Genuine Dispute Summary Judgment Reversed for Abuse of Discretion and Trial of Fact Questions About Expert Opinions

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel

In Fadeeff v. State Farm General Ins. Co. (No. A155691, filed 5/22/20 ord. pub. 6/8/20), a California appeals court held that triable issues of fact and the trial court’s failure to address a request for a continuance precluded summary judgment for an insurer under the genuine dispute doctrine.

In Fadeeff, the policyholders made a claim to State Farm for smoke damage to their home from the 2015 Valley Fire in Hidden Valley Lake, California. With State Farm’s approval, the insureds retained the restoration company, ServPro, to assist with smoke and soot mitigation. State Farm documented smoke and soot on the interior walls, ceilings and carpeting, and on all exterior elevations, including on the deck and handrail. State Farm made a series of payments on the claim totaling about $50,000.

The insureds then hired a public adjuster and submitted supplemental claims for further dwelling repairs and additional contents replacement, totaling approximately $75,000. State Farm responded by using its own independent adjuster to investigate, who was neither licensed as an adjuster, nor as a contractor. State Farm also retained forensic consultants for the structure and the HVAC system, but neither the independent adjuster nor the consultants were aware that State Farm had an internal operation guide for the use of third-party experts in handling first party claims, which guidelines were therefore not followed. In addition, the consultants made allegedly superficial inspections, with one attributing smoke and soot damage to other sources of combustion, including the insureds’ exterior propane barbecue, an internal wood fireplace and wood stove and candles that had been burned in the living room. None of the consultants asked the insureds when they had last used any of the sources of combustion.

State Farm denied the supplemental claim and in the subsequent bad faith lawsuit, State Farm, relying on its use of experts, moved for summary judgment on the ground that the “genuine dispute” doctrine defeats the bad faith claim where an insurer reasonably relies upon expert opinions in reaching a claim decision. The insureds’ opposition was based on declarations from their own adjuster and expert, who opined that the work performed to date had not completely removed soot throughout the structure, or the HVAC system. The declaration from the insureds’ expert also refuted the opinions of State Farm’s expert. Plus, the insureds made a request for a continuance under Code of Civil Procedure section 437c(h), which authorizes a court to order a continuance for additional discovery, on affidavits of necessity.

At the hearing on the summary judgment motion, the trial court did not address the request for continuance. The court sustained State Farm’s objections to portions of the insureds’ declarations and reports, which gutted the insureds’ evidence contradicting State Farm’s expert, and granted State Farm’s motion. On appeal, however, the appeals court found both factual questions and an abuse of discretion by the trial court, mandating reversal.

Regarding the former, the Fadeeff court said that the use of experts does not automatically insulate an insurer from bad faith liability under the genuine dispute doctrine. (Citing Guebara v. Allstate Ins. Co. (9th Cir. 2001) 237 F.3d 987, 994.) In particular, the Fadeeff court said that where the dispute is purely factual, such as differing opinions of experts, whether there was a genuine dispute can only be decided on a case-by-case basis. (Citing Chateau Chamberay Homeowners Assn. v. Associated International Ins. Co. (2001) 90 Cal.App.4th 335, 348.) The Fadeeff court quoted Chateau Chamberay’s list of circumstances where a biased investigation claim should go to jury: (1) the insurer was guilty of misrepresenting the nature of the investigatory proceedings; (2) the insurer’s employee’s lied during the depositions or to the insured; (3) the insurer dishonestly selected its experts; (4) the insurer’s experts were unreasonable; and (5) the insurer failed to conduct a thorough investigation. (Quoting Chateau Chamberay, supra, at 348-349.)

