Ontario's claim against Los Angeles

7/28/2019 Ontario's claim against Los Angeles

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Sheppard Mullin Richter & Hampton LLP1300 I Street, N.W., 11th Floor EastWashington, DC 20005-3314202.218.0000 main202.218.0020 main faxwww.sheppardmullin.com

202.218.0007 [email protected]

213.620.1780 [email protected]

File Number: 29XG-165589

April 11, 2013

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED(ORIGINAL VERSION), W/COPIES BY HAND DELIVERY AND EMAIL

Ms. Sandra J. Miller

SecretaryLos Angeles Board of Airport CommissionersLos Angeles World Airports1 World WayLos Angeles, California 90045Email: [email protected]

VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED(ORIGINAL VERSION), W/COPY BY HAND DELIVERY

Ms. June LagmayCity Clerk

Office of the City Clerk200 North Spring StreetRoom 395, City HallLos Angeles, California 90012

Re: Ontario International Airport

Dear Secretary Miller and Clerk Lagmay:

The City of Ontario, California ("Claimant" or "Ontario"), by and through its undersignedspecial counsel, hereby submits this administrative claim to the City of Los Angeles, California("Los Angeles") in connection with Los Angeles' operation, management and control of OntarioInternational Airport ("ONT" or "Airport"). This claim is made and submitted pursuant to the Cityof Los Angeles Administrative Code, sec. 5.169, the City of Los Angeles Charter, sec. 350, andthe California Government Claims Act, Cal. Government Code sec. 900, et seq. (the "ClaimsCode").1

1By submitting this claim, Ontario does waive its position that the above-referenced provisions do notapply to some or all of its legal or equitable claims or requests for relief recited herein.


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Ms. Sandra J. Miller, et al.April 11, 2013Page 2

The existence and vitality of the Airport is of extreme importance to Ontario and itscitizens and taxpayers, to those living and working in Southern California, and especially tothose seeking to fly into and out of Southern California. The Airport is not merely a symbol ofcivic pride rather, it is a critical engine for economic growth and prosperity in SouthernCalifornia. If an airport thrives, so can the surrounding population. If an airport is left to witherand "die on the vine," the economic impact on the region, and the business owners, residentsand taxpayers in the region can be catastrophic. At the heart of this administrative claim is thecontention that as a matter of fundamental public policy it is indefensible and inexcusable toattempt to deprive the citizens and taxpayers of California of the use of a modern, accessibleand passenger-friendly airport with frequent and price competitive flights that is properlymanaged by an operator committed to pursuing the best interests of the airport and surroundingcommunity.

Unfortunately, the current situation at ONT is one of chronic neglect andmismanagement by its operator, and the operator's unwillingness to comply with its contractualand other legal obligations to further the best interests of ONT. As a result, the financial andoperational situation at ONT is now dire and increasingly urgent. For several decades Los

Angeles through its Department of Airports, now known as Los Angeles World Airports("LAWA") has owned, operated and managed ONT in addition to Los Angeles International

Airport ("LAX"). Both are located in some of the most urbanized and densely populated areas ofthe United States.

Yet LAWA is currently driving ONT into financial and operational ruin, constituting amaterial breach of written agreements between Los Angeles and Ontario. LAWA overtly favorsLAX to the extreme prejudice of ONT and to the detriment of each and every resident of

Southern California, and those around the world seeking to fly to the area. As a direct result ofits neglect of ONT, LAWA has caused a negative economic loss of at least $540 million in 2012,and an estimated loss of over 10,000 jobs in the Ontario area. These are real economic effectson individuals and businesses whose livelihoods depend on the continued success and viabilityof the Airport.

The Airport's bleak prospects became even more desperate when, on October 3, 2011,the Los Angeles Board of Airport Commissioners ("BOAC") decided to exclude ONT from thescope of a new major contract approved for marketing to airlines and consumers. BOAC optedto focus solely on LAX despite the fact that prior contracts included marketing services forONT. LAWA senior management subsequently suggested that BOAC consider closing one ofONT's two passenger terminals.

More recently, LAWA rejected the City of Ontario's offer to have the recently createdOntario International Airport Authority ("OIAA") take control of ONT, assume all of ONTsliabilities, and fairly compensate LAWA for any unreimbursed expenditures. On October 10,2012, the Los Angeles City Council confirmed the rejection of Ontarios offer for the transfer ofONT.


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Concerning any potential transfer, members of the City Council expressed concerns thatthe city "protect LAX as the prime regional airport," noted that "it would be a sin" to transferONT, and asked the Council to consider whether a transfer "would steal our business" fromLAX.

These actions are examples of breaches of fiduciary obligations and the terms of writtenagreements between the City of Ontario and the City of Los Angeles relating to ONT. Inexchange for the right to own, operate and control ONT, the City of Los Angeles expresslyagreed to use its "best efforts" to attract new air service to ONT. Specifically, the 1967 contractbetween the City of Los Angeles and the City of Ontario for the "Joint Exercise of Powers inRelation to Ontario International Airport" ("Joint Powers Agreement" or "JPA") requires Los

Angeles to "exercise its best efforts to attract and obtain additional regular scheduled airlineservice for ONT . . . ." JPA sec. 9, Exhibit 1 hereto.

This "best efforts" obligation is also incorporated into the 1985 "Agreement Between theCity of Los Angeles and the City of Ontario for the Acquisition of Ontario International Airport bythe City of Los Angeles" (the "Acquisition Agreement"), Exhibit 2 hereto. Thus, Los Angeles'rights to ONT are conditioned on its continuing obligation to "attract and obtain additionalregular scheduled airline service for ONT."

Los Angeles is clearly in breach of its "best efforts" obligation under the Joint PowersAgreement. For several years, Los Angeles widely championed a public policy known as airport"regionalization," whereby BOAC would adopt, and LAWA would execute, policies designed toencourage airlines, passengers and cargo companies to forgo crowded, overtaxed and manytimes difficult to reach LAX in favor of ONT. In addition, a 2006 settlement agreement with

various LAX neighboring jurisdictions requires Los Angeles to pursue this regionalizationstrategy. Pursuit of the regionalization objective helped cause ONT to serve airport-highnumbers of 7.2 million passengers in both 2005 and 2007.

Unfortunately for Ontario and its citizens, the regionalization policy has proven to be a"fair weather" policy. LAWA now takes actions that prop up LAX at the direct expense of ONT.It goes out of its way to protect the primary (and favored) asset (LAX), with ONT left to suffer ahuge decline in air service and passengers. Worse still, current LAWA management hasrepudiated Los Angeles' obligation to try to expand airline service at ONT. As noted throughoutthis claim, some members of the BOAC and LAWA executives have made public statementsindicating a preference for LAX over ONT - a direct and material violation of the Joint Powers

Agreement and Acquisition Agreement. Similar statements have been made more recently by

members of the Los Angeles City Council. This demise of regionalization has producedsignificant negative economic and employment consequences for the citizens of the inlandregion in particular, and Southern California in general.

In statements to the BOAC and the media, LAWA has suggested that the serious declinein passenger levels and scheduled air service at ONT is simply due to the decline in the overalleconomy. This is fundamentally flawed reasoning for several reasons. First, LAX's financesand utilization have weathered the economic recession intact and LAX recently enjoyedincreases in passenger and cargo levels and is in the process of spending billions of dollars to


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modernize and expand its terminals. In sharp contrast, passenger levels at ONT havecontinued to decline year after year, falling 40.3 percent since 2007 despite the fact that in manyinstances ONT is the far more convenient and accessible airport for passenger flights and theefficient distribution of cargo throughout the Southwestern United States. The current volume ofpassengers at ONT is now roughly the same as in the early 1980's.

Second, the airlines have not been reducing and terminating service at ONT simplybecause of the economic situation in California. In fact, both LAX and ONT are located inSouthern California and ONT is less than 58 miles from LAX. LAWA has simply made it lessbeneficial for airlines to serve ONT by implementing policies which make the all-important figureof cost-per-enplaned passenger ("CPE") higher than what is acceptable for a medium-sized,secondary airport such as ONT.

