Court Opinion

ID: 9747768
Source: CourtListenerOpinion
Date Created: 2023-08-27 15:32:29.366474+00
Date Added: 2024-06-11T07:25:26.749451
License: Public Domain

BENKE, Acting P. J., Concurring and Dissenting.
While this case presents a number of important and challenging legal issues, I am afraid in the end the majority opinion has not resolved them successfully. I write separately and at some length because in my opinion, the conclusions the majority reaches about the city’s financing arrangements undermine the continuing viability of the well-established Offner-Dean doctrine. In particular, in its treatment of the arcane area of reletting by a landlord, the majority has developed theories which would permit municipalities to incur debt solely for the purpose of having the debt collected. Needless to say, I do not believe this theory is consistent with the Constitution or existing Supreme Court authority.
Because of these concerns, and for the reasons set forth more fully below, I cannot join in the majority opinion.
A. Principles
I begin my analysis by setting forth those areas where I believe there should be no doubt or confusion. A municipal government may, without incurring a debt proscribed by article XVI, section 18 of our Constitution, enter into long-term contracts which in the future will require payment of substantial sums of money for services, products or other consideration to be provided in the future. (County of Los Angeles v. Byram (1951) 36 Cal.2d 694, 698-700 [227 P.2d 4] (Byram); Ruane v. City of San Diego (1968) 267 Cal.App.2d 548, 554-555 [73 Cal.Rptr. 316] (Ruane); see also McBean v. City of Fresno (1896) 112 Cal. 159, 167 [44 P. 358] (McBean); City of Los Angeles v. Offner (1942) 19 Cal.2d 483, 485-486 [122 P.2d 14, 145 A.L.R. 1358] (Offner); Dean v. Kuchel (1950) 35 Cal.2d 444, 446-447 [218 P.2d 521] (Dean); Starr v. City and County of San Francisco (1977) 72 Cal.App.3d 164, 172 [140 Cal.Rptr. 73] (Starr); Mayhew Tech Center, Phase II v. County of Sacramento (1992) 4 Cal.App.4th 497, 508 [5 Cal.Rptr.2d 702] (Mayhew).) Significantly, upon failure by a municipality or the state to pay for what is delivered in the future—whether it is water, cement, a fleet of police cars, access to a communications system or, as here, the right to *1497possess and occupy a parcel of real property—a judgment against the municipality for the contract price of the consideration delivered may be obtained by the disappointed provider. (McBean, supra, 112 Cal. at p. 167; Mayhew, supra, 4 Cal.App.4th at pp. 514-515 (conc. opn. of Blease, J.).)
In this case it is important to emphasize that upon breach of a long-term lease, a municipality is not in any sense “off the hook.” Like any other tenant it may be repeatedly sued for the prescribed rental payments as they come due. (Byram, supra, 36 Cal.2d at pp. 698-700; Lagiss v. County of Contra Costa (1963) 223 Cal.App.2d 77, 90-91 [35 Cal.Rptr. 450] (Lagiss).) However, and this is a critical “however,” at common law the right to collect each rental payment depended upon continuation of the tenant’s right to possession. (4 Witkin, Summary of Cal. Law (9th ed. 1987) Real Property, § 672, pp. 855-856.) Thus, the common law held that any interruption of a defaulting tenant’s right to possession terminated the lease and the landlord’s right to obtain future rent from the tenant. (4 Witkin, Summary of Cal. Law, supra, Real Property, § 672, p. 857; Dorcich v. Time Oil Co. (1951) 103 Cal.App.2d 677, 683 [230 P.2d 10] (Dorcich).) This requirement of the common law works very well with the constitutional debt limitation. Because under the common law no liability for rent can arise without the right to possession, McBean, Offner and Dean involve no sleight of hand or “lawyer’s trick” as intimated by some authorities. (See Constitutionality of Chapter 280, Or. Laws 1975 (1975) 276 Or. 135 [554 P.2d 126, 131].) McBean, Offner and Dean are on firm ground when they teach us that each rental payment on a long-term lease will be supported by new consideration —the continuing right to possession. (See McBean, supra, 112 Cal. at p. 167; Offner, supra, 19 Cal.2d at pp. 485-486; Dean, supra, 35 Cal.2d at pp. 444, 446-447.1)
However the cases are equally clear that the ability or willingness of a municipality to pay a future obligation will not provide the consideration *1498required by the Constitution. “ ‘Each year’s income and revenue must pay each year’s indebtedness and liability, and no indebtednes or liability incurred in one year shall be paid out of the income or revenue of any future year.’ [Citation.] The constitutional provision is there to insure that ‘every separate payment is supported by its own consideration and . . . falls within the budgetary allotment provided for that year. . . .’ [Citation.]” (Starr, supra, 72 Cal.App.3d at p. 174.)
In short the question which we must ask, and which under Offner-Dean must always be asked, is for what purpose is a municipal obligation incurred in the first instance? If an obligation is incurred for some consideration to be delivered in the same year the obligation will come due—even if it is delivery of the proverbial peppercorn—the Constitution will be satisfied. However, the Constitution does not permit a municipal debt to be created in one year for the sole reason that the debt itself will be eliminated by payments from municipal coffers in a future year. Were that the case, the city could avoid the trouble of leaseback financing altogether: it could borrow directly as much money as is needed for any improvements and find consideration for its repayment obligations in the dollar-for-dollar reduction of the debt brought about by its own future appropriations or the efforts of third parties.
It is this latter fundamental limitation on borrowing which the majority has not applied with complete vigor.2