The Fadeeff court pointed out that the insureds had presented evidence that part of their claim had been denied by State Farm in violation of the California fair claim handling regulations, based on ServPro’s work power washing the outside of the structure, which had caused the paint to peel. State Farm had denied that part of the claim on the ground that it, as well as damage to carpets and wall coverings, was not smoke or fire damage, and excluded as wear, tear or deterioration. But the insureds argued that the damage to the exterior caused by power washing was required to be covered under California Code of Regulations, title 10, section 2695.9(a)(1), as “consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy [which should] be included in the loss.” The court also noted the problem of the internal operation guide, and the State Farm independent adjuster’s failure to follow it. That and several other inconsistencies lead the Fadeeff court to conclude that there were triable issues regarding whether State Farm could have reasonably relied on its experts in denying the supplemental claims.

The Fadeeff court also reversed the summary adjudication on punitive damages, finding that State Farm failed to carry its burden to show that the Fadeeffs could not prove that State Farm acted with an absence of malice, oppression or fraud. (Civ. Code, § 3294, subd. (a); § 437c, subd. (f)(1); Basich v. Allstate Ins. Co. (2001) 87 Cal.App.4th 1112, 1118.) The Fadeeff court found that “The fact that an individual plaintiff may not believe that the people at State Farm ’wanted to harm you or hurt you intentionally’ does not conclusively answer the question whether State Farm intentionally misrepresented or concealed a material fact, or acted with knowing disregard of the rights of others.” (Citing CACI No. 3946—Punitive Damages.)

More fundamentally, the Fadeeff court found that reversal was required in any case, because of the trial court’s failure to address the request for a continuance, either at the hearing or in its ruling. The court stated that whether or not to grant a continuance under section 437c(f) is a matter within the court’s discretion, and is reviewed for abuse of discretion. But the Fadeeff court stated that reversal was mandated because a trial court’s failure to exercise discretion is itself an abuse of discretion. (Citing Kim v. Euromotors West/The Auto Galley (2007) 149 Cal.App.4th 170, 176.)

Appeals Court Rules that Vertical and Not Horizontal Exhaustion Applies to Primary and First-Layer Excess Insurance

Christopher Kendrick and Valerie Moore | Haight Brown & Bonesteel

In Santa Fe Braun v. Ins. Co. of North America (No. A151428, filed 7/13/20), a California appeals court relied on Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215 (Montrose III), to hold that absent express policy wording to the contrary, horizontal exhaustion of all primary insurance is not required in order to trigger first-layer excess coverage.

Beginning in 1992, Braun was sued for asbestos injuries from refineries it constructed and maintained. Braun had primary coverage and multiple layers of excess coverage for the relevant time period. After defending for years, the primary insurers reached a settlement under which they paid their limits into a trust which would fund the ongoing defense and settlements. Certain of the excess insurers settled and also contributed to the trust.

Braun initiated coverage litigation in 2004, which went to trial and was on appeal when the Supreme Court handed down its Montrose III decision. The Braun trial court had ruled that in order to trigger the first layer excess insurance, Braun had to establish horizontal exhaustion if a policy either “expressly so provides or . . . contains an ‘other insurance clause’ and does not provide for vertical exhaustion of specific policies.” The trial court then proceeded to find that the first level excess policies all required horizontal exhaustion of the underlying primary coverage, and that Braun failed to prove horizontal exhaustion because its evidence was inadmissible hearsay. In a final phase, the Braun trial court then ruled that the upper level excess policies also required horizontal exhaustion, and since Braun failed to even prove exhaustion of the primaries, it could never prove exhaustion of the first layer excess, thereby entering judgment on favor of the excess insurers.

Braun’s appeal had been fully briefed when Montrose III came down, and the appeals court requested supplemental briefing. Based on Montrose III, the Braun court held that horizontal exhaustion was not required for either primary or excess coverage. The Braun court quoted extensively from Montrose III for the proposition that the excess policies were at best ambiguous regarding horizontal exhaustion, and their terms otherwise “strongly suggest that only vertical exhaustion was required.” The Montrose III court had pointed out that if horizontal exhaustion were required, the express attachment point of the excess policy would be exponentially higher than stated. In Montrose III, the court supplied an example that one excess policy would require exhaustion of more than $750 million in underlying coverage, rather than the $30 million expressly specified in the excess policy itself.

