Stevens v. Geduldig

719 P.2d 1001, 42 Cal. 3d 24, 227 Cal. Rptr. 405, 1986 Cal. LEXIS 187

• Court: California Supreme Court
• Decided: June 30, 1986
• Docket: S.F. 24601
• Status: Published

Opinions

Opinion

BROUSSARD, J.

In a taxpayer’s suit, defendants Dwight Geduldig, Charles Hobbs and Lewis Uhler were found personally liable to the State of California for the unlawful expenditure of state funds.¹ We reverse the judgment, holding (1) that because cash expenditures from the state agencies involved were reimbursed from funds appropriated for the Governor’s office, the agencies incurred no damage on which to predicate liability, and (2) the evidence before the trial court was insufficient to support a judgment based on in-kind contributions of personnel and material. Our opinion follows in large part the views stated by Justice Blease for the Court of Appeal, Third Appellate District.

In August or September of 1972, former Governor Ronald Reagan determined that three task forces should be established to study criminal justice, local government, and taxes. The tax reduction task force was created to study all aspects of state taxing and spending. Uhler was named chairman, and he resigned his position as assistant secretary of the Human Relations Agency (now the Health and Welfare Agency) and was appointed a special assistant to the Governor. Hobbs was named a member of the task force, and he resigned his position as the chief deputy director of the Department of Social Welfare and also was appointed a special assistant to the Governor. The third member of the task force, although named a defendant, was not served with process. In addition, two secretaries worked full time for the task force. Frank Walton, Secretary of the Business and Transportation Agency, was appointed chairman of the task force steering committee, which included several governmental officials. The task force also had about 20 advisors, primarily academicians. At cabinet meetings and special meetings with department directors, the Governor asked for departmental cooperation and encouraged everyone “to lend every possible assistance” to the task force.

So far as appears, the salaries of the task force members were charged to the appropriation for the support of the Governor and his office. The task force did not have a budget of its own. A substantial part of its activities was subsidized by contributions from a private foundation.

To permit the task force to retain outside consultants and pay for miscellaneous expenses, arrangements were made to use the revolving fund of the Department of Health Care Services. On September 1, 1972, Uhler, apparently on behalf of the Department of Health Care Services² and as chairman of the task force, entered into an agreement with the Department of Social Welfare at an estimated cost of $30,000 for analysis of the tax impact on welfare spending including the availability and appropriateness of tax resources for welfare-related programs. The agreement specified that the source of the funds was item 255 of the budget, which is the administrative appropriation for the Department of Social Welfare. An accounting officer certified that budgeted funds were available, and the contract was approved by the Department of General Services by a representative of the chief counsel. The contract provided that the Department of Social Welfare would reimburse the Department of Health Care Services.

At the time Uhler was neither an officer nor employee of the Department of Health Care Services. According to Uhler, the Department of Health Care Services was made a party to the agreement so that the department’s revolving fund could be used for the accounting of task force expenses. The department was chosen because it could take on such responsibilities without significantly affecting its workload.³

On October 1, 1972, Geduldig, the Director of the Health Care Services Department, signed a document purportedly delegating to Uhler “the authority and power to receive and sign for on my behalf all contracts and accounting documents pertinent to the Governor’s Tax Reduction Task Force.” The delegation was limited to the sum specified in the earlier contract. Uhler was not an officer or employee of the Départment of Health Care Services at the time of the delegation.

Uhler did not use the entire $30,000. He entered into five contracts with consultants between October 1, 1972, and January 1, 1973, who were paid a total of $8,703.21 from the Health Care Services revolving fund. The consultants provided services which were not limited to analysis of tax impact and spending on health care and welfare services, but related to other aspects of state taxing and spending as well.⁴ The Health Care Services revolving fund was not reimbursed by the Social Welfare Department as provided by the September 1 contract. Nothing appears in the record as to why the Controller did not make the transfers. Instead the revolving fund was reimbursed by the Governor’s office, in October 1973, after the filing of the instant lawsuit.

In November 1972, Hobbs determined to leave state employment and become a private consultant. He discussed this possibility with Michael Deaver of the Governor’s staff who suggested he enter into a consultant contract and talk to Geduldig, who was then either the Director or deputy director of the Department of Human Resources Development. Hobbs told Geduldig that his consultant work would include the study of unemployment and disability insurance and would also encompass “all types of taxation.” On December 1,1972, Hobbs executed a consultant contract with the Human Resources Development Department. Payments were not to exceed $16.25 per hour. The source of payment under the contract was budget item 240, an appropriation for the “administration of unemployment compensation disability benefits . . . payable from the Unemployment Compensation Disability Fund.” (Stats. 1972, ch. 156, item 240, p. 288.) The contract was signed by an accounting officer whose authority to execute contracts is not challenged.

