaab
__________________________________________________________
Counsel:
Carlin Law Group and Kevin R. Carlin for Plaintiff and Appellant.
Briggs Law Corporation, Cory J. Briggs and Janna M. Ferraro for
California Association of Bond Oversight Committees as Amicus
Curiae on behalf of Plaintiff and Appellant.
Jonathan M. Coupal, Timothy A. Bittle and Laura E. Dougherty for
Howard Jarvis Taxpayers Foundation as Amicus Curiae on behalf of
Plaintiff and Appellant.
Lang Richert & Patch, Mark L. Creede, Stan D. Blyth; Jones Hall and
Charles F. Adams for Defendant and Respondent Fresno Unified
School District.
Fagen Friedman & Fulfrost, James Traber, Linna Loangkote; Robert J.
Tuerck and D. Michael Ambrose for California School Boards
Association’s Education Legal Alliance as Amicus Curiae on behalf of
Defendant and Respondent Fresno Unified School District.
Leone & Alberts, Louis A. Leone and Seth L. Gordon for Statewide
Educational Wrap Up Program as Amicus Curiae on behalf of
Defendant and Respondent Fresno Unified School District.
Tao Rossini and Martin A. Hom for Coalition for Adequate School
Housing, Association of California Construction Managers and
Torrance Unified School District as Amici Curiae on behalf of
Defendant and Respondent Fresno Unified School District.
Whitney Thompson & Jeffcoach, Timothy L. Thompson, Mandy L.
Jeffcoach; Moskovitz Appellate Team, Myron Moskovitz; Baker
Manock & Jensen and Jerry H. Mann for Defendant and Respondent
Harris Construction Company, Inc.
Colantuono, Highsmith & Whatley, Michael G. Colantuono, Matthew
C. Slentz and Conor W. Harkins for League of California Cities and
California Special Districts Association as Amici Curiae on behalf of
Defendants and Respondents.
Lozano Smith, Harold M. Freiman and Arne B. Sandberg for
California Association of School Business Officials as Amicus Curiae on
behalf of Defendants and Respondents.
Counsel who argued in Supreme Court (not intended for
publication with opinion):
Kevin R. Carlin
Carlin Law Group, APC
4452 Park Boulevard, Suite 310
San Diego, CA 92116
(619) 615-5325
Mark L. Creede
Lang, Richert & Patch
P.O. Box 40012
Fresno, CA 93755
(559) 228-6700
Myron Moskovitz
Moskovitz Appellate Team
90 Crocker Avenue
Piedmont, CA 94611
(510) 384-0354