In addition, the Montrose III court stated that the excess policies’ schedules of underlying insurance “provide a presumptively complete list of insurance coverage that must be exhausted before the excess policy may be accessed, with the ‘other insurance’ clauses serving as a backstop to prevent double recovery in the rare circumstance where underlying coverage changes after the excess policy is written. [] But under the [excess] insurers’ rule of horizontal exhaustion, these schedules would represent only a fraction—perhaps only a small fraction—of the insurance policies that must be exhausted before a given excess policy may be accessed.”

Montrose III only involved high-level excess-above-excess insurance but the Braun court found that reasoning also dispositive as regards primary and first-layer excess insurance as well: “These first-level excess policies contain comparable language to that interpreted in Montrose III. The ‘other insurance’ clauses are similarly ambiguous and the ‘other aspects of the insurance policies’ including the scheduling of the applicable primary policies and definitions of ultimate net loss suggest ‘the exhaustion requirements were meant to apply to directly underlying insurance and not to insurance purchased for other policy periods.’” (Quoting Montrose III, supra, 9 Cal.5th at p. 233.)

The Braun court rejected the excess insurers’ arguments based on: (1) the nature of primary coverage being “first dollar” coverage; (2) the difference in premiums; and (3) the right to control defense and settlement being vested in the primary insurer. The Braun court stated: “[W]e note that the differences between primary and excess coverage hold true whether vertical or horizontal exhaustion applies. More importantly, the differences provide little justification for construing the policy language interpreted in Montrose III differently simply because primary coverage purchased often many years later for other policy periods remains outstanding.”

The Braun court went on to say that Montrose III effectively abrogated the horizontal exhaustion cases Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329 and Padilla Constr. Co. v. Transportation Ins. Co. (2007) 150 Cal.App.4th 984, stating: “[I]nsofar as Community Redevelopment . . . addresses the relative obligations as between the various insurers, and not the excess insurer’s obligations to the insured, it is distinguishable. While the court in Padilla . . . involved an action by an insured seeking declaratory relief against its excess insurer, the court’s extension of Community Redevelopment can no longer be justified after Montrose III.”

The trial court in Braun had excluded Braun’s evidence of exhaustion, and the excess insurers argued that the ruling would nonetheless preclude a reversal, despite the trial court’s incorrect application of a horizontal exhaustion requirement. But the appeals court held that the exclusionary ruling was negated by its holding that vertical and not horizontal exhaustion applied: “The error in interpretation alone requires remand for the opportunity to present such evidence.”

Finally, the Braun court denied a cross-appeal by the excess insurers on the burden of proof to establish that the claims paid by the primary insurers were correctly allocated to products liability claims rather than premises/operations claims. The trial court ruled, and the appeals court agreed, that Braun could satisfy its initial burden of proof by relying on allocations made by the primary insurers, rather than having to prove the facts supporting those allocations. Once that prima facie showing was made, the burden would be shifted and the excess insurers would have the burden of showing otherwise.

This document is intended to provide you with information about insurance law related developments. The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.


What Does “Defend, Indemnify and Hold Harmless” Mean?

Nicole E. Roberts, David H. Sweeney and Tyler M. Andrews | Akin Gump Strauss Hauer & Feld

The phase “defend, indemnify, and hold harmless” is found in many, if not most, contracts with liability allocation provisions, across multiple industries. However, many parties do not have a complete understanding of what, exactly, these words mean. The meaning of all three terms varies on a state-by-state basis. Some states require an indemnitor to defend an indemnitee. For example, an Oklahoma statue regarding the interpretation of an indemnity contract states that unless a contrary intention is found in the contract, “[t]he person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity; but the person indemnified has the right to conduct such defense, if he chooses to do so.” Some states, such as Ohio, view the duties to defend and indemnify as wholly separate. Moreover, states such as Colorado, use “indemnify” and “hold harmless” synonymously. Understanding the meaning of this common phrase in a given state goes a long way toward ensuring that the parties’ risk allocation choices (and, ultimately, their economic deal) are respected, which is important in the best of times, and vital in the worst.

