Calhouns Can(n)ons

Regarding the Taxpayers Watch Lawsuit to Personally Sue CSD Board Members

The following is the Judge's ruling on the TPW case, which is suing 5 CSD Board members, personally, not as a Board. The trial on several of the triable issues of fact is tentatively scheduled to go forward in early Dec, wherein the trier of fact will determine if the “facts” are “facts,” not allegations, and whether even if “facts” are facts, do those facts still remain “legal.”

Proposed Tentative Ruling on Motion for Summary Adjudication
Taxpayer’s Watch v LOCSD, et al., CV 050862

Plaintiffs’ second amended complaint challenges the propriety of certain expenditures approved by the individual defendant members of the Los Osos Community Services District. Code of Civil Procedure §526a provides standing to a taxpayer to challenge any illegal expenditure of, waste of, or injury to, the estate, funds, or other property of a county, town or city.

Plaintiffs seek to compel the individual defendant members of the LOCSD to personally reimburse the District for the challenged expenditures.

[W]e start with the general principle that expenditures by an administrative official are proper only insofar as they are authorized, explicitly or implicitly, by legislative enactment.... [S]uch executive officials are not free to spend public funds for any 'public purpose' they may choose, but must utilize appropriate funds in accordance with the legislatively designated purpose." Accordingly, a public official who controls public funds may be held personally liable to repay improperly expended funds if he has failed to exercise due care in permitting the expenditure. (Stanson v. Mott (1976) 17 Cal.3d 206, 226-227)

A cause of action under Code of Civil Procedure section 526a will not lie where the challenged governmental conduct is legal and conduct in accordance with regulatory standards “is a perfectly legal activity.” (Coshow v. City of Escondido (2005) 132 Cal.App.4th 687, 714).

Even though Defendants’ motion for summary adjudication ultimately seeks to establish that the challenged expenditures were lawful, the court is mindful of the fact that under Stanson v. Mott, an illegal expenditure is only one element of liability. If the expenditure is found “unlawful”, Plaintiffs must still prove an absence of due care in making the expenditure and resulting damage. (Stevens v.Geduldig (1986) 42 Cal.3d 24, 35)

In Stevens v.Geduldig, the trial court found that the chairman of a Governor's tax reduction task force had been negligent in contracting to use funds provided by the State Department of Social Welfare for purposes unrelated to that department and that the Director of the State Health Care Services Department had been negligent in authorizing the chairman to enter into consulting subcontracts on behalf of that department.

The Supreme Court reversed the trial court’s judgment against the two officials. Despite finding that the expenditures were improper, the court ruled that subsequent reimbursement by the Governor’s office eliminated all damages attributable to the negligence of the defendants.

When the only illegality is the source of the funds, and the state has subsequently corrected its error and transferred funds from a proper source, we see no reason to require a repayment that would unjustly enrich the state treasury and leave the contractor without compensation for services rendered. Stevens v.Geduldig (1986) 42 Cal.3d 24, 35

To the extent that plaintiffs, at trial, rely upon the theory that the expenditures are unlawful, they will have the burden to establish Defendants’ lack of due care and resulting damage. Whether Defendants were negligent and whether the District suffered actual damage because of the payment of its legitimate obligations will, no doubt, figure prominently.

Fire Protection Fee:
The District paid $760,000.00 to the CDF to continue fire protection services. In June of 2006 the operating fund was insufficient to cover that expense. The District paid the fee from funds transferred from the District’s LAIF Account. Plaintiffs contend that the LAIF fund was originally derived from the 2002 Wastewater Project Bond Sales and was not a legal source of funds to pay the CDF fire debt. Therefore, the expenditure was illegal.

Defendant’s Material Fact 5: In reliance on the declaration of Lisa Schicker and Exhibit Q, defendants assert that the LAIF account was a legal source of revenue to pay this obligation because at least $760,000.00 (earmarked for fire and water reserves) remained in the account.

Exhibit Q is a document that shows the deposits and expenditures of LAIF Account -1011. The disbursements are only identified as “transfers to op”. Defendants assert that sufficient fire and water reserves remained in the LAIF account because all of the other disbursements were made solely for purposes of the wastewater treatment plant.

Exhibit Q is simply insufficient to prove that sufficient fire and water reserves remained in the LAIF account if for no other reason than the document lacks any detail concerning the expenditures identified as “transfers to op”.

Paragraph 13 of Bruce Buell’s declaration disputes Fact 5. He states that, in 2002, the Board adopted Resolution No. 2002-48 that authorized repayment of the interfund loans with bond proceeds. (See Exhibit C) He further states that the repayments were completed shortly after the bond proceeds were received. Therefore, no funds in the LAIF account were fire and water reserves at least up to the time that he was placed on administrative leave in October of 2005.