Pursuant to the contract, Hobbs performed consultant services for the task force, including, but not limited to, studies of unemployment and disability insurance. He received $18,652.59 for expenses and fees from the Human Resources Development Department. In October 1973, the Unemployment Disability Fund administered by the Human Resources Development Department also was reimbursed by the Governor’s office.

The task force also received “in-kind” contributions from, and the services of personnel employed by, the Business and Transportation Agency, Health and Welfare Agency, Governor’s office, and the Department of Finance. In a report to the Governor, Uhler estimated the value of the “in-kind” contributions as $13,728 and the personnel as $99,654. The personnel contributed by the agencies included a secretary, a statistician, and researchers.

The task force continued in existence until June 1973. It undertook to analyze state taxing and spending programs and to consider various alternatives for the reduction of spending and taxes. In November or early December 1972, it concluded that the best means of achieving a tax reduction was by a constitutional amendment and recommended to the Governor a proposal for a constitutional tax limitation measure. In early January, the Governor directed the task force to draft a constitutional amendment to be presented to the Legislature. The task force worked on the language of the amendment in late January and February. Uhler testified that over a 30-day. period he worked on the amendment, and he was assisted by about 40 state officials and employees. Hobbs testified that he spent between 10 and 20 percent of his time working on the amendment.

On March 8, 1973, the proposed amendment was introduced in the Legislature as proposed Constitutional Amendment 12. The task force participated in legislative hearings on the amendment and continued its studies of taxes and spending. In April, however, the Governor concluded that the Legislature was unreceptive to the proposed constitutional amendment, and decided to submit the measure to the electorate as an initiative. During the effort to qualify the measure for the ballot, the task force continued in their uncompleted studies of taxes and spending. Uhler denied that he worked on the initiative on state time. He said he gave some speeches and engaged in some debates before universities and other organizations but was careful to separate the work of the task force from any involvement with the initiative measure. On several weekends he gathered signatures for the initiative with his children.

Hobbs concluded his work under the contract at the end of May 1973. Uhler left state employment at the end of June. The third member of the task force had resigned from state employment in April. After terminating their relationships with the task force, all three worked on the initiative.

The trial court determined that Uhler obtained personnel and in-kind support from several state agencies which was not authorized by any budget appropriation. The trial court also found that the budget did not contain any available appropriations which could be used for the purposes of the Uhler and Hobbs contracts. The trial court also made a number of determinations to the effect that the contracts violated state contracting procedures: Uhler was not an officer, employee, or agent of the Department of Health Care Services when he executed the September 1 contract on behalf of the department; Geduldig had no authority to delegate to Uhler authority to sign contracts on behalf of the department; Uhler had no authority to execute the five contracts with the consultants; certifications in these contracts that there was compliance with the State Administrative Manual were false, and all contracts should have been submitted to the Department of Finance.

The court also determined that the money expended under the contracts was reimbursed by funds from the Governor’s office, but ruled that the reimbursement was improper—and thus did not mitigate defendants’ liability—because the Legislature had set aside no monies for this expenditure in the appropriation for the Governor’s office. It further found that the Governor approved the use of in-kind support, that a substantial but undeterminable part of the expenditures of money, supplies and services was made for the preparation and promotion of the proposed constitutional amendment and that in the exercise of due care and reasonable diligence none of the payments would have been made, none of the contracts executed, and Geduldig would not have delegated his authority.

Plaintiff’s proposed findings of facts included a finding that “a substantial portion of all of the monies, services and supplies . . . were used for the preparation and promotion of the State Initiative on Taxation.'' (Italics added.) Upon objection by defendants that there was no evidence that any of the monies, services and supplies were used to support the initiative, other than the Governor’s transportation costs which were reimbursed from private sources, the trial court rejected the proposed finding. Instead the trial court found that a substantial portion of the monies, services and supplies were used for the “preparation and promotion of the State Constitutional Amendment.”

Judgment was entered against Uhler for $94,231, against Geduldig and Hobbs for $18,652.89 and against Geduldig for $8,703.21. Attorney fees of $18,750 were awarded against all three defendants. Judgment was entered in favor of the Governor and the Controller.⁵

I. The Uhler Subcontracts.

As this court said in Stanson v. Mott (1976) 17 Cal.3d 206, 213 [130 Cal.Rptr. 697, 551 P.2d 1], “[w]e start with the general principle that expenditures by an administrative official are proper only insofar as they are authorized, explicitly or implicitly, by legislative enactment. . . . [Sjuch executive officials are not free to spend public funds for any ‘public purpose’ they may choose, but must utilize appropriate funds in accordance with the legislatively designated purpose.” Accordingly, a public official who controls public funds may be held personally liable to repay improperly expended funds if he has failed to exercise due care in permitting the expenditure. (Id., at pp. 226-227.)

