Wood Robbins, LLP is panel counsel for two accounting malpractice carriers and has represented hundreds of solo to midsize accounting firms in a variety of cases. One of the firm’s special areas of practice is the defense of accounting firms, where the accountant is being blamed for not catching embezzlement sooner. From our litigation experience, we have drawn some conclusions as to how CPA-tax preparers and business advisors can best protect themselves from being dragged into these lawsuits.
What is a Gatekeeper Lawsuit?
In the typical case, the CPA or other advisor is hired to do a job, like preparing a company’s taxes, doing bookkeeping work, or performing some other non-attestation engagement. The CPA prepares an engagement letter that states that the CPA is performing that work and only that work. The letter adds that while the CPA is not trying to uncover fraud, he or she will tell the client about a fraud if one happens to be uncovered (by accident).
Things go well and over time the accountant is relied upon more and more. Management may, for example, call the CPA for advice on how the company should raise cash. The client’s in-house bookkeeper may ask the CPA to assist with a special project mid-year, or more periodically, and may even give the outside CPA online access to the books. Management may be looking at spinning off a new company and ask the CPA to do a quick valuation.
Then, the embezzlement occurs by the client’s bookkeeper or another employee. The CPA has never been asked to detect fraud, but by this time has boxes/gigabytes of accounting detail and boxes/gigabytes of records in their possession, and the incriminating data is all in there. It’s finger pointing time. Management not involved in the theft invariably says they relied on the CPA to guide them, to protect them, period. The engagement letter only talks about a tax engagement, and does not have any disclaimers tied to all of the work the CPA or advisor was actually doing. Lines are blurred and the CPA or other advisor is exposed.
How can you protect yourself from this situation?
1. Take Your Engagement Letter to the Next Level
Obviously, outside CPAs, bookkeepers, and business advisors should have an engagement letter with each and every client. Those new to writing engagement letters can start with CAMICO’s guide entitled CPA’s Guide to Effective Engagement Letters (11th Edition) w/CD, which at the time of writing this article was available on Amazon.com for $185.00.
In our legal practice, the problem is not that our clients do not have engagement letters. They usually do. The problem is, rather, the letters are either out of date, they are no longer effective because the work being done is different than described, or both.
The first step to limiting exposure and a future gatekeeper lawsuit is to take your engagement letter to the next level, catering the letter to each client and situation. Specifically, we recommend paying attention to:
There seems to be a belief that limiting the scope of services in the engagement letter is helpful from a risk management perspective. But, the whole point of having an engagement letter is to include disclaimers. Limit the scope and you can, if you are not careful, effectively limit the disclaimers. This can be done by poor writing or, more likely, by doing work not contemplated by the original language.
The better approach is to use language that captures all of the services you expect to provide, including services that naturally flow from the core engagement, then coupling that scope with disclaimers that attach to all of it. For instance, if you are hired to prepare tax returns, you can expect to be asked to provide tax advice, do tax planning and be consulted on tax-related matters. Depending on the situation, you may also expect to be asked to provide more general services such as calculations and/or advice to management respecting various aspects of the business. Similarly, if you are providing bookkeeping services, you may expect to provide advice on how the books should be kept. Depending on the situation, you may expect to be asked for advice on liquidity and other financial issues. When defining the scope, include these consequential engagements.
Important Note for Auditors: This article and its advice is not aimed at auditors. Audit work is a different animal where the CPA is independent. The form audit engagement letter that specifies that you are performing an audit of the company’s financial statements and not internal controls, etc., should not be modified to suggest you are performing services that would breach your independence. That said, if you anticipate being asked for operational advice outside the audit work, and such consulting services do not breach your independence, you should articulate that in the engagement letter instead of being silent on the point. See CAMICO’s guide for more guidance.
Once you have accurately described the services you expect to perform, add language which limits the extent the client can rely on those services. There is a standard paragraph, touched on above, that provides that the CPA is not tasked with identifying fraud. This language alone is not terribly persuasive where the CPA’s role and access to information has grown since the engagement letter was first written.