Indemnification

The concept of indemnification imposes an obligation on one party, the indemnitor, to pay or reimburse another party, the indemnitee, for losses covered in the indemnification provision. The obligation to reimburse or pay arises when an actual loss or liability has occurred. Generally, indemnification arises in two ways: implied-in-law or through an express contractual provision. Most states hold that, absent anything to the contrary in contract, a person is entitled to an implied indemnity when the person performing a duty owed by another party, the implied indemnitor, is not at fault and still incurs liability. For example, in Alten v. Ellin & TuckerChartered, the District Court for the District of Delaware noted that without an express contractual indemnification provision, a party may still rely on implied indemnity. The Appellate Division of the Supreme Court of New York, Third Department clarified in Hanley v. Fox that such indemnity exists to allow a party who was forced to pay for another’s wrongdoing to recover. Importantly, the party seeking recovery cannot be at fault.

However, when there is an express indemnification provision in a contract, courts, including the Superior Court of Delaware, New Castle are reluctant to read in an implied indemnity. Instead, under these circumstances courts tend to look at the contract itself and honor the intent of the parties. Generally, if there happens to be any ambiguity surrounding an indemnity, it is typically construed by courts against whomever is seeking indemnification.

Defend

The duty to defend triggers an obligation to act when a claim, which is covered by the indemnification provision in the contract, is brought by a party against the indemnitee. The independent obligation to defend requires the indemnitor to actually defend, finance a defense or reimburse the indemnitee against any claim brought against it, regardless of the merits of the claim or the outcome. The differences between the duty to indemnify and to defend, while nuanced, are critically important. The obligation to indemnify arises once a judgment has been entered, whereas the obligation to defend is triggered as soon as a claim is filed against the indemnitee.

Most states consider the duty to indemnify and to defend to be distinct obligations. However, some states, including California and Oklahoma, consider the duty to defend and the duty to indemnify to be separate, yet statutorily require an indemnitor, if requested, to defend an indemnitee unless the contract states otherwise. A California statue regarding the interpretation of an indemnity contract states that unless a contrary intention is found in the contract, “[t]he person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity.”

New York presents another variation on the duty to defend, applying separate analysis depending whether the case arises in an insurance context or non-insurance context. For instance, the Appellate Division of the Supreme Court of New York, Second Department in Brasch v Yonkers Constr. Co., specified that since the defendant in that case was not an insurer, its duty to defend was not broader than its duty to indemnify.

Hold Harmless

The inherent meaning of “hold harmless” is subject to interpretation. The prevailing interpretation is that “hold harmless” and “indemnify” are synonymous. However, under the minority view, “hold harmless” requires payment of both actual losses and potential liabilities, while “indemnify” protects against incurred losses only. The main difference in this case is that “hold harmless” may require a party to protect against actual losses as well as potential losses while indemnification protects against actual losses only.

Certain states, including Ohio, Colorado, Louisiana and Delaware, hold that “indemnify” and “hold harmless” are synonymous. Alternatively, California sees the two concepts as distinct as shown in Queen Villas Homeowners Assn v. TCB Prop. Mgmt. There, the court categorized the obligations to indemnify and hold harmless as offensive and defensive rights. Indemnification, according to the court, is “an offensive right—a sword—allowing the indemnitee to seek indemnification.” On the other hand, hold harmless is a defensive measure providing “[t]he right not be bothered by the other party itself seeking indemnification.” Under this view, hold harmless shields one party from being sued for liability that the other party may incur. Courts in Alaska, New Mexico, Oklahoma and West Virginia have not addressed the issue.

