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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

Secretary
Los Angeles Board of Airport Commissioners
Los Angeles World Airports
1 World Way
Los Angeles, California 90045
Email: millers@lawa.org

VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED

(ORIGINAL VERSION), W/COPY BY HAND DELIVERY

Ms. June Lagmay

City Clerk
Office of the City Clerk
200 North Spring Street
Room 395, City Hall
Los 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 undersigned
special 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 Ontario
International Airport ("ONT" or "Airport"). This claim is made and submitted pursuant to the City
of Los Angeles Administrative Code, sec. 5.169, the City of Los Angeles Charter, sec. 350, and
the California Government Claims Act, Cal. Government Code sec. 900, et seq. (the "Claims
Code").1

1
By submitting this claim, Ontario does waive its position that the above-referenced provisions do not
apply to some or all of its legal or equitable claims or requests for relief recited herein.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 2

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

Unfortunately, the current situation at ONT is one of chronic neglect and

mismanagement by its operator, and the operator's unwillingness to comply with its contractual
and other legal obligations to further the best interests of ONT. As a result, the financial and
operational 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 of
the United States.

Yet LAWA is currently driving ONT into financial and operational ruin, constituting a
material breach of written agreements between Los Angeles and Ontario. LAWA overtly favors
LAX 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 of
its 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 effects
on individuals and businesses whose livelihoods depend on the continued success and viability
of 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 the
scope of a new major contract approved for marketing to airlines and consumers. BOAC opted
to focus solely on LAX – despite the fact that prior contracts included marketing services for
ONT. LAWA senior management subsequently suggested that BOAC consider closing one of
ONT's two passenger terminals.

More recently, LAWA rejected the City of Ontario's offer to have the recently created
Ontario International Airport Authority ("OIAA") take control of ONT, assume all of ONT’s
liabilities, and fairly compensate LAWA for any unreimbursed expenditures. On October 10,
2012, the Los Angeles City Council confirmed the rejection of Ontario’s offer for the transfer of
ONT.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 3

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

These actions are examples of breaches of fiduciary obligations and the terms of written
agreements between the City of Ontario and the City of Los Angeles relating to ONT. In
exchange for the right to own, operate and control ONT, the City of Los Angeles expressly
agreed to use its "best efforts" to attract new air service to ONT. Specifically, the 1967 contract
between the City of Los Angeles and the City of Ontario for the "Joint Exercise of Powers in
Relation to Ontario International Airport" ("Joint Powers Agreement" or "JPA") requires Los
Angeles to "exercise its best efforts to attract and obtain additional regular scheduled airline
service for ONT . . . ." JPA sec. 9, Exhibit 1 hereto.

This "best efforts" obligation is also incorporated into the 1985 "Agreement Between the
City of Los Angeles and the City of Ontario for the Acquisition of Ontario International Airport by
the 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 additional
regular scheduled airline service for ONT."

Los Angeles is clearly in breach of its "best efforts" obligation under the Joint Powers
Agreement. For several years, Los Angeles widely championed a public policy known as airport
"regionalization," whereby BOAC would adopt, and LAWA would execute, policies designed to
encourage airlines, passengers and cargo companies to forgo crowded, overtaxed and many
times 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 regionalization
strategy. Pursuit of the regionalization objective helped cause ONT to serve airport-high
numbers 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 a
huge decline in air service and passengers. Worse still, current LAWA management has
repudiated Los Angeles' obligation to try to expand airline service at ONT. As noted throughout
this claim, some members of the BOAC and LAWA executives have made public statements
indicating 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 produced
significant negative economic and employment consequences for the citizens of the inland
region in particular, and Southern California in general.