B. Application
1. Facility Lease Section 10.01(c)(2)(D)
The primary violation of Offner-Dean principles occurs when the majority discusses the landlord’s right to keep for its own account all rent generated *1499during a reletting. The majority tells us that we should not worry about this disposition of rents because “[ojnce the city’s rental obligation is reduced to zero, there is no debt, and if there is no debt, article XVI, section 18, is not implicated.” (Maj. opn., ante, at p. 1489.) My colleagues repeat this theme when they state that during any reletting, the credit the city may realize against rent it owes is itself consideration for any continuing deficiency. (Ibid.) Taken literally these statements permit municipalities to incur long-term debt so long as they have some intention or plan to pay off the debt as it comes due. This of course is what the courts in City of Palm Springs v. Ringwald, supra, 52 Cal.2d at pages 626-627, and Starr, supra, 72 Cal.App.3d at pages 174-175, explicitly rejected.
This debt reduction as consideration theory, unsupported by any authority,3 should have no part of California Constitution, article XVI, section 18 jurisprudence. With this theory the majority holds that debt can be incurred for the sole purpose of having that very same debt reduced. With due respect, this is circular reasoning. More importantly it is contrary to the teaching of McBean, Offner and Dean that debt can be incurred so long as the city will receive something—a few thousand acre-feet of water, a police car, a computer or simply the opportunity to occupy real property—in the same year in which the debt will arise.
The hazards posed by the majority’s views on this issue cannot be overstated. Over the years the Offner-Dean doctrine has been subjected to some harsh and colorful criticism, which until today I could have easily dismissed as unwarranted and ill-informed. (See Constitutionality of Chapter 280, Or. Laws 1975, supra, 554 P.2d at p. 131 [“scheme that would only fool a lawyer”]; Kosel, Municipal Debt Limitation in California (1977) 7 Golden Gate L.Rev. 641, 653-654 [“the charade of lease-purchase financing”].) However the majority’s theory of debt reduction as consideration lends these critics powerful new ammunition. With due respect, I fear the theory adopted today will subject the “pay-as-you-go” doctrine, so well articulated over the years, to relabeling as the doctrine of “now you see it, now you don’t.”
2. Facility Lease Section 10.01(c)(3)
The second serious violation of Offner-Dean principles occurs when the majority finds that during a reletting the city will receive some continuing consideration because the landlord will be bound to honor and perform the city’s obligations to its subtenants and other contracting parties. (Maj. opn., ante, at pp. 1487-1488, 1489.)
*1500Although my colleagues rely repeatedly on the benefits the city would obtain because of the landlord’s obligation to honor the third party contracts, they do not present any analysis of those supposed benefits. In particular the majority fails to address the question of whether the costs of meeting the third party obligations are to be assumed by the landlord or charged back to the city as a cost of reletting. In my opinion it is imperative that this question be addressed.
Section 10.01(c)(2)(B) of the facility lease states: “[Tjthe City hereby indemnifies and agrees to save harmless the Authority or its assignee from any costs, loss or damage whatsoever arising out of, in connection with, or incident to any retaking of possession of and re-letting of the Leased Property by the Authority or its assignee or its duly authorized agents in accordance with the provisions herein contained.”
By its terms the hold harmless clause would permit the landlord to recover from the city any costs or liabilities it incurred in meeting the city’s obligation to subtenants or third party contractors. Plainly, meeting the city’s financial obligations to the third parties and then passing the costs of doing so on to the city, either by suing the city directly for the costs or deducting the costs from rents received on reletting, would not provide any new consideration or benefit to the city. The mere opportunity to pay the landlord in place of directly paying its obligees does not, within the meaning of the Constitution, provide the city with any consideration for a new debt.
In my opinion, analysis of the hold harmless clause substantially undermines the thesis advanced in the majority opinion. In light of the hold harmless clause it is clear the landlord’s obligation to honor the third party contracts does not involve any cost shifting from the city to the landlord, but at most provides a mere condition restraining the landlord’s conduct should it wish to recover rent by way of a reletting.4 In finding continuing consideration in such conditions on the methods of collecting a debt, the majority gives us a corollary to its theory of “debt reduction as consideration”—and once again abandons Offner-Dean entirely.
One example suffices to demonstrate the potential for mischief in the majority’s holding on this issue: if the city gives a bank a promissory note, *1501secured by a deed of trust on the stadium and due over a 20-year period, and the bank in return provides the city with $70 million in cash, the Constitution will be violated because payment over the 20 years will be for consideration received in a prior year. If however we add to the mortgage a provision which permits the bank to collect rents directly from stadium tenants on the condition the bank honor the city’s agreements with those tenants, this condition on collection would, for the majority at least, provide ongoing consideration for any deficiencies owed to the bank after collecting rent. In both cases the loan payments would be for consideration received in a prior year, but in the latter variant the majority would find that the condition on collection saves the promissory note from constitutional infirmity. For the majority, it apparently would not matter that in this latter scenario payments from the city would be consideration received in a prior year or that the condition imposed on collection provides no new value to the city.
