Southern Inyo Healthcare District v. Optum Bank, Inc.

• Court: United States Bankruptcy Court, E.D. California
• Decided: February 10, 2020
• Docket: 17-01077
• Status: Unknown

Opinion

1 FOR PUBLICATION 2 3 UNITED STATES BANKRUPTCY COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 In re: Case No. 16-10015-A-9

7 SOUTHERN INYO HEALTHCARE DISTRICT,

8 9 Debtor. 10

11 SOUTHERN INYO HEALTHCARE DISTRICT, Adv. No. 17-01077-A

12 Plaintiff, FL-6, FWP-8

13 v. MEMORANDUM 14 OPTUM BANK, INC.,

15 Defendant. 16

17 Argued and submitted on May 22, 2019 18 at Fresno, California 19 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 20

21 Appearances: Jeffrey I. Golden, Weiland Golden Goodrich LLP for Southern Inyo Healthcare District; 22 Ashley M. McDow, Foley & Lardner LLP for Southern Inyo Healthcare District; Latonia 23 C. Williams, Shipman & Goodwin LLP for Optum Bank, Inc.; Gerald N. Sims, Pyle 24 Sims Duncan & Stevenson, P.C. for Optum Bank, Inc. 25 26

27 1 Hospital districts may issue promissory notes for “equipment or 2 items which have a useful life equal to, or longer than, the term of 3 the notes, as determined by the board of directors.” Cal. Health & 4 Safety Code § 32130.2. Longer loans are unenforceable. Apparently 5 without considering the length of the loan vis-à-vis asset life, a 6 hospital district financed, and then refinanced, the purchase of 7 equipment and software. Is the refinance loan enforceable? 8 I. FACTS 9 A. About the Debtor 10 Southern Inyo Healthcare District (“Southern Inyo” or “the 11 district”) is a rural healthcare district founded under the California 12 Local Health Care District Law. Cal. Health & Safety Code § 32000 et 13 seq. It operates a hospital, skilled nursing facility and medical 14 clinic in Inyo County, California. Its principal office is in Lone 15 Pine, California. Southern Inyo is governed by its Board of 16 Directors. 17 B. The El Dorado Line of Credit 18 From time to time in the past, Southern Inyo experienced cash 19 flow difficulties. In 2007, as a means to address short-term cashflow 20 shortfalls, Southern Inyo took out a $250,000 equity line of credit 21 from El Dorado Bank (“El Dorado loan”). It bore interest at 8.25% and 22 was secured by a deed of trust against Southern Inyo’s Lone Pine 23 office property. The line of credit matured in 2012, and having been 24 unpaid, converted to a 15-year promissory note with monthly principal 25 and interest payments. 26 C. The UHC of California Equipment and Software Purchase Loan 27 In 2011, Southern Inyo wanted to purchase Health Information 1 its facilities. Unable to pay cash for these items, the district 2 arranged financing with UHC of California. At a special meeting held 3 in 2011, Southern Inyo’s Board of Directors authorized the issuance of 4 promissory notes to UHC of California for purchase of the equipment 5 and software. The Board of Directors memorialized its decision in 6 Resolution 11-06. Resolution 11-06 contained no findings as to the 7 useful life of the equipment and/or software for which the promissory 8 notes were issued. It also did not reflect whether the Board 9 considered useful life spans of these items vis-à-vis the length of 10 the UHC of California loan. 11 Thereafter, the District purchased the equipment and software, 12 and executed a promissory note for $1.7 million in favor of UHC of 13 California (“UHC loan”). The loan was secured by an Indenture of 14 Trust. It bore interest at 3.75% per annum and matured in late 2016. 15 The note required annual principal reductions in excess of $500,000, 16 which were to be paid starting December 2014. It also required 17 semiannual interest payments. The loan offered Southern Inyo a 18 sliding scale prepayment incentive, e.g., 10% reduction in principal 19 if the note was paid in full within 36 months of inception, and 7.5% 20 reduction in principal if paid in full in 42 months. 21 D. Southern Inyo’s Revenues Decline 22 Starting in 2012, after it executed the loan in favor of UHC of 23 California, Southern Inyo’s revenues fell. 24 Rather than cutting expenses, in 2013 and 2014 Southern Inyo 25 increased staffing. Predictably, those changes resulted in increased 26 operating expenses and further pinched Southern Inyo’s already tight 27 cash flow. By June 2013, the District had only four days’ operating 1 by late 2014, its financial situation was “day to day” and 2 “precarious.”1 As a result, the district was unable to make the first 3 principal reduction in December 2014 on the UHC loan or to take 4 advantage of the prepayment incentives offered as a part of that loan. 5 E. The Optum Bank Loan 6 Driven by constricted cashflow, the district explored 7 refinancing its short-term debt into longer-term obligations with 8 lower monthly payments. Among the interested lenders was Optum Bank. 9 Optum Bank submitted a Confidential Letter of Interest for a loan to 10 refinance the El Dorado line of credit and the UHC loan. The bank 11 proposed a loan (“Optum Bank loan”) of approximately $1.5 million with 12 a 10-year maturity. The interest rate was fixed for the first 5 years 13 of the loan at 5.25% per annum and thereafter adjusted the interest 14 rate to the Federal Home Loan Bank of Seattle’s 5-year rate plus 15 3.59%. But to accommodate the district’s cash flow needs the bank 16 suggested two key provisions: (1) though due and payable in 10 years, 17 the proposed loan was amortized over 20 years, which provided the 18 district with a lower debt service payment; and (2) the repayment was 19 timed to Southern Inyo’s annual cash flow cycle; between January and 20 June of each year, Southern Inyo was to make monthly payments of 21 principal and interest, estimated to be $20,200. Between July and 22 December of each year, Southern Inyo benefitted from a debt service 23 hiatus. The loan was to be secured by a first deed of trust against 24 the district’s Lone Pine, California, real property and against other 25 tangible and intangible personal property. 26 Optum Bank’s loan proposal was presented at a special meeting in 27 October 2014. The agenda described Optum Bank’s proposal as 1 “refinancing long term debt.” Present at the meeting were the members 2 of the Southern Inyo Healthcare District’s Board of Directors (Dick 3 Gering (“Gering”), president; Drew Wickman; and Jack Berry), the 4 District’s Chief Executive and Financial Officer, Lee Barron 5 (“Barron”), and Recording Secretary, Mary Gonzales. Barron summarized 6 the terms of Optum Bank’s proposal. The Board found that “In the long 7 run [the loan] benefits the District as it allows for more reasonable 8 payment options,” and approved Optum Bank’s “mortgage loan.”2 Even 9 though 85% of the Optum Bank loan would be used to refinance the UHC 10 loan, the minutes of the October 2014 meeting do not reflect 11 discussion of the useful life of the equipment and software. 12 Thereafter, on behalf of the District, Barron accepted Optum 13 Bank’s proposal by signing the Confidential Letter of Interest. The 14 District then submitted to Optum Bank a Business Credit Application, 15 which was signed by CEO/CFO Barron, President Gering and Secretary 16 Mary Kemp. 17 The Optum Bank loan closed late February 2015. As a part of 18 finalizing the loan, President Gering and Secretary Kemp signed three 19 species of documents: (1) confirmation of authorization to incur debt, 20 called a “Governmental Certificate;” (2) promissory note; and (3) 21 security interest agreements to create and perfect security interests 22 in favor of Optum Bank. The Governmental Certificate purported to 23 authorize a 10-year $1.767 million loan, secured by Southern Inyo’s 24 real and personal property. The certificate recited that on the date 25 of signing the Board of Directors approved a $1.676 million dollar 26 loan, secured by the District’s real and personal property, with a 27 maturity in February 2025. The promissory note memorialized the loan 1 from Optum Bank in the amount of $1.676 million. The note provided 2 for an initial fixed interest rate of 5.25% for the first five years, 3 but provided that the interest rate thereafter would increase to the 4 Federal Home Loan Bank of Seattle’s 5-year loan rate plus 3.680% 5 (rather than 3.59% as stated in the Confidential Letter of Interest). 6 The note also provided for year-round monthly payments to Optum Bank, 7 rather than the six months on and six months off payment schedule 8 proposed in the Confidential Letter of Interest. The note contained a 9 severability clause. The security interest agreements and deeds of 10 trust encumbered the district’s Lone Pine office building and all, or 11 nearly all, of its personal property. 12 At closing, Optum Bank paid off the El Dorado line of credit 13 ($226,700) and UHC of California equipment and software loan 14 ($1,423,300). The remainder of the loan amount was absorbed by 15 transactional costs or was remitted to the district. 16 II. PROCEDURE 17 A. Southern Inyo Files for Chapter 9 Protection 18 In early 2016, Southern Inyo filed for Chapter 9 protection and 19 this court ordered relief. 20 Optum Bank filed a Proof of Claim for $1.17 million. Optum Bank 21 contended its loan was secured by a deed of trust against Southern 22 Inyo’s real property, i.e., 501 E. Locust Street, Lone Pine, 23 California, and by equipment, inventory, rents, monies, payments, 24 health-care insurance receivables, chattel paper, general intangibles, 25 fixtures, documents, records, instructions and accessions, 26 accessories, replacements, proceeds and other rights. 27 Southern Inyo has proposed, but not yet confirmed, a plan of 1 B. Southern Inyo Files an Adversary Proceeding 2 The district filed this adversary proceeding in 2017. It prays 3 for disallowance of Optum Bank’s Proof of Claim and for declaratory 4 relief as to the invalidity of the bank’s deed of trust against its 5 real property and the bank’s security interest against its personal 6 property. Southern Inyo contends that the Optum Bank loan was made 7 contrary to applicable state law, Cal. Health & Safety Code §§ 32130, 8 32130.2, that the loan is unenforceable, and that any security 9 interest supporting the unlawful loan is invalid. 10 Optum Bank answered and filed a counterclaim for restitution. 11 The parties have filed cross-motions for summary judgment. 