Liability Risk Analysis to Member of LACCE from Scott H. Howard, Of Counsel,
     Colantuono, Highsmith & Whatley, PC

Honorable Mayor & Council:

On August 4 an organization titled California Alliance for Community Energy (hereafter “Alliance”) distributed a letter raising concerns about the Los Angeles County Community Choice Energy (LACCE) implementation plan, budget, and risk to member municipalities, among other things. They contend that the Joint Powers Authority (JPA) structure does not shield the city from liability as a result of misfeasance or malfeasance committed by the JPA, its individual board members, or JPA staff. The Alliance requested that LACCE retain independent counsel to assess the risks for member municipalities.

The focus of the Alliance’s concerns seems to be that mismanagement by staff or the JPA could result in an unlawful rate structure or other risks which could be the basis for liability against the JPA (ostensibly for refunds or prospective relief), and that the JPA cannot shield its individual municipal members from resulting liability for any loss, costs, or damages.
As will be seen from the following, the liability risk to the member municipalities, from a legal perspective, is no greater than it would be with any JPA of which a city is a member.

ANALYSIS

Generally, individual members of a JPA may be jointly and severally liable for the tortious acts or omissions of a JPA of which they are members (Government Code 895.2). However, the JPA may include provisions for contribution or indemnity by any or all public entities to the agreement in any proportion they choose (Government Code sec. 895.4). These twin provisions have been interpreted to apply to claims under tort liability.

Further, even if a city were to be subject to liability for a tortious act or omission, cities do not lose any of their governmental immunities by joining together to form or become a member of a JPA (Gov’t Code sec. 6513).

In the case of the LACCE, the JPA language is clear (although the Alliance appears to have possibly conflated the JPA language with a recently adopted MOU). Section 9.3 “Indemnification of Parties” provides “The Authority shall acquire such insurance coverage as is necessary to protect the interests of the Authority, the parties and the public. The Authority shall defend, indemnify and hold harmless the Parties and each of their respective governing board members, officers, agents and employees, from any and all claims, losses, damages, costs, injuries and liabilities of every kind arising directly or indirectly from the conduct, activities, operations , acts and omissions of the Authority under this Agreement”. This provision effectively shifts all tort risk initially to the JPA, the cities only being potentially responsible for any judgment to the extent the JPA or its insurer(s) cannot pay all or a portion of a judgment. As it pertains to tort liability covered by liability or E & O insurance, absent woefully inadequate limits of insurance, an unlikely scenario. Finally, as seen from the following paragraphs, tort liability risk is further limited.

The recently approved MOU between the County and LACCE (August 4, 2017) does not increase risk for city members of the JPA. The MOU is necessary to memorialize the initial interest free $10M loan from the County to the JPA ( an agreement is required by the JPA; see sec. 7.3.2) and the temporary use of County staff to provide services for the JPA (see Section 3, Funding). Section 7.3.2 of the JPA expressly provides that should the CCA program not become operational, the County will not be entitled to any reimbursement of the initial costs. If the program becomes operational, the initial costs are to be repaid through any loan the JPA obtains from the financial market (expected by end of FY 2018; MOU-sec. 3b).

The JPA wisely also addresses debts , liabilities and obligations of the JPA, which unless otherwise stated become debts, etc. of the parties to the JPA (see Gov’t Code sec. 6508.1).
Section 3.5 of the JPA “Obligations of the Authority” specifically provides that the debts, liabilities, and obligations of the Authority shall not be the debts, liabilities and obligations of the Parties unless the governing body of a Part agrees in writing to assume any of the debts, etc.

The Alliance cites Tucker Land Company v. State (2001) 94 Cal. App.4th 1191 seemingly in agreement that exculpatory language in a JPA CAN (emphasis added) provide protections for parties to a JPA. Tucker involved a rather convoluted foreclosure/ property acquisition action and dispute between the MRCA and a holder of a preexisting note and the continuing validity thereof. The note holder sought payment on the note from MRCA and the parties to the Joint Powers Agreement creating and administering the MRCA, the latter claims based on an alter ego theory.. The court affirmed dismissal of the action finding that parties to a JPA can be insulated from liability for actions of the JPA IF the JPA has language similar to section 3.5 of the LACCE JPA. There is some dicta in Tucker which intimates that an alter ego theory may be viable if a fraud were perpetrated by the MRCA and its members. However, this issue was not squarely addressed and continues to be an open question.

