The San Diego District Attorney's Office investigated allegations that some of the board members of the Sweetwater Union High School District and its superintendent failed to report gifts and travel funds and misused the District's credit card.  The investigation revealed a "pay for play" culture in which Gilbane Building Company and other companies provided gifts to the District's officials and family members in exchange for construction contracts worth several million dollars. 

After the San Diegans for Open Government (SanDOG) discovered the improper gifts, it filed an action against Gilbane seeking imposition of a constructive trust on all consideration received by Gilbane, judgment that all consideration be returned to the District, an injunction preventing Gilbane from disbursing monies received from the contracts, and other relief.  SanDOG alleged that at least one of its members resided in and paid taxes within the District. 

Gilbane argued that SanDOG lacked standing to sue because SanDOG did not pay taxes within the District.  Gilbane also argued that the District had discretion on whether to sue Gilbane, not SanDOG.  The trial court overruled Gilbane's demurrer and found SanDOG alleged sufficient facts to invoke standing.

Section 526a of the California Code of Civil Procedure provides, in pertinent part, that an action to prevent any illegal expenditure of, waste of, or injury to funds or other property of a county, town, city or city and county of the state may be maintained against any officer or any agent or other person either by a citizen resident therein, or by a corporation who is assessed and liable to pay tax therein.

The Court held that a representative organization, like SanDOG, may have standing to bring an action if its members would have had standing to bring that action as individuals.  SanDOG alleged that at least one member paid taxes within the District.  Accordingly, even though SanDOG itself did not pay taxes in the District, it had standing because its members were taxpayers and residents within the District.

Gilbane also alleged SanDOG could not pursue the action because it failed to allege it made a demand on the District to sue.  Government Code section 1090 prohibits members of a district from being "financially interested in any contract made by them in their official capacity, or by any body or board of which they are members."  Courts interpret section 1090 to mean that a contract made in violation of that section is void, not merely voidable.  Taxpayers may sue under section 1090 to have improper contracts declared void.  Although a taxpayer may not bring an action to interfere with a governing body's discretionary actions, SanDOG alleged, and the court agreed, that the District expended funds illegally, and the issue of whether the contracts are void is not within the District's discretion.

Further, the Court held that a demand in this case would have been unavailing.  SanDOG alleged the District's officials were involved in wrongdoing.  It is unlikely the District's officials would have initiated a lawsuit to correct its own wrongs. 

Note:

The case illustrates the high importance courts place upon the conflict of interest statutes in California and the desire to make these laws accessible to the public.  As stated in the decision, the effect of a Government Code section 1090 violation is to make a contract void, not merely voidable.  This can have substantial impact upon any government agency.  LCW regularly provides ethics training that complies with statutory law for elected and appointed officials, as well as for employees who are required to receive such training. 

Gilbane Building Company v. Superior Court (2014) 223 Cal.App.4th 1527.