In statements to the BOAC and the media, LAWA has suggested that the serious decline
in passenger levels and scheduled air service at ONT is simply due to the decline in the overall
economy. This is fundamentally flawed reasoning for several reasons. First, LAX's finances
and utilization have weathered the economic recession intact and LAX recently enjoyed
increases in passenger and cargo levels and is in the process of spending billions of dollars to
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 4

modernize and expand its terminals. In sharp contrast, passenger levels at ONT have
continued to decline year after year, falling 40.3 percent since 2007 despite the fact that in many
instances ONT is the far more convenient and accessible airport for passenger flights and the
efficient distribution of cargo throughout the Southwestern United States. The current volume of
passengers 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 simply
because of the economic situation in California. In fact, both LAX and ONT are located in
Southern California and ONT is less than 58 miles from LAX. LAWA has simply made it less
beneficial for airlines to serve ONT by implementing policies which make the all-important figure
of 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 larger
nearby airport like LAX that competes for the same carriers and passengers. Baltimore-
Washington International Airport and Fort-Lauderdale International Airport are examples of
thriving secondary airports which have CPE lower than the nearby primary airport. But LAWA
has turned this fundamental concept on its head by making it more expensive for airlines to
serve ONT.

Third, LAWA has refused to make reasonable and appropriate concessions to the
airlines – in the form of fee waivers and other incentives, marketing programs, or otherwise – to
try to entice airlines to retain or introduce new service at ONT. LAWA does not care that an
independent 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 economy
does 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 airlines
to serve ONT. LAWA charges ONT an unnecessary and onerous 15 percent administrative fee
based 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 on
CPE at ONT – in order to benefit LAX's standing in the capital markets. Moreover, LAWA has
allocated a bloated and unnecessary number of highly compensated LAWA staff to the ONT
cost base. These actions have had the natural result of increasing overall costs and chasing
airlines 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 an
aggressive marketing campaign (including if appropriate the use of financial incentives) so that
airlines will commence and enhance service to the airport. In contravention of this established
and 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 the
discontinuance of airline service at Palmdale Regional Airport at the end of 2008.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 5

In addition to breaching its contractual obligation to use its "best efforts" to attract airline
service to ONT, Los Angeles has breached the implied covenant of good faith and fair dealing
and its fiduciary duties and duties of trust owed to Ontario. Los Angeles also has failed to
protect ONT and Ontario against the inherent conflict of interest which exists within LAWA in its
treatment of LAX and ONT as parts of the same local airport system. Los Angeles has made
improvement and modernization of LAX a top priority. The $4.1 billion in construction projects
for LAX are being touted as the "legacy" of the current Administration. See, e.g., "LAX hopes to
dominate the Western skies once again," Los Angeles Times, July 2, 2011 (avail. at
http://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 see
http://www.lawa.org/uploadedFiles/LAXDev/Photos/ADG%20Update%20Feb%202013.pdf; see
also http://travel.cnn.com/los-angeles-airport-815681.

However the enormous debt that LAWA has undertaken to fund these and other projects
at LAX has further intensified LAWA's inherent conflict of interest. To pay the debt owed for the
LAX projects LAWA must maximize airline service and passenger levels at LAX, which means
that marketing dollars are being focused on LAX – not ONT. Further, LAWA must now ensure
that airlines maintain and increase their service levels at LAX, rather than shift operations to
ONT. Additionally, LAWA will use its control over ONT to make sure that the CPE is not
sufficiently 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 ONT
could be considered as a stand-alone airport, without also considering the impact on LAX of any
decision 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 ONT
comprised of at least two Ontario City Council members. Los Angeles has treated ONT like a
distant colony, assuming the role of "colonial governor" rather than a joint venture partner
collaborating in ONT's success.

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

Ontario should never have been saddled with this predicament. The law does not allow
an entity such as Los Angeles to assume ownership and control over another municipality's
airport for all of eternity. Under California law, a joint powers agreement must be for "a definite
term." Cal. Gov't Code sec. 6510. Yet the JPA contains no specified term. In this case the
term of the JPA can reasonably be construed to have already terminated, especially in light of
the fact that Los Angeles ceased honoring its terms several years ago.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 6

