Calif. Supreme Court: San Diegans for Open Government v. Public Facilities Financing Authority of the City of San Diego

Only a party to a contract may bring a legal action under Government Code section 1092 to invalidate a contract allegedly made in violation of Government Code section 1090, the California Supreme Court held. The Dec. 26 decision eliminates private party standing to bring an action under section 1092 to “avoid” a contract and obtain the remedies of “disgorgement” and “claw back” on behalf of a public agency.

In San Diegans for Open Government v. Public Facilities Financing Authority of the City of San Diego, a citizens’ taxpayer organization challenged certain aspects of a debt refinancing transaction by the City of San Diego and its Public Facilities Financing Authority. The plaintiffs claimed the agencies violated section 1090, which prohibits public officials and employees from making contracts in their official capacities in which they have a personal financial interest. The City argued that the plaintiff did not have standing to sue to have the contract declared void as a section 1090 violation. The trial court sided with the City on that issue, finding that only contracting parties may file a lawsuit under section 1092. However, the Fourth District Court of Appeal, relying on a host of prior Supreme Court and appellate decisions, reversed the trial court, holding instead that “any litigant with an interest in the subject contract sufficient to support standing” could bring suit under section 1092 — not just a party to the challenged contract. The City appealed to the Supreme Court.

The Supreme Court looked first to section 1092’s text, which provides that “[e]very contract made in violation of any of the provisions of Section 1090 may be avoided at the instance of any party except the officer interested therein.” The Court found that “the most natural reading” of the statute is that the phrase “any party” refers back to the “contract.” Moreover, the Court reasoned that the use of the term “avoid” also supports that construction because, ordinarily, the power of avoidance rests only with parties to a contract.

The Court found that this plain reading of the statute had to be considered because the Legislature did not otherwise clearly state an intent for an action under section 1092 to be brought by non-parties to a transaction.

The Court then considered whether there are compelling policy reasons to find a private right of action for non-parties under section 1092. The Court did not find that any prior cases cited by the appellate court supported the argument that a non-party may sue under section 1092 to avoid a contract. Rather, the Court found that the cases either found a private right of action under Code of Civil Procedure section 526a or did not explain the authorization for the plaintiff’s lawsuit. The only appellate court to directly consider the standing question found that section 1092 did not create a private right of action.

Additionally, the Court held that there are no other compelling reasons to permit private standing because alternative avenues for enforcement — administrative, civil and criminal — exist where a contract is allegedly made in violation of section 1090.

The Court sent the action back to the appellate court to consider whether the plaintiff could maintain its action under Code of Civil Procedure section 526a, on the basis that the bond refinance contracts violated section 1090.

Code of Civil Procedure section 526a generally allows taxpayers to maintain an action to obtain a judgment that restrains or prevents an illegal expenditure of, waste of, or injury to the estate, funds or other property of a local agency. However, an action under section 526a is far more limited than one brought under section 1092. First, relief in an action under section 526a may be limited to restraining or preventing future illegal expenditures. Such an action would not result in a judgment requiring “disgorgement” or “claw back,” as would an action under section 1092. Second, unlike the 4-year statute of limitations under section 1092, section 526a does not contain a statute of limitations. Certain actions under section 562a may have only a 60-day statute of limitations if subject to “reverse validation” procedure. This usually applies to public financing transactions, such as bond offerings, but may apply more broadly.

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