CASBO has been asked by Fresno Unified School District to submit a letter to the California Supreme Court in relation to its ongoing litigation in Davis v. Fresno Unified School District, et al., urging the Court to take on review the latest part of the case (Davis II).

In July 2015, Fresno Unified, a CASBO organizational subscriber, was grateful for CASBO’s letter of support of Supreme Court review of Davis I, after which ruling, a significant split of authority developed, giving rise to Fresno Unified’s and co-petitioner Harris Construction’s current desire that the Court grant review of Davis II.

Case Background

In 2015, the Fifth Appellate District ruled in Davis I that a lease-leaseback contract could be invalid if it did not include terms indicating (a) contractor financing of the project, and (b) school district use of the facilities during the lease — even though the statute did not specifically require these terms. In addition, Davis I ruled that the contractor could have a conflict of interest under Government Code section 1090 by having an initial preconstruction contract with a school district and then being hired for the subsequent construction contract. The plaintiff was claiming that the lease-leaseback contract was void for both reasons, and therefore the contractor must disgorge the money that Fresno Unified paid for the work back to Fresno Unified.

In the 2016 McGee v. Balfour Beatty Construction decision regarding what is required for lease-leaseback (McGee I), the plaintiff was making arguments similar to those in Davis I. The Second Appellate District agreed with Davis I as to the conflict-of-interest issue. However, it disagreed with Davis I and held that additional terms were not needed beyond what the statute required on its face.

In short, the Davis I and McGee I cases created a split of authority between California appellate districts as to whether additional terms were needed in a lease-leaseback contract. The Supreme Court chose to not accept any appeal, thus leaving unresolved the split of authority. Therefore, to be safe, many school districts across the state re-wrote their lease-leaseback contracts so that they would comply with Davis I since a trial court outside of the Second Appellate District could potentially choose to follow Davis I in any challenge to the contract by a taxpayer or contractor.

Effective January 2017, the California Legislature revised the procedures in the lease-leaseback statute (Education Code section 17406) so that there would be two types of lease-leaseback contracts: lump sum price and percentage fee. The latter could include preconstruction services, thus allowing school districts to avoid the conflict of interest problem discussed in Davis I and McGee I. However, the Legislature did not resolve the split of authority regarding whether additional terms were needed in a lease-leaseback contract.

In 2020, the Second Appellate District issued another decision in the same lawsuit filed by McGee (this decision was entitled McGee v. Torrance Unified School District [McGee II]). The court held that the remaining conflict-of-interest claim was now moot since the construction had been completed. The court ruled that this case was one of “reverse validation,” which is a process where the complaint is filed in court promptly after award of the contract in order to quickly challenge its validity. Based on prior case law, the court decided that once construction is complete, the reverse validation action became moot. The court held that even McGee’s claim as a taxpayer was subject to the validation statutes since the “gravamen” of McGee’s action was to seek invalidity of the lease-leaseback contract.

Later in 2020, the Fifth Appellate District issued another decision in the continuing lawsuit filed by Davis (Davis II). Contrary to McGee II, the Davis II court ruled that the plaintiff’s taxpayer action was not subject to the validation statutes since the lease-leaseback contract did not include a contractor financing component. Therefore, the taxpayer action was not moot and could proceed to trial.

This decision created a new split of authority between the Second and Fifth Appellate Districts. This time, the Supreme Court agreed to hear the Davis II appeal to resolve this split of authority. However, the Supreme Court only agreed to resolve the limited issue of whether use of bonds on a lease-leaseback contract would qualify as financing that would trigger the application of the validation statutes. In other words, if the bonds qualified as financing, then the entire action — including the taxpayer claim — may be subject to the validation statutes, and they may be moot due to the completed construction; but if the bonds did not qualify as financing, then the taxpayer claim may not be moot under the validation statutes and it might proceed to trial.

An Issue of Statewide and Multi-District Concern

The parties in the lawsuit have completed their briefing for the Court, and while they mostly addressed the Supreme Court’s narrow issue, they have offered some additional arguments to support their respective causes. In support of those arguments, CASBO’s amicus brief focuses on public policy issues, especially the complications that would arise if the Supreme Court were to affirm Davis II.

For example, the brief argues that upholding Davis II would result in school district projects and other public works being subject to litigation and potential disgorgement for years, and even after completion of construction, thus increasing the risks of public works construction for contractors, which would lead to fewer bidders and higher prices on public works projects. In addition, it would discourage school districts from using lease-leaseback projects since a school district would not want to use a delivery method that could be easily challenged by a taxpayer years after award of the contract.

The end result is significant confusion among school districts and contractors across the state regarding the legal and procedural requirements applicable to lease-leaseback contracts, including whether and when the validation statutes apply and whether disgorgement is an available remedy when a project involving a statutorily-complying contract has been completed.

If review is not granted, school districts and contractors cannot be clear on which standards will be imposed on lease-leaseback contract review, and those school districts and contractors located in jurisdictions where a District Court of Appeal has not yet weighed in can have no certainty or confidence regarding what is required by section 17406 or whether the validation statutes will apply regarding their lease-leaseback contracts.

At that point, it is California’s students who would suffer, as those school districts that are in dire need of new school facilities will be deprived of the benefits of the cost-effective, efficient, fair, competitive, high quality and timely lease-leaseback method of project delivery the Legislature intended for them to have, into the foreseeable future.

CASBO has offered its support in Fresno Unified’s case because it believes California’s school districts are entitled to certainty regarding the standards applicable to lease-leaseback contracts so they can confidently utilize such project delivery methods to rehabilitate existing schools or build new schools to better serve their students.

We will keep you posted on the outcome of Fresno Unified’s request of the Supreme Court to review Davis II. In the meantime, if you would like to follow the status of this litigation, you may learn more at the Appellate Courts Case Information Site.