Is it the End of the Lease-Leaseback Shootouts? Maybe.
It’s the case that has turned into a modern day Hatfield versus McCoy – McGee v. Torrance Unified School District, Case No. 8298122, 2nd District Court of Appeals (May 29, 2020) – a series of cases challenging the validity of certain lease-leaseback construction contracts in California.
In shootout number one, James McGee sued the Torrance Unified School District challenging the validity of lease-leaseback contracts the District had entered into with general contractor Balfour Beatty Construction, LLC. Under California’s lease-leaseback statute, a school district can lease property it owns to a developer, who in turns builds a school facility on the property and leases the facility back to the school district. The primary benefit of the lease-leaseback method of project delivery is that a school district does not need to come up with money to build the facility because the district pays for the facility over time through lease payments to the developer. In shootout number one, McGee argued that Torrance Unified School District was required to competitively bid the lease-leasebacks projects. The 2nd District Court of Appeals disagreed.
In shootout number two, McGee v. Balfour Beatty Construction, LLC 247 Cal.App.4th 235 (2016), McGee sued Balfour Beatty arguing that lease-leaseback contracts the general contractor had entered into with the District were a “sham,” because the lease-leaseback agreements at issue, rather than requiring that Balfour Beatty finance construction and receive lease payments following completion of the projects, the lease-leaseback contracts required the District to make progress payments disguised as “lease payments” to Balfour Beatty during construction of the project. Once again, the 2nd District Court of Appeals disagreed.
In the latest shootout, McGee sued the District arguing that the lease-leaseback projects with Balfour Beatty should be set aside because Balfour Beatty provided pre-construction services to the District. By providing pre-construction services, McGee argued, Balfour Beatty was an employee of the District. And as an employee of the District, Balfour Beatty had a conflict of interest under Government Code Section 1090, which precludes employees of a public agency to be financially interested in any contract with the public agency, and shouldn’t have been allowed to act as the general contractor on the projects.
A bench trial was held and among the evidence presented was testimony that the projects at issue had been completed. Finding that McGee’s case was an “in rem reverse validation action,” which is simply a fancy phrase for an action seeking to invalidate an action by a public entity, the trial court found that McGee’s in rem reverse validation action was moot because the projects were completed and there was nothing left to invalidate.
On appeal, the Court of Appeal explained that “[a] case is considered moot when ‘the question addressed was at one time a live issue in the case,’ but has been deprived of life ‘because of events occurring after the judicial process was initiated.'”:
Because “the duty of every . . . judicial tribunal . . . is to decide actual controversies by a judgment which can be carried into effect, and not give opinions upon moot questions or . . . to declare principles or rules of law which cannot affect the matter in issue in the case before it[,] [I]t necessarily follows that when . . . an event occurs that renders it impossible for [the] court, if should decide the case in favor of plaintiff, to grant him any effectual relief whatsoever, the court will not proceed to formal judgment.”
Here, explained the Court of Appeals, Government Code Section 860 permits an interested person to bring an action challenging the validity of an action by a public entity. Known as a “reverse validation action,” explained the Court, Section 860 is intended to provide a “speedy determination of the validity of the public agency’s action” and “[g]iven the public interest in quickly resolving the legality of agency decisions, ‘California law has long recognized that the completion of a public works project moots challenges to the valid of the contracts under which the project was carried out.'” And, here, held the Court, the projects at issue had been completed at the time of the trial court’s decision.
In response, McGee argued that his lawsuit was not an in rem reverse validation action, but rather a taxpayer claim under Code of Civil Procedure Section 526a, which authorizes a taxpayer to file an action to enjoin waste by a local public agency. As such, argued McGee “mootness” did not apply.
The Court of Appeals disagreed:
[R]egardless of how McGee characterizes his conflict of interest claims or the relief he seeks, the gravamen is the invalidity of the lease-leaseback agreements. McGee admits he seeks “a finding that the contracts were ultra vires, illegal, void, and unenforceable due to a conflict of interest.” His complaints alleged as much. A judgment finding Balfour violated section 1090 would render the lease-leaseback agreements “‘void from [their] inception.'” (McGee II, supra, 247 Cal.App.4th at p. 247.) Although McGee focuses on the fact that he seeks disgorgement directly from Balfour, any judgment ordering disgorgement would require a finding the lease-leaseback agreements were void. In other words, the agreements would necessarily be invalidated.
Further held the Court of Appeals:
A judgment in McGee’s favor would also undermine the very purpose behind the validation statutes. A cloud has hung over the challenged projects for years, destroying any hope in prompt validation of the underlying lease-leaseback agreements. That delay is largely attributable to McGee, who strategically chose not to prevent the projects from moving forward. Beyond the specific projects here, a judgment in McGee’s favor would threaten future projects with the prospect of lawsuits long after completion. That would undoubtedly inhibit the District’s ability to obtain financing for them.
So there you have it. The presumable end to the McGee lease-leaseback cases. But then again, with McGee, never say never.
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