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Cinema West, LLC v. Baker

California Court of Appeals, First District, Second Division

June 30, 2017

CINEMA WEST, LLC, Plaintiff and Appellant,
CHRISTINE BAKER et al., Defendants and Respondents.

         Sonoma County Super. Ct. No. SCV254439

          Peters & Peters, Mark D. Peters for Plaintiff and Appellant.

          California Department of Industrial Relations, Christopher G. Jagard, Gary J. O'Mara, Ken Lau for Defendants and Respondents.

          Molteni Employment Law, M. Cristina Molteni as Amicus Curiae on behalf of Defendants and Respondents.

          STEWART, J.

         This appeal concerns whether the construction of a movie theater built by Cinema West, LLC in Hesperia, California qualifies as a “public work” within the meaning of California's prevailing wage law (Lab. Code, §§ 1720-1861[1]) (the PWL), which provides that, with certain exceptions, the prevailing wage “shall be paid to all workers employed on public works.” (§ 1771.) In administrative proceedings initiated by a labor union, respondent Christine Baker, Director of the State Department of Industrial Relations (Director), [2] concluded that it did. Cinema West filed a petition for writ of mandate challenging the Director's decision, which the superior court denied. This appeal followed. Applying substantial evidence review to the superior court's factual findings and de novo review to its application of the PWL to the facts, we find no error and therefore affirm.



         In 2004, the City of Hesperia (City)[3] began acquiring vacant property in its downtown to facilitate development of a Civic Plaza, which was to include a city hall, public library, other government buildings and “complimentary retail, restaurant, and entertainment establishments.” The City's goal was “to develop a vibrant, participatory multi- and mixed-use civic/downtown environment.”

         Hesperia did not have a movie theater. From 2000 to 2010, it met with numerous theater operators in an effort to facilitate construction of a “state-of-the-art cinema experience in Hesperia.” For predominantly financial reasons, no company had built a theater during that period. In 2010, the City met with appellant Cinema West, LLC (Cinema West), who “articulated a cogent plan to develop a new, 12-screen digital cinema immediately west of the Civic Plaza Park.”

         Cinema West's proposal, according to a City staff report, included the following “[d]eal points”: the City would convey about 54, 000 square feet of real property to Cinema West for $102, 529, the property's fair market value; Cinema West would construct a “38, 000 square foot, twelve-screen digital theatre”; the City would construct “the necessary parking lot and provid[e] reciprocal access and use of said parking lot, ” develop a water retention system for the theater and the parking lot, and install “off-site improvements including curb, gutter and sidewalks”; Cinema West would execute a ten-year operating agreement with the City.

         The city manager and staff analyzed the fiscal impacts of the project.[4] According to their September 7, 2010 report, development of the parking lot and related amenities would cost “approximately $1, 443, 834, ” and the fair market value of the property being conveyed was $102, 529, resulting in a total cost to the City of $1, 546, 363. This amount would be paid out of the City's Economic Development Fund or other City resources. The project would have a negative rate of return, a negative net present value and a lengthy payback period. However, these costs would be partially offset by annual property taxes of $32, 882, annual sales taxes of over $8, 000 and development-related fees of approximately $227, 486. Further, there would be other benefits to the City, including its ownership of and access to the parking lot for “the City and surrounding civic uses.” Although “the net benefit of the DDA [Disposition and Development Agreement between the City and Cinema West] to the [City] is a negative number, ” the city manager and staff informed the mayor and city council that “the Project is worthwhile and will result in the development of a long-awaited entertainment amenity which will benefit the community, ” “catalyze future retail and restaurant development proximate to the Civic Plaza and downtown, ” and bring new jobs, increased foot traffic and associated spending to the area that would benefit local businesses.

         On September 7, 2010, after reviewing the staff report and conducting a public hearing, the City adopted resolutions approving the DDA and authorizing its execution. Among the resolutions' recitals were that “the [City] desires to encourage commercial growth within the Project Area”; “in furtherance of the public purposes of the [City] and the Project Area, Cinema West, LLC (Developer) desires to enter into a [DDA] with the [City] in order to purchase 54, 248 square feet of real property located at the southeast corner of Smoke and 9th, Hesperia, California (Site), in order to develop and operate a 36, 000 square foot theater (Project)”; and “[i]n order to ensure the sustained economic viability of the Project, the Developer has requested certain forms of [City] participation as more fully described in the DDA.”

         On or about September 7, 2010, the City and Cinema West entered into the DDA and, as a part of it, a series of related documents and agreements, including an operating covenant; a reciprocal access and easement agreement; covenants, conditions and restrictions (CC&Rs); a promissory note; and deed of trust.

