KAATZ v. CITY OF SEASIDE

Filed 9/20/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

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We also deem it of some significance that, since City of Ontario, supra, 2 Cal.3d 335, was decided in 1970, the Legislature has not acted to modify in any way Government Code section 53511 to give a more expansive definition of the term “contracts” than its construction by the Supreme Court. (See Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 1155 [Supreme Court “generally presume[s] the Legislature is aware of appellate court decisions”].) Furthermore, the Legislature has amended Government Code 53511 since 1970. In 2004, it added subdivision (b) to the statute but did not change the original text of the statute other than to insert subdivision (a) immediately before it. (Stats. 2004, ch. 470, § 3.) This fact suggests that the Legislature had no quarrel with City of Ontario‘s restrictive interpretation of the term “contracts.” (See Marina Point, Ltd. v. Wolfson (1982) 30 Cal.3d 721, 734: “[W]hen the Legislature amends a statute without altering portions of the provision that have previously been judicially construed, the Legislature is presumed to have been aware of and to have acquiesced in the previous judicial construction.”) Furthermore, in the Legislature’s addition of subsection (b) of Government Code section 53511, it repeated the same language in the original statute that is at issue here, “i.e., “bonds, warrants, contracts . . . .” (See fn. 18, ante.) This fact further suggests the Legislature’s concurrence with City of Ontario‘s earlier interpretation of the statute and, in particular, its interpretation of the term “contracts.” (See City of Long Beach v. Payne (1935) 3 Cal.2d 184, 191: “It is a well-recognized rule of construction that after the courts have construed the meaning of any particular word, or expression, and the legislature subsequently undertakes to use these exact words in the same connection, the presumption is almost irresistible that it used them in the precise and technical sense which had been placed upon them by the courts.”)

Moreover, it is clear that the Legislature knows how to draft language that clearly provides a broad scope for matters embraced by the validation statutes. (See generally Dyna-Med, Inc., supra, 43 Cal.3d at p. 1395 [rejecting construction of statute as authorizing Fair Employment and Housing Commission to award punitive damages, where review of other statutes disclosed that “when the Legislature intends to authorize an agency to award damages for discrimination, it does so expressly”].) For example, a number of statutes expressly provide for proceedings under sections 860 through 870 to validate any action by the public agency. (See, e.g., Gov. Code, §§ 26170.20, 55855; Health & Saf. Code, §§ 2006, 9006, 13806; Pub. Resources Code, § 5780.9.) Likewise, various statutes refer to sections 860 through 870 to permit proceedings to determine the validity of any contract. (See, e.g., Pub. Contract Code, § 20434; Wat. Code, §§ 22670, 35855, 50979, 71752, 81442, 81662; Wat. Code App., §§ 52-39, 64-64, 98-64, 100-19.5, 101-19.5, 112-19.5, 114-163, 118-412, 127-51.) And, significantly, some of the statutes authorizing the testing of “any contract” by an action brought pursuant to the validation statutes were enacted before the 1963 enactment of Government Code section 53511. (See Wat. Code, §§ 35855, 50979; Wat. Code App., §§ 98-64, 100-19.5, 101-19.5.)[1]

It is therefore clear that “contracts” under Government Code section 53511 should be assigned a restricted meaning. Rather than authorizing proceedings to validate any public agency contract--or even any contract constituting a financial obligation of a public agency[2]--the “contracts” under Government Code 53511 are only those that are in the nature of, or directly relate to a public agency’s bonds, warrants or other evidences of indebtedness. We next examine whether, in light of this restricted meaning, the City’s execution of the LDA was an action embraced by Government Code section 53511.

d. the LDA and the validation statutes

The LDA bears no relationship to the issuance of bonds. No bonds were issued or contemplated in connection with the proposed transaction under which the City would acquire Hayes Park and then resell it to K&B Bakewell. Likewise, the LDA does not relate to warrants.

We conclude further that the LDA neither constituted nor related to “evidence[] of [public agency] indebtedness.” (Gov. Code, § 53511.) In the context of the validation statutes, the LDA did not represent a transaction in which the City borrowed funds for a specific purpose (i.e., the acquisition of the Property). The LDA did not memorialize or otherwise describe an indebtedness incurred by the City. And we reject respondents’ contention to the contrary. In essence, respondents assert that because the City was not itself directly providing the funds for purchasing the Property--but instead was using a portion of the funds provided by K&B Bakewell in exchange for the City’s subsequent, immediate resale of the Property--the LDA was a “financing mechanism” that was subject to the validation statutes. But neither the LDA nor the resolution authorizing its execution spoke in terms of loaning funds or otherwise providing money to the City for its acquisition of the Property. We believe that treating the LDA as a financing agreement would be an unnatural characterization of the document.