Applying this rule, the trial court found Geduldig liable for payments of $8,703.21 from the revolving fund of the Health Care Services Department to consultants and other individuals under the Uhler subcontracts because Geduldig failed to exercise due care in delegating to Uhler his right to contract on behalf of the department. It ordered Geduldig to repay the state treasury “without any credit for reimbursement from funds paid by or received from the Governor’s office.” It is unclear whether any portion of the judgment against Uhler also rests on these payments, but as we analyze the issue, we find no distinction between the two defendants.

Geduldig’s delegation to Uhler of authority to contract on behalf of the Health Care Services Department was made pursuant to Government Code section 12854, which provides that “twjhenever a power is granted to the secretary of an agency [or department], the power may be exercised by such officer or employee within the agency [or department] as designated in writing by the secretary.” (Italics added.) As we have noted, Uhler was neither an officer nor an employee within the Health Care Services Department at the time of the delegation. Moreover, the subject of the delegation was the prior interagency agreement with the Social Welfare Department, which Uhler had signed on behalf of the Health Care Services Department. While state agencies may contract with each other for services, materials and equipment (Gov. Code, §§ 11256, 11257), Uhler was not an agent or employee of the Health Care Services Department at the time he entered into the inter-agency agreement. It is clear that Geduldig and Uhler should have known of Uhler’s lack of authority to enter into contracts on behalf of the Health Care Services Department.

But apart from questions of Uhler’s status and authority, there is a more fundamental problem with the expenditures under the Uhler subcontracts. The money spent under these contracts came from item 255 of the budget, the administrative appropriation for the Department of Social Welfare. None of the expenditures, however, relate to any subject within the authority of that department. Such expenditures violate the principle that funds must be spent “in accordance with the legislatively designated purpose.” (Stanson v. Mott, supra, 17 Cal.3d 206, 213.)

Defendants point to a variety of statutory provisions to justify these expenditures. Article V, section 4 of the California Constitution provides that “[t]he Governor may require executive officers and agencies and their employees to furnish information relating to their duties.” Section 10553, subdivision (c) of the Welfare and Institutions Code requires the director of the Department of Social Welfare to “observe and report to the Governor on the conditions of public social services throughout the state.” Section 10612 of that code requires the department annually to make a “full and complete report to the Governor of all its transactions during the preceding year. . . with suggestions and recommendations for legislative and executive action.” All of these provisions, however, relate to the duties of the department. They may be given a broad interpretation, authorizing the department to conduct research on issues of social welfare related to its responsibilities, and to report to the Governor on such research. But we cannot read them so broadly that the department may use its funds to conduct a general review of taxation and spending in California, including taxes and expenditures specifically within the jurisdiction of other departments.

Neither may the use of Department of Social Welfare funds be justified on the theory that the department was merely carrying out its constitutional duty to assist the Governor in the preparation of his budget. (Cal. Const., art. IV, § 12, subd. (b).) This provision contemplates that each department will provide the Governor with the information and estimates necessary for him to determine that department’s place in the annual budget; it does not contemplate that one department will finance research into state revenue and expenditures generally upon the possibility that the research may affect the future budget of that and all other departments.

We therefore affirm the trial court’s finding that defendant Geduldig acted negligently in authorizing Uhler to enter into the consulting subcontracts on behalf of the Health Care Services Department. On the record, it is also clear that Uhler acted negligently in contracting to use funds provided by the Department of Social Welfare for purposes unrelated to the function of that department. Both Geduldig and Uhler are personally liable for any loss entailed by their actions.

II. The Hobbs Contract.

The trial court also found Geduldig and Hobbs liable for the $18,652.59 Hobbs received from the Human Resources Development Department under the December 1 consultant contract. As explained by the Court of Appeal: “There is no doubt that the Unemployment Compensation Disability Fund was an improper funding source for payment under the service contract. Because this fund is in its nature a special trust held for the benefit of unemployed and disabled workers (Unemp. Ins. Code, §§ 2601, 3001), no monies within the fund may be used for a public purpose unrelated to the benefit of these workers. (See Gillum v. Johnson (1936) 7 Cal.2d 744, 758 [62 P.2d 1037, 108 A.L.R. 595]; see also Valdes v. Cory (1983) 139 Cal.App.3d 773, 778 [189 Cal.Rptr. 212].) The fact that an administrative appropriation from the special fund (Stats. 1972, ch. 156, item 240, pp. 288-289) was the actual funding source does not make its use permissible for purposes unrelated to the compensation of unemployed and disabled workers. (Ibid.) Here, the record clearly establishes that Hobbs, pursuant to the consultant contract, conducted taxing and spending studies which were not limited to the subjects of unemployment and disability insurance.