For the reasons set forth above and below, Ontario respectfully requests that Los
Angeles agree to (1) rescind the Joint Powers Agreement of 1967 and Acquisition Agreement of
1985; (2) return ownership and control of ONT to Ontario and the OIAA; (3) immediately transfer
management of ONT to the OIAA while the details of items (1) and (2) are worked out between
the parties – so as to avoid further financial harm to ONT, Ontario and its citizens; (4) cease and
desist from violating the "best efforts" obligation in section 9 of the Joint Powers Agreement of
1967; (5) cease and desist from breaching the implied covenant of good faith and fair dealing
owed to Ontario under operative agreements; (6) cease and desist from breaching the fiduciary
duty owed to Ontario in connection with operation of ONT; (7) eliminate the onerous 15 percent
administrative fee charged to ONT; (8) pay damages to Ontario in an amount sufficient to
compensate 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 "in
conjunction with" LAX. (Sec. 1) The JPA states that "the public interest, convenience and
necessity 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 [ONT
and LAX] and to the users of air transportation into and out of Southern California in the event
an 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 to
in 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 the
occurrence of other events, Ontario was required to "transfer such right, title and interest as it
possesses 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 to
support and encourage the continued expansion of airline services at ONT. The clause states:

Continued Development of ONT. Los Angeles shall exercise its best efforts
to attract and obtain additional regular scheduled airline service for ONT
and shall immediately, upon approval of this Agreement, apply to the Civil
Aeronautics Board for change in the certificates of the scheduled carriers
presently serving Los Angeles to specify ONT as a joint-use airport or
hyphenated point with LAX. . . . (JPA sec. 9) (emphasis added).

As is painfully obvious, Los Angeles has failed to use its best efforts to obtain the
necessary airline service for ONT, as required by the JPA, and has failed to use its best efforts
to continue to attract and retain airline service at ONT.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 7

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

The JPA also required Los Angeles to form an Airport Advisory Board to supervise the
operation 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 entering
into the so-called Acquisition Agreement, whereby ownership of ONT was formally transferred
from Ontario to Los Angeles. (Exhibit 2 hereto) The Acquisition Agreement was highly
controversial and the then-Mayor of Ontario, Robert Ellingwood, refused to sign the Agreement
on behalf of ONT.

Although the Agreement transfers ONT to Los Angeles, it conditions the transfer on the
continued 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 agree
to cooperate with each other in continuing to carry out the purposes and
objects of the Joint Powers Agreement which it is agreed shall remain in
full force and effect. (Emphasis added)

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

For Years Los Angeles Made Legitimate Efforts to Attract

And Obtain Additional Regular Scheduled Airline Service at ONT

For many years, Los Angeles took seriously its obligations to use its best efforts to
attract and obtain additional regular scheduled airline service for ONT. From 1980 through
2007, the annual number of passengers at ONT increased from 2 million to 7.2 million. During
the 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 that
it included ONT within the scope of two five-year contracts that BOAC approved in 2001 and
2006 for LA, Inc., The Convention and Visitors Bureau ("LA, Inc.") through 2011. LA, Inc. is a
private, not-for-profit marketing and sales organization contracted by the City of Los Angeles to
promote Los Angeles as a destination for conventions, meetings, and leisure travel from
domestic and international markets. For example, LAWA Resolution No. 22984 (May 16, 2006)
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 8

awarded a five-year contract to LA, Inc. that included several goals and objectives for the
growth 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 to

ONT." (Resolution, at 2; Exhibit A to Resolution, at 1)

• "Implement cooperative sales promotions with airlines offering direct

service 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 between
Mexico 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, or

Even Retain, Airline Service and Passengers for ONT

LAWA has ceased trying to attract or even retain airline services and passengers for
ONT. For all intents and purposes, LAWA officials have abandoned the regionalization policy to
focus on LAX rather than ONT. Although the BOAC has continued to approve the expenditure
of 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 at

ONT. By contrast, LAWA budgeted only $142,000 for advertising and public relations for ONT
for 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 spent
nearly $7 million for advertising and public relations at LAX. For 2010, LAWA's expenditures for
advertising 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 FY
2013, an increase from the $173,000 for FY 2012. So LAWA is spending less for advertising
and 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 to
award a new contract to LA, Inc. that excludes ONT from the scope of services – in sharp
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 9

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

I just wanna be clear, or get confirmation, this [new LA, Inc.] contract that the
board 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 only
for 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 of
marketing expenses to capitalize on the ONT's proximity to vacation destination spots such as
Disneyland. 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 to
ONT. 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 at
ONT – but this is something that LAWA repeatedly refused to do.