         Under these agreements, Cinema West agreed (1) to purchase property from the City at a fair market value determined to be $102, 529; (2) to develop the site with a 12-screen, 36, 000 square foot movie theater; (3) to obtain financing for, and bear the costs of, construction of the theater and related facilities other than the parking lot; to obtain necessary entitlements, approvals and permits; to create at least 40 employment positions on the site; to maintain the property, including landscaping and the on-grade parking lot; and to operate the site as a movie theater for at least ten years.

         The City agreed to convey fee simple title to the theater site to Cinema West; to approve or disapprove all conceptual site plans submitted by Cinema West; to ensure the project complied with the California Environmental Quality Act (CEQA); to issue a certificate of completion after construction was satisfactorily completed; to deliver the property in buildable condition, including a rough graded pad for the theater; to develop an on-grade parking lot adjacent to the site for use by Cinema West, its assigns and invitees as a parking lot for the movie theater; to provide Cinema West a reciprocal access and parking easement for the parking lot; to process certain zone changes and plan amendments; upon issuance of a certification of completion for the theater, to provide an interest-bearing loan to Cinema West of $1, 546, 363 forgivable over ten years and a one-time payment of $102, 529 as consideration for the operating covenant.

         The DDA stated that the City was not “providing any financial assistance to [Cinema West] in connection with [Cinema West's] acquisition of the Site or development of the Project thereon” and that Cinema West “is paying fair market value to acquire the Site and is responsible for paying the full costs of all improvements to be constructed on the [theater] Site, ” including for “compliance with CEQA; grading and Site preparation; building construction; Site development and infrastructure; design; building permit and development fees; and financing.” The minimum investment for these costs was to be $7, 473, 159. The DDA further stated, however, that “[n]otwithstanding the foregoing, as described in Sections 606 and 607 of this Agreement, [City] will purchase an Operating Covenant from Developer, should Developer construct and operate the Project contemplated herein.” In section 606 of the DDA, entitled “the Operating Covenant, ” Cinema West agreed to operate the project as a movie theater on the site for at least ten years after completion of the project, and to obtain the City's approval for any ancillary uses. In section 607, the City agreed to “purchase the Operating Covenant” from Cinema West by providing the “forgivable loan” to Cinema West in the amount of $1, 546, 363. Section 607 further stated that the City was “not providing any financing for the project and the Note is intended only to acknowledge an obligation on Developer should the need arise to seek repayment for the funds expended by the [City] in purchasing the Operating Covenant.” Repayment of the loan by Cinema West would be required only in the event it defaulted on the operating covenant.

         The operating covenant provided that in addition to the $1, 546, 363 forgivable loan it would make a “one-time payment” to Cinema West of $102, 529-also as consideration for the operating covenant. The outstanding balance on the “loan” would be earned in equal annual installments of the principal plus accrued interest over a ten-year period. If Cinema West defaulted on the operating covenant and failed to cure, it was required to repay the City all unearned funds with any interest accrued on those funds.

         In exchange for this “compensation, ” Cinema West would: “(a) continuously operate the Project on the Site, [5] (b) provide the [City] with free advertising prior to each movie showing, and (c) comply with all provisions of the Declaration of Covenants, Conditions and Restrictions (‘CC&Rs') for the Project as required by the DDA.” The CC&Rs provide that Cinema West “may only use the Site for a movie theater, ” will “maintain[] and repair... the Site and adjacent [City]-owned parking lot... and all related on-site improvements... in a first class condition and repair” and will pay “all related utility expenses (water and electricity)” and “all real estate taxes and assessments levied against the Site.”

         In the Reciprocal Access and Parking Agreement, the City granted Cinema West “a non-exclusive easement for vehicular and pedestrian ingress, egress, and parking, and for drainage, maintenance, and public utility purposes across, over and upon the Parking lot.” The easement was “solely for the benefit of the Site.” The City retained the right to make use of the parking lot, “provided... such use shall not interfere unreasonably with the use or enjoyment of the Easement by the then Site owner.” Cinema West was required to maintain the parking lot and pay the utilities associated with it.