Exclusive Remedy Provisions

Exclusive remedy provisions frequently accompany defend, indemnify and hold harmless provisions. An exclusive remedy provision provides that a given remedy (in this case indemnification, defense, and hold harmless) will be the only remedy for any claims arising out of the contract. In this context, much depends on the specific indemnity language chosen. In some states, for instance, failure to include “defend,” together with an exclusive remedies provision, means that there will be no defense obligation. In this respect, certain rights, such as adjustments to a purchase price and payment of contingent consideration, do not lend themselves well to any of the remedies arising out of a defense, indemnification or hold harmless provision and should be excluded. In these cases, the obligee is likely to want the bargained-for consideration, not an indemnification right against their absence. However, without such an exclusion, it is not clear that the party entitled to such a right would be able to easily enforce it.

Concerns in the Current Market

Current market conditions have emphasized the importance of ensuring that risk allocations are understood and respected. Whether the obligations that arise under the contractual terms “defend, indemnify and hold harmless” hold up through bankruptcy and dissolution are growing concerns for market players. It is important to realize that the duty to indemnify may not survive bankruptcy as demonstrated recently in both Texas and Delaware. The U.S. Bankruptcy Court for the Northern District of Texas, in In re Superior Air Parts, Inc., held that contractual indemnity provisions give rise to a dischargeable claim. While the contract survives bankruptcy, the indemnification provision within the contract was dischargeable in bankruptcy. The U.S. Bankruptcy Court for the District of Delaware looked at the issue of indemnification claims in In re Touch America Holdings Inc., and found claims for indemnity were disallowed, consistent with section 502(e) of the Bankruptcy Code. How can parties in a contract protect their indemnification claims? One option is to insure against the claims. Representation and Warranty Insurance, Director and Officer Insurance and contingent liability policies have becoming increasingly common vehicles that can provide a financial backstop for risk allocation choices. Being knowledgeable about how different states view defend, indemnify and hold harmless provisions is crucial in today’s market. A lack of clear understanding about how an indemnification clause will function, be that in bankruptcy or otherwise, can have long lasting, real impact. Remember that when drafting your next agreement.

Commercial Owners Associations/Residential Owners Associations The Same — But Different

Justin M. Lewis | Ward and Smith

What are commercial owners associations, and are they really that different from residential owners associations? 

Commercial owners associations are nonprofit corporations that govern planned communities, condominiums, or a combination of the two, in which the lots and/or units are used for non-residential purposes.

Commercial owners associations are governed by the same statutes as residential owners associations: Chapter 55A of the North Carolina General Statutes (the Nonprofit Corporation Act), Chapter 47C of the North Carolina General Statutes (the Condominium Act), Chapter 47A of the North Carolina General Statutes (the Unit Ownership Act) and Chapter 47F of the North Carolina General Statutes (the Planned Community Act). 

While some of the obligations and responsibilities of commercial associations are the same as residential associations (the collecting assessments from the members, maintaining the common elements, and enforcing the rules and regulations), there are some issues that are more important, or are unique, to commercial associations.

Parking

Typically, parking is not an issue in residential communities.  Owners of lots park on their lots and owners of condominium units park in what are often limited common elements parking spaces dedicated to particular units. 

But for a commercial community, parking is very important to the owners.  Adequate and convenient parking for the employees, and most importantly, the customers, is vital to the success of the business.  Some commercial communities have ample parking in the common elements, but business owners may want some designated parking close to their lot or unit; and, in a community with limited parking, it may be necessary for each lot or unit to be allocated some limited common elements parking to ensure easy access for customers. 

This issue should be addressed in the declaration when the commercial community is formed.  If it is not, an amendment to the declaration may be necessary, which often will require the consent of a certain percentage of the owners.

Signage

Signs are usually prohibited in residential communities or subject to rules that establish duration, size, and location on political signs and “for sale” and “for rent” signs. 