In sum, although until today it had been uniformly held that long-term municipal obligations required long-term receipt of consideration, my colleagues have now loosened that restraint and would permit municipalities to receive consideration in one year and pay for it in future years so long as conditions are imposed on the means of collecting the debt. In this regard the majority’s later statement that “A party in breach of its contractual obligations cannot reasonably expect to continue to receive the full benefit of the bargain” (maj. opn., ante, at p. 1489) is not a reassuring portent. Just how minimal or slight a condition on collection of a debt will be sufficient to provide continuing consideration? Would a promise to evict subtenants only after giving some period of notice or an opportunity to negotiate with the landlord be sufficient? Under such analysis, perhaps a promise to indemnify the city for any loss resulting from such an eviction would be enough?
C. Alternatives
The majority’s attempt to honor the literal terms of the facility lease by foresaking the Ojfner-Dean doctrine is, frankly, overkill.
Although there can be little serious doubt the reletting permitted by facility lease section 10.01(c)(2) would deprive the city of any benefit or consideration during a reletting,5 we can and should save the reletting clause from constitutional infirmity by simply finding portions of the reletting remedy unenforceable.
*1502In this regard I think it is significant to note that at common law if there was no express reletting clause in a lease, “ ‘Upon surrender of possession by the lessee before the expiration of the lease term, the lessor had three remedies: (1) to consider the lease as still in existence and sue for the unpaid rent as it became due for the unexpired portion of the term; (2) to treat the lease as terminated and retake possession for its own account; or (3) to retake possession for the lessee’s account and relet the premises, holding the lessee for the difference between the lease rentals and what it was able in good faith to procure by reletting.' [Citation]. [D It is in connection with the third remedy enumerated above that most of the cases have arisen. The *1503landlord, upon an abandonment by the tenant, may retake possession of the premises on behalf of the tenant, relet the premises for the tenant’s account, and hold the tenant for the difference.” (Dorcich, supra, 103 Cal.App.2d at pp. 683-684, italics added.)
In my view, if the reletting set forth in the facility lease were consistent with the common law principles articulated in Dorcich, the Constitution would not be offended.6 Under these common law principles, a reletting for the account of the tenant permits the tenant to enjoy, if not the actual possession of the premises, its economic value. More importantly, I think it is plain that it was these common law limitations which the court in Nesvig, supra, 231 Cal.App.2d at page 612 was, sub silentio, relying upon when it stated: “In the event this right of reentry were exercised, either the leaseback would be declared terminated and the county’s obligation to pay further rent would end, or the bidder would repossess the property and relet it for the county’s account. In the latter event the county’s obligation would continue to accrue from year to year accordance with the contract and it would continue to receive the value of the use of the property from year to year in the form of credits against its obligation.” (Ibid.)
As elegantly as these well-defined limits on a reletting landlord’s rights work with the limits of the Constitution, the majority abandons them in favor of the literal terms of the lease. As my previous discussion of the violations of Offner-Dean principles indicates, the most difficult provision for the majority is facility lease section 10.01(c)(2)(D) by which the city assigns to the financing authority any rent the authority receives in excess of the rent due under the lease and the costs of reletting. Obviously if, as Nesvig instructs, a reletting must be for the account of a municipal tenant, this disposition of excess rent cannot be enforced. Plainly in such a situation, as Justice Cardozo noted,7 the reletting is in no sense for the account or benefit of the tenant. (Harvey, A Study To Determine Whether the Rights and Duties Attendant Upon the Termination of a Lease Should Be Revised, supra, 54 Cal.L.Rev. at p. 1177.)
At this point in the analysis I would jettison the offending portion of the reletting remedy rather than Nesvig. My colleagues’ analysis, however, is not so anchored to the language of the court in Nesvig or the circumstances that *1504court was considering. As I have explained, the majority has instead created a new theory, i.e., that debt reduction will serve as consideration, and a corollary that limitations on debt collection practices are of continuing benefit to a debtor.
As opposed to undermining the otherwise durable and useful Offner-Dean doctrine, I would simply find that the disposition of excess profits under the lease is unenforceable8 and that the lease otherwise meets the requirements of Offiier, Dean and Nesvig. As so modified,9 I would affirm the judgment.
Appellants’ petition for review by the Supreme Court was denied October 16, 1996. Kennard, J., and Chin, J., were of the opinion that the petition should be granted.