Fact 5 is not adequately established by the evidence. A more detailed accounting could prove that fire and water reserves were maintained in the LAIF account and sufficient money remained at the time the Fire Services payment was due. However, Exhibit Q is inadequate because there is no description of the real nature of the disbursements from the LAIF account. Moreover, Buell’s declaration disputes the assertion that fire and water reserve funds remained in the LAIF account.

Accordingly, the motion for summary adjudication on the issue of the Fire Protection Fee is denied.

Bond Assessment Payment:
The District paid $716,000.00 on a bond assessment payment from its Reserve fund in the LAIF account.

Under the terms of Resolution 2002-33 and the bond agreement, bond payments were to be made with assessment revenues held in the Redemption Fund. Where there is a shortfall, payments were to be made from a Reserve Fund. [See Exhibit A at pages 10-11; Exhibit R where MBIA demands payment from the reserve fund and Buell declaration at ¶8(c)]

There is no dispute of fact that the reserve fund was a legal source of payment of bond payment. As such, that expenditure is legal. Plaintiffs fall back to an argument that the expenditures that depleted the Redemption fund were illegal. That issue is not tendered in the prayer of the complaint or in the motion for summary adjudication.

Accordingly, the motion for summary adjudication on the issue of the legality of the Bond Assessment payment is granted. There is no triable issue of fact that payment was made from a legal source of the budget.

Settlements:

Government Code §1090:

The District settled five separate lawsuits on November 23, 2005. Concerned Citizens of Los Osos was the plaintiff in three of those lawsuits.

Plaintiffs’ second amended complaint alleges that the settlements were collusive or sham settlements. Specifically, paragraph 13 complains that the dismissal of the Measure B lawsuit pending on appeal with a payment settling that case was improper. The complaint further alleges that defendants had personal ties to the organizations that benefitted from the settlements and that defendants benefitted directly or indirectly from the settlement payments. Paragraph 14 alleges that the Board used state money from the State Water Quality Control Board’s Revolving Fund program designated to pay contractors who worked on the project. Paragraph 21 alleges that the settlements were paid without legal cause.

Defendants’ motion argues that none of the individual board members were in violation of Government Code §1090 because they derived no financial or pecuniary benefit from the settlements. Government Code § 1090 codified the common law prohibition of public officials having a financial interest in contracts they make in their official capacities. The purpose of this section is to prohibit self-dealing, not representation of the interests of others. (See Breakzone Billiards v. City of Torrance (2000) 81 Cal.App.4th 1205, 1230 and 1231 )

Plaintiffs attempt to dispute Fact Number 23 with Plaintiff’s Exhibits 12 and 13. They are proffered in an effort to establish that Schicker and Tacker received indirect financial benefits in the form of compensation because they were “covert” members of CCLO.

The exhibits consist of copies of email communications between Schicker and Tacker on the one hand with attorneys Parker & Hawley as well as Julie Biggs on the other. The exhibits establish that Schicker and Tacker were in communication with the above referenced attorneys concerning the status of and strategy for handling of the litigation.

The email correspondence with Parker & Hawley also reveals discussion concerning the need for payment of attorneys’ fees and costs to keep the litigation going. The tenor of the communications relate to CCLO’s obligation to keep the account current. Exhibit 12 establishes that CCLO’s lack of money to finance the litigation, in large part, led to Parker & Hawley’s withdrawal.

The settlement agreements of the CCLO lawsuits (Defendants’ Exhibit K) establish that the settlement covered fees for services through November 15, 2005, a period that would encompass Parker & Hawley’s representation. However, the evidence does not establish that Schicker and Tacker received a financial or pecuniary benefit from the settlements because these exhibits do not establish that they were personally liable for fees incurred by CCLO. Moreover, according to the email communications, Keith Swanson appears to be the party who was responsible for keeping the accounts current on CCLO’s behalf.

Footnote 1 of plaintiff’s opposition makes reference to Schicker’s signature on CCLO’s contract for legal services. Plaintiffs state that the contract is not presented in the opposition because there is a dispute about its admissibility.

Plaintiffs’ points and authorities also make reference to Schicker’s deposition where she states she signed a contract in a representative capacity. This does not establish any personal liability for the attorney’s fees incurred.

There is no evidence presented that would establish that Schicker obligated herself to be personally responsible for the payment of attorney’s fees.

Plaintiffs raise no dispute to the assertion in Fact 23 that Fouche, Senet and Cesena had no pecuniary or financial interest in any of the settlements whatsoever.