In a commercial community, signs are necessary to identify and advertise the owners’ businesses.  While some regulations as to the size, number, and type of signs are desirable, signs should be allowed in commercial communities.  In addition to signs on a lot or unit of the business, commercial communities often maintain monument signs or electronic signs in the common elements that identify the various businesses.  The governing documents should address how these signs are managed by the owners association so that each business is given a fair opportunity to advertise its business. 

Use Restrictions

While governing declarations establish and restrict the uses of lots and units within particular communities, those uses will differ between residential and commercial development.

As implied by the designation, declarations creating residential communities promote typical neighborhood/non-commercial activities and restrict or prohibit the uses and actions that may be a nuisance to the other owners within the community. 

Use restrictions in commercial communities are also intended to prevent one business owner from becoming a nuisance to the other owners within the community.  Such restrictions also frequently establish specific uses permitted within that community.  For example, some commercial communities are restricted to only medical offices, business offices, or, perhaps, a combination of restaurant and retail uses.

It is important that any such use restrictions on the lots or units be established in the declaration and additional governing documents.  As North Carolina law favors the unrestricted and free use of property, subsequent rules or regulations intended to restrict or prohibit certain uses not specified in the declaration and governing documents will most likely be unenforceable.

Ordinances and Regulations

In addition to the governing North Carolina statutes (mentioned above), local, state, and federal ordinances and regulations (think about local zoning ordinances) must be observed.  In residential communities, all of the lots or units are being used for the same general purposes, so the same ordinances and regulations would apply to all of the owners and their properties.

However, in a commercial community, you may have restaurants, business offices, medical offices, retail stores, and other uses all of which may be subject to different ordinances and regulations.  Most of the burden for complying with those ordinances and regulations will fall on the individual business owners, but the owners association should be aware of the ordinances and regulations applicable to the community to make certain that owners do not commit violations that could harm, or result in a violation enforced against the entire community and association.

Mixed-Use Communities

Some planned communities and condominiums contain both commercial and residential lots and units.  The owners association for a mixed-use community will need to deal with all of the issues important to a commercial community, some of which are described above, and the issues important to a residential community.  One way to ensure that all of the owners’ needs and concerns are considered is to establish in the governing documents that the association board will be comprised of owners of both residential lots or units and commercial lots or units.  The concept of selecting board members from different types of lots or units may also be applied in a solely commercial community to make sure the board is truly representative of the entire community.

All owners associations must perform many of the same tasks, enforce the same rules, fulfill the same obligations, and comply with the same statutes, but the needs and issues in commercial owners associations are unique.  It is important for the board of directors of these associations to understand the complexities of a commercial community so that they can adequately meet the needs of their members.

Is it the End of the Lease-Leaseback Shootouts? Maybe.

Garret Murai | California Construction Law Blog

It’s the case that has turned into a modern day Hatfield versus McCoy – McGee v. Torrance Unified School District, Case No. 8298122, 2nd District Court of Appeals (May 29, 2020) – a series of cases challenging the validity of certain lease-leaseback construction contracts in California.

In shootout number one, James McGee sued the Torrance Unified School District challenging the validity of lease-leaseback contracts the District had entered into with general contractor Balfour Beatty Construction, LLC. Under California’s lease-leaseback statute, a school district can lease property it owns to a developer, who in turns builds a school facility on the property and leases the facility back to the school district. The primary benefit of the lease-leaseback method of project delivery is that a school district does not need to come up with money to build the facility because the district pays for the facility over time through lease payments to the developer. In shootout number one, McGee argued that Torrance Unified School District was required to competitively bid the lease-leasebacks projects. The 2nd District Court of Appeals disagreed.

