In a low-profile but important new decision, San Luis Obispo Local Agency Formation Commission v. City of Pismo Beach, __ Cal.App.5th __ (2021) (Case No. B296968), the Second District Court of Appeal affirmed a trial court decision and held that the Cortese-Knox-Hertzberg Act (Gov. Code § 56000 et seq.) does not authorize a local agency formation commission (“LAFCO”) to require an indemnification agreement or to require the payment of attorney fees based on such an agreement.

The case arose in connection with the development of a housing project consisting of 252 single-family residences and 60 senior housing units in Pismo Beach. After the City approved the project, the City and developer applied to the San Luis Obispo LAFCO to annex the property. The SLO LAFCO application contained an indemnity agreement that provided, among other things, “This indemnification obligation shall include, but not be limited to, damages, costs, expenses, attorneys’ fees, and expert witness fees that may be asserted by any person or entity, including the Applicant, arising out of or in connection with the application.” For reasons not explained in the opinion, LAFCO denied the application.

The City and developer sued LAFCO, but LAFCO prevailed and presented a bill to the City and developer for more than $400,000 in fees and costs on the basis of Government Code section 56383. Section 56383 authorizes the commission to establish a schedule of fees and a schedule of service charges and specifies that the fees shall not exceed the estimated reasonable cost of providing the service for which the fee is charged and the service charges shall not exceed the cost of providing the service for which the service charge is charged. The City and developer refused to pay, and LAFCO sued to recover its costs based on the indemnity provision contained in the annexation application.

LAFCO made three arguments:

  • the indemnity agreement is a valid contract provision;
  • it is allowed to require the indemnity agreements because the Cortese-Knox-Hertzberg Act allows LAFCOs to establish a schedule of fees and service charges; and
  • it has the implied power to require the indemnity agreement.

The Court of Appeal quickly dispatched with each of LAFCO’s arguments.

Reciting basic contract principles, the Court noted that a contract requires consideration, which consists of either a benefit to the promisor or a detriment to the promisee. A promise to do something the promisor is legally bound to do is not consideration. The Court rejected LAFCO’s argument that the indemnification agreement is given in consideration for not requiring anticipated attorney fees to be paid as part of the application fee at the beginning of the process. Recognizing that LAFCO has a statutory duty to accept all completed applications and to review and approve or disapprove the application, the Court held that LAFCO gave no consideration in exchange for the indemnity agreement.

Addressing the Cortese-Knox-Hertzberg Act, the Court noted that the fees and charges shall be imposed pursuant to the requirements of the Mitigation Fee Act. The Court pointed out that LAFCO did not comply with the Mitigation Fee Act and explained that “when a statute mandates a particular procedure, it does not imply that the procedure may be avoided by inserting a provision in an application form.” The Court also explained that the Cortese-Knox-Hertzberg Act contemplates that the fees and charges it authorizes will be limited to those necessary to the administrative process, not to post-decision court proceedings. “No matter how broadly construed,” according to the Court, “nothing in the [Cortese-Knox-Hertzberg Act] authorizes the indemnity agreement.”

And addressing LAFCO’s implied power argument, the Court turned to Code of Civil Procedure section 1021, which provides:

“Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties; but parties to actions or proceedings are entitled to their costs, as hereinafter provided.”

The Court recognized the critical constraint contained in section 1021 and held that “attorney fees in post-decision court proceedings are not ‘specifically provided for by statute.’ ”

SLO LAFCO is an interesting and important case even in the somewhat esoteric world of the Cortese-Knox-Hertzberg Act, which establishes procedures for local government changes of organization. But the case deserves a more elevated profile to the extent it extends to other areas of California local government law that are more regularly part of the development process. In the land use context, for example, cities and counties routinely imbed the same types of compelled indemnity clauses in their applications for discretionary development permits. As in the LAFCO context, cities and counties are required to accept for filing and review and approve or disapprove various types of applications for development. And as in the LAFCO context, the Planning and Zoning Law does not appear to “specifically provide” for attorney fees in post-decision court proceedings.