In order for airports like ONT to thrive, the CPE must be significantly lower than a largernearby airport like LAX that competes for the same carriers and passengers. Baltimore-Washington International Airport and Fort-Lauderdale International Airport are examples ofthriving secondary airports which have CPE lower than the nearby primary airport. But LAWAhas turned this fundamental concept on its head by making it more expensive for airlines toserve ONT.

Third, LAWA has refused to make reasonable and appropriate concessions to theairlines in the form of fee waivers and other incentives, marketing programs, or otherwise totry to entice airlines to retain or introduce new service at ONT. LAWA does not care that anindependent operator of ONT would understand that such measures are imperative. Rather,LAWA is prepared to let ONT continue to lose air service, passengers and, ultimately, viability,

because LAWA is focused entirely on LAX, to the detriment of ONT. The state of the economydoes not give LAWA an excuse to breach its "best efforts" obligation under the JPA.

LAWA does not need to make it so expensive (and therefore less beneficial) for airlinesto serve ONT. LAWA charges ONT an unnecessary and onerous 15 percent administrative feebased on the operating expenses of ONT, which LAWA does not charge to LAX. Further,LAWA has retained the 15 percent charge to ONT despite its material negative impact onCPE at ONT in order to benefit LAX's standing in the capital markets. Moreover, LAWA hasallocated a bloated and unnecessary number of highly compensated LAWA staff to the ONTcost base. These actions have had the natural result of increasing overall costs and chasingairlines away from ONT, rather than attracting them to the Airport, as Los Angeles is contract-bound to do.

In order for smaller airports such as ONT to compete with their better-known and more-utilized competitors (such as LAX), it is imperative that the airport owner engage in anaggressive marketing campaign (including if appropriate the use of financial incentives) so thatairlines will commence and enhance service to the airport. In contravention of this establishedand indeed obvious necessity, LAWA slashed the marketing budget for ONT over recent years,and has excluded ONT from efforts to promote LAX. LAWA also failed to carry out the Los

Angeles Mayor's directive to use at ONT the $7.3 million per year savings it realized by thediscontinuance of airline service at Palmdale Regional Airport at the end of 2008.


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In addition to breaching its contractual obligation to use its "best efforts" to attract airlineservice to ONT, Los Angeles has breached the implied covenant of good faith and fair dealingand its fiduciary duties and duties of trust owed to Ontario. Los Angeles also has failed toprotect ONT and Ontario against the inherent conflict of interest which exists within LAWA in itstreatment of LAX and ONT as parts of the same local airport system. Los Angeles has madeimprovement and modernization of LAX a top priority. The $4.1 billion in construction projectsfor LAX are being touted as the "legacy" of the current Administration. See, e.g., "LAX hopes todominate the Western skies once again," Los Angeles Times, July 2, 2011 (avail. athttp://articles.latimes.com/2011/jul/02/local/la-me-lax-restoration-20110703);http://momsla.com/2011/11/lax-modernization-in-progress-villaraigosas-legacy-in-the-making/.For a recent update of the huge construction renovation project at LAX seehttp://www.lawa.org/uploadedFiles/LAXDev/Photos/ADG%20Update%20Feb%202013.pdf; seealso http://travel.cnn.com/los-angeles-airport-815681.

However the enormous debt that LAWA has undertaken to fund these and other projectsat LAX has further intensified LAWA's inherent conflict of interest. To pay the debt owed for theLAX projects LAWA must maximize airline service and passenger levels at LAX, which meansthat marketing dollars are being focused on LAX not ONT. Further, LAWA must now ensurethat airlines maintain and increase their service levels at LAX, rather than shift operations toONT. Additionally, LAWA will use its control over ONT to make sure that the CPE is notsufficiently lower at ONT such that airlines are encouraged to move flights from LAX to ONT.

At a minimum, Los Angeles should have erected a system whereby the interests of ONTcould be considered as a stand-alone airport, without also considering the impact on LAX of anydecision relating to ONT. Los Angeles should not have ignored, as it has, even the most basic

good faith efforts and its obligation under the JPA to convene an Airport Advisory Board for ONTcomprised of at least two Ontario City Council members. Los Angeles has treated ONT like adistant colony, assuming the role of "colonial governor" rather than a joint venture partnercollaborating in ONT's success.

Ontario has engaged in tireless efforts to work with Los Angeles to resolve the issuesreflected in this letter. Unfortunately, that effort has proven unsuccessful due to theunwillingness of Los Angeles and LAWA to engage in realistic discussions with Ontario to find apractical solution to this dire problem. Ontario is now left with a stark choice: either watchpassively as its Airport continues to suffer a financial and operational "tailspin," or takeadministrative, and if necessary, legal action to protect the critical municipal function ofproviding a well-managed, viable California airport.

Ontario should never have been saddled with this predicament. The law does not allowan entity such as Los Angeles to assume ownership and control over another municipality'sairport for all of eternity. Under California law, a joint powers agreement must be for "a definiteterm." Cal. Gov't Code sec. 6510. Yet the JPA contains no specified term. In this case theterm of the JPA can reasonably be construed to have already terminated, especially in light ofthe fact that Los Angeles ceased honoring its terms several years ago.


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For the reasons set forth above and below, Ontario respectfully requests that LosAngeles agree to (1) rescind the Joint Powers Agreement of 1967 and Acquisition Agreement of1985; (2) return ownership and control of ONT to Ontario and the OIAA; (3) immediately transfermanagement of ONT to the OIAA while the details of items (1) and (2) are worked out betweenthe parties so as to avoid further financial harm to ONT, Ontario and its citizens; (4) cease anddesist from violating the "best efforts" obligation in section 9 of the Joint Powers Agreement of1967; (5) cease and desist from breaching the implied covenant of good faith and fair dealingowed to Ontario under operative agreements; (6) cease and desist from breaching the fiduciaryduty owed to Ontario in connection with operation of ONT; (7) eliminate the onerous 15 percentadministrative fee charged to ONT; (8) pay damages to Ontario in an amount sufficient tocompensate it for the financial harm suffered as a result of the breaches referenced above; and(9) reimburse Ontario for its attorneys' fees and costs in this matter.

I. STATEMENT OF FACTS

The 1967 Joint Powers Agreement

On October 18, 1967, Ontario and Los Angeles entered into a "Joint Powers Agreement"("JPA" or "Agreement") (Exhibit 1 hereto). The purpose of the JPA is to "develop" ONT "inconjunction with" LAX. (Sec. 1) The JPA states that "the public interest, convenience andnecessity required the immediate and continuing further expansion and development" of ONT.(JPA at 2) The two municipalities recognized that "considerable benefit will result to both [ONTand LAX] and to the users of air transportation into and out of Southern California in the eventan efficient and equitable method of joint operation of said airports could be arranged . . . ." (Id.at 2) (emphasis added).

Significantly, the JPA provides that, upon the tender to Ontario of the monies referred toin the JPA, Los Angeles would have the right to "manage, operate and control ONT . . . ." (Id.sec. 7.) Further, upon Los Angeles' payment of certain additional monies to Ontario and theoccurrence of other events, Ontario was required to "transfer such right, title and interest as itpossesses to ONT and all parts thereof to Los Angeles . . . ." (Id. sec. 12.)

The JPA contains a "best efforts clause," which requires Los Angeles to continue tosupport and encourage the continued expansion of airline services at ONT. The clause states:

Continued Development of ONT. Los Angeles shall exercise its best effortsto attract and obtain additional regular scheduled airline service for ONT

and shall immediately, upon approval of this Agreement, apply to the CivilAeronautics Board for change in the certificates of the scheduled carrierspresently serving Los Angeles to specify ONT as a joint-use airport orhyphenated point with LAX. . . . (JPA sec. 9) (emphasis added).

As is painfully obvious, Los Angeles has failed to use its best efforts to obtain thenecessary airline service for ONT, as required by the JPA, and has failed to use its best effortsto continue to attract and retain airline service at ONT.


