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Baez v. California Public Employees' Retirement System

California Court of Appeals, Second District, Second Division

May 8, 2015

CESAR BAEZ, Plaintiff and Appellant,


APPEAL from a judgment of the Superior Court of Los Angeles County No. BC498010. Michael L. Stern, Judge.

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Meylan Davitt Jain Arevian & Kim, Robert L. Meylan, Vincent J. Davitt, Benedetto L. Balding; Schlam Stone & Dolan, Jeffrey M. Eilender and Elizabeth Wolstein, for Plaintiff and Appellant.

K&L Gates, Christopher J. Kondon, Matthew B. O’Hanlon, and Saman M. Rejali, for Defendant and Respondent California Public Employees’ Retirement System.

Soltman, Levitt, Flaherty & Wattles, Kevin S. Wattles and Lisa R. Kamrath, for Defendant and Respondent Joseph Dear.



This appeal presents the following question: Does a plaintiff who alleges he was treated differently because he is Latino state a claim for relief under the anti-affirmative action provision originally enacted as Proposition 209 and now codified in Article I, section 31 of the California Constitution? We conclude he does not, and agree with the trial court on this point. We nevertheless reverse the trial court’s order dismissing this and other claims on demurrer because the plaintiff in this case has demonstrated a

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reasonable possibility of amending his complaint and, as we discuss in the unpublished portion of this opinion, because dismissal of plaintiff’s remaining claims was improper.


Plaintiff Cesar Baez (plaintiff) and two others signed two agreements forming (and dividing the profits earned by) two different companies-Centinela Investment Partners, LLC and Centinela Group, LLC. Of the three partners, two (including plaintiff) are Latino; the third is black. Defendant California Public Employees’ Retirement System (CalPERS) is charged with managing the investments that fund the pensions of California state employees. CalPERS hired plaintiff and his partners to manage two $500 million investment funds. To effectuate this arrangement, plaintiff and his partners created two new entities that they (through the two Centinela entities named above) co-owned with CalPERS: (1) Centinela Holdings LLC, to serve as the two funds’ manager; and (2) Centinela Capital Partners LLC, to serve as the two funds’ investment advisor.

At some point thereafter, the California Attorney General began investigating whether CalPERS was unlawfully awarding contracts at the behest of influence peddlers called “placement agents.” Believing plaintiff to be “associate[d] with several businessmen and individuals” under investigation, defendant Joseph Dear, CalPERS chief investment officer at the time, informed plaintiff’s two partners that CalPERS would not award the Centinela entities a third fund to manage as long as plaintiff was still an active participant in those entities. Plaintiff subsequently signed a separation agreement withdrawing from the Centinela entities, but allowing him to receive his share of the Centinela entities’ earnings from managing the two existing CalPERS funds.

Although CalPERS had no problem continuing to work with plaintiff’s Latino partner who had no association with the influence peddlers under investigation, plaintiff alleges that CalPERS’s and Dear’s (collectively, defendants’) actions were due solely to racial animus-namely, an avowed desire not to do business with “anyone whose name ends with an ‘ez.’” Plaintiff therefore sued CalPERS and Dear for $30 million. He alleged that the defendants: (1) “discriminat[ed] against, or grant[ed] preferential treatment to, any individual... on the basis of race, ” in violation of article I, section 31 of the California Constitution; (2) intentionally interfered with the two contracts that created (and divided the profits from) the Centinela Investment Partners LLC and Centinela Group LLC; (3) intentionally interfered with a prospective economic advantage by preventing plaintiff from sharing in any

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profits from a third CalPERS fund and from other fund management opportunities in Texas, Michigan and Rhode Island; and (4) negligently interfered with the same prospective economic advantages.

Defendants demurred and moved to strike the initial complaint. The trial court sustained the demurrer in its entirety, denying leave to amend on the constitutional claim and granting leave to amend on the remaining tort claims.[1] Plaintiff filed a more detailed first amended complaint (FAC) re-alleging his three tort claims. The trial court again sustained the defendants’ demurrers to the entire FAC, denying leave to amend on the claims alleging interference with a prospective economic advantage and granting leave to amend on the interference with a contractual relation claim.

Plaintiff stipulated to the entry of judgment as to the contractual interference claim, and filed this timely appeal.