Respondents raise several additional arguments that the LDA was subject to a validating proceeding. First, they contend that the Supreme Court distinguished between “routine” or “run-of-the-mill” public agency contracts that are not subject to the validation statutes, and those contracts that “embody important policy decisions affecting the public at large.” (City of Ontario, supra, 2 Cal.3d at p. 341.) Respondents argue that because the LDA fell into the second category, it was governed by the validation statutes. City of Ontario, however, does not establish such a bright-line test. A careful reading of the case discloses that the passage relied on by respondents was meant as an illustration of the breadth of public agency actions accomplished by contract, not as a statement that agency contracts are subject to the validation statutes if they “embody important policy decisions affecting the public at large.” (Id. at p. 341.) Further, as seen from our discussion, ante, nothing in the legislative history of either the validation statutes or Government Code section 53511 suggests that the Legislature intended to provide for validation of public agency contracts where they were “important” or “affect[ed] the public at large.” Moreover, we believe such a “test” would create an unworkable formula for determining whether an agency contract was subject to validation.[3]

Second, respondents assert that the LDA was subject to the validation statutes because it was of such significance that “the lack of a prompt validating procedure [would] impair the public agency’s ability to operate.” (Walters, supra, 61 Cal.App.3d at p. 468; see also Graydon v. Pasadena Redevelopment Agency (1980) 104 Cal.App.3d 631, 644-645 (Graydon).) And they argue further that the absence of proceedings under the validation statutes here would “impair a public agency’s ability to operate financially.” (Friedland, supra, 62 Cal.App.4th 835, 843.)[4] But while having a prompt validating procedure to permit a public agency to operate without impairment may be a significant rationale for the validation statutes’ application to agency action as provided in the statutes (e.g., the issuance of bonds), this rationale should not be transformed into a test for determining the type of agency action encompassed by Government Code section 53511 and the validation statutes. Nothing in either City of Ontario, supra, 2 Cal.3d 335, or the legislative history suggests that Government Code section 53511 should be construed to mean that contracts or obligations are governed by the validation statutes if a contrary conclusion would result in the impairment of the public agency’s ability to operate (or to operate financially). Such a proposed standard is unsupported by either the legislative history of the statute or the intent of the Legislature. It is moreover a nebulous test, the application of which would result in uncertainty and inconsistent results based upon the extent to which individual judges might view a public agency’s ability to operate in a particular instance as impaired or not impaired by the absence of a validating proceeding.

Third, respondents argue that because the LDA concerned the City’s financial transaction with a third party, K&B Bakewell, it was thus subject to the validation statutes.[5] The genesis of this argument is apparently a statement in Walters, supra, 61 Cal.App.3d 460. Immediately following its reference to “impair[ment of] the public agency’s ability to operate” (discussed, ante), the court noted: “We feel that the possibility of future litigation is very likely to have a chilling effect upon potential third party lenders.” (Id. at p. 468; see also Friedland, supra, 62 Cal.App.4th at p. 843 [one objective of validation statutes “is to facilitate a public agency’s financial transactions with third parties by quickly affirming their legality”].) But if this were the standard, then any financial transaction between a public agency and a third party would be subject to the validation statutes, a proposition that is simply not true. (See fn. 35, ante, and cases cited therein.) And the extent to which the nonapplication of the validation statutes may have a chilling effect upon a third party to a transaction with a public entity is not a standard for determining whether the public agency action is, in fact, of the type that is covered by sections 860 through 870 and Government Code section 53511. As is true of the other so-called tests advanced by respondents that we have discussed and rejected, the “chilling effect” standard is unsupported by statutory construction and is an impracticable formula.