12 Southern Inyo advances two primary arguments in favor of its position: 13 (1) Southern Inyo was mistaken to authorize a loan that is 14 unenforceable under California Health & Safety Code § 32130.2; and (2) 15 applicable law precludes a public entity from encumbering public 16 assets in favor of a private lender. Optum Bank advances precisely 17 the opposite position on each issue. In the alternative, Optum Bank 18 argues that even if the loan was not authorized, the bank holds a 19 claim for restitution. 20 III. JURISDICTION 21 This court has jurisdiction. 28 U.S.C. § 1334(a)-(b); see also 22 General Order No. 182 of the Eastern District of California. This is 23 a core proceeding. 28 U.S.C. § 157(b)(2)(B),(K),(O). The parties 24 have consented to final orders and judgments by this court. Amended 25 Scheduling Order § 2.0, April 5, 2018, ECF # 72. 26 IV. LAW 27 A. Summary Judgment 1 summary judgment on a claim or defense “if the movant shows that there 2 is no genuine dispute as to any material fact and the movant is 3 entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a), 4 incorporated by Fed. R. Bankr. P. 7056. “[T]he mere existence of some 5 alleged factual dispute between the parties will not defeat an 6 otherwise properly supported motion for summary judgment; the 7 requirement is that there be no genuine issue of material fact.” 8 California v. Campbell, 138 F.3d 772, 780 (9th Cir. 1998) (citing 9 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986)). “A 10 fact is ‘material’ when, under the governing substantive law, it could 11 affect the outcome of the case.” Thrifty Oil Co. v. Bank of Am. Nat’l 12 Trust & Sav. Ass’n, 322 F.3d 1039, 1046 (9th Cir. 2003) (citing 13 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). 14 “The court must view the evidence in the light most favorable to 15 the non-movant and draw all reasonable inferences in the non-movant’s 16 favor.” Swoger v. Rare Coin Wholesalers, 803 F.3d 1045, 1047 (9th 17 Cir. 2015) (citing Clicks Billiards Inc. v. Sixshooters Inc., 251 F.3d 18 1252, 1257 (9th Cir. 2001)). 19 A shifting burden of proof applies to motions for summary 20 judgment. In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 21 2010). “The moving party initially bears the burden of proving the 22 absence of a genuine issue of material fact.” Id. 23 “Where the non-moving party [e.g., a plaintiff] bears the burden 24 of proof at trial, the moving party need only prove that there is an 25 absence of evidence to support the non-moving party’s case. Where the 26 moving party meets that burden, the burden then shifts to the non- 27 moving party to designate specific facts demonstrating the existence Id. 1 Circuit has explained that the non-moving party’s “burden is not a 2 light one. The non-moving party must show more than the mere 3 existence of a scintilla of evidence.” Id. “In fact, the non-moving 4 party must come forth with evidence from which [the factfinder] could 5 reasonably render a verdict in the non-moving party’s favor.” Id. 6 When the moving party has the burden of persuasion at trial 7 (e.g., a plaintiff on claim for relief or a defendant as to an 8 affirmative defense), the moving party’s burden at summary judgment is 9 to “establish beyond controversy every essential element of its . . . 10 claim. S. California Gas Co. v. City of Santa Ana, 336 F.3d 885, 888 11 (9th Cir. 2003) (internal quotation marks omitted). In such a case, 12 there is no need to disprove the opponent’s case “[i]f the evidence 13 offered in support of the motion establishes every essential element 14 of the moving party’s claim or [affirmative] defense.” Hon. Virginia 15 A. Phillips & Hon. Karen L. Stevenson, Federal Civil Procedure Before 16 Trials, Calif. & 9th Cir. Edit., Summary Judgement, Burden of Proof ¶ 17 14:126.1 (Rutter Group 2019). 18 A party may support or oppose a motion for summary judgment with 19 affidavits or declarations that are “made on personal knowledge” and 20 that “set out facts that would be admissible in evidence.” Fed. R. 21 Civ. P. 56(c)(4). The assertion “that a fact cannot be or is 22 genuinely disputed” may be also supported by citing to other materials 23 in the record or by “showing that the materials cited do not establish 24 the absence or presence of a genuine dispute, or that an adverse party 25 cannot produce admissible evidence to support the fact.” Fed. R. Civ. 26 P. 56(c)(1). 27 “A motion for summary judgment cannot be defeated by mere Angel v. 1 Seattle-First Nat’l Bank, 653 F.2d 1293, 1299 (9th Cir. 1981) (citing 2 Marks v. U.S. Dep’t of Justice, 578 F.2d 261, 263 (9th Cir. 1978)). 3 “Furthermore, a party cannot manufacture a genuine issue of material 4 fact merely by making assertions in its legal memoranda.” S.A. 5 Empresa de Viacao Aerea Rio Grandense v. Walter Kidde & Co., 690 F.2d 6 1235, 1238 (9th Cir. 1982). 7 Summary judgment may only be granted if there is no genuine 8 dispute as to a material fact and the party is entitled to judgment as 9 a matter of law. Fed. R. Civ. P. 56(a), (e) (lack of opposition is 10 insufficient basis to grant), incorporated by Fed. R. Bankr. P. 7056; 11 Fair Housing Council of Riverside County, Inc. v. Riverside Two, 249 12 F.3d 1132, 1136 (9th Cir. 2001) (cross-motions for summary judgment do 13 not require that one motion must be granted). 14 B. Claims Filed 15 A proof of claim is “deemed allowed, unless a party in interest 16 . . . objects.” 11 U.S.C. § 502(a). Federal Rule of Bankruptcy 17 Procedure 3001(f) creates an evidentiary presumption of validity for 18 “[a] proof of claim executed and filed in accordance with [the] 19 rules.” Fed. R. Bankr. P. 3001(f); see also Litton Loan Servicing, LP 20 v. Garvida (In re Garvida), 347 B.R. 697, 706–07 (B.A.P. 9th Cir. 21 2006). This presumption is rebuttable. Id. “The proof of claim is 22 more than some evidence; it is, unless rebutted, prima facie evidence. 23 One rebuts evidence with counter-evidence.” Id. at 707 (citation 24 omitted) (internal quotation marks omitted). After the presumption is 25 rebutted, the creditor bears the burden of proof as to the validity 26 and amount of its claim. In re Southern California Plastics, Inc., 27 165 F.3d 1243 1248 (9th Cir. 1999); In re Palmdale Hills Property, LLC aff’d 1 Cir. 2011). 2 Bankruptcy Code § 502(b) enumerates grounds for objecting to a 3 Proof of Claim. Among those is the unenforceability of the debt on 4 which the claim is based under applicable nonbankruptcy law. 11 5 U.S.C. § 502(b)(1); In re Salamon, 528 B.R. 171, 178 (9th Cir. BAP 6 2015) (borrower’s liability for deficiency after foreclosure in 7 violation of California anti-deficiency law). Moreover, disallowing 8 the claim underlying the lien voids liens securing that debt. 11 9 U.S.C. § 506(d); Desnup v. Timm, 502 U.S. 410, 415-16 (1992); In re 10 Blendheim, 803 F.3d 477, 489 (9th Cir. 2015). 11 C. State Law on Hospital Districts Taking Loans 12 California law authorizes the formation of rural hospital 13 districts under “The Local Healthcare District Law.” Cal. Health & 14 Safety Code § 32000 et seq. Hospital Districts so organized act 15 through a Board of Directors. Id. at §§ 32100-32111. Those statutes 16 enumerate the authority of the Board of Directors to act on behalf of 17 the district. Id. at §§ 32121-32140. Among those powers is the 18 authority to establish and operate health care facilities, as well as 19 to purchase and encumber district property. Id. at § 32121(c),(j), 20 32122. 21 A hospital district’s authority to borrow is expressly 22 enumerated. Cal. Health & Safety Code §§ 32130-32130.6. As pertinent 23 here, Southern Inyo’s decision to borrow from Optum Bank is governed 24 by two provisions. Cal. Health & Safety Code § 32130 and § 32130.2. 25 Section 32130 provides: 26 A district may borrow money and incur indebtedness in an amount not to exceed 85 percent of all estimated income and 27 revenue for the current fiscal year, including, but not limited to, tax revenues, operating income, and any other 1 whatever source derived. The money borrowed and indebtedness incurred under this section shall be repaid 2 within the same fiscal year. 3 Cal. Health & Safety Code § 32130 (emphasis added). 4 Section 32130.2 provides: 5 (a) A district may, by resolution adopted by a majority of the district board, issue negotiable promissory notes to 6 acquire funds for any district purposes subject to the restrictions and requirements imposed by this section. The 7 maturity of the promissory notes shall not be later than 10 years from the date thereof. The total aggregate amount of 8 the notes outstanding at any one time shall not exceed 85 percent of all estimated income and revenue for the current 9 fiscal year, including, but not limited to, tax revenues, operating income, and any other miscellaneous income of the 10 district. Indebtedness incurred pursuant to any other provision of law shall be disregarded in computing the 11 aggregate amount of notes that may be issued pursuant to this section. 12 (b) Negotiable promissory notes may be issued pursuant to 13 this section for any capital outlay facility, equipment, or item which has a useful life equal to, or longer than, the 14 term of the notes, as determined by the board of directors. 15 (c) The maximum annual interest rate which may be paid on the negotiable note shall at no time exceed the amount 16 authorized under Section 53531 of the Government Code. 17 Cal. Health & Safety Code § 32130.2 (emphasis added). 18 Cal. Government Code § 53531 provides: 19 Any provision of law specifying the maximum interest rate on bonds to the contrary notwithstanding, bonds may bear 20 interest at a coupon rate or rates as determined by the legislative body in its discretion but not to exceed 12 21 percent per year payable as permitted by law, unless some higher rate is permitted by law. 22 23 Cal. Government Code § 53531 (emphasis added). 24 No known case has construed or applied § 32130.2. But as this 25 court reads that statute, subdivision (a) applies to the issuance of 26 negotiable promissory notes “for any district purposes,” including 27 those described in subdivision (b). Subdivision (b) applies only to a district’s use of promissory notes to acquire assets that have a 1 finite useful life, e.g., that wear out, break or become obsolete. 