Consider beefing up the section that states that you are not charged or tasked with detecting fraud. There are, indeed, many ways management and/or internal bookkeeping staff (or anyone else that handles client funds) can improperly use or abscond with company funds without detection. Say that, and consider adding examples tailored to the client and situation. By example: just because you are getting copies of documents, including bank statements, does not mean that you are checking to make sure the transactions on these documents are legitimate. If you think your client will be sending you accounting detail and/or backup, like bank statements, be clear as to what you will be using the documents for and, equally as important, what you will not be using them for. And use plain English, for example: “We will not be reviewing bank statements for suspicious transactions.”
Every engagement letter, we think, should then take another step, and that is to make clear that additional services are available for an additional fee. We do not see this often enough.
Juries don’t understand how accounting services are provided, or how much they should cost. While each side can hire an expert to explain it, nothing would be more convincing than the CPA or advisor saying to the client at the outset that additional services cost additional money.
The CPA or advisor doesn’t have to provide the service. The engagement or annual notice just needs to say that the service exists in the universe and provide a range on the cost. With that in the letter, we as defense attorneys can ask the plaintiff if they ever hired someone to do that work, if they ever paid the additional fee that it would cost, and deal a deftly blow.
If your engagement letter is out of date or imperfect, you can still help yourself by renewing it or even just sending an annual notice that includes the above-discussed language (disclaimers coupled with an identification that additional services are available for an additional fee). A client will be hard-pressed to argue they were relying on the accountant to catch fraud where the accountant sent them a notice every year that said the exact opposite.
2. When Doing Bookkeeping Type Work, Train Your Lower Staffers to Be Aggressive and Educate Them on Internal Controls
Many of our clients are small CPA firms that provide tax and/or outside bookkeeping services to small businesses, including bank reconciliations. From the CPA’s perspective, these are low-level services. Accordingly, the CPA hires college graduates and/or lesser experienced individuals to do the work. The result is, the person doing the work is both new to the industry, in addition to being new to the client’s business.
The problem is, embezzlers are not newcomers to their respective businesses. They are seasoned experts that, usually, have been working at the same place for many years learning its weaknesses. In a recent case that we handled, a bookkeeper at a doctor’s office used the credit card machine to refund money, seemingly to patients but really to himself. The CPA’s staffer doing the reconciliation never thought to question the refunds. In another recent case, an in-house bookkeeper with check writing authority wrote checks to cash and then claimed vendors were paid with cash when, in fact, they were not. The CPA’s staffer doing the reconciliation mentioned to the bookkeeper (the embezzler) that transactions should not be done this way, but the effort stopped there.
The solution is to make clear to inexperienced staff to be inquisitive, if not aggressive. Train staff to take a greater interest in the businesses they are working on. Staff should take notes of vendor payments, employee payments, and other trends and/or transactions of interest and report what they find to the CPA in charge. As part of this process, staff should be trained to ask the CPA questions, however stupid they may seem. A properly trained staffer puts the CPA on notice of odd vendor payments, double payments to employees, or irregular credit card and cash transactions.
In addition to training staff to be inquisitive, CPA should educate staff on what internal controls are – what they look like. Arguably anyone in the world providing accounting services to anyone else in the world should know what the phrase “internal controls” means, and how controls might take shape. Staffers are not going to review the internal controls of every organization, but if they know what internal controls are they can at least ask more intelligent questions about suspicious transactions — that is, if they are verified by a control or not, information which the CPA will ultimately need to determine whether to raise the issue or not.
3. Identify Clients at High Risk and, when Suspicious Transactions are Identified, Report Them to the Next Person Up
Doctors, chefs, and tradesman are a few examples of clients who never, ever, ever pay attention to the accounting going on under them. They are so engrossed in their craft they completely ignore the business side of their business. They rely heavily on one person or outside providers of bookkeeping services, and ultimately their CPA.
Take note if the client relies on one person or an outside service to do in-house bookkeeping work. Educate staffers that this client is at risk and, as a result, your firm is at risk too.
If suspicious transactions do present, report them:
Why in writing? In the law, a communication not in writing is as good as not happening at all. Why report to the next level up? With fraud, reporting to the person that committed the fraud is about as good as not reporting at all. For a communication to reduce a CPA or other advisor’s risk, it must be in the correct form, addressed to the correct person.