The rationale which supports this rule of law was fully set forth nearly a century ago by the United States Supreme Court in City of Walla Walla v. Walla Walla Water Co. (1898) 172 U.S. 1, 19 [43 L.Ed. 341, 349, 19 S.Ct. 77] (City of Walla Walla). In City of Walla Walla the city was bound by a similar debt limitation provision when it entered into a long-term water contract with a private water company. A competing water provider challenged the contract on the ground the long-term nature of the city’s obligation created a debt. In rejecting this contention, the court stated: “But we think the weight of authority, as well as of reason, favors the more liberal construction, that a municipal corporation may contract for a supply of water or gas, or a like necessary, and may stipulate for the payment of an annual rental for the gas or water furnished each year, notwithstanding the aggregate of its rentals during the life of the contract may exceed the amount of the indebtedness limited by the charter. There is a distinction between a debt and a contract for a future indebtedness to be incurred, provided the contracting party perform the agreement out of which the debt may arise. There is also a distinction between the latter case and one where an absolute debt is created at once, as by the issue of railway bonds, or for the erection of public improvement, though such debt be payable in the future by installments. In the one case the indebtedness is not created until the *1498consideration has been furnished; in the other, the debt is created at once, the time of payment being only postponed.” (Ibid.)

I do however, agree with the majority’s conclusion that nothing in Rider v. County of San Diego (1991) 1 Cal.4th 1 [2 Cal.Rptr.2d 490, 820 P.2d 1000], or Vanoni v. County of Sonoma (1974) 40 Cal.App.3d 743, 750 [115 Cal.Rptr. 485], prevents the city from using an intermediary which it controls as part of a lease-back financing arrangement. I note there is no credible claim the city’s control over the financing agency makes it directly liable to the bondholders for the principal or interest on the amounts borrowed by the financing agency. (See City of Palm Springs v. Ringwald (1959) 52 Cal.2d 620, 624-625 [342 P.2d 898]; see also Lagiss, supra, 223 Cal.App.2d at p. 94.) Thus, if the city is liable for any debt, it must be debt created by the facility lease. Significantly if the facility lease creates debt, the lease is invalid whether the debt is owed to an entity the city controls or an entity controlled by the bondholders. In either event, the critical question for purposes of applying the debt limitation is not to whom the lease obligations are owed, but whether the obligation is one which creates debt in a future fiscal year.

As I will explain in part C, under County of Los Angeles v. Nesvig (1965) 231 Cal.App.2d 603 [41 Cal.Rptr. 918] (Nesvig), which the majority cites, the reletting must be for the account of the tenant.

In the end, the majority apparently agrees with this interpretation of the facility lease. The only item of value the majority has been able to find in section 10.01(c)(3) is protection from liability to the third parties. As I have noted, under the hold harmless clause, the cost of meeting the third party agreements will always remain with the city.