“There also is substantial evidence to support the trial court’s determination that Geduldig authorized or arranged the Hobbs consultant contract and would not have done so in the exercise of due care. The trial court reasonably could have concluded that a director of the Human Resources Development Department, who was responsible for administering the special fund, would not have approved the expenditures for consultant work which he knew only incidentally involved the study of unemployment and disability insurance.”

Hobbs’ liability, however, rests on a different theory. He is not liable for negligent approval of state expenditures under the doctrine set forth in Stanson v. Mott, supra, 17 Cal.3d 206, since he was not a state official when he entered into the consulting contract. If, however, a contractor obtains money from the state under an illegal contract, “a right of action exists in the state to recover money paid to a contractor and [the] state is not estopped to deny the validity of such a contract even where it has received the benefit of full performance.” (Pac. Inter-Club Yacht Assn. v. Richards (1961) 192 Cal.App.2d 616, 619-620 [13 Cal.Rptr. 730]; cf. Bear River etc. Corp. v. County of Placer (1953) 118 Cal.App.2d 684, 690 [258 P.2d 543].) Under this line of authority, the good faith of the contractor is irrelevant; “ [o]ne dealing with public officers is charged with the knowledge of, and is bound at his peril to ascertain, the extent of their powers to bind the state for which they seem to act. And, if they exceed their authority, the state is not bound thereby to any extent.” (Mullan v. State (1896) 114 Cal. 578, 587 [46 P. 670]; see also Air Quality Products, Inc. v. State of California (1979) 96 Cal.App.3d 340, 350-351 [157 Cal.Rptr. 791]; Bear River etc. Corp. v. County of Placer, supra, 118 Cal.App.2d 684, 690; but see Gov. Code, § 19257 [applicable to state employees].)

III. The Effect of Reimbursement by the Governor’s Office.

Liability of a public official for negligence under Stanson v. Mott, supra, 17 Cal.3d 206, is based on tort. It is a fundamental principle of tort law “that a negligent act does not give rise to liability without damage.” (4 Witkin, Summary of Cal. Law (8th ed. 1974) p. 3135, italics omitted.) At the time this lawsuit was filed, monies spent on the Uhler subcontracts and the Hobbs consulting contract had not been reimbursed; thus the complaint stated a cause of action for negligence. The reimbursement by the Governor’s office, however, eliminated all damages attributable to the negligence of defendants.

Plaintiff, however, argues, and the trial court found, that the funds appropriated for the Governor’s office could not properly be used to reimburse the expenditures in question. An improper reimbursement, presumably, would not eliminate the damages caused by the unauthorized expenditures.

We first reject the suggestion that the task force funds were used for nongovernmental purposes which could not properly be financed by state revenues. The trial court rejected a proposed finding that task force activities encompassed promotion of an initiative measure, and found instead that its activities involved preparation and promotion of a constitutional amendment before the Legislature. The drafting of a constitutional amendment on behalf of the Governor, and lobbying on its behalf with the Legislature, is a permissible use of public funds. (See Stanson v. Mott, supra, 17 Cal.3d 206, 218.)

The particular contracts here at issue concerned a comprehensive study of taxing and spending programs. Unquestionably such a study is a proper function of the Governor and his office. His authority to prepare and submit a proposed budget, and to recommend legislation, necessarily includes the power to engage in studies of the financial structure of state government. (See Bateman v. Colgan (1896) 111 Cal. 580, 587-588 [44 P. 238].) We conclude that the Governor had the power both to establish the task force, and to finance it from the appropriation for his office. It necessarily follows, we believe, that when the Governor became aware that the task force had been financed from improper sources, depleting funds appropriated for other purposes, he had the power to correct the error and reimburse the injured departments from the budget of his office.

In sum, since the Department of Health Care Services and the Social Welfare Department sustained no permanent loss as a result of the negligence of Geduldig or Uhler, the judgment against those defendants should be reversed. Although Hobbs’s liability rests on a theory of strict liability instead of negligence, we reach the same result as to him, finding that the reimbursement of the agencies exonerates his liability. The cases establishing the duty of a contractor to repay monies obtained under an illegal contract even though he has performed the services called for impose an onerous burden. When the only illegality is the source of the funds, and the state has subsequently corrected its error and transfered funds from a proper source, we see no reason to require a repayment that would unjustly enrich the state treasury and leave the contractor without compensation for services rendered.