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

Moreover, when airline service was terminated at Palmdale Regional Airport, the Mayor
of 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 money
that LAWA could have used to materially lower CPE at ONT, or to fund incentives for new ONT
airline service. Instead, LAWA decided to use that savings at LAX.

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

When we talk about regionalization I guess it's heresy to say what we should be
thinking about is how to get more traffic to LAX. But you know, I think that's
also a serious economic reality, that it may have all been for the wrong reasons
that 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 be
done 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 a
strategy 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)
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 10

Also, in direct contrast to LAWA's successful effort in late 2011 to increase the number
of U.S. Customs and Border Protection ("CBP") at LAX, LAWA did nothing to persuade CBP to
remain at ONT, implying instead that CBP might no longer staff a Customs post at ONT in the
first quarter of 2012. In a November 22, 2011 letter to Ontario's Mayor, LAWA's Executive
Director 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. He
now splits his time managing Van Nuys Airport. No other U.S. airport in the same category as
ONT has a part-time manager.

In a Los Angeles City Council meeting on October 10, 2012, councilmember Richard
Alarcon 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 City’s effort to protect
LAX at the expense of ONT indeed has paid dividends, resulting in an increase in passenger
traffic at LAX of 3.8% while passenger traffic at ONT continued to fall to levels not seen for
almost 30 years.

Los Angeles Has Put ONT Into a Financial and

Operational "Death Spiral"

Los Angeles's decision no longer to attract or retain airline service and passenger levels
at ONT has had a disastrous effect at ONT. The number of passengers using ONT has
precipitously declined, from 7.2 million passengers in 2007 to 4.31 million in 2012, a decline of
40.3 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 same
period in 2010. This downward trend continued from 2011 to 2012 and is expected to continue
this year. The number of passengers using ONT in 2012 is as low as it has been since the mid
1980s.

The following Chart 1 shows the steep decline in passenger levels at ONT since 2007:
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 11

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

Until Recently

Annual Passengers at ONT (Millions)

1980-2012

8,000,000

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 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 dramatic
occurs to halt it. In October 2012, LAWA released passenger figures that show passenger
traffic at ONT decreased 6.9% between fiscal year 2011 and 2012. During the same time
frame, LAX's traffic increased by about 3.8 percent.

The following Chart 2 shows by percentage the decline in scheduled air service at ONT
since January 2011 and as projected to continue through October of this year:
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 12

Chart 2 – Ontario Continues to Lose Air Service – With Even Deeper

Cuts in the Months Ahead

Scheduled Seats at Ontario International Airport

Compared to Prior Year Same Month
January 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 to
ensure 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 57,827,501
persons. In December 2010, LAWA's Deputy Executive Director and Comptroller stated that:

Passenger and cargo traffic at LAX has shown encouraging growth. Passenger
traffic 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 2010
Financials, Dec. 6, 2010)
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 13

The situation continues to improve at LAX. As of June 2011, LAX had increased
domestic traffic by 6.47 percent and international traffic by 4.84 percent in comparison to the
same period in 2010, for a total increase of 6 percent in passenger traffic since 2010. Through
the end of fiscal year 2012, passenger traffic at LAX grew to 62.9 million, a 3.8 percent increase
over 2011, while ONT’s 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 has
fallen, LAX's market share has increased from 69.6 percent to 74.2 percent between 2007 and
2012. Moreover, LAWA is spending billions to modernize and expand LAX and is pursuing new
carriers 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 Adams
of Leigh Fisher (formerly Jacobs Consultancy) has acknowledged, ["w]hen you look at Ontario
as compared to other medium hub airports in the U.S., also in the L.A. basin, also for the West
Coast, it's been one of the most severely affected airports with respect to passenger levels and
seats." (Tr. BOAC Meeting, Aug. 2, 2010, at 2) The following Charts 3 and 4 demonstrate how
much more poorly ONT has fared compared with other airports:

Chart 3 – ONT in Perspective (2000-2011)