         An August 2010 report prepared by the City pursuant to Health and Safety Code section 33433[6] (Summary Report), which summarized various aspects of the DDA, including the “Costs of the DDA to the [City], ” sheds light on the nature of the $1, 546, 363 “forgivable loan.” It states: “The [City's] costs to implement the DDA include ... certain development costs.” Specifically, “the City will buy an operating covenant from [Cinema West] by developing and paying for costs related to the on-grade parking lot shared by the theater. Said costs shall be repaid to the [City] if all conditions of the Operating Covenant are not honored by Developer, however, if after the end of ten years from the effective date of the DDA, it is determined that [Cinema West] has honored all of the requirements of the Operating Covenant, then [the City] shall deem costs of development to be earned, and will relinquish any financial obligation to repay the [City].” A staff report prepared in December 2011 is consistent, stating “the DDA did commit, among other covenants, to invest $1, 546, 363 into the construction of an on-grade parking lot for the benefit of the Project and adjacent park.”

         The parties executed the DDA in November 2010. In the ensuing months, Cinema West secured financing for the theater project and pursued various permits and other entitlements from the City. In the meanwhile, the costs for the theater construction rose due to an increase in steel prices and the City's adoption of new building codes. In view of these changes, the city council adopted a resolution in December 2011 making a $250, 000 additional forgivable loan to Cinema West to aid with a $700, 000 anticipated shortfall in funds for the theater project. The parties executed a second operating covenant providing a $250, 000 forgivable loan as consideration.[7]

         Cinema West commenced construction of the theater in February 2012 and completed it in December 2012. In June 2012, the City entered into a contract with Cooley Construction, Inc. to construct the parking lot, which was completed shortly before the theater opened.

         Administrative Proceedings

         In November 2012, as development of the theater and parking lot was nearing completion, the International Brotherhood of Electrical Workers Local 477 (Union) submitted to the Director a request for a public works coverage determination for the Cinema West theater and related facilities project. It submitted copies of various documents relating to the theater and parking lot developments, including City staff reports, and resolutions, the DDA, and other documents reflecting the agreement between the City and Cinema West.

         The Department wrote to Cinema West and the City in December 2012, notifying them of the coverage request and requesting certain information and documents. Cinema West submitted a brief letter arguing the theater was a private development on property for which Cinema West had paid fair market value, no public financial assistance was involved, there was “no evidence to suggest that the parking lot was built because it was needed to serve the Project, ” that the “forgivable loan” was something Cinema West agreed to pay if it failed to comply with the DDA, but that “no public funding is associated with the loan” and the purchase of the operating covenant had not been consummated. Based on these assertions, Cinema West requested “a determination that the... movie theater is not a public works project and is not subject to prevailing wage requirements.” Cinema West did not submit any documents or other evidence. The City provided documents but took no position on the coverage issue.

         In March 2013, the Director issued her determination that “the construction of a movie theatre and related facilities (Project) is a public work subject to prevailing wage requirements.” In reaching this conclusion, the Director first determined the scope of the construction project. The Union “consider[ed] the theatre construction, the parking lot improvements and the related infrastructure improvements to be a single project, ” whereas implicit in Cinema West's contention that no public funds were used was that the relevant construction project was the theater alone. The Director agreed with the Union, stating: “Given the very specific terms of the DDA and the mutual agreements of the parties to construct all these improvements in tandem to serve the theatre complex there is no doubt the ‘Project' includes all the elements specified in the DDA to create a single complete and integrated theatre complex.” The Director then identified “three separate sources of public funds utilized on the Project”: the City's one-time payment of $102, 529 to Cinema West upon the filing of a notice of completion for the theater; the two forgivable loans made by the City to Cinema West of $1, 546, 363 and $250, 000 in connection with the operating covenants; and “the construction of the adjacent parking lot, a water retention system for the theater and parking lot, and the installation of off-site improvements to curbs, gutters and sidewalks.” Based on these “public subsidies, ” the Director concluded the theater development was a public work subject to the requirements of the PWL. This was true whether the project was considered the theater alone or more broadly the theater and the parking lot, because in either event there were public subsidies that supported the development of the theater.

         In April 2013, Cinema West filed a timely administrative appeal. In its appeal, it requested a hearing “so that it may develop a factual record suitable for judicial review.” It proffered no evidence, though its brief asserted some facts that had not been presented to the Director prior to her initial decision.[8]

         In July 2013, the Director issued a final determination on appeal affirming her initial decision. In that opinion, she addressed the new factual assertions raised by Cinema West, accepting some and rejecting others that were contradicted by the evidence. Ultimately, they did not change her analysis. Thereafter, the Department's Division of Labor Standards Enforcement (DLSE) commenced wage enforcement proceedings against Cinema West and the contractors and subcontractors who constructed the theater. The hearing officer appointed to hear those matters, after consolidating them, stayed those proceedings pending a final decision in this matter.

         Superior Court ...

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