To further support their position that there may be some liability risk, the Alliance notes that one cannot avoid or shift liability for willful misconduct, fraud or a violation of law, whether negligent or intentional (Civil Code secs. 1668 and 3513). However, the risk shifting limits outlined in section 1668 have been narrowly construed to apply to adhesion contracts (Tunkl v. Board of Regents (63)-60 Cal.2d 92 -requiring emergency room patients to waive future negligence (malpractice) is unconscionable and against public policy due to the unequal bargaining position of the patient), and to violations of a statute which was enacted to protect the public interest.

In addition, public agencies (JPA and cities) enjoy many immunities from liability, including for example, absolute immunity for negligent or intentional misrepresentation (Gov’t Code sec. 818.8 – see Nuveen Municipal High Income Opportunity Fund v. City of Alameda (2013) 730 F.2d 1111 (9th Cir.) – investors sue  city for alleged common law securities violations involving issuing bonds for cable system;  held, city is immune from liability under Gov’t Code 818.8. However cf. Bernard Osher Trust DTD v. City of Alameda (2009) unpublished Dist. Ct, N.D. Ca. – where securities law expressly imposes liability on a person or government agency, the Government Code immunities may not be applicable). This particular immunity, although one of many, is of some importance in the context of the risk contentions raised by the Alliance in that contextually it would apply to a number of their asserted basis for liability. The immunity afforded by section 818.8 has been broadly construed and applies to miscalculations  (Jopson v. Feather River Air Quality Mgmt Dist (2003) 108 Cal. App.4th 492 ; common law fraud (Burden v. County of Santa Clara (81 Cal. App.4th 244); and suppression of facts (Harshbarger v. City of Colton (88) 197 Cal. App. 3rd 1335.  Harshbarger further notes that a public entity is wholly immune for actual fraud, corruption or the actual malice of an employee (although an employee may not likewise enjoy such complete immunity, Harshbarger @pg. 1345).   Further, Civil Code section 1668 which is applicable to more than just public agencies, additionally runs headlong into the presumption that official duties are regularly performed (Evidence Code sec. 664). This presumption applies to claims of willful misconduct by public officials (see Ellis Landing & Dock Co. v. City of Richmond et al (1925) 70 Cal. App. 720- it is presumed that city council will not attempt to willfully violate the law).

Examples provided by the Alliance of possible liability for inaccurate information contained in the implementation plan, budget forecasts, financial strategies, and timing and magnitude of customer phase in, are the types of action which would fall squarely into the protection afforded by section 818.8 (and other possibly other immunities), and the presumption that official duties are regularly performed.

To be sure, membership in ANY JPA carries a degree of risk. For example, while many immunities exist to shield agency liability, statutes which impose a mandatory duty may escape some immunities and leave open the narrow possibility that legal action can in the first instance overcome a demurrer or motion to dismiss. However, on balance, most risk is attenuated and effectively minimized through insurance for tort liability (both through third party contractors and the insurance to be procured by the JPA) and the JPA’s declaration that its contractual debts are not the debts or obligations of the parties. While willful misconduct cannot usually be insured against nor can the JPA fully insulate a party to the JPA for the JPA’s willful misconduct, immunities and presumptions go a long way to creating a high bar for anyone seeking to “pierce” the JPA and seek compensation from the parties to the JPA.

Lastly, one must also assess risk in the context of the mission of the JPA. The following may be simplistic, but boiled down to its essentials, the LACCE will be an energy provider. At least under its current plan, the JPA will not own infrastructure or generating facilities (although if a generating facility is acquired or constructed, risk can be addressed through an assessment of the adequacy of insurance limits including whether excess liability coverage should be increased or added). Its mission is to acquire mixes of electrical energy from various sources and provide the electricity at various rates to the public. Its risks then appear to spring from the JPA establishing rates (are the rates lawfully and properly established), possibly power outages (causation and damage), and contractual disputes.

CONCLUSION

Based on the foregoing, in the final analysis, risks to the parties to this JPA are minimal and attenuated by the language in the JPA, and immunities and presumptions available to public agencies.


Scott H. Howard
Of Counsel
Colantuono, Highsmith & Whatley, PC
300 South Grand Avenue, Suite 2700 | Los Angeles, CA 90071
Direct 213-542-5722 | Main 213-542-5700 | Fax 213-542-5710
showard@chwlaw.us  | www.chwlaw.us

 

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