Wednesday, April 13, 2016
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C.A. Revives Conflict of Interest Claim Against Builder
Panel Says Construction Company/Consultant’s Dual Role May Violate Statute
By KENNETH OFGANG, Staff Writer
A lawsuit charging a builder with conflict of interest in connection with construction projects in the Torrance Unified School District has been partially revived by the Court of Appeal.
Div. Eight, in an unpublished opinion by Justice Madeleine Flier, said the role of Balfour Beatty Construction, which supplied preconstruction consulting to the district in connection with the building of two elementary schools, in addition to having served as the builder, may have violated Government Code §1090.
The statute generally prohibits a public official or employee from acting on a contract in which that person has an interest. The Supreme Court explained in a 2013 decision that the law “is concerned with ferreting out any financial conflicts of interest, other than remote or minimal ones, that might impair public officials from discharging their fiduciary duties with undivided loyalty and allegiance to the public entities they are obligated to serve.”
James McGee and the California Taxpayers Action Network claimed in their complaint that as project manager, Balfour “filled the roles and positions of officers, employees, and agents” of the district.
Split Ruling
The appellate panel said that Los Angeles Superior Court Judge Ramona G. See erred in sustaining a demurrer to the conflict-of-interest cause of action. But it upheld the dismissal of claims that the district violated the competitive bidding provisions of the Education and Public Contract codes.
This is the second appellate reversal in litigation between McGee and Balfour Beatty and the district. In January of last year, the Court of Appeal reached a similar result in a suit over the construction of three other schools.
The contracts involved in the current litigation call for a leaseback arrangement in which the builder pays the district $1 per year to lease each school site, then leases the property back to the district for an amount determined by the cost of construction, subject to a guaranteed maximum.
McGee and the taxpayer group claim such agreements are a subterfuge designed to avoid competitive bidding.
The use of such leaseback arrangements has long been controversial.
State Official’s Opinion
In 2004, the executive officer of the State Allocation Board, which distributes state funds to school districts, opined that such arrangements to not create a “legitimate lease” unless contractors finance the costs of construction. The executive officer said that many districts were using Education Code §17406, which exempts lease-leaseback arrangements from competitive bidding requirements, to bypass the checks and balances that competitive bidding provides.
The executive officer reported that “virtually none of the projects currently using lend lease-back arrangements actually have financing provided by the developer” and the projects were “in every regard typical public works projects, except that they had not been competitively bid.”
The board, however, did not adopt the executive officer’s position, and See rejected the plaintiffs’ claims, which were modeled on the report. She also sanctioned plaintiffs’ attorney Kevin Carlin under Code of Civil Procedure §128.7, finding the action frivolous in light of the dismissal of the first McGee suit—the Court of Appeal had not yet reversed—and the approval of such arrangements in numerous validation actions.
The Fifth District Court of Appeal, however, subsequently adopted the plaintiffs’ theory in Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, holding that a lend-leaseback arrangement violated §17406.
Flier rejected the Fifth District’s reasoning, saying it was contrary to the plain language of the section. “If the Legislature shares plaintiffs’ view that the competitive bid process is superior, it may amend section 17406 to specify that it requires a school district to obtain competitive bids,” she wrote.
Compton Case Cited
The conflict-of-interest claim, however, should have survived demurrer, the justice said, citing Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114. The court there held that a contractor who bribed city officials to obtain an exclusive waste hauling franchise while also running the city’s in-house waste division had violated §1090.
Flier also rejected the claim that consultants are not subject to §1090 because Public Contract Code §10365.5, a different conflict-of-interest statute, applies to consultants specifically. The two sections are not mutually exclusive, the jurist concluded.
The panel also reversed the sanctions award against Carlin, accepting Balfour’s concession that the lawsuit cannot be considered frivolous in light of Davis.
Carlin represented the plaintiffs on appeal, with John G. McClendon of Leibold McClendon & Mann representing Carlin on the sanctions issue; Jason R. Thornton and Louis J. Blum of Finch, Thornton & Baird representing Balfour Beatty, and Martin A. Hom and Jennifer D. Cantrell of Atkinson, Andelson, Loya, Ruud & Romo representing the Torrance Unified School District.
The case is McGee v. Balfour Beatty Construction LLC, B262850.
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