Michael Spencer is a man on a mission.
Spencer, president of Harris Construction, has been meeting with Fresno Unified trustees as well as news reporters to talk about the costs of the long-running lawsuit over the construction contract for Rutherford D. Gaston Middle School.
The legal bills for Harris and Fresno Unified taxpayers, who are footing the bill for the multiple law firms that the district has employed over the past 11 years, have continued to mount ever since a rival contractor, Stephen Davis, filed suit over the Gaston lease-leaseback contract.
The 5th Circuit Court of Appeal and California Supreme Court have both ruled that the contract, which went to Harris, could not be validated because there was no competitive bidding.
After the California Supreme Court’s ruling in June, the case returned to Fresno County Superior Court, which has scheduled a trial for next February.
Time to End It?
Spencer and his father, Richard Spencer — and also several Fresno Unified trustees — say that it’s time for the school district to end the legal battle and agree to a settlement.
Fresno Unified isn’t saying how much it has spent so far on legal fees. Neither is Michael Spencer, although a court filing for attorneys’ fees in 2019 set the tab at nearly $900,000.
Fresno Unified trustees last month expressed frustration when they sought out the same answer, only to be told that the information is confidential because of the ongoing litigation.
School Board members need information so they can make informed choices, in particular about spending money on lawsuits instead of on children’s education, board clerk Susan Wittrup said recently.
“It really gives the context, I believe, to the decisions that we’re making now. And I do think that this has been going on for 11 years. I do think the taxpayers have a right to know how much money is going towards this lawsuit. And, I am really urging the district leadership to do what they can to put an end to this,” she said.
GV Wire submitted a public records request, seeking access to the checks written to the law firms in connection with the suit, but the district rejected the request, citing the ongoing litigation.
The district has been represented by Atkinson, Andelson, Loya, Ruud & Romo: Lang, Richert and Patch, and attorney Carl Faller, who provided counsel during the federal investigation into the lease-leaseback contracts.
Michael Spencer said the Atkinson legal firm drew up multiple lease-leaseback contracts for the district, including the one for Gaston. Only the Gaston contract wound up in court.
Should Lawsuit Be Included in Contracts’ Cost?
Meanwhile, ever since the Gaston contract was awarded in 2012, Davis Moreno Construction —Davis is president and CEO of the company — has won hundreds of millions in construction contracts from the district, even as his lawsuit has played out slowly through the courts.
That’s been part of the Spencers’ messaging that got the attention of several School Board members who in recent board meetings asked about the cost of doing business with Davis Moreno, including the cost of the lawsuit, the number and dollar amounts of change orders that Davis Moreno had submitted on its contracts, and whether the district should be doing business with a firm whose owner has been suing it for more than a decade — even if that firm won contracts by being the low bidder.
Barring a company because its principal is involved in lawsuit could open up the district to more lawsuits, warned Tom Duffy, legislative director for the Sacramento-based Coalition for Adequate School Housing and a partner in the education facilities consulting firm of Murdoch, Walrath and Holmes.
“School districts have had claims filed and have been sued for strictly following the law and their own internal procedures,” Duffy said. “Such claims and litigation have been used as political pressure tools to win jobs.”
Districts typically don’t disqualify businesses or their bids without first providing a “clear due process opportunity” to the firm being disqualified, he said.
‘Corporations Are People’
And there’s another problem with disqualifying Davis Moreno because of Davis’ lawsuit. Davis Moreno is not the plaintiff in the lawsuit, and as much as Spencer and the trustees keep connecting the business to its owner, they are not the same entity from a legal standpoint, said one district official speaking on background.
“Davis Moreno’s company is the one that gets the bids, if you will, and the work,” the official said. “The lawsuit is an individual taxpayer lawsuit. Even if there was a disqualifying factor of a company in litigation or an entity in litigation, that would still not apply in this case.
“…My understanding is that, you know, corporations are people. So they’re two different people.”
Stephen Davis did not respond Wednesday to a request for comment.
The district official said the pressure by trustees to settle the lawsuit and to target Davis and his company might work in his favor.
“I think we’ve given Davis a stronger position legally with the continued singling out, and tied our hands if we ever did want to do something, because it would seem to be retaliatory,” the official said. “We’re coming to the negotiating table in a weakened position.”
How Much to Settle?
But there might not be much to negotiate about, Michael Spencer says.
He notes that under a state law enacted in 2015, school construction contracts that are determined not to be valid don’t have to be fully “disgorged.” Davis’ suit is seeking to make Harris repay Fresno Unified the entire $36.7 million that was spent to build the school, even though Harris’ share as the prime contractor only amounts to about $1.1 million.
Under the state law, which was enacted as a result of the appellate court decision in Davis’ lawsuit, only the prime contractor’s fee might be subject to being repaid. Even if a court found the contract to be invalid, the contractor would be able to keep the money so long as the work was performed to the satisfaction of the school district, the contractor believed the contract was valid while the work was being done, and “contractor fraud did not occur in the obtaining or performance of the instrument (contract),” the law says.
Under the law the most that Davis and his San Diego attorney, Kevin Carlin, could collect would be the $1.1 million that was paid to Harris, Richard Spencer said.
“The $36 million that (Davis attorney Kevin) Carlin likes to shake around and talk about is really $1.1 (million) and then only if the contract were fraudulent, which it is not,” he said. “It’s simply not validatable, but it’s not fraudulent. And the safe harbor that is shrinking this down to profit has a retroactivity clause in it that goes back and picks up our contract.
“So now the whole thing is $1.1 (million), and that leads you to jump forward and say, ‘why in the hell is the district retaining or not settling this agreement, this contract? Why are they in this lawsuit?’ I mean, why are they not going to Davis and saying, ‘hey, drop it, just drop it. You don’t want any money. Harris is not going to have to pay any money. Just drop it and let’s go on as friends.'”
There could be yet another twist to the long-running legal saga, and that’s whether Fresno Unified’s initial counsel, Atkinson, Andelson, might have liability for drawing up a contract that the courts deemed could not be validated, Michael Spencer said.
“When this happened, Fresno Unified turned and put them on notice. They have a tolling agreement with them. That’s why they handed the case to a different lawyer (Lang, Richert),” he said.
A tolling agreement is when a potential plaintiff and potential defendant make a formal agreement to extend the statutory limitations time period on the plaintiff’s claim, typically so that parties will have more time to settle their dispute without going to court.
Can a law firm that draws up a contract that the courts later determine is not validatable be on the hook financially for any legal costs associated with that contract?
Says Duffy, “They carry errors and omissions insurance for such purposes.”