Based upon the evidence presented in the separate statement of facts, plaintiffs have not adequately disputed Fact 23.

Fact 27 states that no defendant was an officer, director or member of CCLO at any time that BWS represented CCLO in the actions. Although it is not clear from Exhibits 12 and 13 when Burke, Williams and Sorenson undertook representation of CCLO, Julie Biggs is associated with that law firm. Communications with Biggs are set out in Exhibit 13. Those communications do involve some strategic decisions concerning the ongoing litigation. The evidence contained in Exhibit 13 could lead a reasonable trier of fact to conclude that Tacker acted as a member to CCLO because she participated in what appears to be confidential communications. Therefore, Fact 27 appears to be disputed.

Plaintiffs also argue that the settlements were improper as a gift of public funds in violation of Cal. Const., art. XVI, § 6, despite the fact that the pleading does not make this specific claim. Finally plaintiffs argue that the settlements were paid from an illegal source of funds.

Gift of Public Funds:

[T]he settlement of a good faith dispute between the State and a private party is an appropriate use of public funds, neither wasteful within the meaning of section 526a, nor a gift barred by article XVI, section 6, because the relinquishment of a colorable legal claim in return for settlement funds paid by the State is good consideration and accomplishes a valid public purpose. County Foundation v. Irvine Co. (1983) 139 Cal.App.3d 195, 200

Where funds are expended pursuant to a settlement agreement in exchange for wholly invalid claim, no “public purpose” is achieved. Such an expenditure violates the gift clause of Cal. Const., art. XVI, § 6. Orange County Foundation v. Irvine Co. (1983) 139 Cal.App.3d 195, 201

The court in Jordan v. California Dept. of Motor Vehicles (2002) 100 Cal.App.4th 431 followed the rationale in Orange County Foundation when it invalidated an arbitrator’s award of attorney’s fees in the amount of $88,000,000.00 when a statute limited such an award to $18,000,000.00. The court reasoned that, because the attorneys had no colorable claim to fees in excess of $18 million, any payment over that amount served no public purpose. (Jordan v. California Dept. of Motor Vehicles (2002) 100 Cal.App.4th 431, 451)

The issue of whether the settlement of the five cases constitutes a gift of public funds is not raised in the motion for summary adjudication. Therefore, the motion does not trigger plaintiff’s burden of production of evidence nor does it dispose of plaintiff’s entire claim.

However, to prevail on the theory that the settlements were an improper gift of public funds, plaintiffs will have the burden to establish that each settlement was of a compromise of a wholly invalid claim.

"[C]ompromise of a doubtful claim asserted and maintained in good faith constitutes a sufficient consideration for a new promise, even though it may ultimately be found that the claimant could not have prevailed." (Union Collection Co. v. Buckman, (1907) 150 Cal. 159, 163) Thus, surrender of a possibly meritless claim which is disputed in good faith is supported by valid consideration.(Stub v. Belmont, (1942) 20 Cal.2d 208, 218)

The court is mindful that there are numerous reasons to settle and resolve pending lawsuits, even those that have little or no merit. The issue of whether the settlements constitute a gift of public funds requires a very narrow inquiry. It is not an invitation to retry the merits of each compromised lawsuit nor does it provide the opportunity to examine the propriety of the reasons for the settlement. The key issue is whether there was a compromise of a knowingly unfounded claim. (Orange County Foundation v. Irvine Co. (1983) 139 Cal.App.3d 195, 200)

Source of Funds for Settlement:

Plaintiffs challenge the settlement payments on the basis that they were drawn from the State Water Quality Control Board Revolving Fund. Here again, plaintiffs have the burden to establish the elements of illegality and lack of due care on the part of the defendants. This would require the same analysis as set out in Stanson v. Mott. Plaintiff will have the burden to prove expenditures from an illegal source and negligence resulting in damage.

Failure to Request Corrective Action:

Defendants assert that plaintiffs failed timely request corrective action. There are triable issues concerning whether this was a futile act.

Conclusion:

Accordingly, the motion for summary adjudication of the claim related to the payment of the fire service fund is denied. Fact 5 has not been adequately established by the evidence and is disputed in the declaration of Bruce Buel.

Defendants’ motion for summary adjudication of the claim related to the bond fund is granted. There is no dispute of fact that the source of the payment was a proper and legal source.

The motion for summary adjudication of the claim related to settlement of litigation is denied. Fact 27 is disputed. Moreover, the facts, even if undisputed, do not dispose of plaintiffs’ entire claim.

To the extent that the motion is based upon a contention that plaintiffs failed to timely request corrective action, there are triable issues of fact concerning whether the effort would have been futile.
The brief incorrectly refers to Exhibits 11 and 12.