Moreover, the authorities upon which respondents rely do not suggest a different conclusion. For instance, in Graydon, supra, 104 Cal.App.3d at p. 634--which K&B Bakewell claimed at oral argument to be the principal case supporting its position--the Pasadena Redevelopment Agency sold approximately $58,000,000 in tax allocation bonds to finance the public cost of a retail shopping development, which included buildings and parking garages (one subterranean and two above-ground). The Graydon plaintiffs challenged a component of that project, namely, the award and execution by the agency of a contract (valued at approximately $12,000,000) for construction of the subterranean garage, claiming that it was illegal because it was awarded without competitive bidding. (Id. at pp. 634-635.) The appellate court held that the action was subject to the validation statutes because, while it may not have been a direct challenge to the agency’s issuance of bonds to fund the project, the subterranean garage contract was “an integral part of the whole method of financing the public costs associated with the retail center. The financing is by bonds issued by the Agency.” (Id. at p. 645.) Thus, the public agency action being challenged indirectly in Graydon was a public financing arrangement: “These bonds were intimately and inextricably bound up with the award of this contract [to construct the subterranean garage].” (Id. at p. 646.) The case before us involves no such challenge (direct or indirect) to a public financing arrangement.

In Walters, supra, 61 Cal.App.3d 460, the court concluded that the claims challenging the bidding and awarding of franchises for the collection and disposal of solid waste were not subject to the validation statutes. (Id. at p. 468.) But it held that sections 860 through 870 were applicable to the plaintiff’s claim challenging the county’s guaranty of the third party franchisees’ respective payment obligations for the purchase of heavy equipment. (Walters, supra, at pp. 468-469.) Thus, Walters is likewise factually distinguishable. Unlike Kaatz’s claims, the claim in Walters that was subject to the validation statutes did, in fact, concern a direct commitment of public funds for a project, namely, the guarantee of third party obligations. And while respondents argue that the holding in Walters supports a broad application of Government Code section 53511--enunciating a standard based on whether the “lack of a prompt validating procedure will impair the public agency’s ability to operate” (Walters, supra, at p. 468)--we have previously rejected that assertion.

Moreover, we disagree that respondents’ position is supported by Friedland, supra, 62 Cal.App.4th 835, a case that concerned bonds and a substantial commitment of public funds relating to their issuance. In Friedland, an aquarium project was being financed by the issuance of a nonprofit corporation’s revenue bonds in the amount of $130,000,000. (Id. at p. 838.) The project included pledges of designated funds by two public agencies as security for payment of the debt service on the bonds. (Id. at p. 839.) Following the entry of judgment on a validation action brought by the entities to validate (among other actions) the pledges, the plaintiffs brought suit to invalidate the public actions. (Ibid.) The court held that the pledges of public funds were proper subjects of the prior validation proceeding (id. at pp. 845) and rejected the plaintiffs’ contention that, notwithstanding the 60-day statute of limitations under the validation statutes, they could raise constitutional challenges at any time (id. at pp. 846-847).

Here, unlike Friedland, there was neither a pledge of public funds nor a project involving bonds. And there was no prior action filed by the City to validate its execution of the LDA. To the contrary, as Kaatz argues, there is no evidence that the City--at any time prior to joining in K&B Bakewell’s motion to dismiss (more than six months after Kaatz filed suit)--ever believed that the LDA was subject to the validation statutes. There was no reference to potential validating proceedings in the 34-page LDA. Nor did the City raise the issue of the alleged failure to bring a timely validating proceeding in its opposition to Kaatz’s application for preliminary injunction, or in its answer to the complaint. Thus, Friedland, supra, 62 Cal.App.4th 835, involved very different circumstances--a clear, substantial commitment of public funds as security for the issuance of bonds that had been the subject of prior validating proceedings-- than the case before us.

Furthermore, we reject the City’s claim that, based on language found in Friedland, 62 Cal.App.4th at page 843, public agency contracts under Government Code section 53511 are subject to the validation statutes if they are “contracts involving financing and financial obligations.” Nothing in Friedland suggests that by “financial obligations,” the court meant that any financial obligation incurred by a public agency is subject to the validation statutes. Such a suggestion would be unfounded since, as we have discussed (see fn. 35, ante), not all contracts that involve financial commitments by the agency are covered under the validation statutes. (See Phillips v. Seely, supra, 43 Cal.App.3d at p. 112.)