You might ask: Who is above the CEO? The CEO may have hired you, but he or she is not at the top of the corporate food chain. Above the CEO (in a corporation) is the Board of Directors, and that is to whom suspicious activity should ultimately be reported. If you need to protect yourself with respect to CEO-level activity, the best you can do is give the CEO a courtesy call before reporting and offer to include whatever explanation the CEO desires.
Depending on the level of suspicion and the adequacy of the response, the CPA has to consider whether to continue to do work for the client, or disengage. This is one of those things where, if you are asking yourself the question of whether you should disengage, you know the answer.
4. Confirm Payroll Taxes are Current
After giving you broad tips to reduce risk, advising to pay special attention to payroll taxes probably doesn’t seem to fit, and you’re right. But, we’ve seen it too many times not to mention it.
In-house bookkeeper/embezzlers often do not pay payroll taxes. It doesn’t make sense to us why embezzlers think this is an area where they can skim, but it is. The embezzler must be concerned that if he or she does not pay one of the company’s day-to-day vendors, the vendor will call management and the embezzler’s fraud will be uncovered. The IRS and FTB are slow responders by comparison. In at least two of our recent cases, the embezzler was caught only because the IRS put a tax lien on the company’s accounts.
If you find yourself doing more and more work for a client, consider taking an interest in payroll taxes – just confirm they are current.
5. Get Insurance, and Don’t Be Afraid to Call for Help
Even the most organized and diligent CPA can find himself or herself named in a complaint. Professional liability insurance is your best friend when that happens. Have coverage and have enough coverage to protect your personal assets. Talk to a licensed insurance agent for more advice on that front.
With insurance comes the ability to call for help. Most carriers have hotlines. If your carrier does not have a hotline, or you are looking for legal advice, call us. Wood Robbins, LLP exists to help accountants and business advisors, and initial consultations are free. This means that if you have a question or concern, you can call us, get educated advice and go about your own business smarter at no extra cost to you. Call Greg Wood at (415) 249-7900.
The law against preliminary injunctions restricting speech is nothing short of brutal:
“The right to free speech is … one of the cornerstones of our society,” and is protected under the First Amendment of the United States Constitution and under an “even broader” provision of the California Constitution. (Hurvitz v. Hoefflin (2000) 84 Cal.App.4th 1232, 1241, 101 Cal.Rptr.2d 558; see Cal. Const., art. I, § 2, subd. (a).) An injunction that forbids a citizen from speaking in advance of the time the communication is to occur is known as a “prior restraint.” (DVD Copy, supra, 31 Cal.4th at p. 886, 4 Cal.Rptr.3d 69, 75 P.3d 1; Hurvitz v. Hoefflin, supra, 84 Cal.App.4th at p. 1241, 101 Cal.Rptr.2d 558.) A prior restraint is “ ‘the most serious and the least tolerable infringement on First Amendment *1167 rights.’ ” (DVD Copy, supra, 31 Cal.4th at p. 886, 4 Cal.Rptr.3d 69, 75 P.3d 1; Near v. Minnesota (1931) 283 U.S. 697, 713, 51 S.Ct. 625, 75 L.Ed. 1357.) Prior restraints are highly disfavored and presumptively violate the First Amendment. (Maggi v. Superior Court (2004) 119 Cal.App.4th 1218, 1225, 15 Cal.Rptr.3d 161; Hurvitz v. Hoefflin, supra, 84 Cal.App.4th at p. 1241, 101 Cal.Rptr.2d 558.) This is true even when the speech is expected to be of the type that is not constitutionally protected. (See Near v. Minnesota, supra, 283 U.S. at pp. 704–705, 51 S.Ct. 625 [rejecting restraint on publication of any periodical containing “malicious, scandalous and defamatory” matter].)67 To establish a valid prior restraint under the federal Constitution, a proponent has a heavy burden to show the countervailing interest is compelling, the prior restraint is necessary and would be effective in promoting this interest, and less extreme measures are unavailable. (See Hobbs v. County of Westchester (2d Cir.2005) 397 F.3d 133, 149; see also Nebraska Press Assn. v. Stuart (1976) 427 U.S. 539, 562–568, 96 S.Ct. 2791, 49 L.Ed.2d 683.) Further, any permissible order “must be couched in the narrowest terms that will accomplish the pin-pointed objective permitted by constitutional mandate and the essential needs of the public order….” (Carroll v. Princess Anne (1968) 393 U.S. 175, 183–184, 89 S.Ct. 347, 21 L.Ed.2d 325.)89 Even if an injunction does not impermissibly constitute a prior restraint, the injunction must be sufficiently precise to provide “a person of ordinary intelligence fair notice that his contemplated conduct is forbidden.” (United States v. Harriss (1954) 347 U.S. 612, 617, 74 S.Ct. 808, 98 L.Ed. 989; see also People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1115, 60 Cal.Rptr.2d 277, 929 P.2d 596.) An injunction is unconstitutionally vague if it does not clearly define the persons protected and the conduct prohibited.