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The term of the JPA is indefinite and potentially infinite. It provides: "This Agreementshall continue until terminated by the parties by their mutual written consent." (JPA sec. 5) Anindefinite term in a joint powers agreement is prohibited by California Law. (Cal. Gov't Codesec. 6510)

The JPA also required Los Angeles to form an Airport Advisory Board to supervise theoperation of ONT, to be comprised of at least two Ontario City Council members. (Sec. 3)However, Los Angeles has failed to comply with this obligation.

The 1985 Acquisition Agreement

In 1985, Los Angeles and Ontario purported to implement the JPA further by enteringinto the so-called Acquisition Agreement, whereby ownership of ONT was formally transferred

from Ontario to Los Angeles. (Exhibit 2 hereto) The Acquisition Agreement was highlycontroversial and the then-Mayor of Ontario, Robert Ellingwood, refused to sign the Agreementon behalf of ONT.

Although the Agreement transfers ONT to Los Angeles, it conditions the transfer on thecontinued compliance by Los Angeles with its obligations under the JPA. Section 14 of the

Acquisition Agreement states:

[B]oth Los Angeles and Ontario recognize the necessity for and hereby agreeto cooperate with each other in continuing to carry out the purposes andobjects of the Joint Powers Agreement which it is agreed shall remain infull force and effect. (Emphasis added)

Thus, even though Los Angeles had acquired ONT, it still was obligated, among otherrequirements in the JPA, to "exercise its best efforts to attract and obtain additional regularscheduled airline service for ONT."

For Years Los Angeles Made Legitimate Efforts to AttractAnd Obtain Additional Regular Scheduled Airline Service at ONT

For many years, Los Angeles took seriously its obligations to use its best efforts toattract and obtain additional regular scheduled airline service for ONT. From 1980 through2007, the annual number of passengers at ONT increased from 2 million to 7.2 million. Duringthe latter part of this period LAWA and BOAC pursued a policy of "regionalization," whereby

airlines, passengers, and cargo customers were encouraged to use airports other than LAX especially ONT.

A prime example of Los Angeles' previous efforts to bolster traffic at ONT is the fact thatit included ONT within the scope of two five-year contracts that BOAC approved in 2001 and2006 for LA, Inc., The Convention and Visitors Bureau ("LA, Inc.") through 2011. LA, Inc. is aprivate, not-for-profit marketing and sales organization contracted by the City of Los Angeles topromote Los Angeles as a destination for conventions, meetings, and leisure travel fromdomestic and international markets. For example, LAWA Resolution No. 22984 (May 16, 2006)


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awarded a five-year contract to LA, Inc. that included several goals and objectives for thegrowth of ONT:

"Increase international passenger volume at Ontario International Airport."(Resolution, at 1; Exhibit A to Resolution, at 1)

"[S]olicit international airlines to initiate passenger and cargo service toONT." (Resolution, at 2; Exhibit A to Resolution, at 1)

"Implement cooperative sales promotions with airlines offering directservice to . . . ONT to increase load factors. (Exhibit A to Resolution, at 3)

"Solicit airline to introduce service between western Canada and ONT."

(Id.)

"Conduct meeting with charter airlines, in cooperation with tour operators,to package ONT from European markets." (Id.)

"Meet with airlines to encourage new flight times and routes betweenMexico and ONT to capture a greater share of business travelers." (Id.)

"Promote access to Palm Springs and the Inland Empire via ONT." (Id.)

Los Angeles Stopped Making Genuine Efforts to Attract, orEven Retain, Airline Service and Passengers for ONT

LAWA has ceased trying to attract or even retain airline services and passengers forONT. For all intents and purposes, LAWA officials have abandoned the regionalization policy tofocus on LAX rather than ONT. Although the BOAC has continued to approve the expenditureof millions of dollars to market LAX, it has gutted the marketing and advertising budget for ONT.

In 2005-2007, LAWA spent between $2 million to $3 million per year on marketing atONT. By contrast, LAWA budgeted only $142,000 for advertising and public relations for ONTfor FY 2012, and the same miniscule figure for FY 2013. Only $93,000 was spent in FY 2010,and only $156,000 was budgeted for FY 2011. In stark contrast, in FY 2010, LAWA spentnearly $7 million for advertising and public relations at LAX. For 2010, LAWA's expenditures foradvertising and public relations were 1.7% of aviation revenue; whereas at ONT this percentage

was only 0.2 percent.

At Van Nuys Airport, advertising and public relations were budgeted for $186,000 in FY2013, an increase from the $173,000 for FY 2012. So LAWA is spending less for advertisingand public relations at Ontario a medium hub airport than its general aviation airport.

Los Angeles's shift away from ONT is exemplified by its decision on October 3, 2011 toaward a new contract to LA, Inc. that excludes ONT from the scope of services in sharp


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contrast to what occurred with the five-year contracts awarded in 2001 and 2006. BOACPresident Michael Lawson stated:

I just wanna be clear, or get confirmation, this [new LA, Inc.] contract that theboard report specifically talks about LAX, it does not mention Ontario. . . .[J]ust to be clear, the contract that we're proposing to approve now, is onlyfor LAX. (Tr. BOAC Meeting, Oct. 3, 2011, at 7) (emphasis added)

Had LAWA not turned its back on ONT, it could have allocated a material amount ofmarketing expenses to capitalize on the ONT's proximity to vacation destination spots such asDisneyland. This was the specific suggestion of Peggy Ducey, the "Regionalization Consultant"that LAWA retained allegedly to assist in LAWA's efforts to steer airlines and passengers toONT. LAWA rejected Ms. Ducey's suggestions and disavowed her efforts. LAWA also could

have offered financial incentives to the airlines to remain at or commence or expand service atONT but this is something that LAWA repeatedly refused to do.

There is no financial basis for LAWA to starve ONT of marketing expenses. In October2012, LAWA reported that its assets exceed liabilities by $4.4 billion (as of June 2012), includingunrestricted assets of $479.7 million. Yet LAWA has used little, if any, of this surplus to try toattract new airline service to ONT. Instead, it praised its investment of $4 billion, which itdescribed as the largest public works project in the Citys history. No portion of that $4 billioninvestment was directed to ONT.

Moreover, when airline service was terminated at Palmdale Regional Airport, the Mayorof Los Angeles committed to shift to ONT the resulting $7.3 million per year in savings in the

LAWA budget. However, LAWA never followed through on this commitment. That is moneythat LAWA could have used to materially lower CPE at ONT, or to fund incentives for new ONTairline service. Instead, LAWA decided to use that savings at LAX.

Los Angeles officials have candidly admitted that "regionalization" conflicted with theirdesire to protect and enhance LAX utilization and market share. During a BOAC session onJuly 14, 2010, then-President Alan Rothenberg stated:

When we talk about regionalization I guess it's heresy to say what we should bethinking about is how to get more traffic to LAX. But you know, I think that'salso a serious economic reality, that it may have all been for the wrong reasonsthat we've taken some of the pressure off of LAX . . . . (Tr. BOAC Meeting, July

14, 2010, at 6-7) (emphasis added)

During that same meeting, then-Commissioner Walter Zifkin suggested that nothing else bedone on regionalization because "traffic at LAX in terms of relative market share is down." (Id.at 6) In addition, Executive Director Gina Marie Lindsey stated that "continuing to pursue astrategy that actively pushes traffic away from the city of Los Angeles and into other

jurisdictions could be viewed as a little self destructive." (Id. at 1) (emphasis added)


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Also, in direct contrast to LAWA's successful effort in late 2011 to increase the numberof U.S. Customs and Border Protection ("CBP") at LAX, LAWA did nothing to persuade CBP toremain at ONT, implying instead that CBP might no longer staff a Customs post at ONT in thefirst quarter of 2012. In a November 22, 2011 letter to Ontario's Mayor, LAWA's ExecutiveDirector acknowledged that she had taken no steps to dissuade CBP from making that decision.

In addition, LAWA has relegated the ONT airport manager to a "part time" status. Henow splits his time managing Van Nuys Airport. No other U.S. airport in the same category asONT has a part-time manager.

