FACILITY FUNDING — LEASE-LEASEBACK CONTRACTS
Davis v. Fresno Unified School District (Davis II) – California Supreme Court (Case No. S266344)
MEMBER(S) INVOLVED: Fresno Unified School District
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.
On Aug. 20, 2021, CSBA’s 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.
Ultimately, the court held that Fresno USD’s arguments in favor of the validation cause of action were not persuasive because a lease-leaseback is not a “contract” as defined in the applicable Government Code section. The court concluded “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.”
The court made a point to state that the split in court of appeal decisions about structuring lease-leaseback agreements without a multiyear leaseback component, similar to what Fresno USD did for the middle school project, was not analyzed or decided here. This decision focused only on the specific question of if the validation action was the “appropriate procedural vehicle for challenging the validity of a lease-leaseback project that is independently financed by the school district.” Moving forward, the case will return to the trial court level for the disgorgement cause of action to be considered and decided.