In shootout number two, McGee v. Balfour Beatty Construction, LLC 247 Cal.App.4th 235 (2016), McGee sued Balfour Beatty arguing that lease-leaseback contracts the general contractor had entered into with the District were a “sham,” because the lease-leaseback agreements at issue, rather than requiring that Balfour Beatty finance construction and receive lease payments following completion of the projects, the lease-leaseback contracts required the District to make progress payments disguised as “lease payments” to Balfour Beatty during construction of the project. Once again, the 2nd District Court of Appeals disagreed.

McGee III

In the latest shootout, McGee sued the District arguing that the lease-leaseback projects with Balfour Beatty should be set aside because Balfour Beatty provided pre-construction services to the District. By providing pre-construction services, McGee argued, Balfour Beatty was an employee of the District. And as an employee of the District, Balfour Beatty had a conflict of interest under Government Code Section 1090, which precludes employees of a public agency to be financially interested in any contract with the public agency, and shouldn’t have been allowed to act as the general contractor on the projects.

A bench trial was held and among the evidence presented was testimony that the projects at issue had been completed. Finding that McGee’s case was an “in rem reverse validation action,” which is simply a fancy phrase for an action seeking to invalidate an action by a public entity, the trial court found that McGee’s in rem reverse validation action was moot because the projects were completed and there was nothing left to invalidate.

McGee appealed.

The Appeal

On appeal, the Court of Appeal explained that “[a] case is considered moot when ‘the question addressed was at one time a live issue in the case,’ but has been deprived of life ‘because of events occurring after the judicial process was initiated.’”:

Because “the duty of every . . . judicial tribunal . . . is to decide actual controversies by a judgment which can be carried into effect, and not give opinions upon moot questions or . . . to declare principles or rules of law which cannot affect the matter in issue in the case before it[,] [I]t necessarily follows that when . . . an event occurs that renders it impossible for [the] court, if should decide the case in favor of plaintiff, to grant him any effectual relief whatsoever, the court will not proceed to formal judgment.”

Here, explained the Court of Appeals, Government Code Section 860 permits an interested person to bring an action challenging the validity of an action by a public entity. Known as a “reverse validation action,” explained the Court, Section 860 is intended to provide a “speedy determination of the validity of the public agency’s action” and “[g]iven the public interest in quickly resolving the legality of agency decisions, ‘California law has long recognized that the completion of a public works project moots challenges to the valid of the contracts under which the project was carried out.’” And, here, held the Court, the projects at issue had been completed at the time of the trial court’s decision.

In response, McGee argued that his lawsuit was not an in rem reverse validation action, but rather a taxpayer claim under Code of Civil Procedure Section 526a, which authorizes a taxpayer to file an action to enjoin waste by a local public agency. As such, argued McGee “mootness” did not apply.

The Court of Appeals disagreed:

[R]egardless of how McGee characterizes his conflict of interest claims or the relief he seeks, the gravamen is the invalidity of the lease-leaseback agreements. McGee admits he seeks “a finding that the contracts were ultra vires, illegal, void, and unenforceable due to a conflict of interest.” His complaints alleged as much. A judgment finding Balfour violated section 1090 would render the lease-leaseback agreements “‘void from [their] inception.’” (McGee II, supra, 247 Cal.App.4th at p. 247.) Although McGee focuses on the fact that he seeks disgorgement directly from Balfour, any judgment ordering disgorgement would require a finding the lease-leaseback agreements were void. In other words, the agreements would necessarily be invalidated.

Further held the Court of Appeals:

A judgment in McGee’s favor would also undermine the very purpose behind the validation statutes. A cloud has hung over the challenged projects for years, destroying any hope in prompt validation of the underlying lease-leaseback agreements. That delay is largely attributable to McGee, who strategically chose not to prevent the projects from moving forward. Beyond the specific projects here, a judgment in McGee’s favor would threaten future projects with the prospect of lawsuits long after completion. That would undoubtedly inhibit the District’s ability to obtain financing for them.

Conclusion

So there you have it. The presumable end to the McGee lease-leaseback cases. But then again, with McGee, never say never.