In a Los Angeles City Council meeting on October 10, 2012, councilmember RichardAlarcon stated that "it would be a sin" to transfer ONT and permit ONT to "steal our business,"noting that "we need to protect LAX as the prime regional airport." The Citys effort to protect

LAX at the expense of ONT indeed has paid dividends, resulting in an increase in passengertraffic at LAX of 3.8% while passenger traffic at ONT continued to fall to levels not seen foralmost 30 years.

Los Angeles Has Put ONT Into a Financial andOperational "Death Spiral"

Los Angeles's decision no longer to attract or retain airline service and passenger levelsat ONT has had a disastrous effect at ONT. The number of passengers using ONT hasprecipitously declined, from 7.2 million passengers in 2007 to 4.31 million in 2012, a decline of40.3 percent. The decrease in passengers is continuing. Between June 2009 and June 2010,passenger traffic at ONT decreased 8.8 percent (From 5,267,290 to 4,803,685 persons). In

June 2011, domestic passenger traffic decreased by 11 percent as compared to the sameperiod in 2010. This downward trend continued from 2011 to 2012 and is expected to continuethis year. The number of passengers using ONT in 2012 is as low as it has been since the mid1980s.

The following Chart 1 shows the steep decline in passenger levels at ONT since 2007:


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Chart 1 ONT A Growth Airport Throughout Much of Its History,Until Recently

Annual Passengers at ONT (Millions)1980-2012

Unfortunately, the decline in passengers at ONT is not currently projected to taper off,much less improve. Rather, the "death spiral" at ONT will continue unless something dramaticoccurs to halt it. In October 2012, LAWA released passenger figures that show passengertraffic at ONT decreased 6.9% between fiscal year 2011 and 2012. During the same timeframe, LAX's traffic increased by about 3.8 percent.

The following Chart 2 shows by percentage the decline in scheduled air service at ONTsince January 2011 and as projected to continue through October of this year:

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


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Chart 2 Ontario Continues to Lose Air Service With Even DeeperCuts in the Months Ahead

Scheduled Seats at Ontario International AirportCompared to Prior Year Same MonthJanuary 2012 October 2013

Source: Official Airline Guide as of March 2, 2012

LAX Passenger Levels Have Been Increasing

In stark contrast to the dismal situation at ONT, LAWA has taken the necessary steps toensure that passenger levels have increased at LAX. Between June 2009 and June 2010, the

amount of passengers using LAX increased 2.3 percent, from 56,547,039 to 57,827,501persons. In December 2010, LAWA's Deputy Executive Director and Comptroller stated that:

Passenger and cargo traffic at LAX has shown encouraging growth. Passengertraffic increased by 2.3% in fiscal year 2010 as compared to the prior fiscal year,while air cargo tonnage increased by 14.6% during the same comparative period.

At ONT, passenger and cargo traffic continued to decline . . . . (Audited FY 2010Financials, Dec. 6, 2010)


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The situation continues to improve at LAX. As of June 2011, LAX had increaseddomestic traffic by 6.47 percent and international traffic by 4.84 percent in comparison to thesame period in 2010, for a total increase of 6 percent in passenger traffic since 2010. Throughthe end of fiscal year 2012, passenger traffic at LAX grew to 62.9 million, a 3.8 percent increaseover 2011, while ONTs passenger traffic decreased by 6.9 percent during the same period.While ONT's market share compared with the five other commercial airports in the region hasfallen, LAX's market share has increased from 69.6 percent to 74.2 percent between 2007 and2012. Moreover, LAWA is spending billions to modernize and expand LAX and is pursuing newcarriers and service to fund these projects.

ONT Has Suffered Much Worse Passenger Drop-Offs Than Other Airports

LAWA repeatedly argues that ONT's precipitous decline in passenger levels is simply

reflective of a down-turned economy. However, as LAWA's private consultant, Warren Adamsof Leigh Fisher (formerly Jacobs Consultancy) has acknowledged, ["w]hen you look at Ontarioas compared to other medium hub airports in the U.S., also in the L.A. basin, also for the WestCoast, it's been one of the most severely affected airports with respect to passenger levels andseats." (Tr. BOAC Meeting, Aug. 2, 2010, at 2) The following Charts 3 and 4 demonstrate howmuch more poorly ONT has fared compared with other airports:

Chart 3 ONT in Perspective (2000-2011)

2000-2012 Passenger Growth ComparisonIndexed to 2000=1.00


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Chart 4 ONT versus Competing Airports in the Region

Passengers at Southern California Regional Airports (Millions)2000-2012

The sharp decline in passenger levels at ONT cannot be attributed, as LAWA hassuggested, to a purported industry trend to de-emphasize secondary airports in favor of largehubs. Using LAWAs own numbers and comparing ONT against all other medium size U.S.airports, ONT has suffered a greater loss of passengers than all but one airport, Cincinnati,where Delta Airlines discontinued its hub operation after merging with Northwest. Yet evenCincinnati does not fare as badly as ONT once connecting passengers are excluded. ONTsdrop in passengers is by far the worst of the Los Angeles area airports. Moreover, the situationat Oakland and San Jose Airports is vastly different because those two airports have

experienced healthy passenger growth in recent years, while ONT has suffereddisproportionately and stands by itself among medium size U.S. airports.

LAWA Has Crippled ONT With Unreasonably High Costs

ONT has the highest costs among airports in Southern California and among the highestin the United States for comparable airports due specifically to costs over which LAWAexercises control. Costs have been driven so high as a result of LAWA's actions, that airlinescannot afford to maintain and expand levels of service. During the past four years, JetBlue and


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ExpressJet stopped serving ONT, while the few remaining air carriers slashed service.Meanwhile one of the two terminals has become a "ghost town" with restaurants closing in themiddle of the day for lack of customers. LAWA has largely refused to take significant costcutting measures and has taken only minimal steps to address and reverse these high costs,although it has the immediate ability to do so.

ONT's high costs are not the product of debt service. As recognized by LAWA'sconsultant, Warren Adams, the debt service for ONT is "extremely low." (Tr. BOAC Meeting,

Aug. 2, 2010, at 9) "Debt service is a very, very, very small component of the rate base that theairlines pay for at Ontario." (Id.) The ONT debt service is 33 percent of the national average.

The financial means of potential passengers at ONT is not the cause of the 40 percentdecline in traffic. The ONT catchment area is the second richest in the region, with the annual

median household income more than $50,000. Only John Wayne Airport's catchment area hasa higher median household income.

ONT Has Had Higher Cost-Per-Enplaned Passenger than LAX

As a secondary airport it is critical that ONT have a level of CPE that is materially lowerthan the primary airport in the region LAX and competitive with the other secondary airportsin the region. However, LAWA, despite its ability as manager to reduce such costs, has causedthe CPE at ONT to be higherthan at LAX. This situation is fatal for an airport such as ONT.

Chart 5 below demonstrates that CPE at ONT has been the highest in the Los Angelesregion including higher than the CPE at LAX and nearly twice as high as the U.S. median

CPE.


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Chart 5 Cost per Enplaned Passenger

Source: Fitch Ratings reports issued in 2011 for Burbank, John Wayne, LAX, Long Beach, andOntario. FAA Form 127 financial reports. Moodys U.S. Airport Medians for FY 2010

Fitch stated in March 2013 that ONT's "[s]trategic cost management is critical to avoidincreases to an already high CPE that could lead to service retrenchment by air carriers." "Fitch

Affirms Ontario Airport's Revenue Bonds" (March 11, 2013) ("Fitch's 3/11/13 Press Release")."Given the prospect of stagnant growth at the airport Fitch believes that further cost reduction iscritical to avoid an increase in CPE which could result in service entrenchment." Id.

LAWA is compounding the problems at ONT by holding on to much more unrestrictedcash than necessary. According to Fitch, ONT's "[u]nrestricted cash position of $104 million infiscal 2012 is greater than the amount of debt outstanding and equivalent to 622 days cash onhand." Fitch's 3/11/13 Press Release. This cash position is significantly higher than theaverage for medium hub airports (see Moody's Investors Service, "US Airport Medians for FY

2011 (October 19, 2012) at 6) and much higher than what is needed. Unfortunately LAWA hasrefused to use this clear opportunity to pay down debt and take further actions that couldsignificantly and materially reduce CPE at ONT.