Evans v. Evans, 162 Cal. App. 4th 1157, 1166-67, 76 Cal. Rptr. 3d 859, 867 (2008)
There are a few different tools defense lawyers can use to defend a case. One tool is the motion for summary judgment and/or motion for summary adjudication (“MSJ/MSA”).
A MSJ/MSA says two things to the Court. It first says that the material facts of the case are undisputed. There is no need for a trial. The Court can decide this one on the papers. The Motion then says: under these undisputed facts and the applicable law, moving party should win the case.
Motions for summary judgment and/or summary adjudication of causes of action are weapons of mass destruction that rarely detonate. There is strong public policy in favor of giving plaintiffs their day in Court. So, judges are reluctant to grant MSJ/MSA’s. Judges can usually find at least one or more material facts in dispute to support a denial. At the firm, we tell our clients that the best MSJ/MSA ever written in the history of time had a 50% of winning.
That said, the potency of the motion makes it worth filing if there are grounds to do so. Trial is absurdly expensive. Defeating a claim – or even reducing it in scope – can save the client hundreds of thousands of dollars in fees and costs alone, not to mention resolve the dispute favorably.
Under the Contractors’ State Licensing Law, “no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter…” Further, “A person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”
Being able to claw back fees paid to someone that has done the work may seem like a draconian rule. California Courts have said, however, regardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek “compensation” for illegal unlicensed contract work. (Lewis & Queen, 48 Cal.2d at pp. 150-152, 308 P.2d 713.) Thus, an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials. (See Davis Co. v. Superior Court (1969) 1 Cal.App.3d 156, 159, 81 Cal.Rptr. 453; Grant v. Weatherholt (1954) 123 Cal.App.2d 34, 41-42, 266 P.2d 185.) The statutory prohibition operates where the person for whom the work was performed knew the contractor was unlicensed. (Pickens, 269 Cal.App.2d at p. 302, 74 Cal.Rptr. 788; Cash v. Blackett (1948) 87 Cal.App.2d 233, 196 P.2d 585.) The statutory prohibition even operates where the person for whom the work was performed engaged in fraud. (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 803 P.2d 370.
The appellate court in Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th at p. 1262, 94 Cal.Rptr.2d 756, stated the rule and then provided its explanation for the basis thereof as follows. “ ‘Because of the strength and clarity of this policy, it is well settled that section 7031 applies despite injustice to the unlicensed contractor. “Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state.” ‘ “ (79 Cal.App.4th at p. 1261, 94 Cal.Rptr.2d 756; citations omitted.
Whether a worker is an independent contractor or an employee largely turns on whether the employer “has the right to control the manner and means by which the worker accomplishes the work.” Estrada v. FedEx Ground Package System, Inc., 154 Cal. App. 4th 1, 10 (2007); see Cal. Lab. Code § 3353 (defining independent contractor as “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished”); S.G. Borello & Sons, Inc. v. Department of Indus. Relations, 48 Cal. 3d 341, 350 (1989) (noting that “[the] principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired”); see also In re Brown, 743 F.2d 664, 667 (9th Cir. 1984) (stating that, under California law, “the most significant factor is the right to control the means by which the work is accomplished”). Even the trial court in our case agreed that this factor is the “most significant question in the independent contractor/employee determination.” (6 AA at 1728.)
