Fresno Unified could get stuck with contractor’s legal fees in no-bid contract case

As attorney fees pile up for Fresno Unified over a controversial no-bid construction project, school officials worry that the district – and taxpayers – could soon also be on the hook for the legal costs of the contractor that built the school in question.

A clause in Fresno Unified’s contract to build Gaston Middle School, signed in 2012, shows the district agreed to “indemnify, hold harmless and defend” Harris Construction and its employees from any action that might challenge the legality of the contract.

That scenario became a reality when a local contractor took the district to court, saying the contract unfairly circumvented the traditional low-bid process. A federal investigation is underway probing it and similar contracts.

With the statute of limitations on the case possibly ending as soon as next month, time is running out for district officials to take action to avoid paying Harris Construction’s fees in addition to their own costs accrued in the case. Trustees will address the issue in closed session next week.

As of September, the district had paid more than $220,000 in legal fees associated with the case. The district also is paying a separate attorney $400 an hour to help it respond to the grand jury subpoena’s demands. In November, the board denied Chief Financial Officer Ruthie Quinto’s request to use district dollars to pay for an attorney to represent her during the subpoena process.

Fresno Unified Trustee Carol Mills, an attorney, has asked the school board more than once to address the issue and has questioned whether the district should consider a malpractice suit against Atkinson, Andelson, Loya, Ruud & Romo – the law firm that provides counsel to the district.

Attorneys for the firm also erroneously told the 5th District Court of Appeal that a preconstruction contract for the project did not exist, though documents proved otherwise. If the firm was found liable in a malpractice suit for authorizing the Gaston contract’s indemnification clause, it would be responsible for Harris Construction’s legal fees, not the district.

Mills emphasized that she is not certain legal malpractice occurred, but the district’s possible financial risk warrants an investigation.

“I think the public should be concerned that money that was intended for the students of FUSD is being spent on legal bills. We’re potentially paying hundreds of thousands, if not millions, in legal fees. And if this is because of poor advice from attorneys, then the attorneys’ malpractice carrier should be paying this cost,” she said. “No determination can be made without an investigation.”

Mary Beth De Goede, a senior partner with Atkinson who works for the district, did not return phone calls.

Fresno Unified spokesman Miguel Arias said in an email Friday that the district is aware of a request “regarding possible legal action as a result of an indemnification clause,” but he noted that similar clauses have been used in contracts by school districts across the state.

“The district routinely relies on the highly respected legal counsel of Atkinson, Andelson, Loya, Ruud & Romo, as it did in this matter,” Arias said. “Most importantly, all of the district’s 25 lease-leaseback agreements were subjected to a thorough vetting process before those agreements were publicly approved by formal action of the board of education.”

But some trustees contend they weren’t aware of all of the details in the contract and still don’t know who actually wrote it.

Mills, Board President Luis Chavez and trustee Brooke Ashjian first called for an outside firm to look into the questionable contract – and the indemnification clause – in June, but say their request never was fulfilled.

“We still have not gotten clarity on that specific question, and that was originally what gave us all huge red flags. If you can’t get a simple answer as to how that occurred …  people just are not being forthcoming,” Chavez said. “At the heart of this case is that indemnification clause. What will be telling is how it got there.”

Ashjian, who owns a paving business and regularly oversees contracts, says the indemnification clause has been his main concern all along.

“It makes no sense for a billion-dollar corporation to indemnify a contractor. Nobody I know in my business does that,” he said. “This is what I’ve been saying was going to come back to bite us, and now there’s potential for legal fees and penalties in the seven figures. This puts Fresno Unified in massive financial jeopardy.”

Mills said she, too, is not clear about who drafted the contract in 2012.

“Of greater concern to me as a board member is whether legal counsel reviewed and approved it before it was signed by (Quinto) and if not, why not?” she said. “Why did legal counsel lie about its existence to the 5th District? And why wasn’t this contract on a board agenda as required by education code?”

This story was originally published January 16, 2016 at 9:00 AM with the headline "Fresno Unified could get stuck with contractor’s legal fees in no-bid contract case."