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LAWA Allocates Far Too Many Employee Costs to ONT

Another significant aspect of the high ONT costs is the number of employees that LAWAhas allocated to the ONT budget, and the relatively high average compensation of thoseemployees. LAWA has hired many more airport employees assigned to ONT (and its costbase) than are necessary to operate an airport of its size. Similarly-sized airports in the regionoperate with far fewer employees. For example, as of 2010, ONT's employee count was 387 more than twice the 175-member staff at John Wayne Airport, and more than triple Long Beach

Airport's staff of 124 employees. The decision by LAWA to burden the ONT balance sheet withunnecessary employees renders its CPE artificially higher, and makes it that more difficult forONT to retain and attract new air service. Although the number of employees allocated to ONThas decreased to approximately 270, this is still at least 100 employees too high. Moreover, asof 2010 the average compensation per employee was an astounding $104,000. In addition, the

imposition of the 15 percent "administrative fee" (see below) has the effect of adding yet moreemployee costs to the ONT cost base and fee structure.

LAWA's Imposition of the 15 Percent "Administrative Fee" at ONT

LAWA is also charging ONT a 15 percent "administrative fee" based on the total amountof operating expenses. LAWA's budget for FY 2012 approved in June 2011 lists totaloperating expenses for ONT of $64,701,000. On this amount LAWA imposes the 15 percentcharge, which amounts to $8,439,000. This charge directly increases the CPE that airlinesmust pay to serve ONT from $9 to $13, a huge difference. By contrast, LAWA imposes nosimilar 15 percent administrative charge at LAX.

The deteriorating situation at ONT is having a "death spiral" effect. As airlines continueto reduce service to ONT, costs for the remaining airlines increase because such costs areshared among the airlines that serve ONT. As more airlines leave, the remaining carriers musttake on an even larger financial obligation. In this day of paper thin profit margins (if that),airlines cannot afford such cost increases and are choosing to reduce or eliminate service toONT. As Mr. Adams stated:

If you have fewer passengers which you do [at ONT], you have fewer non-airlinerevenues, more costs are paid by the airlines and you have fewer passengersgoing through so that unit costs goes up. So there's almost like a multiplier affectwith what's been happening recently. (Tr. BOAC Meeting, Aug. 2, 2010, at 2)

To make matters even worse, on December 15, 2011, LAWA staff made a presentationto the BOAC which suggested that the BOAC explore the possibility of shutting down one of thetwo ONT terminals because of the huge and unprecedented loss in air service at ONT.

The decline in air service at ONT has caused an economic loss of at least $540 million,and an estimated loss of over 10,000 jobs in the region.


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Clear Indicia of Los Angeles's Failure to Use Best Efforts to Retain or Add AirlineService and Passengers at ONT

The following events demonstrate the manner in which Los Angeles has failed to usebest efforts to retain or add airline service and passengers at ONT:

LAWA continues to rebuild LAX as its "showcase" airport while simultaneouslyneglecting ONT and "starving" it out of viable existence.

Passenger levels at ONT decreased over 40 percent from 2007 to 2012, from 7.2 millionto 4.31 million.

ONT's market share has fallen to 5.0 percent from more than 8.2 percent in 2005 and

8.0 percent in 2007, while LAX's share has increased from 69.3 percent in 2007 to 74.2percent in 2012.

ONT is operating at passenger activity levels not seen since the mid 1980s a decadebefore its two new passenger terminals were built.

Airline schedules show ONT will continue to decline in 2013, placing the airport indanger of a total market collapse.

ONT continues to have among the highest airline rates and charges in the United Statesamong small and medium hub airports. LAWA's cost structure cannot work at ONT. Aslong as LAWA controls ONT it will not be a competitive secondary airport to meet

Southern California's long-term needs for airport capacity.

The CPE at Ontario in FY 2011 was $12.28, higher than other medium hub airports.Leigh Fisher Report, at 33. CPE for FY 2013 is about $14, up from the budgetedamount of about $12.71 for FY 2012. The number of Full Time Equivalent Employeesper million enplaned passengers in FY 2011 was nearly twice as high as the average formedium hub airports in the United States 138 versus 77. Leigh Fisher Report, at 40.

The figure in FY 2011 for Personnel Compensation and Benefits per enplanedpassenger was $12.68 compared with $6.93 as the average for medium hub airports inthe United States. (Id. at 42)

In FY 2011 Ontario paid $6.69 in Security, Law Enforcement and Airport Rescue andFirefighting Expense per enplaned passenger, compared to $2.95 as the average formedium hub airports in the United States. (Id. at 43)

In FY 2011 the Operations and Maintenance costs at Ontario were $13.69 per enplanedpassenger versus $9.86 for the average for medium hub airports in the United States.(Id. at 44)


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LAWA continues to impose the 15 percent administrative fee at ONT despite notcharging a similar fee at LAX and despite the fact that the existence of that feepermanently hamstrings the ability of ONT to be a viable competitor. LAWA's ownconsultant acknowledges that "If the Administrative Fee were not charged for FY 2013,the Airports CPE would decline as a result from about $13 to $9/enplaned pax.LA/ONT's CPE would be more competitive with other airports in the Region." "Report toCity of Los Angeles re Ontario International Airport," Acacia Financial Group, Inc.,William Blair, Axis Consulting (September 21, 2012) ("Acacia Report"), at 54.

LAWA has utterly failed in its obligations to promote Ontario International Airport. Itsown consultant concedes that there has not "been a robust and well-funded campaign toattract new routes and/or additional frequencies on existing routes, generally referred toas air service development." (Acacia Report, at 56) This is despite the fact that "Air

service development is often considered more beneficial for medium hubs and smallerairports as the airlines often are not as familiar with specific characteristics of thecatchment area." (Id.)

Los Angeles strives to protect itself from fairly competing against Ontario. One of the"public policy considerations impacting [the] potential transfer of the Airport to Ontario isthe potential for competition by LA/ONT versus LAX." (Id. at 69)

LAWA has not put forth a credible plan to restore ONT.

LAWA has downgraded the ONT airport manager position to part-time. ONT is now theonly medium hub airport in the United States without a full-time airport manager.

There have been no BOAC meetings at ONT since 2007 despite having meetings twotimes a year in prior years.

The ONT marketing and advertising budget has virtually been eliminated, decreasingfrom the millions of dollars allocated as recently as 2005 to 2007 (when passenger trafficreached its peak), to a fraction of those amounts during the past three years.

LAWA has failed to act on the Los Angeles Mayor's commitment to invest into ONT thesavings from cessation of airline activities at Palmdale.

LAWA's "Office of Regionalization" was shut down following efforts by the

Regionalization Consultant being thwarted by LAWA senior management.

LAWA failed to support the efforts of Aero Ontario LLC to develop an international aircargo center at ONT.

LAWA has failed to take steps to ensure CBP retains Customs officers at ONT in thefuture.


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In addition, LAWA has failed to implement any of the recommendations for ONT madeby the consultant engaged by the Los Angeles City Controller KH Consulting Group ("KH") in its September 2008 "Industrial, Economic, and Administrative Survey" of LAWA , includingthe following suggestions, any of which could have enhanced the situation at ONT:

"The Executive Director should identify an executive-level champion in charge ofRegional Airport Affairs to further efforts toward regionalization of the LAWAsystem and the other airports in the region." (Page I-7) (emphasis in original)

"LAWA should leverage airlines' requests to optimize regional capacity byencouraging more regionally balanced growth as airline traffic begins to increaseagain." (Page I-8) (emphasis in original)

"Assign dedicated air service marketing staff to ONT" to "work closely with the economicdevelopment activities in the ONT surrounding communities San Bernardino County,City of Ontario, City of Claremont, and others and support trade missions and otheractivities to increase airport use and economic development of the Inland Empire."(Page XIV-12)

"If an airline can save $1 million at LAX, LAWA staff should consider what they mightrequest that would cost one-quarter to one-third of that amount at ONT. In this way,LAWA can develop strategies for shifting traffic from LAX to ONT. LAWA can build onsuccessful strategies used at other airports, which have offered various incentives,restricted gate availability to certain aircraft types, etc." (Page 1-8)

To save ONT what is needed is (1) significantly reduced airport charges, (2) aggressivemarketing, and (3) airport management focused on developing ONT. However, Los Angeleshas given no indication that it is prepared to pursue any of these necessary objectives.

