Property owners who received an $850,000 loan from the Carson Redevelopment Agency must return the money because they acquiesced to the mayor’s demand for a $75,000 bribe, the Second District Court of Appeal has ruled.

The property owners contended the court did not have to void the loan agreement because the corrupt public official did not have a direct interest in the agreement. They also argued that the court should consider remedies other than disgorgement of the $850,000. The court expressed sympathy to the property owners, but said that legal precedent and public policy mandated the case’s outcome.

“A public contract obtained through an extortion payment is not valid, and no one should believe that it is valid. A bright line rule is required,” Justice Judith Ashmann-Gerst wrote for the unanimous three-judge panel.

Michael and Bertha Padilla own the 45-unit Camino Senior Village apartment complex in Carson. In 1994, they signed a contract with the city’s redevelopment agency under which the agency agreed to provide rental assistance for six years of up to $295 a month per qualified tenant, up to a maximum of 22 units. In exchange, the Padillas agreed to provide 22 units as low-income senior housing for 30 years.

In 1999, the Padillas asked the agency to extend the rental assistance for another 24 years and to include all 45 units. The agency responded with a proposed “buydown agreement” in which the agency would provide the Padillas an $850,000 forgivable loan to be used for buying down their existing mortgage. In exchange, the Padillas would restrict tenancy in 44 units to low-income people at least 55 years old for 24 years.

Then-Mayor Agapito “Pete” Diaz Fajardo told Michael Padilla he would have to pay $75,000 to get the City Council and the redevelopment agency board to approve the new agreement. The Padillas paid the bribe and got the new agreement.

The FBI indicted Fajardo in late 2002 for extorting money from the Padillas and attempting to extort another bribe from a bidder on a city public works project (see CP&DR In Brief, January 2003). Padilla pleaded guilty in early 2003 and eventually was sentenced to 15 months in federal prison.

The Carson Redevelopment Agency sued the Padillas, seeking avoidance of the buydown agreement and return of the $850,000. Los Angeles County Superior Court Judge Haley Fromholz ruled for the agency and ordered the Padillas to repay the $850,000 plus interest.

On appeal, the Padillas argued that under Government Code § 1090, a public contract is not void unless a public official is financially interested in the contract. Although Fajardo received an illegal payment, he did not get paid with public funds and therefore did not have a cognizable financial interest in the contract, the property owners argued.

However, the court ruled that Fajardo’s conflict of interest was plain and was covered by § 1090, which prohibits a public official from having an interest in a public contract that he created. “[S]ection 1090 is aimed at any interest, other than an interest that is too remote or speculative, that could compromise a public official’s judgment or cast doubt on whether he executed his duties with the utmost allegiance, diligence, and loyalty to his office,” Ashmann-Gerst wrote.

Here, the extortion payment created Fajardo’s financial interest in the contract, the court ruled. “[T]he term ‘financially interested’ in § 1090 cannot be interpreted in a restricted and technical manner,” the court ruled. “The sweep of § 1090 is broad; within its reach comes any interest that might deter a public official from the most righteous and noble path of civil service.”

The Padillas also argued that requiring them to disgorge the $850,000 was unfair punishment of the victims of extortion. They said the court should consider the facts of the case before determining the appropriate remedy.

The Second District, though, ruled that disgorgement is “automatic.” The court sited Thomson v. Call, (1985) 38 Cal.3d 633, in which the state Supreme Court ruled that an Albany city councilman who sold his land to the city through a third party had to return the payment he received for the land, while the city got to keep the land.

“More recently,” Ashmann-Gerst wrote, Finnegan v. Schrader, (2001) 91 Cal.App.4th 572, “held that a public entity is entitled to recover any compensation it paid under a tainted contract without restoring any of the benefits it received. By logical import, Finnegan interpreted Thomson as a binding precedent holding that the disgorgement remedy is automatic. … Also, as a policy matter, it is the most effective way to give § 1090 all the teeth that it needs.”

The Case:
Carson Redevelopment Agency v. Padilla, No. B184629, 06 C.D.O.S. 5948, 2006 DJDAR 8423. Filed June 28, 2006.
The Lawyers:
For Carson Redevelopment Agency: William Wynder, Aleshire & Wynder, (949) 223-1170.
For Padilla: Jay Coggan, (310) 407-0922.