2 When applicable, subdivision (b) modifies downward the 10-year 3 maturity rule otherwise applicable to a promissory note by limiting 4 its maturity to the “useful life” of the asset, “as determined by the 5 board of directors.” Id. 6 This reading is consistent with the purpose of § 32130.2, which 7 is to require hospital districts to avoid accumulating debt. As the 8 court in Southern Humboldt Community Healthcare Dist., observed: 9 Restrictions on the borrowing of public entities are common in California and other states. . . They may include a 10 limitation on debt as a percentage of revenue, a restriction on the fiscal year from which loans may be 11 repaid, or both. They are intended to prohibit the accumulation of public debt without the consent of the 12 taxpayers, and require governmental agencies to carry on their operations on a cash basis. 13 14 Southern Humboldt Community Healthcare Dist., 254 B.R. 758, 760 15 (Bankr. N.D. Cal. 2000) (emphasis added). 16 Moreover, when a hospital district’s Board of Directors 17 exercises it statutory authority under § 32130.2 or any other 18 applicable provision of law, it must memorialize compliance with that 19 provision. 20 The municipal record, to be complete, should show all of the essential or material facts respecting the corporate 21 vote, act or transaction and that all of the mandatory charter provisions have been followed substantially. For 22 example, where bills are required to be read a certain number of times before passage, the record should show that 23 this has been done. However, the view has been expressed that a council need not, as a prerequisite to taking 24 action, compile an evidentiary record through formal proceedings. It is free to base its actions on information 25 and arguments that come to it from any source. An incomplete record or the absence of a record may render 26 ineffectual the action taken or purported to have been taken. 27 Municipal Corporations 1 14.3 Showing Required (3d ed.) (emphasis added). 2 D. Ultra Vires Acts 3 “The powers of a municipality are to be exercised through its 4 legally constituted agents, its officers, boards, or departments, and 5 the authority of each officer, board, or department to exercise any of 6 the corporate power with which the municipality has been clothed must 7 be distinctly conferred upon that officer, board, or department, or 8 its act will create no obligation against the municipality.” Von 9 Schmidt v. Widber, 105 Cal. 151, 159 (1894). Governmental boards of 10 directors and officials only possess those powers “which are (1) 11 expressly granted by the state constitution or by state statute or (2) 12 necessarily implied by such express grants.” In re County of Orange, 13 31 F.Supp.2d 768, 774 (C.D. Cal. 1998). “Any fair, reasonable doubt 14 concerning the existence of the power” should be resolved against the 15 municipality. Schmidt v. Widber, 105 Cal. at 157. 16 California restricts the amount of debt a public entity may 17 incur and the manner in which the public entity may incur the debt. 18 In re Southern Humboldt Community Healthcare Dist., 254 B.R. at 760, 19 citing City of Los Angeles v. Offner, 19 Cal.2d 483, 486 (1942). 20 “The validity of a [public entity’s] transaction, whether it 21 creates indebtedness or liabilities, is measured at the time the 22 transaction is entered into.” County of Orange, 31 F.Supp.2d at 776, 23 citing Arthur v. City of Petaluma, 175 Cal. 216, 223-24 (1917); and 24 Buck v. City of Eureka, 124 Cal. 61, 68 (1899). 25 Actions that are wholly beyond the powers of a governmental 26 entity are ultra vires and void. In re County of Orange, 31 F.Supp.2d 27 at 768; G.L. Mezzetta, Inc. v. City of American Canyon, 78 Cal.App.4th Offner 1 V. DISCUSSION 2 A. The Optum Bank Loan 3 Two principles guide this court’s inquiry into the validity of 4 the Optum Bank loan. First, Southern Inyo’s Board of Directors is 5 presumed to have performed its duty in authorizing the Optum Bank 6 loan. Carruth v. City of Madera, 233 Cal.App.2d 688, 693 (1965); Cal. 7 Evid. Code 664 (“It is presumed that official duty has been regularly 8 performed”), incorporated by Fed. R. Evid. 302. That presumption is 9 rebuttable. Id. 10 Second, a public entity speaks “by and through its records.” 5 11 McQuillin, Municipal Corporations, at § 14.6. “It is well established 12 that a court determines the validity of legislative enactments based 13 on the facial content or effect of the enactment, not by examining the 14 subjective motives or purposes of the legislators.” Schroeder v. 15 Irvine City Council, 97 Cal.App.4th 174, 192-93 (2002). “Courts will 16 not permit testimony from current or former public officials 17 concerning their intentions or understanding of legislative actions.” 18 City of King v. Community Bank of Central California, 131 Cal.App.4th 19 913, 942 (2005). But the omission of a statutorily required factual 20 predicate for the validity of a resolution does not “per se 21 invalidate” an otherwise valid municipal act. 5 McQuillin, Municipal 22 Corporations at § 14.9. Parol evidence may be admitted “to establish 23 the real facts of transactions or corporate acts, in the entire 24 absence of all record, or where the record kept is so meager that the 25 particular transaction, act or vote is not disclosed by it.” Id. 26 “[P]arol evidence is admissible to prove facts omitted from the record 27 unless the law expressly and imperatively requires all matters to H.C. Gordon 1 v. City of San Diego, 108 Cal. 264, 269 (1895). 2 1. Promissory Note 3 A promissory note is negotiable if it meets the elements of a 4 negotiable instrument. Cal. Comm. Code § 3104. That section provides: 5 [N]egotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without 6 interest or other charges described in the promise or order, if it is all of the following: 7 (1) Is payable to bearer or to order at the time it is 8 issued or first comes into possession of a holder. 9 (2) Is payable on demand or at a definite time. 10 (3) Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in 11 addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, 12 or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or 13 realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or 14 protection of an obligor. 15 Cal. Comm. Code 3104(a) (emphasis added); 4 Hawkland, Lawrence & 16 Miller, Uniform Commercial Code Series, Article 3 Commercial Paper § 17 3-110 et seq. (December 2019); Marques v. Joseph (In re Marques), 2016 18 WL 7188653 *7-8 (December 9, 2016) (applying Cal. Comm. Code § 3104 to 19 variable rate note); Resolution Trust Corp. v. Kennelly, 57 F.3d 819 20 n. 1 (9th Cir. 1995) (“It is far from clear [under the Uniform 21 Commercial Code] that a note is rendered nonnegotiable simply because 22 it contains a variable interest rate”). 23 “Whether an instrument is negotiable is a question of law to be 24 determined solely from the face of the instrument, without reference 25 to the intent of the parties.” Cooperative Centrale Raiffeisen- 26 Boerenleenbank B.A. v. Bailey, 710 F. Supp. 737, 738 (C.D. Cal. 1989). 27 Here, Optum Bank’s promissory note satisfies the elements of § 1 in monthly installments over a 10-year period. As a result, the 2 negotiable promissory note element of § 32130.2(a) has been satisfied. 3 2. Resolution by the Board of Directors 4 “Resolution” is not defined in § 32130.2(a). As a rule, it is 5 “[a] formal expression of the opinion or will of an official body or a 6 public assembly, adopted by vote. . . .” Black’s Law Dictionary 1310- 7 1311 (16th ed. 2019). In the context of public entities, it is 8 characterized by less formality than other actions by the entity’s 9 Board of Directors, i.e., ordinances, San Diego City Firefighters, 10 Local 145 v. Bd. of Admin. of San Diego City Employees. Ret. Sys., 206 11 Cal.App.4th 594, 607–08 (2012) (it is “a mere declaration with respect 12 to future purpose or proceedings”); 5 McQuillin, Municipal 13 Corporations at § 15.6 (a resolution is “a unilateral action that is 14 temporary in nature and, thus, it does not create any vested 15 contractual rights”). A “resolution,” as that term is used by 16 § 32130.2(a), requires the formal assent of Southern Inyo’s Board of 17 Directors at a duly called meeting. 18 Hospital districts may borrow money. Cal. Health & Safety Code 19 §§32130-32130.6. As a rule, the authority of the Board of Directors 20 may not be delegated to third parties. 2A McQuillin, Municipal 21 Corporations, at § 10:44. Moreover, “[w]here a municipality is 22 authorized to delegate a state-granted authority, it is confined in 23 its delegation to the powers authorized in its own enabling 24 ordinance.” Id. The Local Healthcare District Law does not authorize 25 the Board of Directors to delegate its borrowing authority. Cf. Cal. 26 Health & Safety Code §§ 32121.1 (discharge of certain subordinate 27 officers and employees).3 As a result, Southern Inyo was authorized 1 to act only with approval by of quorum of the Board of Directors. 2 Here, there is no dispute that Southern Inyo’s Board of 3 Directors authorized the District to take a loan from Optum Bank; 4 there is a dispute over whether the Board authorized the district to 5 take this loan from the bank. 6 Optum Bank points to the Governmental Certificate, executed by 7 Richard T. Gering, President, and Mary Kemp, Secretary, which it 8 contends was authorized by a quorum of the Board of Directors at the 9 October 2014, special meeting. The certificate contains pre-printed 10 verbiage that states: 11 Certificates Adopted. At a meeting of the appropriate governing body of the Entity, duly called and held on 12 February 20, 2015, at which a quorum was present and voting, or by other duly authorized action in lieu of a 13 meeting, the resolutions set forth in this Certificate were adopted. 14 Southern Inyo concedes that Board President Gering and Secretary 15 Kemp signed the Governmental Certificate. But neither side has 16 offered evidence, beyond the boilerplate language of the certificate, 17 that the Board of Directors actually convened as recited. Moreover, 18 during oral argument, Optum Bank implicitly conceded that no such 19 meeting occurred. Since the Board’s authority to borrow cannot be 20 delegated and since there is no record that the Board actually 21 convened on February 20, 2015, without more, the Governmental 22 Certificate is not a “resolution” within the meaning of § 32103.2(a). 23 The Confidential Letter of Interest, as approved by the Board, 24 authorized a “mortgage loan” of “approximately $1,500,000” secured by 25 a first deed of trust against the District’s real property. It 26