In response to the repeated requests by Ontario for return of its Airport, Los Angeles hasrecently indicated plans to undertake some superficial actions which it claims could perhapsassist Ontario. However, such steps are meaningless like rearranging the deck chairs on theTitanic. They also are far too little. In 2007, ONT employed four times as many employees asthe average medium-sized airport. Although the current level has been reduced to two timesthe average number, that figure is still too high. Moreover, the 15 percent administrative fee hasthe effect of increasing the figure back to three times the average. Los Angeles continues tocripple ONT's efforts to compete. Ultimately, Los Angeless desire to renovate, expand and

promote LAX, and preclude legitimate competition by ONT, undercuts any lip service it pays toassisting ONT.

Ontario's Efforts to Resolve Its Claims Regarding ONT

Ontario has attempted in good faith, but in vain, to obtain from Los Angeles a solution forthe significant problems facing ONT. It has met on multiple occasions with LAWA officials andrepresentatives from the Los Angeles Mayor's Office and City Council but with no measurableprogress or success even though the situation at ONT grows more urgent by the day. All the


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while LAWA and Los Angeles have remained steadfast in their unwillingness to honor the termsof the JPA and Acquisition Agreement, or to return ONT to Ontario on fair and reasonableterms. Instead, LAWA commissioned a valuation of ONT based on numerous erroneous andinapplicable assumptions, the implication being that Ontario should agree to pay Los Angeles asum in the range of $243 million to $605 million in order to regain control of its airport.

This is shocking and inappropriate since Los Angeles paid virtually nothing for ONT andthere never has been a transfer of an airport from one public entity to another involving a cashpayment for the airport property and operations. In this instance, such a payment is particularlyunwarranted because LAWA and Los Angeles have not paid or invested any sums for ONTsbenefit that have not been reimbursed through LAWA's exorbitant 15 percent administrative feeor otherwise.

In addition, by attempting to charge Ontario a king's ransom for the transfer of ONT,LAWA is trying to accomplish its goal of permanently making ONT uncompetitive by saddling itwith a high debt burden. In other words, if it keeps the airport, it can avoid the competition fromONT, and if it only releases ONT for a high price, it will leave ONT permanently in a positionwhere it cannot be an effective competitor.

During this period of time LAWA has continued to fail to meet its obligations under theJPA and Acquisition Agreement, and the financial situation at ONT has continued to spiraldownwards. Notwithstanding the dire situation at ONT and the significant economic impactONT has on all of Southern California and on the livelihoods of those citizens in the inlandregion, LAWA officials and Los Angeles officials appear unwilling to take the necessary steps tosave ONT from certain ruin. Ontario has been ready and willing to regain control of ONT to

save it from ruin, and has made that proposal clear to Los Angeles on many occasions, butsuch efforts have continually been thwarted.

In connection with its rejection of the Ontario proposal, Los Angeles procured the AcaciaReport. Although the preparation of the Report was managed by Los Angeles, the Report ishighly critical of LAWA's management of ONT and fully demonstrates the need to transfer the

Airport to the OIAA at this time. Among other things, the Acacia Report states:

In August 2012, Allegiant Airlines stopped providing service on three ONT routesbecause of the Airport's higher cost structure. (Report at 17)

"By most metrics such as changes in share and raw volumes, LA/ONT registered the

worst performance" relative to all airports in the region. (Id. at 36)

Given proper ownership and management, ONT can achieve far better results due to itsstructural strengths. The Airport "is uncongested in comparison to other airports in theRegion and has fewer noise abatement rules than other airports such as SNA, located inOrange County and [Long Beach]. The Airport's long runways make it an importantalternate for international flights and offer the potential for intercontinental flights bywide-body aircraft." (Id. at 45)


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ONT's "CPE is considerably higher than its peers, and particularly those in the [LosAngeles] Region." (Id. at 47)

Ontario's "total operating expenses are significantly higher than its peer set, particularlythe Regional subset. Its combined employee and contract cost per passenger arehigher than many peers' total costs." (Id. at 49) "Utilities and supplies are alsosignificant cost drivers and [Ontario's] costs in both categories are much higher thantheir peers on a per passenger basis." (Id.)

The measures that have been taken regarding ONT "chiefly in the area of budgetmanagement, have not been enough to reduce the CPE to the levels that would helpstimulate increased air service." (Id. at 62) "Indeed, the Airport's operations andfinancial challenges are so severe that the Acacia Team is of the belief that moresignificant and 'game changing' solutions must be implemented on an expedited basis toturn around the downward spiral." (Id.)

Significantly, Acacia concluded that it "is possible that there may be more value inherent in theproposal made by the City of Ontario for a total amount of $246.0 million consisting of a$50.0 million upfront payment, repayment or assumption of $71.0 million in debt and possiblerepayment of approximately $125.0 million in LAX PFCs as compared to the other optionsdiscussed." Id.at 68 (emphasis added).

II. CLAIMS FOR RELIEF

Ontario's preference is to resolve the issues relating to LAWA's operation, managementand control of ONT without litigation. However, in the event that is not possible because Los

Angeles denies these administrative claims or is otherwise unwilling to address the issues setforth herein, Ontario intends to seek relief based on the following claims. Ontario also retains itsrights to amend or supplement these claims.

1. Los Angeles Has Continually and MateriallyBreached the Joint Powers Agreement.

Los Angeles's treatment of ONT as detailed above constitutes an egregious andmaterial breach of section 9 of the JPA, which requires Los Angeles to "exercise its best effortsto attract and obtain additional regular scheduled airline service for ONT. . . ." Exhibit 1, sec. 9.

In addition, LAWA has drastically decreased its marketing efforts for ONT by as much as 85percent. LAWA's mismanagement of ONT, and the high 15 percent administrative fee Los

Angeles charges ONT, has burdened ONT with the highest costs in the region. As a result,passenger traffic at ONT has dropped by over 40 percent between 2007 and 2012, andcontinues to fall.

The culmination of Los Angeles's breach of the "best efforts" clause was BOAC'sdecision on October 3, 2011 to approve a new marketing contract with LA, Inc. that focusessolely on LAX, and excludes ONT from its scope, and the even more recent decision of the


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LAWA senior management to suggest to BOAC on December 15, 2011 that it consider closingone of the two passenger terminals at ONT.

A "best efforts" clause "requires a party to make such efforts as are reasonable in light ofthat party's ability and the means at its disposal and of the other party's justifiable expectations."Samica Enters., LLC v. Mail Boxes Etc. USA, Inc., 637 F. Supp. 712, 717 (C.D. Cal. 2008). Anobligation to use one's "best efforts" requires more than just "good faith." As the Samica courtexplained:

Courts [and Plaintiffs] sometimes confuse the standard of best efforts with that ofgood faith. . . . Good faith is a standard that has honesty and fairness at its coreand that is imposed on every party to a contract. Best efforts is a standard thathas diligence as its essence and is imposed only on those contracting parties

that have undertaken such performance. The two standards are distinct and thatof best efforts is the more exacting.2

In Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979), the buyer of a beercompany was found to have breached its contractual obligation to use best efforts to market andsell the acquired company's beer products when the buyer sharply decreased advertising for thepurchased brand which resulted in a "catastrophic drop in [beer] sales." Id. at 613-14. Similarlyhere, LAWA's decision to slash marketing expenses for ONT played a material role in theunprecedented decline in passenger levels at the Airport.

As set forth above, Los Angeles's breach of the JPA and ONT's resulting loss ofpassenger air service caused a negative economic impact of at least $540 million in 2012, and

an estimated loss of over 10,000 jobs. Ontario seeks recovery of its damages and demandsthat Los Angeles take immediate affirmative action to make ONT more economically viable.