“While . . . the right to control work details is the ‘most important’ or ‘most significant’ consideration, the authorities also endorse several ‘secondary’ indicia of the nature of a service relationship.” S.G. Borello & Sons, Inc., 48 Cal. 3d at 350. Those “secondary indicia” “have been derived principally from the Restatement Second of Agency.” Id. at 351. They include,
(1) whether the worker is engaged in a distinct occupation or business, (2) whether, considering the kind of occupation and locality, the work is usually done under the principal’s direction or by a specialist without supervision, (3) the skill required, (4) whether the principal or worker supplies the instrumentalities, tools, and place of work, (5) the length of time for which the services are to be performed, (6) the method of payment, whether by time or by job, (7) whether the work is part of the principal’s regular business, and (8) whether the parties believe they are creating an employer-employee relationship.
Estrada, 154 Cal. App. 4th at 10; see Antelope Valley Press, 162 Cal. App. 4th at 852-53. Additionally, S.G. Borello & Sons Inc. also
noted with approval the six-factor test developed by other jurisdictions [which b]esides the right to control the work . . . include[s] (1) the alleged employee’s opportunity for profit or loss depending on his managerial skill; (2) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (3) whether the service rendered requires a special skill; (4) the degree of permanence of the working relationship; and (5) whether the service rendered is an integral part of the alleged employer’s business.
Bowman v. Wyatt, 186 Cal. App. 4th 286, 301 (2010) (internal quotation marks omitted) (citing S.G. Borello & Sons, Inc., 48 Cal. 3d at 354–55). If these were not enough criteria to consider, the courts have found that the “the right to discharge at will without cause” is yet another “secondary factor . . . constituting strong evidence in support of an employment relationship” and against a contractor relationship. Angelotti v. Walt Disney Co., 192 Cal. App. 4th 1394, 1404 (2011); see S.G. Borello & Sons, Inc., 48 Cal. 3d at 350; Kowalski v. Shell Oil Co., 23 Cal. 3d 168, 177 (1979). Failure to consider these secondary factors is considered error. See Bowman, 186 Cal. App. at 303-304 (holding that CACI jury instruction did not articulate a “correct statement of the law” because it failed to “instruct the jury that it must weigh all of [the secondary] factors”); Messenger Courier Assn. of Americas v. Cal. Unemployment Ins. Appeals Bd.,175 Cal. App. 4th 1074, 1095 (2009).
The fact that there is a contract between the parties that characterizes the relationship between the Parties as contractor/client or employee/employer is of limited relevance in determining a worker’s proper classification under law: “The agreement characterizing the relationship as one of client – independent contractor will be ignored if the parties, by their actual conduct, act like employer – employee.” Toyota Motor Sales U.S.A., Inc. v. Superior Court, 220 Cal. App. 3d 864, 877 (1990) (internal quotations omitted); see Tieberg v. Unemployment Ins. App. Bd., 2 Cal. 3d 943, 952 (1970). “Indeed, attempts to conceal employment by formal documents purporting to create other relationships have led the courts to disregard such terms whenever the acts and declarations of the parties are inconsistent therewith.” Toyota Motor Sales U.S.A., Inc., 220 Cal. App. 3d at 877; see, e.g., Pacific Lbr. Co. v. Ind. Acc. Com., 22 Cal. 2d 410, 422 (1943); White v. Uniroyal, Inc., 155 Cal. App. 3d 1, 27 (1984); Bemis v. People, 109 Cal. App. 2d 253, 266 (1952); Lewis v. Constitution Life Co., 96 Cal. App. 2d 191, 194 (1950). As a matter of law it is not particularly relevant what an agreement might say about labor classification between the parties.