Lastly, K&B Bakewell cites Planning & Conservation League II, supra, 83 Cal.App.4th 892, in support of its claim that the term “contracts” in Government Code section 53511 should be read broadly to include the LDA. K&B Bakewell argues that the term “contracts” is not limited to public agency financing issues because those involved in Planning & Conservation League II were long-term contracts affecting water supply and distribution in the state--where “[f]inancing was not the issue . . . [but the contracts clearly involved] issue[s] of widespread public importance.” But in that case, the controversy on appeal did not concern whether the plaintiffs’ claims were subject to the validation statutes. Rather, the primary issues concerned whether the state Department of Water Resources had abdicated its statutory duty to serve as the lead agency in preparing the environmental impact report (EIR), and whether the trial court had erred in finding the EIR to have been sufficient. A secondary issue concerned whether the trial court had erred in granting summary adjudication of the validation cause of action on the basis that previously dismissed defendants were indispensable parties. The appellate court concluded that this ruling was error because an action pursuant to sections 860 through 870 is an in rem proceeding. (Planning & Conservation League II, supra, at pp. 921, 924-926.)[6] No issue was raised by the parties or addressed by the court concerning whether the public agency action challenged by the plaintiffs was a proper subject for validation. Therefore, Planning & Conservation League II, supra, 83 Cal.App.4th 892, offers no support for respondents’ contention that the LDA was subject to the validation statutes.

e. Conclusion

Based upon the foregoing, we conclude that the City’s conduct challenged in this action--the execution of the LDA and the City’s subsequent conveyance of the Property to K&B Bakewell pursuant to that agreement--were not matters embraced by the validation statutes and Government Code section 53511. In so concluding, we note that there are competing policy considerations. On the one hand, respondents, as well as amici curiae,[7] argue that important matters such as a public agency’s acquisition and subsequent resale of a large tract of land should be the subject of prompt final resolution by application of the validation statutes. Among the concerns is the risk that, absent the mechanism of prompt resolution that a validating proceeding provides, third parties such as developer K&B Bakewell would be unwilling to enter into a transaction such as the LDA here. Irrespective of this policy concern--and without offering an opinion here on its importance--we will not rewrite or interpret the validation statutes and Government Code section 53511 in a manner inconsistent with legislative history or intent, or in a way that is contrary to the rules of statutory construction.

We are also mindful of the competing policy concern militating against broad application of the validation statutes to render public agency actions incontestable. As the Supreme Court expressed in response to the potential application of Government Code section 53511 to all public agency “contracts”: “[I]f [Ontario’s] construction of the word ‘contract’ is correct, virtually every taxpayer has become an ‘interested person’ with regard to virtually every action of a local public agency. It is unreasonable to assume that the members of such a large and amorphous group are likely to have prompt notice of each agency action affecting them. Yet whether such a person has such notice or not, he is given only 60 days in which (1) to discover the existence, scope and effect of the agency's action, (2) to reach a conclusion as to its validity, (3) to determine whether the agency has instituted a validating proceeding or imminently intends to do so, and (4) if not, to prepare and file a proceeding of his own. In an age of increasingly complex government, this seems a heavy burden to impose on the vigilant taxpayer.” (City of Ontario, supra, 2 Cal.3d at p. 342.) We thus decline to interpret the validation statutes broadly insofar as they impose an abbreviated statute of limitations upon challenges to public agency actions, where the Legislature has not intended to do so. (See Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 396: “To establish any particular limitations period under any particular statute of limitations entails the striking of a balance between the two [public policies of applying time limits for filing actions to promote repose and the countervailing policy of having matters decided on their merits]. To establish any such period under any such statute belongs to the Legislature alone [citation], subject only to constitutional constraints [citation].”)[8]

DISPOSITION

The judgment entered on the order dismissing the second amended complaint is reversed.

Duffy, J.

WE CONCUR:

Mihara, Acting P.J.

McAdams, J.