There is no merit to a claim by Los Angeles that the huge and unprecedented decline inpassenger volumes and airline service at ONT is due solely (or even primarily) to the state ofthe economy. Despite the economic problems in the Greater Los Angeles Area, Los Angeleshas managed to retain and even increase passenger service and volumes at the favored LAX to the direct disadvantage of ONT. ONT is the only airport in the region to have suffered as ithas.

Nor can Los Angeles legitimately assert that it has no control whatsoever over thedecisions made by airlines as to which airport to serve, or the geographic scope or frequency of

that service. Such a contention ignores the considerable power that airport authorities wieldover airline decisions in terms of the costs incurred to serve an airport, and the marketing that isaimed at airlines. After LAWA decided to subject ONT to excessive costs-per-enplanedpassengers by way of unnecessary staffing costs and the exorbitant "administrative fee," and toslash the budget for marketing airlines to serve ONT, it is all too convenient for LAWA to throwup its hands and say that airlines make their own decisions.

2Whether a defendant used its best efforts under the circumstances is a factual question. U.S. Ecology,Inc. v. State of California, 92 Cal. App. 4th 113, 136 (2001).


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Ontario requests recovery of the damages it has incurred because of Los Angeles'sfailure to comply with its obligation to use "best efforts" to attract airline service to ONT. Ontarioalso seeks rescission of the JPA and the Acquisition Agreement. A material breach of contractwarrants the remedy of rescission. Associated Lathing and Plastering Co. v. Dunn, 135 Cal.

App. 2d 40, 50, 286 P.2d 825, 831 (1955) ("The trial court was justified in basing the rescissionupon the fact of a material breach").

2. Los Angeles has Breached the Implied Covenantof Good Faith and Fair Dealing Owed to the City of Ontario.

By mismanaging ONT and failing to fulfill its obligations under the JPA, Los Angeles hasbreached the covenant of good faith and fair dealing and frustrated Ontario's right to receive thebenefits of the JPA. The covenant of good faith and fair dealing is implied in every contract.

See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal. 4th 342,373 (1992). It "is implied as a supplement to the express contractual covenants, to prevent acontracting party from engaging in conduct which (while not technically transgressing theexpress covenants) frustrates the other party's rights to the benefits of the contract." Los

Angeles Equestrian Center, Inc. v. City of Los Angeles, 17 Cal. App. 4th 432 (1993) (citationand internal quotations omitted). The covenant of good faith is particularly applicable where, ashere, one party is invested with a discretionary power affecting the rights of another -- suchpower must be exercised in good faith. Carma Developers (Cal.), Inc., 2 Cal. 4th at 371-372.

The JPA not only requires Los Angeles to "exercise it best efforts to attract and obtainadditional regular scheduled airline service for ONT," but also to "use its best efforts to makefunds available . . . for the continued development of facilities and services at ONT." Exhibit 1,

sec. 9. The JPA expressly acknowledges that "considerable benefit will result to both suchairports [ONT and LAX], to Ontario, to Los Angeles and to the users of air transportation intoand out of Southern California in the event an efficient and equitable method of joint operation ofsaid airports could be arranged." Id. at 2. These terms, in addition to others, indicate that theintent of the JPA was to turn over operation and management of ONT to Los Angeles for thepurposes of continued development of ONT, the development of further regularly scheduledairline service for ONT, and the efficient and equitable operation of ONT for the benefit ofOntario and the entire inland region's economic well being. Los Angeles' neglect andmismanagement of ONT and other misconduct alleged herein has frustrated and injuredOntario's right to receive the benefits of the JPA, resulting in economic and monetary damage toOntario.

Ontario requests recovery of the damages it has incurred as a result of Los Angeles'sbreach of the implied covenant of good faith and fair dealing, and also seeks rescission of theJPA and the Acquisition Agreement.

3. Los Angeles Has Breached Its FiduciaryDuty Owed to Ontario.

Through its treatment of ONT, Los Angeles has breached the fiduciary duty owed toOntario. "The existence of a fiduciary duty . . . depends on whether the parties were in a joint


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venture with each other, since partners or joint venturers have a fiduciary duty to act with thehighest good faith towards each other regarding affairs of the partnership or joint venture."Pellegrini v. Weiss, 165 Cal. App. 4th 515, 524 (2008). In addition, "[a] fiduciary or confidentialrelationship can arise when confidence is reposed by persons in the integrity of others, and ifthe latter voluntarily accepts or assumes to accept the confidence, he or she may not act so asto take advantage of the other's interest without that person's knowledge or consent." Pierce v.Lyman, 1 Cal. App. 4th 1093, 1101-02 (1991).

The JPA created a fiduciary relationship between Los Angeles and Ontario because, likea joint venture, Los Angeles and Ontario undertook to carry out "an efficient and equitablemethod of joint operation of" LAX and ONT under the JPA. Exhibit 1 at 2. See Pellegrini, 165Cal. App. 4th at 525 ("[t]he essential element of a joint venture is an undertaking by two or morepersons to carry out a single business enterprise jointly for profit").

The fiduciary duty owed by Los Angeles to Ontario requires, at a minimum, that LosAngeles not subordinate the interests of Ontario and ONT to those of LAX. Yet that is preciselywhat Los Angeles has done. After the economy experienced a downturn, Los Angeles decidedto "protect" its favored airport LAX to the detriment of ONT. Los Angeles failed to ensurethat the CPE at ONT was reasonable, and slashed the marketing budget at ONT, thecombination of which ensured that airline service and passenger levels at ONT wouldsignificantly decline. By contrast, during the same period Los Angeles managed to ensure thatLAX continued to thrive. SeeO'Sullivan v. City of San Diego, 2007 WL 2570783, *6 (Cal. App.4 Dist. 2007) (affirming trial court finding that city breached fiduciary duty by failing to take stepsto manage the property to preserve it for the purpose and uses for which it was constructed andgranted to the city as trustee); see also White v. NFL, 766 F. Supp. 2d 941, 953 (D. Minn. 2011)

("A promisor's consideration of its own interests becomes unreasonable when it is manifestlyharmful to the party to which it has obligations").

Evidence of Los Angeles's breach of fiduciary duty includes, without limitation, LosAngeles's acts and omissions in:

Deciding to halt regionalization efforts when the economy turned bad so that passengerlevels at LAX could stabilize (and increase) despite the severely negative effect such adecision would have on passenger levels at ONT.

Allowing and continuing to allow CPE to increase and remain at such high levels at ONTthat airlines have fled ONT in favor of other airports (including LAX).

Requiring ONT to pay the excessive and discriminatory 15 percent administrative fee toLAWA.

Gutting and virtually eliminating the marketing and advertising budget for ONT, andexcluding ONT from the scope of the LA, Inc. marketing contract approved by the BOACin October 2011.


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Refusing to implement an airline service subsidy program, or revenue-sharing program,to retain and increase airline service at ONT, including LAWA's scrapping of concreteefforts that had been underway in 2007 towards a landing fee incentive program at ONT.

Allowing funds that should have been spent at ONT to be used to pay for LAX programsand initiatives, including, without limitation, the TBIT construction projects.

Failing to adopt and pursue a plan for turning around the "death spiral" that LAWA hascreated at ONT by driving carriers out with high costs, and failing to commit funds toassist carriers in marketing service at ONT.

Failing to carry out the Los Angeles Mayor's commitment to use savings from the end ofairline service at Palmdale to assist ONT.

Rejecting the suggestions of the Regionalization Consultant to increase air service andpassenger levels at ONT.

Rejecting the recommendations of its consultant, KH, for enhancing air service at ONT.

Suggesting that BOAC consider closing one of the two ONT passenger terminals.

Rejecting Ontario's offer concerning the transfer while suggesting through valuations andpublic statements of City officials that LAX needs to "be protected" from competition withONT.