Districts Bylaws, e.g. Art. IV § 4, can be read to authorize broadly 27 delegation of authority. To the extent that Optum Bank so argues, the court finds that the Bylaws exceed the scope of delegation authorized by The Local 1 provided for payments of $20,200 per month between January and June of 2 each calendar year and for no payments between July and December of 3 each year. It also provided for interest for the first five years of 4 repayment at the rate of 5.25%, followed by interest for the second 5 five years adjusted to the Federal Home Loan Bank of Seattle’s 5-year 6 loan rate plus 3.59%. 7 In contrast, the loan that Optum Bank actually made to the 8 District was for $1,676,000, secured by the District’s real property 9 and personal property. The note contained a year-round monthly 10 repayment schedule.4 It also provided for interest during the second 11 five-year repayment period at the Federal Home Loan Bank of Seattle’s 12 5-year loan rate plus 3.680%. 13 As a result, a genuine issue of fact exits: whether Southern 14 Inyo’s Board of Directors authorized the Optum Bank loan that was 15 actually written.5 16 3. 10-Year Maturity Date 17 A promissory note issued under § 32130.2 must mature not later 18 than 10 years from the date issued. Cal. Health & Safety Code 19 § 32103.2(a). Absent specific language in a statute, deadlines are 20 calculated by excluding the first day and including the last day on 21 which an act must occur. Clements v. Pasadena Fin. Co., 376 F.2d 22 1005, 1007 (9th Cir. 1967) (“In order to apply a different method of 23 computing time, the particular statute involved must specifically 24 4 Admittedly, the average monthly payment over a 12-month period is the same, or nearly so, under the Confidential Letter of Interest and under the loan 25 actually written. The loan proposed call for monthly payments of $20,200 between January and June of each year. The loan actually written required 26 year-round monthly payments of $10,169.