IV. In-kind Contributions and Services.

The trial court found Uhler liable in the amount of $94,231 for the value of in-kind contributions and services received by the task force from various agencies and departments. The Governor’s office has not reimbursed the cost of in-kind contributions and services.

We agree, however, with the Court of Appeal that the evidence is insufficient to hold defendant Uhler liable for the value of the in-kind services. In the first place, the evidence of the nature and value of the services is inadequate. There is no evidence identifying either the specific nature of the support given by various agencies and departments or the funding source for such support. In fact, the only evidence on the subject is a note by Uhler himself giving rough estimates of the in-kind contributions and personnel provided the task force.⁶ Uhler was not able to testify specifically what in-kind services he received from each agency or department.

Secondly, it is not at all clear to what extent the services contributed by employees went beyond the employee’s duties on behalf of the departments where they were employed. The trial court’s finding, holding Uhler liable for the full value of the services, was based on the theory that the task force was an improper governmental activity, and that no public funds or employee time could properly be devoted to that activity. We have concluded, however, that the task force study was a legitimate governmental activity which could have properly been financed from the budget for the Governor’s office. Also, to the extent that public employees were asked to provide the Governor with information relating to their duties, that use of their time was authorized by article V, section 4 of the state Constitution.

Finally, we believe that the efficient use of state personnel requires a flexible attitude toward the borrowing of employees. On occasion one state agency may temporarily need the expert skills and knowledge of an employee who works for another agency; on other occasions one agency may be shorthanded while another is unable to utilize its personnel fully. The temporary borrowing of employees under such circumstances should not expose the supervising official to personal liability as long as the borrowed employee is used for a proper state purpose.

This flexibility has its limits, for extensive and long-term borrowing of employees could become a device to circumvent the direction of the Legislature, which has appropriated fixed amounts for the budget of each agency. The evidence does not show that such limits were exceeded in this case.

V. Attorney Fees.

Plaintiff seeks attorney fees under Code of Civil Procedure section 1021.5, which authorizes such an award to a successful party in an action which has resulted in the enforcement of an important right affecting the public interest, if the award confers a significant benefit on the general public or a large class of persons. Plaintiff has not prevailed in this litigation, but it is possible that he might be entitled to fees on the theory that the filing of his suit caused the Governor’s office to reimburse monies improperly taken from the Department of Social Welfare and the Unemployment Compensation Disability Fund. Upon remand the trial court may determine whether plaintiff is entitled to attorney fees under section 1021.5, and the amount thereof. (See Woodland Hills Residents Assn., Inc. v. City Council (1979) 23 Cal.3d 917, 925-926 [154 Cal.Rptr. 503, 593 P.2d 200].)

The judgment is reversed.

Mosk, J., Reynoso, J., and Grodin, J., concurred.

1 Judgment was entered against Uhler for $94,231, against Geduldig and Hobbs for $18,652.89 and against Geduldig for $8,703.21. In addition, attorney fees of $18,750 were awarded against all three.

2 Uhler signed the agreement two lines below the designation of Health Care Services as a contracting party. His title as chairman of the task force appeared immediately below his signature.

3 Although Uhler did not testify why the Department of Social Welfare could not process contractual payments without significantly affecting its workload, it appears that during the 1972-1973 fiscal year, the state personal income tax withholding was to be processed through the Department of Social Welfare under contract with the Franchise Tax Board. (See 1972-1973 Governor’s Budget, p. A-49.) Perhaps this burden explained the use of Health Care Services accounting facilities for transactions which ultimately were to be paid by the Department of Social Welfare.

4 One contract for $2,500 was for the development of methods to finance public schools, and another for nearly $5,000 was for the development of plans for an implementing organization. Smaller contracts were entered into for economic analysis of tax and spending programs and graphic illustrations. A number of other contracts were entered into, but no state funds were paid pursuant to them.

5 The Controller rejected the Hobbs contract in May 1973 prior to the filing of the instant action but approved it after the Governor reimbursed the Human Resources Disability Fund.

6 The approximated contributions included $750 in money, $2,444 in kind, and $16,975 in personnel from the Business and Transportation Agency (Department of Housing and Community Development); $5,400 in kind and $65,522 in personnel from the Health and Welfare Agency (Department of Social Welfare and Human Resources Development); and $3,140 in personnel from the Department of Finance.