2000-2012 Passenger Growth Comparison

Indexed to 2000=1.00
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 14

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 has
suggested, to a purported industry trend to de-emphasize secondary airports in favor of large
hubs. Using LAWA’s 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 even
Cincinnati does not fare as badly as ONT once connecting passengers are excluded. ONT’s
drop in passengers is by far the worst of the Los Angeles area airports. Moreover, the situation
at Oakland and San Jose Airports is vastly different because those two airports have
experienced healthy passenger growth in recent years, while ONT has suffered
disproportionately 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 highest
in the United States for comparable airports due specifically to costs over which LAWA
exercises control. Costs have been driven so high as a result of LAWA's actions, that airlines
cannot afford to maintain and expand levels of service. During the past four years, JetBlue and
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 15

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 the
middle of the day for lack of customers. LAWA has largely refused to take significant cost
cutting 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's
consultant, 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 the
airlines 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 percent
decline 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 has
a 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 lower
than the primary airport in the region – LAX – and competitive with the other secondary airports
in the region. However, LAWA, despite its ability as manager to reduce such costs, has caused
the CPE at ONT to be higher than 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 Angeles
region – including higher than the CPE at LAX – and nearly twice as high as the U.S. median
CPE.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 16

Chart 5 – Cost per Enplaned Passenger

Source: Fitch Ratings reports issued in 2011 for Burbank, John Wayne, LAX, Long Beach, and
Ontario. FAA Form 127 financial reports. Moody’s U.S. Airport Medians for FY 2010

Fitch stated in March 2013 that ONT's "[s]trategic cost management is critical to avoid
increases 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 is
critical 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 unrestricted

cash than necessary. According to Fitch, ONT's "[u]nrestricted cash position of $104 million in
fiscal 2012 is greater than the amount of debt outstanding and equivalent to 622 days cash on
hand." Fitch's 3/11/13 Press Release. This cash position is significantly higher than the
average 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 has
refused to use this clear opportunity to pay down debt and take further actions that could
significantly and materially reduce CPE at ONT.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 17

LAWA Allocates Far Too Many Employee Costs to ONT

Another significant aspect of the high ONT costs is the number of employees that LAWA
has allocated to the ONT budget, and the relatively high average compensation of those
employees. LAWA has hired many more airport employees assigned to ONT (and its cost
base) than are necessary to operate an airport of its size. Similarly-sized airports in the region
operate 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 with
unnecessary employees renders its CPE artificially higher, and makes it that more difficult for
ONT to retain and attract new air service. Although the number of employees allocated to ONT
has decreased to approximately 270, this is still at least 100 employees too high. Moreover, as
of 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 more
employee 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 amount
of operating expenses. LAWA's budget for FY 2012 – approved in June 2011 – lists total
operating expenses for ONT of $64,701,000. On this amount LAWA imposes the 15 percent
charge, which amounts to $8,439,000. This charge directly increases the CPE that airlines
must pay to serve ONT from $9 to $13, a huge difference. By contrast, LAWA imposes no
similar 15 percent administrative charge at LAX.

The deteriorating situation at ONT is having a "death spiral" effect. As airlines continue
to reduce service to ONT, costs for the remaining airlines increase because such costs are
shared among the airlines that serve ONT. As more airlines leave, the remaining carriers must
take 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 to
ONT. As Mr. Adams stated:

If you have fewer passengers which you do [at ONT], you have fewer non-airline
revenues, more costs are paid by the airlines and you have fewer passengers
going through so that unit costs goes up. So there's almost like a multiplier affect
with 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 presentation
to the BOAC which suggested that the BOAC explore the possibility of shutting down one of the
two 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.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 18

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

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

• LAWA continues to rebuild LAX as its "showcase" airport while simultaneously

neglecting ONT and "starving" it out of viable existence.

• Passenger levels at ONT decreased over 40 percent from 2007 to 2012, from 7.2 million
to 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 74.2
percent in 2012.