In an article discussing reletting and reentry provisions and prepared for the California Law Review Commission, one commentator stated: “A clause appearing frequently in the leases involved in appellate cases provides that upon abandonment by the lessee, or after default by the lessee and eviction by the lessor, the lessor may reenter the property relet it as
*1502‘agent’ for the defaulting lessee and hold the lessee responsible for any deficiencies resulting from the reletting.
<<
“The cases involving agency-to-relet lease provisions reveal confusion as to the governing theory. It is clear that the lease is not surrendered and, therefore, the lessee’s rental obligation and interest in the leasehold continues. But, even though the leasehold still ‘belongs’ to the lessee in theory, the lessor has the right to evict the lessee from the premises. And, in addition, there is language indicating that when the property is relet after the eviction the reletting is for the lessor’s account, not the lessee’s.
“The 'agency to relet’ is a fiction. The lessor is not an agent of the lessee since the lessee has no right to direct or control the activities of the lessor—if he did, he could order the lessor to allow him back into the possession. As Justice Cardozo stated: ‘The provision that the landlord may relet as the agent of the tenant after the termination of the lease does not mean that he is an agent in a strict sense. Plainly, he is not, for after the termination of the lease, what he relets is his own.’ The case law confusion in theory and the fictional agency seem to derive from an underlying notion that damages for the loss of future rentals cannot be recovered unless the lease somehow continues in existence. This, of course, is a reflection of the common law conception of rent as an incident of the leasehold estate which ceases only upon termination of that estate. But damages for the loss of the rental obligation is a contractual remedy. It is compensation for a lost obligation, not a recovery of a continuing obligation. As Justice Cardozo pointed out, the leasehold actually terminates when the lessee ceases to have any enforceable right to possession of the property. What remains is merely a right to damages, and it is unnecessary to recognize any fictional interest of the lessee in a nonexistent estate to support that right of the lessor.” (Harvey, A Study To Determine Whether the Rights and Duties Attendant Upon the Termination of a Lease Should Be Revised (1966) 54 Cal.L.Rev. 1141, 1176-1177, fns. omitted, italics added.)
In 1970 the Legislature largely adopted these recommendations and eliminated the requirement that the leasehold continue in order to recover future lost rent. (4 Witkin, Summary of Cal. Law, supra, Real Property, § 674, pp. 860-863.) In place of the requirement that the lease continue the Legislature permitted landlords to terminate the tenancy and sue the tenant for damages measured by the likely amount of lost future rent. (Civ. Code, § 1951.2) In the alternative, the landlord can allow the lease to continue to run, and so long as the landlord does not interfere with the tenant’s right of possession, sue for rental payments as they arise. (Civ. Code, § 1951.4; 4 Witkin, Summary of Cal. Law, supra, Real Property, § 674, pp. 860-863.) In this scheme the agency to relet fiction is no a longer available to commercial landlords because possession by the landlord terminates the lease giving rise only to a cause of action for damages. (See In re Lomax (Bankr. 9th Cir. 1996) 94 Bankr. 862, 865-866.) By adopting the commission’s recommendation, the Legislature clearly endorsed the commission’s conclusion the agency to relet in lease provisions are fictions and that upon reentry by a landlord a tenancy is terminated.

Indeed in its latest brief the city suggested as much. The city argued that we could interpret the reletting clause in the facility lease as providing the remedies now available under Civil Code section 1951.4. Like the limitations set forth in Dorcich, under Civil Code section 1951.4 the tenant continues to receive the economic value of the lease even if a receiver must be imposed to preserve the landlord’s interest. (See Civ. Code, § 1951.4, subd. (b).)

See footnote 5, ante.

Likewise I believe section 10.01(c)(2)(E) of the facility lease, the alteration and repair provision, runs afoul of the Constitution. I would find that the only circumstances under which the alteration and repair provisions may be enforced will occur when the repairs or alterations are commenced in the same fiscal year in which the landlord gives the required notice of completion.

I note the city has expressed concern that because similar provisions appear in any number of other lease-back transactions, any holding finding particular parts of this lease invalid would undermine the stability of a number of public projects. We should forthrightly reject this concern. The errors of other municipalities and governmental agencies do not relieve us of our duty to interpret and apply the Constitution in this case consistent with principles established by our Supreme Court. Moreover the threat to the stability of other transactions is for the most part illusory. As the Supreme Court noted in Rider v. County of San Diego, supra, 1 Cal.4th at page 13, in addition to the power we have to make any such determination solely prospective, Code of Civil Procedure sections 860 and 863 provide a 60-day statute of limitations for actions challenging the validity of financing schemes such as this. “[S]uch statutes of limitations are deemed within legislative power to provide a prompt validating procedure for asserting such challenges.” (Rider v. County of San Diego, supra, 1 Cal.4th at p. 13.)