Trial Court: Monterey County

Superior Court No. M65043

Trial Judge: Hon. Kay T. Kingsley

Attorneys for Plaintiff

and Appellant: Jay P. Renneisen

Law Offices of Jay P. Renneisen

Heidi K. Whilden

Law Offices of Heidi K. Whilden

Edward P. Dudensing

Law Offices of Edward P. Dudensing

Michael J. Whilden

Law Offices of Michael J. Whilden

Attorneys for Defendants

and Respondents City of Seaside, et al: Donald G. Freeman

Perry & Freeman

Claudia J. Martin

Lee C. Rosenthal

Goldfarb & Lipman

Attorneys for Defendants

and Respondents K&B Bakewell

Seaside Venture: Julie L. Woods

Barry R. Levy

Horvitz & Levy

Kenneth B. Bley

Cox, Castle & Nicholson

Attorneys for amicus curiae on

behalf of Respondents: Jennifer B. Henning

California State Association of Counties

David P. Landerman

Breanna E. Moorhead

Sheppard, Mullin, Richter & Hampton

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[1] Moreover, the language of Water Code section 71752, enacted in 1963 (Stats. 1963, ch. 1151, § 17, p. 2641) is interesting: “An action to determine the validity of any contract authorized by Article 1 (commencing with [Water Code] Section 71720) of Chapter 5 of this part and any bonds, notes or other evidences of indebtedness may be brought pursuant to Chapter 9 (commencing with Section 860) of Title 10 of Part 2 of the Code of Civil Procedure.” Thus, as of 1963, the Legislature was clearly able to promulgate statutes that used the term “contracts” with an unrestricted meaning, separated from terms with a more restricted scope, as contrasted with the syntax of Government Code section 53511 (“bonds, warrants, contracts, obligations, or evidences of indebtedness”), assigning a much narrower meaning to the term “contracts.”

[2] If Government Code section 53511 were construed to authorize validating proceedings for any contract constituting an obligation and/or financial obligation of a public agency, its scope would be unrestricted. Such a construction would yield the conclusion that “contracts’ under Government Code section 53511 would even include agency contracts previously held to not be subject to the validation act. (See, e.g., Walters, supra, 61 Cal.App.3d 460 [franchises for collection and disposal of solid waste]; Smith v. Mt. Diablo Unified Sch. Dist., supra, 56 Cal.App.3d at p. 421 [school district contract to acquire computer]; Phillips v. Seely, supra, 43 Cal.App.3d at p. 112 [contract to retain attorney to provide legal services to indigents].) Thus, just as the term “contracts” must be interpreted by reference to the four other terms in Government Code section 53511 surrounding it, so must the term “obligations” be so construed to give it a more restrictive meaning.

[3] Arguing against the proposition that the applicability of the validation statutes to public agency contracts is determined by whether they are “important” or “affect the public at large” (City of Ontario, supra, 2 Cal.3d at p. 341), Kaatz relies extensively on a recent decision of the Third District Court of Appeal for which review was subsequently granted by the Supreme Court. (See In re Bay-Delta Programmatic Environmental Impact Reprt Coordeinated Proceedings (2005) 133 Cal.App.4th 154, review granted sub. nom. Laub v. Davis Jan. 25, 2006, S138975, S138974.) Accordingly, we have not considered the case in reaching our conclusion. (Cal. Rules of Court, rules 976(d)(1), 977(a).)

[4] The trial court adopted this reasoning: “The court finds . . . that the LDA is the type of contract that the city’s ability to operate financially and to proceed with its contractual obligations would be substantially impaired without such a prompt validation requirement. . . .

. . .

. . . Requiring a validation action under the facts of this contract fulfills [the] objective[ of] . . . limit[ing] the extent to which delay due to litigation may impair a public agency’s ability to operate financially.”

[5] It is apparent that the trial court based its decision in part on this factor: “Significant third party financial interests also are affected by this type of contract [the LDA]. . . .

. . .

. . . Requiring a validation action under the facts of this contract fulfills [the] objective[ of] . . . facilitat[ing] a public agency’s significant financial transactions with third parties by quickly affirming their legality.”

[6] In so doing, the appellate court held that the trial court’s prior ruling granting the motion to quash of the claimed indispensable parties--and the Supreme Court’s subsequent dismissal of the plaintiffs’ appeal of that order in Planning & Conservation League I, supra, 17 Cal.4th 264--did not preclude the plaintiffs’ subsequent summary adjudication motion. (Planning & Conservation League II, supra, 83 Cal.App.4th at pp. 922-924.)

[7] We have considered the respective amicus briefs filed by (1) California State Association of Counties, and (2) California Building Industry Association, Building Industry Legal Defense Foundation, and Homebuilders Association of Northern California.

[8] Because we conclude that the validation statutes are inapplicable to the claims asserted in the second amended complaint and the court therefore erred in dismissing the action, we need not address Kaatz’s remaining arguments in support of reversal of the judgment. (See Hiser v. Bell Helicopter Textron Inc. (2003) 111 Cal.App.4th 640, 655 [appellate courts generally “decline to decide questions not necessary to the decision”].) Furthermore, we do not address the merits of K&B Bakewell’s demurrer to the second amended complaint on which the trial court expressly stated that it took no action in light of its granting of the motion to dismiss. (See Walters, supra, 61 Cal.App.3d at p. 469, fn. 2 [court reviewing dismissal based on validation statutes may reverse without deciding merits of separate demurrer not ruled on by trial court].)