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Court Decisions, Pending Legislation Make for Complicated Situation Regarding Lease Leaseback Construction Contracts

May 16, 2016

Two recent court decisions, as well as a bill that is currently making its way through the California Legislature, have made for a complicated situation regarding “lease leaseback” contracts that some California school districts have used for the construction of new facilities.

On May 4, the California Second District Court of Appeal upheld a lower court’s dismissal of a taxpayer advocate’s lawsuit that claimed the Torrance Unified School District circumvented a law requiring government entities to hire the lowest bidder on construction projects. The decision was widely interpreted as favoring school districts’ use of lease leaseback contracts.

According to the Torrance Daily Breeze:

The ruling by the California Second District Court of Appeal, published this week, might “significantly affect school districts throughout California” that use so called lease leaseback agreements with contractors, Torrance district officials said in a statement.

“Crucially, the Court of Appeal ruled that (the California Education Code) does not require competitive bidding,” the district said. “This is an important ruling not only for the Torrance Unified School District, but for many other school districts, contractors and taxpayers across the state.”

But in another closely watched case, a Fresno County Superior Court Judge acted on May 10 to deny a motion by the Fresno Unified school district to dismiss a lawsuit challenging a lease leaseback contract involving the school district and contractors – meaning that the legal challenge by Fresno contractor Stephen Davis will apparently continue. According to the Fresno Bee, some Fresno Unified construction contracts are now under federal investigation.

Meantime in Sacramento, the Assembly Education Committee voted unanimously on May 4 to approve AB 2316, a bill introduced by Assemblymember Patrick O’Donnell (D-Long Beach) that clarifies several aspects of lease leaseback contracts between California school districts and contractors. While favored by some legislators and contractors, the bill is opposed by some who have challenged current lease leaseback contracts, including the attorney representing Fresno contractor Stephen Davis. According to the Fresno Bee:

Kevin Carlin, the San Diego-based attorney representing Davis, says that in addition to being a “get out of jail free card” for contractors, the proposed bill is subjective and can be misused – just like the leaseback process.

“ ‘Best value’ is code word for ‘give the deal to your best friend,’ ” Davis said Wednesday. “It’s still a subjective selection process, and anytime you introduce subjectivity, you introduce the opportunity for fraud, favoritism and corruption. They’re wallpapering over the problem with pretty language.”

Several California law firms, including Fagen, Friedman and Fulfrost; Atkinson, Andelson, Loya, Ruud & Romo and Lozano Smith have issued advisories during the past week regarding the lease leaseback situation in California school districts.

Source:  EdBrief staff

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