27 5 Admittedly, in limited circumstances, parol evidence may be admissible to amplify the true intention of Southern Inyo’s Board of Directors. City of King 1 require the application of a different rule”); People v. Sup. Ct. 2 (Finch), 200 Cal.App.3d 1546, 1551 (1988). 3 California has codified this rule: “The time in which any act 4 provided by law is to be done is computed by excluding the first day, 5 and including the last, unless the last day is a holiday, and then it 6 is also excluded.” Cal. Gov't Code § 6800; see also, Cal. Civ. Code § 7 10; Cal. Code of Civ. Proc. 12. That rule has been broadly applied. 8 Rauer v. Broder, 107 Cal. 282, 283-84 (1895) (due date of promissory 9 note); Reichardt v. Reichardt, 186 Cal.App.2d 808, 809-12 (1960) 10 (duration of domestic support payments under divorce decree); Rapp v. 11 Los Angeles City Sch. Dist., 5 Cal.App.2d 342, 343 (1935) (statutory 12 notices). 13 Here, the promissory note was executed on February 20, 2015, and 14 will mature on February 20, 2025. Applying the rule of excluding the 15 first day and including the last day, the Optum Bank note matures 16 precisely 10 years after issuance and complies with Cal. Health & 17 Safety Code § 32130.2(a). Optum Bank has satisfied its burden of 18 proof as to the 10-year maturity element of § 32130.2. 19 4. Debt-to-Income Ratio 20 California law limits the total promissory note indebtedness a 21 district may incur at any one time to 85% of the district’s estimated 22 revenue for the current fiscal year. Cal. Health & Safety Code 23 § 32130.2(a). Carefully parsed, the rule has two parts: (1) measured 24 contemporaneously, County of Orange, 31 F.Supp.2d at 776; and (2) the 25 aggregate amount of all promissory notes issued under § 32130.2 may 26 not exceed 85% of estimated income and revenue for the current fiscal 27 year in which the promissory notes are to be issued. Cal. Health & 1 Optum Bank asserts, and Southern Inyo admits, that as of June 2 30, 2015, approximately four months after the loan was made, Southern 3 Inyo’s debt-to-income ratio was 27%.6 Though not calculated 4 contemporaneously with Optum Bank’s loan, there is no genuine issue 5 over the fact that the Optum Bank loan did not cause the district to 6 have a debt-to-income ratio in excess of 85% when the loan was issued. 7 Optum Bank has sustained its burden of proof on the issue. 8 5. Interest Rate 9 Section 32130.2(c) limits the maximum annual interest rate paid 10 on a promissory note; the interest rate “shall at no time exceed the 11 amount authorized under Section 53531 of the Government Code.” 12 Section 53531 limits the interest rate to 12% per annum. Burks v. 13 Monterey Regional Water Pollution Control Agency, 156 Cal.App.3d 1013, 14 1016 (1984) (describing the rate in § 53531 as a “ceiling”). 15 Southern Inyo’s promissory note bears interest within the limits 16 imposed by § 53531. The initial rate was fixed at 5.250% for the 17 first five years and then converts to a variable interest rate 18 (Federal Home Loan Bank of Seattle’s 5-year loan rate plus 3.680%). 19 At all pertinent times Optum Bank charged interest at less than the 20 12% per annum cap. Moreover, the Ninth Circuit applies savings 21 clauses to preclude a finding of illegality of a contract. In re 22 Dominguez, 995 F.2d 883 (9th Cir. 1993) (facially usurious loan, i.e., 23 17% per annum, protected by “savings clause”); Restatement (Second) of 24

