IMPORTANCE OF STATEWIDE ISSUE:

In the latest decision, the Fifth District Court of Appeal held that the legal action was not moot even though the school construction was completed, and that taxpayers can seek disgorgement/return of payments made to the contractor. The court of appeal concluded that the contract could not be immunized from legal attack through a court validation proceeding because the lease-leaseback contract at issue did not include financing. Other California appellate courts have come to different conclusions in similar lease-leaseback cases, creating uncertainty for local educational agencies (LEAs) about when such contracts are subject to validation actions, a process that helps local agencies determine the validity of the contract and give more certainty for districts in the construction process.

The ELA filed a letter on Jan. 29, 2021, in support of the district’s Petition for Review, encouraging the court to take the case and clarify whether/when lease-leaseback contracts are subject to validation, and whether taxpayer actions can challenge the validity years after a project has been completed.

On March 17, 2021, the California Supreme Court granted the Petition for Review, limited to the question of whether a lease-leaseback construction contract financed solely through bond proceeds, rather than by a contractor, is a “contract” subject to validation (validation can preclude legal challenges to the contract). This limited review should address the appellate court split around the applicability of the validation statute, and whether lease-leaseback contracts must include a financing component to be subject to validation.

If the court rules that financing must be part of the agreement for a lease-leaseback agreement to be considered a contract within the meaning of Government Code 53511, then the agreement would be subject to validation, thereby creating a time certain for challenging the validity of the contract. If the court holds it is not a contract under Gov. Code 53511, then the agreement would not be subject to validation and, as happened in the Davis case, the validity of the contract could be challenged allowing for potential disgorgement even after the project has been completed. This would result in uncertainty for both LEAs and contractors that rely on lease-leaseback agreements and would have a chilling effect on the continued use of such agreements.

On Aug. 20, 2021, CSBA and the ELA filed an amicus brief in support of Fresno USD, highlighting how schools have struggled with the uncertainty created by the courts’ decisions in Davis I and Davis II, and explaining how LEAs have an ongoing interest in using lease-leaseback provisions in a manner that complies with the law and ensures that their contracts are valid. The brief further argues that the challenged agreements in this case should be construed as contracts subject to validation under Gov. Code 53511.