“RLUIPA is the latest skirmish in a tug of war between Congress and the Supreme Court over the meaning and application of the Free Exercise Clause of the United States Constitution.” (Lennington,Thou Shalt Not Zone: The Overbroad Applications and Troubling Implications of RLUIPA’s Land Use Provisions (2006) 29 Seattle U. L.Rev. 805, 806–807.) Adopted in response to the Supreme Court’s partial invalidation of the Religious Freedom Restoration Act, title 42 United States Code section 2000bb (RFRA), in City of Boerne v. Flores (1997) 521 U.S. 507 [117 S.Ct. 2157, 138 L.Ed.2d 624], RLUIPA applies to a government’s implementation of land use regulations so long as the government makes, or has in place procedures allowing it to make, “individualized assessments of the proposed uses for the property involved.” (42 U.S.C. § 2000cc (a)(2)(C).) If applicable, RLUIPA prohibits a government from implementing a land use regulation in a way that “imposes a substantial burden” on one’s “religious exercise” unless the burden satisfies strict scrutiny.8 In passing the Act, Congress intended to relax the requirement under First Amendment jurisprudence that the “religious exercise” be central to the individual’s religion. Under RLUIPA, free exercise includes “any exercise of religion, whether or not compelled by, or central to, a system of religious belief.” (42 U.S.C. § 2000cc–5(7)(A).) *118 Particularly relevant to our inquiry here, RLUIPA provides that “[t]he use, building, or conversion of real property for the purpose of religious exercise shall be considered to be religious exercise of the person or entity that uses or intends to use the property for that purpose.” (42 U.S.C. § 2000cc–5(7)(B).)
A RLUIPA substantial burden analysis proceeds in sequential steps. First we look, as a threshold question, to determine if the government has made an “individualized assessment” in its implementation of laws affecting land. 42 U.S.C. § 2000cc(a)(2)(C). Second, “the plaintiff must demonstrate that a government action has imposed a substantial burden on the plaintiff’s religious exercise.” Int’l Church of Foursquare Gospel v. City of San Leandro, 673 F.3d 1059, 1066 (9th Cir. 2011) [hereinafter Foursquare Gospel]; see 42 U.S.C. § 2000cc(a)(1) (providing that a land-use regulation “impos[ing] a substantial burden on the religious exercise of a . . . religious assembly or institution” is unlawful). Finally, “once the plaintiff has shown a substantial burden, the government must show that its action was the least restrictive means of further[ing] a compelling governmental interest.” Id.
In the United Methodist Church case, we argued the pending demolition and CUP permits qualified for RLUIPA protection. Courts have repeatedly held that a city’s “treatment of [a] Church’s [CUP] applications” which include a demolition permit “constitutes an ‘individualized assessment’” subject to RLUIPA. Foursquare Gospel, 673 F.3d at 1066; see Guru Nanak, 456 F.3d at 987 (same); Acad. of Our Lady of Peace v. City of San Diego, 09-CV962 (WQH) (AJB), 2010 WL 1329014, at *10 (S.D. Cal. Apr. 1, 2010) (examining whether a CUP that included a demolition permit was subject to RLUIPA and “conclude[ing] that RLUIPA applies in this case”).
We further argued the second part of the test, a substantial burden existed because, as a consequence of a city’s denial of a CUP—a CUP which includes a demolition permit—the religious organization suffered the “ultimate burden on the use of the [affected] land,” the burden of effective non-use of that land, quoting:
The burden on the Church’s use of land in this case is not only substantial, but entire. By denying the conditional use permit, the City has effectively barred any use by the Church of the real property in question. This is not a case where the Church’s proposed use of land—equated with “religious exercise” by RLUIPA—is restricted in a minor or “unsubstantial” way (e.g., by limiting a building’s size or occupancy). Rather, the denial of the CUP bars the Church’s use altogether, thereby imposing the ultimate burden on the use of that land.
Elsinore Christian Ctr. v. City of Lake Elsinore, 291 F. Supp. 2d 1083, 1090 (C.D. Cal. 2003), reversed on other grounds, Elsinore Christian Ctr. v. City of Lake Elsinore, 197 Fed. Appx. 718, 719 (9th Cir. 2006) (reversing the district court’s holding that RLUIPA was unconstitutional but affirming the district court’s holding that the City violated RLUIPA).