6 That percentage was calculated thusly. Southern Inyo’s promissory notes to 25 all creditors aggregated $1,847,242. Exhibits to Decl. Williams, Exh. 45, p. 11, lines 17-21, March 20, 2019, Exh. 179. As of June 30, 2015, Southern 26 Inyo’s income and revenue was $6,909,724 (Operating Revenues $6,105,816 + District Tax Revenues $779,075 + Investment Income $949 + Grants and 27 contributions $23,894). Exhibits to Second Amended Plan for Adjustment of Debt, Exh. 4, p. 54, January 17, 2018, ECF # 398. Doing the math: $1,847,242 1 Contracts § 203(a) (1981) (“[A]n interpretation which gives a 2 reasonable, lawful, and effective meaning to all the terms is 3 preferred to an interpretation which leaves a part unreasonable, 4 unlawful, or of no effect”). Consequently, the interest rate charged 5 is consistent with §§ 32130.2(c), 53531. 6 6. Useful Life Limitation 7 Southern Inyo argues that authorizing the Optum Bank loan was 8 ultra vires as it was in violation of the useful life limitation under 9 § 32130.2(b). First, Southern Inyo argues that while the UHC Loan 10 fell squarely within the useful life limitation of § 32130.2(b), the 11 authorizing resolution, i.e., Resolution 11-06, did not contain useful 12 life findings as to either the equipment or the software. As a 13 result, the UHC loan, and any loan to refinance it, i.e., the Optum 14 Bank loan, was tainted by illegality. Second, Southern Inyo argues 15 that at the time it authorized Optum Bank to refinance the UHC 16 equipment and software loan the Board of Directors made no findings as 17 to the remaining useful life of the equipment or software. 18 The court agrees with Southern Inyo’s first argument that the 19 UHC loan was tainted--and that the taint extends to the Optum Bank 20 loan, provided the Southern Inyo Board of Directors made no useful 21 life findings when it authorized the UHC loan. 22 California courts have long understood that illegal contracts 23 may not be enforced. Stockton Morris Plan Co. v. Calif. Tractor & 24 Equipment Corp., 112 Cal.App.2d 684, 690-691 (1952). That is true 25 even if it is an innocent assignee that seeks enforcement. Fewel & 26 Dawes, Inc. v. Pratt, 17 Cal.2d 85, 92 (1941). Since overruling 27 Southern Inyo’s objection to Optum Bank’s Proof of Claim enforces the 1 that the Optum Bank loan was not statutorily authorized. In the case 2 of a public entity, the argument is made stronger still by the fact 3 that persons who contract with governmental entities are deemed to 4 know the limitations on their power to contract, Miller v. McKinnon, 5 20 Cal.2d 83, 89 (1942); G.L. Mezzetta, 78 Cal.App.4th at 1094, n. 4, 6 and that the public entity’s acts are outside of its authority “will 7 be imputed to the other contracting party.” 1 Gelfand, State and 8 Local Government Debt Financing, at § 11:18. 9 The court also agrees with Southern Inyo’s second argument that 10 refinancing debt to acquire assets with finite lifespans is itself 11 limited by the useful life span limitation of § 32130.2(b). Section 12 32130.2(a) authorizes issuance of promissory notes “for any district 13 purposes subject to the restrictions and requirements imposed by this 14 section.” Cal. Health & Safety Code § 32130.2(b) is such a 15 limitation. It limits the length of a promissory note given to 16 acquire assets that have finite lifespans. 17 Negotiable promissory notes may be issued pursuant to this section for any capital outlay facility, equipment, or item 18 which has a useful life equal to, or longer than, the term of the notes, as determined by the board of directors. 19 20 Cal. Health & Safety Code § 32130.2(a) (emphasis added). 21 No known case addresses whether debt in excess of the debt 22 ceiling may be cleansed by refinancing that debt. But the language of 23 the statute and analogous case law suggest not. Section 32130.2(b) 24 applies the useful life restriction to promissory notes issued “for” 25 equipment and items. The preposition “for” means “with respect to.” 26 Webster’s New Explorer Encyclopedic Dictionary 715 (2006 ed.). 27 Without qualifying language, the use of the preposition “for” suggests 1 otherwise covered by that subsection. 2 Moreover, precedent and commentators preclude entities from 3 accomplishing indirectly what they could not do directly. Public 4 entities may not evade debt limitations by recharacterizing debt. 5 Fontana Redevelopment Agency v. Torres, 153 Cal.App.4th 902, 912-913 6 (2007), as modified on denial of reh’g (August 24, 2007) and rev. 7 denied (October 24, 2007). As one commentator put it: 8 In some instances, municipalities have sought to avoid debt ceilings by attempting to recharacterize the nature of the 9 debt into a category which would not technically fall within the debt ceiling limitations. Courts are not, 10 however, agreeable to such recharacterization, and look instead to the underlying operation of the transaction . . 11 . 12 Gelfand, State and Local Government Debt Financing, Debt Ceilings and 13 Other Restrictions on Debt Financing, Devices Employed to Evade Debt 14 Ceilings at § 11:26 (2d ed.), citing Fontana Redevelopment Agency, 153 15 Cal.App.4th at 912-913. 16 The UHC loan falls within § 32130.2 and, as a result, is subject 17 to the useful life limitation. Refinancing a debt covered by the 18 narrower useful life limitation of subdivision (b) of § 32130.2 into 19 the longer 10-year maturity rule of subdivision (a) of § 32130.2 is a 20 prohibited recharacterization. 21 Neither side has sustained its burden of proof on the issue. To 22 prevail at summary judgment, Optum Bank must show that Southern Inyo’s 23 Board of Directors made useful life findings as to equipment and 24 software for both the UHC loan and the Optum Bank loan. It has not 25 done so. 26 In contrast, to prevail at summary judgment, Southern Inyo must 27 show that its Board of Directors did not make useful life findings as 1 to the equipment and software. It has not done so.7 Neither 2 Resolution 11-06, which approved the UHC loan, nor the resolutions, 3 i.e., civil minutes of the October 14, 2014 meeting or the 4 Governmental Certificate, which purportedly approved the Optum Bank 5 loan made useful life findings. Southern Inyo also has not 6 demonstrated the absence of admissible parol evidence from which such 7 a finding might be made. As a result, neither side has demonstrated 8 entitlement to judgment. 9 B. The Encumbrance in Favor of Optum Bank 10 Southern Inyo contends that neither the California Constitution 11 nor applicable statutory law authorizes a public entity to give a 12 private lender a security interest in property owned by the entity. 13 The California Constitution does not preclude a public entity 14 from pledging assets to a private lender to secure a loan in its 15 favor. Merchants Nat. Bank of San Diego v. Escondido Irr. Dist., 144 16 Cal. 329 (1904) (holding that an irrigation district’s pledge of 17 assets held in trust violated due process of law under the Cal. 18 Const., Art. 1, § 13), overruled by La Mesa, Lemon Grove & Spring Val. 19 Irr. Dist. v. Halley, 197 Cal. 50, 58-62 (1935). 20 In the absence of contrary constitutional prohibition, a public 21 entity’s authority to encumber its assets is defined by the entity’s 22 7 Southern Inyo mistakenly assumes that Resolution 11-06, the civil minutes 23 of the October 2014, and/or the Governmental Certificate provide sufficient, stand-alone evidence by which useful life findings might be made. This is 24 not the case. As a rule, parol evidence of the predicate legislative findings is admissible absent express charter or statutory exclusion of that evidence. 5 McQuillin, Municipal Corp., Municipal Records § 14:9 (3d ed.) 25 (“Where the charter or statute applicable declares in express terms that a record shall be kept and shall be the only evidence of corporate acts, the 26 rule of strict construction would exclude parol evidence . . . “); see also, City of King v. Community Bank of Central California, 131 Cal.App.4th 913, 27 942-947 (2005). Here, § 32130.2 contains no such limitation. As a result, limited parol evidence would be admissible to show that findings were made. 1 charter and by applicable statutory law. Branham v. City of San Jose, 2 24 Cal. 585 (1864); Wallace v. Mayor and Common Council of San Jose, 3 29 Cal. 180, 186 (1865) (public entities have those powers 4 specifically granted or necessary to carry out expressly granted 5 powers); 10 McQuillin, Municipal Corporations at § 28:46. No such 6 constitutional prohibition exits here.8 Subject to statutory 7 limitations, The Local Healthcare District Law authorizes hospital 8 districts to encumber assets: 9 Each local district shall have and may exercise the following powers: 10 . . . 11 (c) To purchase, receive, have, take, hold, lease, use, and 12 enjoy property of every kind and description within and without the limits of the district, and to control, dispose 13 of, convey, and encumber the same and create a leasehold interest in the same for the benefit of the district. 14 15 Cal. Health & Safety Code § 32121(c)(emphasis added). 16 Southern Inyo contends that the District’s right to encumber 17 under § 32121(c) is limited by § 32127.2 and § 32127.3, which 18 authorizes encumbering district assets to secure state insurance 19 financing and specified federal loans to construct, expand or remodel 20 healthcare facilities. In the pertinent part, § 32127.2 provides: 21 Exclusively for the purpose of securing state insurance of financing for the construction of new health facilities, 22 the expansion, modernization, renovation, remodeling and alteration of existing health facilities, and the initial 23