A demurrer tests the legal sufficiency of a complaint’s allegations (Satyadi v. West Contra Costa Healthcare Dist. (2014) 232 Cal.App.4th 1022, 1028 [182 Cal.Rptr.3d 21] (Satyadi)), not whether the plaintiff will eventually be able to prove them (Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 328, fn. 11 [120 Cal.Rptr.3d 741, 246 P.3d 877]). In ruling on a demurrer, a court must accept as true all of the operative complaint’s allegations, as well as all matters contained in exhibits attached to that complaint and any matters subject to judicial notice. (Satyadi, at p. 1028; Orthopedic Specialists of Southern California v. Public Employees’ Retirement System (2014) 228 Cal.App.4th 644, 647-648 [175 Cal.Rptr.3d 295].). The court need not accept the complaint’s contentions, deductions or conclusions of fact or law. (Lin v. Coronado (2014) 232 Cal.App.4th 696, 700 [181 Cal.Rptr.3d 674] (Lin).) The court must give the complaint a “reasonable interpretation.” (Satyadi, at p. 1028.) On appeal of a demurrer, we independently assess the complaint’s sufficiency (ibid.), but review for an abuse of discretion the trial court’s denial of leave to amend (Lin, at p. 701). That discretion is abused if “there is a reasonable possibility that the defect can be cured by amendment.” (Ibid.)

I. Article I, section 31 (Proposition 209) claim

The trial court’s order sustaining the demurrer to plaintiff’s claim for discrimination under article I, section 31 of the California Constitution (section 31) did not contain any reasoning, and the parties did not transcribe

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the hearing on that demurrer. On appeal, defendants defend the order on the ground that section 31 prohibits preferential treatment of minorities, women and other protected groups, not discrimination against them. Plaintiff contends that section 31’s plain language encompasses both, and thus reaches his discrimination claim.

Section 31 provides, in pertinent part, that “[t]he State shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education or public contracting." (§ 31, subd. (a).) The voters added this provision to the California Constitution in 1996 when they passed Proposition 209.

At the time Proposition 209 passed, the California Constitution already guaranteed “the equal protection of the laws.” (Cal. Const., an. I, § 7, subd. (a).) That guarantee broadly prohibited the state from discriminating on the basis of race, but tolerated programs that granted preferences to minorities, women and other protected groups as long as those programs were narrowly tailored to serve a compelling state interest of remedying past discrimination. (C&C Construction, Inc. v. Sacramento Municipal Utility Dist. (2004) 122 Cal.App.4th 284, 293 [18 Cal.Rptr.3d 715] (C&C Construction); Connerly v. State Personnel Bd. (2001) 92 Cal.App.4th 16, 35 [112 Cal.Rptr.2d 5] (Connerly).) Proposition 209 altered our state’s equal protection jurisprudence by flatly prohibiting the “race- and gender-conscious preferences” that our equal protection clause used to permit. (Coral Construction, Inc. v. City and County of San Francisco (2010) 50 Cal.4th 315, 322 [113 Cal.Rptr.3d 279, 235 P.3d 947] (Coral Construction); see also Connerly, at p. 42.) However, Proposition 209’s ban on preferential treatment programs is not absolute; such programs are still allowed if they (1) favor one sex over another, if tied to a bona fide occupational qualification (§ 31, subd. (c)), (2) were contained in a court order or consent decree in place at the time Proposition 209 became effective (id., subd. (d)), or (3) are necessary to ensure eligibility for federal funding (id., subd. (e)).

Plaintiff offers two reasons why his claim alleging that defendants discriminated against him because he is Latino is actionable under section 31. He first asserts that section 31’s text broadly prohibits the state, while engaged in public contracting, from “discriminat[ing] against, or grant[ing] preferential treatment to, any individual or group on the basis of race... ." (§31, subd. (a), italics added.) Plaintiff observes that our Supreme Court has defined the term “discriminate” in section 31 to mean “‘mak[ing] distinctions in treatment; [or] show[ing] partiality (in favor of) or prejudice (against).’” (Hi-Voltage Wire Works, Inc. v. City of San Jose (2000) 24 Cal.4th 537, 559-560 [101 Cal.Rptr.2d 653, 12 P.3d 1068], italics omitted (Hi-Voltage);

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See Coral Construction, supra, 50 Cal.4th at p. 327 fn.6.)[2] Plaintiff concludes that section 31’s language, on its face and as interpreted by the courts, plainly prohibits defendants’ race-driven efforts to force him out of the Centinela entities.

We disagree that section 31’s plain language is unambiguous and subject only to plaintiff’s interpretation. To be sure, section 31 can be read as plaintiff suggests-that is, as a reaffirmation of the already existing prohibition against race-based discrimination found elsewhere in our Constitution. But section 31 can also be read more narrowly to prohibit the discrimination against unprotected groups that flows inexorably from the preferential treatment of protected groups; in other words, section 31 can be read to prohibit only the discrimination that is the flip side of the preferential treatment coin. Our Supreme Court has acknowledged this reading of section 31. (Hi-Voltage, supra, 24 Cal.4th at p. 560 [striking down program because it “affords preferential treatment to [minority- and women-owned] subcontractors on the basis of race or sex, ... and . . . discriminates on the same bases against non-[minority and women] subcontractors" (fn. omitted)].)

