Litigation & Case Law Update

• Jurisdiction: California,United States
• Author: By Katherine Cook, Donna Mooney, Tara Newman, and Christine Wood
• Publication year: 2017
• Citation: Vol. 40 No. 3

Litigation & Case Law Update

By Katherine Cook, Donna Mooney, Tara Newman, and Christine Wood^*

TAXES AND RATE-SETTING

City and County of San Francisco v. Regents of University of California (2017) 11 Cal.App.5th 1107 (1st App. Dist., filed May 25, 2017)

Charter city authority insufficient to compel state entities to collect and remit city tax for use of state property.

San Francisco sought to enforce the collection of its parking tax by state universities at university parking lots in the city. Although the city would have reimbursed the universities for the costs to collect and remit, the universities refused. The city filed a writ, which was denied by the trial court. The appellate court affirmed, holding that the California Constitution's home rule provision does not overcome the doctrine exempting state entities from local regulation. The state does not have to collect a local tax on third parties for use of state property, even if the state is reimbursed the cost to collect.

The appellate court majority reasoned that since Hall v. Taft (1956) 47 Cal.2d 177, a state entity engaged in a sovereign activity need not comply with local regulation unless the Constitution or statute requires it. State parking operations, the majority held, are governmental activities and since there is no constitutional or statutory provision requiring compliance, the state does not have to follow or enforce the city's law. The majority rejected the city's argument that its ordinance is a revenue - not regulatory - measure and therefore Hall is inapplicable. The appellate court recognized that charter city status is a constitutional grant of power on municipal affairs beyond the reach of the state legislature, but does not overcome the legal doctrine that states are exempt from local regulation.

Against this analysis, a lengthy, detailed dissenting opinion offers that the power to tax includes the power to require reasonable means to collect it, and that the tax at issue is on parking lot users - third parties -not the state. The dissent asks how is it then that the Attorney General opined that the state can be required to collect a tax on occupants of a state-owned conference center (65 Ops. Cal.Atty.Gen. 267 (1982)), and how can a city impose a gross receipts tax on an electrical contractor that does business with state entities? City of Los Angeles v. AEC Los Angeles (1973) 33 Cal.App.3d 933. The dissent notes that in the context of federal - state and federal - tribal tax, the U.S. Supreme Court holds that sovereign immunity is not impinged by the minimal burden of collecting another sovereign's tax, urging California to take the same approach and drop the illusory, wavering task of deciding whether a governmental function is involved.

Russell City Energy Company, LLC v. City of Hayward (2017) 14 Cal. App.5th 54 (1st App. Dist., filed Aug. 7, 2017)

Company could seek recovery with claim for quasi-contractual restitution in a contract dispute over application of subsequently-enacted utility users tax.

An energy company entered into a contract with the City of Hayward for an option to buy city land for an energy center with terms that included paying the city $ 10 million for construction of a library. The agreement obligated the city not to impose any other fees and taxes other than those generally applicable to similarly-situated real property owners in the city. A few years later, voters approved a utility users tax on electricity and gas. The city informed the company it must pay the tax, but the company asserted the contract provision about taxes precluded the city from imposing the tax.

The company sued on five theories. The city filed a demurrer, asserting the tax complied with the provision in the agreement, and the company's interpretation would violate California Constitution Art. XIII Section 31 which provides that the power to tax may not be surrendered or suspended by contract. The trial court sustained the demurrer without leave to amend, concluding the company's interpretation violated the California Constitution.

The appellate court also agreed with the city that the company's interpretation of the clause violated the California Constitution, noting that such an interpretation would prohibit the city from imposing payroll, business license, and occupancy taxes on the company, insulating it "from virtually all revenue-raising assessment." However, the appellate court reversed the trial court on the issue of leave to amend. The court rejected the city's argument that the contract provision at issue was malum in se (against good morals) and not amenable to remedy of any kind.

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The court concluded the contract was merely malum prohibitum (prohibited by statute) and subject to recovery of money. The court also rejected the city's argument that the company may not sue on a quasi-contract theory. Instead, the court noted, the company could seek recovery of some of the consideration it provided "because the City was unable to deliver its promised performance" and on this unique set of circumstances the company should be given an opportunity to amend its complaint to allege a quasi-contractual restitution claim.

San Diego County Water Auth. v. Metropolitan Water Dist. of Southern Cal. (2017) 12 Cal.App.5th 1124 (1st App. Dist., filed June 21, 2017, mod. July 18, 2017)

Water District's transportation costs charged to Water Authority, including transportation charges paid to the State Water Project, do not violate California wheeling statutes.

This appellate decision was the latest in a case that has literally involved generations of public lawyers. The heart of the case is what rate Metropolitan ("Met") may charge SDCWA for "wheeling" water SDCWA purchases from Imperial Irrigation District ("IID") through the Met conveyance system, specifically whether Met could charge SDDCWA to recover Met's allocable transportation costs over the California Aqueduct and part of the State Water Project, regardless of whether the IID water actually comes through those components of Met's system on its way from Imperial to San Diego.

The court of appeal held that the inclusion of Met's system-wide transportation costs (including transportation charges paid to the State Water Project) do not violate California wheeling statutes even if they cover infrastructure not actually used to transport IID water. (Cal. Const., art. XIIIC(1)(e); Gov. Code § 54999.7.) "It is not necessary to limit wheeling charges to the marginal cost of transporting water over the portion of the system utilized in a particular transaction." On the other hand, the court of appeal held that Met's "water stewardship" charges were not properly chargeable to SDCWA, as they were part of Met's efforts to encourage conservation. Met had argued that conservation frees up capacity in its system, thus helping to control the rates that SDCWA might otherwise pay for system augmentation at increased capital cost. The court, however, held that a water agency's payments to its members to encourage water conservation is "outside the scope of recoverable costs contemplated by the wheeling statutes."

The court also invalidated a non-litigation "Rate Structure Integrity" ("RSI") clause in the Met-SDCWA wheeling agreement, which Met had invoked to terminate its water conservation funding agreements with SDCWA. The court of appeal found that the clause was unconstitutional under the doctrine of unconstitutional conditions, which limits the government's power to seek the surrender of a constitutional right -even by a governmental agency as a consequence of asserting a claim. Therefore, Met could not invoke the RSI clause to stop SDCWA's challenge to its rate structure. The court of appeal set aside the trial court decision that SDCWA lacked standing to use the unconstitutional condition theory in the case. The case was remanded.

LABOR AND EMPLOYMENT

Santa Ana Police Officers Assn. v. City of Santa Ana (2017) 13 Cal. App.5th 317 (4th App. Dist., filed June 13, 2017, mod. July 12, 2017)

Denial of request for tape of first of two interrogations states a claim for violation of Public Safety Officers Procedural Bill of Rights Act.

Two officers alleged that after being interrogated once, and after they were notified of additional interrogations, they were entitled to all materials pursuant to Government Code Section 3303(g). That provision, part of the Public Safety Officers Procedural Bill of Rights Act ("POBR"), provides that "the complete interrogation" of an officer may be recorded and if a tape recording is made of an interrogation, the police officer shall have "access to the tape if any further proceedings are contemplated or prior to any further interrogation at a subsequent time." The statute further provides that the officer is...