24 8 Southern Inyo’s citation to the California Constitution, Art. 11, § 11(a) does not support its position. That section provides: “The Legislature may not delegate to a private person or body power to make, control, appropriate, 25 supervise, or interfere with county or municipal corporation improvements, money, or property, or to levy taxes or assessments, or perform municipal 26 functions.” Courts considering this provision have construed it to mean that the legislature “may not delegate to a private person or body the power to 27 levy taxes.” Howard Jarvis Taxpayers’ Ass’n v. Fresno Metropolitan Projects Authority, 40 Cal.App.4th 1359, 1396 (1995). 1 equipping of any such health facilities . . . and notwithstanding any provision of this division or any other 2 provision or holding of law, the board of directors of any district may (a) borrow money or credit, or issue bonds, as 3 well as by the financing methods specified in this division, and (b) execute in favor of the state first 4 mortgages, first deeds of trust, and other necessary security interests as the Office of Statewide Health 5 Planning and Development may reasonably require in respect to a health facility project property as security for the 6 insurance. . . 7 Cal. Health & Safety Code § 32127.2 (emphasis added). 8 Similarly, § 32127.3 provides: 9 (a) Exclusively for the purpose of securing federal mortgage insurance, federal loans, federal loans or grants 10 or guaranteed loans issued pursuant to the federal Consolidated Farm and Rural Development Act . . . for 11 financing or refinancing the construction of new health facilities, the expansion, modernization, renovation, 12 remodeling, or alteration of existing health facilities, and the initial equipping of those health facilities under 13 the federal mortgage insurance programs as are now or may hereafter become available to a local hospital district, 14 and notwithstanding any provision of this division, or any other provision or holding of law, the board of directors 15 of any district may do either or both of the following: 16 (1) Borrow money or issue bonds, in addition to other financing methods authorized under this division. 17 (2) Execute, in favor of the United States, appropriate 18 federal agency, or federally designated mortgagor, first mortgages, first deeds of trust, or other necessary 19 security interests as the federal government may reasonably require with respect to a health facility project property 20 as security for that insurance. 21 Cal. Health & Safety Code § 32127.3(a)(emphasis added). 22 In construing its statutes, California courts place a premium on 23 ascertaining legislative intent and, wherever possible, attempt to 24 interpret statutes consistent with that intent. Cal. Code of Civ. 25 Proc. 1859. California courts hold that statutory language should be 26 construed by their plain and ordinary meaning. Stephens v. County of 27 Tulare, 38 Cal. 4th 793 (2006); Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 59, (2002) (court should “follow the 1 Legislature's intent, as exhibited by the plain meaning of the actual 2 words of the law”). “If the plain language of the statute is clear 3 and unambiguous, our inquiry ends, and we need not embark on judicial 4 construction. If the statutory language contains no ambiguity, the 5 Legislature is presumed to have meant what it said, and the plain 6 meaning of the statute governs.” People v. Johnson, 28 Cal.4th 240, 7 244 (2002). 8 Here, the legislature has used plain words to express its 9 intention. Sections 32127.2 and § 32127.3 each provide that 10 “notwithstanding any provision of this division or any other provision 11 or holding of law” the board of directors may encumber district 12 assets. The use of the word “notwithstanding” signals a legislative 13 intent to offer hospital districts still another statutory avenue by 14 which it may borrow funds and encumber district assets. Sections 15 32127.2 and 32127.3 do not restrict the Board of Directors’ authority 16 to encumber under § 32121(c). Those sections also do not preclude the 17 board borrowing from private lenders. As a result, if Southern Inyo 18 was authorized to borrow money from Optum Bank, it was authorized to 19 encumber district assets to secure that loan. 20 C. Optum Bank’s Claim for Restitution 21 Courts and commentators are uniform that ultra vires acts by a 22 public entity are void. Miller v McKinnon, 20 Cal.2d at 87; Reams v. 23 Cooley, 171 Cal. 150, 153 (1915). That rule has been applied to 24 unauthorized agreements entered into by public entities. Miller v. 25 McKinnon, 20 Cal.2d at 83. In such instances the party who has 26 entered the ultra vires contract with the public entity is without 27 remedy. Id. at 88-89. As one court observed: 1 entity on an implied-in-law or quasi-contract theory, because such a theory is based on quantum meruit or 2 restitution considerations which are outweighed by the need to protect and limit a public entity's contractual 3 obligations.” 4 As our Supreme Court stated long ago: “[N]o implied liability to pay upon a quantum meruit could exist where 5 the prohibition of the statute against contracting in any other manner than as prescribed is disregarded.” The reason 6 is simple: “The law never implies an agreement against its own restrictions and prohibitions, or [expressed 7 differently], ‘the law never implies an obligation to do that which it forbids the party to agree to do.’ ” In other 8 words, contracts that disregard applicable code provisions are beyond the power of the city to make. 9 10 Katsura v. City of San Buenaventura, 155 Cal.App.4th 104, 109–110 11 (2007) (internal citations omitted); see also, Stockton Morris Plan 12 Co., 112 Cal.App.2d at 684 (1952); Lundeen Coatings Corp. v. Dep’t of 13 Water & Power, 232 Cal.App.3d 816, n. 9 (1991).9 Denial of recovery 14 has been applied to debt that violates statutory debt limits. 15 15 McQuillin, Municipal Corp., at § 41:45 (“The creditor, if his or her 16 debt exceeds the limit, is without remedy”). 17 At least three potential exceptions to the rule exist. First, 18 recovery may be allowed for contracts within the authority of a public 19 entity to enter, but which are rendered invalid by blunders in 20 execution. 21