In 1963, the State of California enacted Government Code sections 25373 and 37361. Section 25373 provides in pertinent part:
(b) The board may, by ordinance, provide special conditions or regulations for the protection, enhancement, perpetuation, or use of places, sites, buildings, structures, works of art and other objects having a special character or special historical or aesthetic interest or value.
§ 37361 is identical and applies to cities.
In enacting subsection (b), the State Legislature expressly granted to cities and counties broad powers to regulate and protect all kinds of structures. (Cal. Govt. Code §§ 25737 and 37361.)
The broad power granted by subsection (b) encompasses not only landmarking but all manner of preservation. In fact, the word “landmark” is not used. (Cal. Govt. Code §§ 25737(b) and 37361(b).)
In 1994, by Assembly Bill No. 133, the broad powers granted to cities and counties by subsection (b) were expressly taken away from cities and counties with respect to noncommercial property held by religious organizations. The Legislature amended both statutes to allow religiously affiliated organizations to exempt their noncommercial property (“exempt property”) from the placement of any condition, or any regulation, for the protection, enhancement, perpetuation, or use of said property. Subsection (d) provides:
Subdivision (b) shall not apply to noncommercial property owned by any association or corporation that is religiously affiliated and not organized for private profit …
(Cal. Govt. Code § 25737(d).)
Thus, in 1963, the State of California expressly granted to local governments broad powers to regulate and protect all kinds of structures and, in 1994, expressly took that power away from local governments with respect to exempt property. The result is that local governments are without power to place any “special conditions or regulations for the protection, enhancement, perpetuation, or use of places, sites, buildings, structures, works of art and other objects having a special character or special historical or aesthetic interest or value.” (Cal. Govt. Code §§ 25737 and 37361.)
The California Supreme Court has discussed the purpose of the Government Code exemptions, which is to protect religious freedom:
An explanation of the purpose of the exemption subdivisions was included in Senate Bill No. 1185 (1993–1994 Reg. Sess.), the 1993 legislation, and in Assembly Bill No. 133 (1993–1994 Reg. Sess.), the 1994 bill (hereafter Assembly Bill No. 133), each of which, after noting that historic landmark restrictions were not related to or compelled by public health or safety concerns, stated: “Sections 1 and 2 of this act ensure the protection of religious freedom guaranteed by Section 4 of Article I of the California Constitution and by the First Amendment to the United States Constitution.” (Stats.1993, ch. 419, § 7, p. 2388; see Stats.1994, ch. 1199, § 3 [substantially identical].)
East Bay Asian Local Dev. Corp. v. State of Cal., 24 Cal.4th 693, 702 (2000) (East Bay).
The legislative history is even more specific. With respect to the Senate bill, Section 7 of Stats.1993, c. 419 (S.B.1185), provides:
“(a) The Legislature hereby finds and declares that Section 2 of this act addresses a matter of statewide interest and concern… (b) Sections 1 and 2 of this act ensure the protection of religious freedom guaranteed by Section 4 of Article I of the California Constitution and by the First Amendment to the United States Constitution.”
(West’s Ann. Cal. Govt. Code § 25373.)
With respect to the Assembly bill, Section 3 of Stats.1994, c. 1199 (A.B.133), provides:
“Sections 1 and 2 of this act address a matter of statewide interest and concern…
Therefore, Sections 1 and 2 of this act ensure the protection of religious freedom guaranteed by Section 4 of Article I of the California Constitution, and by the First Amendment to the United States Constitution.”
(West’s Ann. Cal. Govt. Code § 25373.)
Every legal dispute is infinitely different. Successes in other cases are not a guarantee or prediction of success in your case.
The articles and information on this site are based on California law at the time they were written. They are informational only and should not be relied upon except in conjunction with the advice and counsel of an attorney licensed to practice law. Everyone’s situation is different and general advice, as is discussed here, is not helpful in a particular case.
If you are in the process of making decisions that may have legal consequences, you must contact a lawyer to update you on the current law and apply it to your specific facts. If you are interested is discussing potential representation by Wood Robbins, LLP, call for a free consultation (415) 247-7900. Your communications may be privileged, but the firm does not represent you as your lawyer unless and until a written fee agreement is signed and in effect.