Legal Alerts Dec 17, 2020

Taxpayer Actions Can be Used to Challenge Government Contracts Even After Contract Completion

California Court of Appeal Decision in School District Case Applies to Public Agencies

Even completed government contracts can be challenged by a taxpayer claiming the contract constituted the improper expenditure of funds, the California Court of Appeal determined.

Plaintiff Stephen Davis sued the Fresno Unified School District and Harris Construction Co. for entering into a construction contract allegedly in violation of the competitive bidding requirements and laws preventing conflict of interest. The District filed a demurer and the case was dismissed, but the Fifth District Court of Appeal reversed the dismissal and sent the case back to the trial court. The District then filed a motion for judgment on the pleadings on the grounds that the construction was completed, thereby rendering Davis’ claims moot. The trial court agreed, dismissed the action and Davis again appealed.

Davis’ response to the motion for the judgment on the pleadings advanced two different claims for relief: a “reverse validation” action and a taxpayer action. A reverse validation action is a cause of action challenging the validity of a government action where the relief requires the government to stop performing the challenged action or paying out government funds. A taxpayer action is a cause of action challenging how the government has spent public money. For a taxpayer action, relief could require the government to stop performing the action or paying government funds, or require the contracting party to disgorge the profits or proceeds received from the allegedly illegal contract.

Since courts may adjudicate a case only where relief can be ordered, the appellate court had to determine whether relief on each cause of action was possible. As to the reverse validation action, because the challenged action — the contract — had been completed, there was no relief the court could order. As to the taxpayer action, however, the relief is monetary — disgorgement (return) of the profits or proceeds from the allegedly illicit contract. Since money can be disgorged regardless that the purpose for which the money was paid has been completed — the construction, itself — a taxpayer action is permissible even when the challenged contract has been completed. Thus, the appellate court held that a reverse validation action is permissible only if the contract is not yet completed, but a taxpayer action is allowed regardless of the completion of the contract.

Because expenditure of funds can be challenged by a taxpayer action regardless of whether the contract has been completed or not, all government agencies must be careful to follow the competitive bidding laws, where applicable, and guard against conflicts of interest. Following these procedures will protect the interests of the contracting parties and prevent the possibility of contracting parties having to disgorge the profits or proceeds received for the contracted work.

Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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