22 9 Optum Bank’s authorities do not stand for the proposition that a party injured by a public entity’s ultra vires acts are entitled to restitution. 23 A Ps at ri ta nn ea r sv ,. LH Pa i vn . SC te rl ae ts oti s,a l 8 2G 8r o Fu .p, 3d 7 18 03 2 3F . (3 9d t h7 5 C3 i r( .9 t 2h 0 1C 6i )r ;. 2 R0 u1 t5 h) e; r fE oS rG d C Ha op li dt ia nl g s, 24 L FL rC a nv c. i sP cl oa z Ha o uD se il n gR a Ay u, t h2 o2 r3 i tC ya ,l . 7A 2p p F. e4 dt .h A2 p2 p1 x .( 2 60 01 94 ) (. 2 0 0H 3o )n ,e y iw se l al n, uI nn pc u. b lv i. s hS ea dn decision, issued prior to 2007, and may not be cited. Fed. R. App. P. 32.1, 25 36-3. The closest case is Russell City Energy Co., LLC v. City of Hayword, 14 Cal.App.5th 54 (2017). That case is distinguishable; there the city had 26 the power to contract, but the agreement was ultimately held to violate Section 31 of the California Constitution. And it was decided on “the unique 27 circumstances” of the case. p. 73. It does not stand for the proposition that restitution is available to the injured party whenever a public entity 1 Undoubtedly, . . . a municipal corporation, may, under some circumstances, be held liable upon an implied contract for 2 benefits received by it, but this rule of implied liability is applied only in those cases where the board or 3 municipality is given the general power to contract with reference to a subject matter and the express contract 4 which it has assumed to enter into in pursuance of this general power is rendered invalid for some mere 5 irregularity or some invalidity in the execution thereof. 6 Reams v. Cooley, 171 Cal. at 153 (emphasis added). 7 Second, equitable recovery may be allowed where the injured 8 creditor can trace “the identical property delivered to the 9 municipality.” 15 McQuillin, Municipal Corp., at § 41:45. 10 Third, recovery may be allowed in “exceptional circumstances.” 11 Id. “Where contract for conditional sale of water-pumping equipment 12 to city created a debt in violation of the constitution, the seller 13 was entitled to recover on an implied contract for the reasonable 14 value of the use of the equipment during the years not barred by the 15 statute of limitations.” Id. at n. 5, citing City of Eastman v. 16 Georgia Power Co., 69 Ga. App. 182, 25 S.E.2d 47 (1943); Russell City 17 Energy Co., LLC v. City of Hayward, 14 Cal.App.5th 54 (2017) 18 (successful constitutional challenge). 19 If Southern Inyo’s Board of Directors acted without statutory 20 authority when it took the Optum Bank loan, the bank is presumptively 21 without remedy and the objection to the bank’s Proof of Claim must be 22 sustained. Though California law does provide for limited exceptions 23 to that rule, Optum Bank has not carried its burden of proof as to the 24 applicability of an equitable remedy. The exception most likely 25 applicable, if any, is the irregularity in execution. Until the court 26 establishes whether (1) Southern Inyo enacted a resolution within the 27 meaning of § 32130.2(a); and (2) useful life findings, as required by § 32130.2(b), were made as to the equipment and/or software, the court 1 cannot determine whether any of the three noted exceptions allowing 2 for equitable remedies should apply here. 3 VI. CONCLUSION 4 For each of the foregoing reasons, Southern Inyo’s motion for 5 summary judgment is denied. 6 Optum Bank’s motion for summary judgment is granted in part. 7 Optum Bank has satisfied the following elements of California Health & 8 Safety Code § 32130.2: (1) Southern Inyo executed a negotiable 9 promissory note in favor of Optum Bank; (2) that promissory note 10 matured not more than 10 years from issuance; (3) on the date Southern 11 Inyo executed the note its aggregate notes to creditors did not exceed 12 85% of all of Southern Inyo’s estimated revenue and income; and (4) 13 the interest rate for the negotiable promissory note executed in favor 14 of Optum Bank was less than the statutory maximum. Except as to the 15 four elements described herein, Optum Bank’s motion for summary 16 judgment is denied. 17 The court will issue an order from chambers. 18 Dated: Feb 10, 2020 19 ) 2 Fredrick E. Clement 21 United States Bankruptcy Judge 22 23 24 25 26 27 28 31

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3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document 4 via the BNC or, if checked ____, via the U.S. mail.

6 Ashley M. McDow Eric S. Goldstein 555 South Flower Street, Suite 3300 1 Constitution Plaza 7 Los Angeles CA 90071 Hartford CT 06103-1919 Gerald N. Sims Riley C. Walter 8 1620 Fifth Avenue, Suite 400 205 E. River Park Circle, Ste. 410 9 San Diego CA 92101 Fresno CA 93720 Jeffrey I. Golden Latonia C. Williams 10 650 Town Center Drive, Ste 600 One Constitution Plaza Costa Mesa CA 92626 Hartford CT 06103-1919 11 Paul J. Pascuzzi Office of the U.S. Trustee 12 500 Capitol Mall, Suite 2250 2500 Tulare St, Ste 1401 Sacramento CA 95814 Fresno, CA 93721 13

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