New Section 1090 Case Regarding Prohibited Interests in Contracts

A court of appeal has upheld a $22 million verdict in a contract dispute involving the City of Compton. The city had terminated a solid waste franchise (a form of contract); the franchisee sued for breach of contract. The city cross-complained, asking the court to invalidate the contract and require the franchisee to refund all amounts paid under the contract. The trial and appellate courts sided with the city and ordered the franchisee to pay $22 million.

The case arose under a state law, Government Code section 1090, that prohibits public officials from having financial interests in contracts. Compton had hired an individual named Michael Aloyan to advise the city on its solid waste operations through his company (called American Utilities Services LLP, or AUS). Ultimately, Aloyan persuaded the city to award his company the franchise for the city’s waste disposal operation (originally he submitted the proposal under AUS’s name; he then created a second company, HUB City Solid Waste Services, and substituted that company as the proposed franchisee).

After HUB received the franchise on a no-bid basis, HUB gave the four city council members who supported the contract substantial campaign contributions. HUB also hired a local official’s relative to work for HUB and gave other local officials’ relatives monetary gifts.

The trial and appellate courts found that the prohibition against interests in contracts had been violated in two ways:

1. Aloyan’s role as a consultant was such that he constituted a public official and therefore he was prohibited from participating in negotiating contracts on behalf of the city in which he has an interest.

2. Elected officials’ receipt of campaign contributions under these circumstances meant that they too had an interest in this contract.

As a result, both Aloyan and the elected officials had violated section 1090. The court also found Aloyan and HUB were one in the same, such that both were on the hook for the $22 million judgment in favor of the city.

The case name is Hub City Solid Waste Services, Inc. v. City of Compton, --- Cal.Rptr.3d ----, 2010 WL 2804055, 10 Cal. Daily Op. Serv. 9236, 2010 Daily Journal D.A.R. 11,245 (2d Dist., July 19, 2010) (No. B196639). See pod at right for full opinion.