Because § 31’s language is susceptible to two reasonable interpretations, it is ambiguous. (See, e.g., Ceja v. Rudolph & Sletten, Inc. (2013) 56 Cal.4th 1113, 1119 [158 Cal.Rptr.3d 21, 302 P.3d 211].) When a voter-enacted provision is ambiguous, we may look to other indicia of the electorate’s intent, including the analysis and arguments contained in the official ballot pamphlets. (American Civil Rights Foundation v. Berkeley Unified School Dist. (2009) 172 Cal.App.4th 207, 216 [90 Cal.Rptr.3d 789].) It is undisputed that the sole intent behind Proposition 209 (and thus section 31) was to eliminate affirmative action and other preferential treatment programs, not to reenact the equal protection-based bar against discriminating against protected groups that already existed elsewhere in our Constitution. (Hi-Voltage, supra, 24 Cal.4th at p. 542 [“it is clear the voters intended to... [prohibit preferential treatment]”]; Coral Construction, supra, 50 Cal.4th at pp. 326-327 [official ballot statement indicated that purpose was to eliminate preferential treatment programs]; Coalition for Economic Equity v. Wilson (9th Cir. 1997) 122 F.3d 692, 696 (Coalition for Economic Equity) [same], overruled on other grounds by Winter v. Natural Resources Defense Council (2008) 555 U.S. 7 [172 L.Ed.2d 249, 129 S.Ct. 365].) In light of this purpose, we construe section 31 to prohibit affirmative action programs not

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excepted from its reach (and the discrimination that is their necessary by-product), and not to reach the more conventional form of discrimination against protected groups.

Plaintiff’s second argument is that we must adopt his broad reading of section 31, or else it is unconstitutional. Plaintiff relies upon the so-called “political structure” doctrine, which is an aspect of equal protection that prohibits a state from reallocating legislative power in a way that burdens the equal protection rights of protected groups. (Coral Construction, supra, 50 Cal.4th at p. 329; Hunter v. Erickson (1969) 393 U.S. 385, 389-392 [21 L.Ed.2d 616, 89 S.Ct. 557) [amendment to city charter to require majority voter approval of any race-related housing law, instead of allowing city councils to pass such laws; violation of political structure doctrine]; Washington v. Seattle School Dist. No. 1 (1982) 458 U.S. 457, 479-480 [73 L.Ed.2d 896, 102 S.Ct. 3187] (referendum requiring constitutional amendment to authorize race-related school busing programs, instead of allowing local school boards to adopt such programs; violation of political structure doctrine].) More specifically, plaintiff contends that section 31 reallocates legislative power by barring preferential treatment programs (absent a further constitutional amendment) that state and local governments used to be able to adopt on their own. Plaintiff reasons that the only way section 31’s reallocation of legislative authority can be valid under the political structure doctrine is if section 31 bars all discrimination-preferential or not. He argues that our Supreme Court held as much in Coral Construction.

We are unpersuaded. Coral Construction rejected a “political structure”-based challenge to section 31, but not on the grounds plaintiff recounts. Instead, Coral Construction determined that section 31 did not offend the “political structure” doctrine because its abolition of preferences-which are themselves “presumptively unconstitutional”-did not “burden[] the right to equal treatment.” (Coral Construction, supra, 50 Cal.4th at pp. 328-332.) This is the same reasoning cited by every other court to consider and reject a “political structure”-based challenge to section 31. (E.g., Coalition for Economic Equity, supra, 122 F.3d at pp. 704-708; Coalition to Defend Affirmative Action v. Brown (9th Cir. 2012) 674 F.3d 1128, 1131-1136.) None of these decisions have turned on (or, for that matter, looked to) whether section 31 protected conventional discrimination as well as preferential treatment.

For these reasons, we agree with the trial court that plaintiff has not stated a claim under section 31 because he is not challenging a preferential treatment program.

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However, the substance of plaintiff’s claim is that he was the victim of racial discrimination. We accordingly invited the parties under Government Code section 68081 to file supplement briefing as to whether plaintiff could amend his complaint to plead a cause of action under our State constitution’s general equal protection clause. (Cal. Const., art. I, § 7, subd. (a).) Although a violation of this provision does not support a prayer for damages (Gates v. Superior Court (1995) 32 Cal.App.4th 481, 516 [38 Cal.Rptr.2d 489]), our review of the supplemental letters leads us to conclude that plaintiff can state a prayer for appropriately tailored injunctive relief.[3] Because a reasonable possibility that the defect in plaintiff’s pleading can be cured by amendment, he must be afforded an opportunity to amend his complaint on remand.



For the foregoing reasons, we reverse the judgment dismissing this lawsuit and remand the matter to permit plaintiff to file a second amended complaint consistent with this opinion.

Ashmann-Gerst, Acting R J., and Chavez, J., concurred.

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