Los Angeles has made sure that the interests of LAX are paramount, even whendecisions are made regarding ONT. Los Angeles should have recognized its inherent conflict ofinterest in operating both LAX and ONT and taken measures to ensure an appropriate level ofindependence and fairness in making decisions regarding ONT. See, e.g., Everest Investors v.McNeil Partners, 114 Cal. App. 4th 411 (2003) (due to potential conflict of interest, generalpartner set up "independent special committee" to evaluate the transaction on behalf of limitedpartners). Where, as here, a fiduciary has conflicting loyalties, affirmative steps must be takento eliminate or at least minimize the impact of the conflict. Thus, once LAWA decided topromote LAX to the detriment of ONT, it should have removed itself as the manager of ONT.Los Angeles also should not have ignored its obligation under the JPA to convene an Airport

Advisory Board for ONT comprised of at least two Ontario City Council members.

Ontario requests recovery of the damages it has incurred as a result of Los Angeles'breach of fiduciary duty as well as rescission of the JPA and the Acquisition Agreement.

4. The JPA and Acquisition Agreement Should Be RescindedAnd ONT Should Be Returned to Ontario and OIAA.

The JPA is invalid and should be rescinded, in whole or in part, because it improperlypurports to last for an infinite period of time. California law only authorizes joint powersagreements for a "definite term." Cal. Gov't Code sec. 6510 states:


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The agreement may be continued for a definite term or until rescinded orterminated. The agreement may provide for the method by which it may berescinded or terminated by any party. (Emphasis added).

In violation of section 6510, the JPA's term is "indefinite" it continues forever "untilterminated by the parties by their mutual written consent." JPA sec. 5. Because the JPA wasunlawful, it follows that the Acquisition Agreement which is based on and expresslyincorporates the JPA is also unlawful and should be rescinded.

Under California Civil Code section 1689(b)(6), rescission is appropriate if "the publicinterest will be prejudiced by permitting the contract to stand." The public interest of the citizensof the City of Ontario will be severely prejudiced if the JPA and Acquisition Agreement arepermitted to stand, given the claims herein and the vital economic significance ONT has for the

citizens of Ontario and the Inland Empire.

Rescission of the JPA and Acquisition Agreement is also the right result becauseOntario officials lacked authority to relinquish ownership and control of the local airport for anindefinite and possibly infinite time period. A contract that purports to surrender or impairgovernmental power is "invalid as contrary to public policy if the contract amounts to amunicipality's 'surrender' or 'abnegation' of its control of a municipal function." 108 Holdings,Ltd. V. City of Rohnert Park, 38 Cal. Rptr. 3d 589, 596 (2006) (citing County MobilehomePositive Action Com., Inc. v. County of San Diego, 62 Cal. App. 4th 727, 736, 73 Cal. Rptr. 2d409 (1988); see also Morrison Homes Corp. v. City of Pleasanton, 130 Cal. Rptr. 196 (1967);Wills v. City of Los Angeles, 287 P. 962, 964 (1930) (since a city "cannot surrender itsgovernmental . . . functions, a municipality cannot make contracts which will embarrass or

control its legislative powers and duties, or which amount to an abrogation of its governmentalfunction or its police power") (citation and internal quotation marks omitted).

Operation of a local airport is a key municipal function, and Ontario officials had noauthority to convey the city airport out from under the city especially not to a third partymunicipality which owned its own, competing airport and which has an untenable conflict ofinterest in owning and operating both airports. See City of Burbank v. Burbank-Glendale-Pasadena Airport Authority, 85 Cal. Rptr. 2d 28, 34-35 (1999) (as a party to a joint powersagreement, "a city may not delegate discretionary powers in such a way that results in a totalabdication of those powers").

Alternatively, the JPA should be reformed to state that, after a reasonable time period, it

may be rescinded or terminated by either party. When a contract contains no express term ofduration, "California courts have not hesitated to imply a term of duration when the nature of thecontract and surrounding circumstances afford a reasonable ground for such implication."Consolidated Theatres, Inc. v. Theatrical Stage Employees Union Local 16, 69 Cal. 2d 713, 727(1968). The Court explained:

While the initial effort of the court, in construing contracts of continuingperformance or forbearance which contain no express term of duration, mustalways be that of implying a term of duration commensurate with the intentions of


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the parties, in some cases the nature of the contract and the totality ofsurrounding circumstances give no suggestion as to any ascertainable term. Insuch cases the law usually implies that the term of duration shall be at least areasonable time, and that the obligations under the contract shall be terminableat will by any party upon reasonable notice after such a reasonable time haselapsed.

Id. at 727-28 (emphasis added); see also Zee Medical Distributor Ass'n v. Zee Medical, Inc., 80Cal. App. 4th 1, 10 (2000) ("[i]f neither an express nor an implied term can be found, the courtwill generally construe the contract as terminable at will").

An implied term of reasonable duration should be read into the JPA, after which anyparty may terminate the contract upon reasonable notice. Because a time period of a more than

reasonable duration - 45 years has already lapsed, Ontario should have the right toimmediately terminate the JPA and take back management and control of ONT.

Pursuant to the rescission requested herein, Ontario will return to Los Angeles anyconsideration provided by Los Angeles to the extent it has already not been matched orexceeded by consideration provided by Ontario.

III. INFORMATION REQUIRED BY CALIFORNIAGOVERNMENT CODE SEC. 910

1. The Name and Post Office Address of the Claimant.City of Ontarioc/o Mr. Chris HughesCity ManagerCity of Ontario303 East B StreetOntario, California [email protected]

2. The Post Office Address to Which the Person Presenting the

Claim Desires Notices to be Sent.

Roy Goldberg, Esq.Sheppard Mullin Richter & Hampton, LLP1300 I Street, N.W.Suite 1100 EastWashington, D.C. 20005-3314Tel. (202) 218-0007


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Fax (202) 312-9425Email: [email protected]

Andre J. Cronthall, Esq.Sheppard Mullin Richter & Hampton, LLP333 South Hope Street, 48th FloorLos Angeles, California 90071-1448Tel. (213) 620-1780Fax (213) 620-1398E-Mail: [email protected]

3. The Date, Place and Other Circumstances of the Occurrence orTransaction which Gave Rise to the Claim Asserted.

See Sections I and II above.

4. A General Description of the Indebtedness, Obligation, Injury,Damage or Loss Incurred So Far as It May be Known at the Time ofthe Presentation of the Claim.

See Sections I and II above.

5. The Amount Claimed.

The amount claimed exceeds ten thousand dollars. Therefore, pursuant to Government

Code section 910(f), no dollar amount is included in this claim. This shall not be a limited civilcase.

IV. CONCLUSION

For the reasons stated above, claimant City of Ontario respectfully requests that the Cityof Los Angeles agree to (1) rescind the Joint Powers Agreement of 1967 and the Acquisition

Agreement of 1985; (2) return ownership, operation and control of Ontario International Airportto the City of Ontario and OIAA; (3) immediately transfer management of ONT to the OIAA whilethe details of items (1) and (2) are worked out between the parties so as to avoid any furtherfinancial harm to ONT, Ontario and its citizens;(4) cease and desist from violating the "bestefforts" obligation in section 9 of the JPA; (5) cease and desist from breaching the implied

covenant of good faith and fair dealing owed to Ontario under operative agreements; (6) ceaseand desist from breaching the fiduciary duty owed to Ontario in connection with the operation ofONT; (7) eliminate the onerous 15 percent administrative fee charged to ONT; (8) pay damagesto Ontario in an amount sufficient to compensate it for the financial harm suffered as a result ofthe breaches referenced above; and (9) reimburse Ontario for its attorneys' fees and costs inthis matter.


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Sincerely,

/s/ Roy Goldberg/s/Andre J. Cronthall

Roy GoldbergAndre J. Cronthallfor SHEPPARD, MULLIN, RICHTER & HAMPTON LLPSPECIAL Counsel for City of Ontario, California

SMRH:200806799.1

Enclosures (Exhibits 1 (1967 Agreement) and 2 (1985 Agreement))

cc: Gina Marie Lindsey, Executive Director, LAWAMichael A. Lawson, Esq., President, Board of Airport CommissionersRaymond S. Ilgunas, General Counsel, LAWAHon. Antonio Villaraigosa, Mayor, City of Los AngelesHerb Wesson, President, City of Los Angeles City Council

(VIA MESSENGER)


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Ontario's claim against Los Angeles

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Transcript of Ontario's claim against Los Angeles