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

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

• ONT continues to have among the highest airline rates and charges in the United States
among small and medium hub airports. LAWA's cost structure cannot work at ONT. As
long 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 budgeted
amount of about $12.71 for FY 2012. The number of Full Time Equivalent Employees
per million enplaned passengers in FY 2011 was nearly twice as high as the average for
medium 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 enplaned
passenger was $12.68 compared with $6.93 as the average for medium hub airports in
the United States. (Id. at 42)

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

• In FY 2011 the Operations and Maintenance costs at Ontario were $13.69 per enplaned
passenger versus $9.86 for the average for medium hub airports in the United States.
(Id. at 44)
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 19

• LAWA continues to impose the 15 percent administrative fee at ONT – despite not
charging a similar fee at LAX – and despite the fact that the existence of that fee
permanently hamstrings the ability of ONT to be a viable competitor. LAWA's own
consultant acknowledges that "If the Administrative Fee were not charged for FY 2013,
the Airport’s 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 to
City 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. Its
own consultant concedes that there has not "been a robust and well-funded campaign to
attract new routes and/or additional frequencies on existing routes, generally referred to
as 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 smaller
airports as the airlines often are not as familiar with specific characteristics of the
catchment 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” is
the “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 the
only 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 two
times a year in prior years.

• The ONT marketing and advertising budget has virtually been eliminated, decreasing
from the millions of dollars allocated as recently as 2005 to 2007 (when passenger traffic
reached 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 the
savings 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 air
cargo center at ONT.

• LAWA has failed to take steps to ensure CBP retains Customs officers at ONT in the
future.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 20

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

"The Executive Director should identify an executive-level champion in charge of

Regional Airport Affairs to further efforts toward regionalization of the LAWA
system and the other airports in the region." (Page I-7) (emphasis in original)

"LAWA should leverage airlines' requests to optimize regional capacity by

encouraging more regionally balanced growth as airline traffic begins to increase
again." (Page I-8) (emphasis in original)

"Assign dedicated air service marketing staff to ONT" to "work closely with the economic
development activities in the ONT surrounding communities – San Bernardino County,
City of Ontario, City of Claremont, and others – and support trade missions and other
activities 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 might
request 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 on
successful 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) aggressive
marketing, and (3) airport management focused on developing ONT. However, Los Angeles
has 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 has
recently indicated plans to undertake some superficial actions which it claims could perhaps
assist Ontario. However, such steps are meaningless – like rearranging the deck chairs on the
Titanic. They also are far too little. In 2007, ONT employed four times as many employees as
the average medium-sized airport. Although the current level has been reduced to two times
the average number, that figure is still too high. Moreover, the 15 percent administrative fee has
the effect of increasing the figure back to three times the average. Los Angeles continues to
cripple ONT's efforts to compete. Ultimately, Los Angeles’s desire to renovate, expand and
promote LAX, and preclude legitimate competition by ONT, undercuts any lip service it pays to
assisting 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 for
the significant problems facing ONT. It has met on multiple occasions with LAWA officials and
representatives from the Los Angeles Mayor's Office and City Council – but with no measurable
progress or success even though the situation at ONT grows more urgent by the day. All the
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 21

while LAWA and Los Angeles have remained steadfast in their unwillingness to honor the terms
of the JPA and Acquisition Agreement, or to return ONT to Ontario on fair and reasonable
terms. Instead, LAWA commissioned a valuation of ONT based on numerous erroneous and
inapplicable assumptions, the implication being that Ontario should agree to pay Los Angeles a
sum 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 and
there never has been a transfer of an airport from one public entity to another involving a cash
payment for the airport property and operations. In this instance, such a payment is particularly
unwarranted because LAWA and Los Angeles have not paid or invested any sums for ONT’s
benefit that have not been reimbursed through LAWA's exorbitant 15 percent administrative fee
or 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 it
with a high debt burden. In other words, if it keeps the airport, it can avoid the competition from
ONT, and if it only releases ONT for a high price, it will leave ONT permanently in a position
where it cannot be an effective competitor.

During this period of time LAWA has continued to fail to meet its obligations under the
JPA and Acquisition Agreement, and the financial situation at ONT has continued to spiral
downwards. Notwithstanding the dire situation at ONT and the significant economic impact
ONT has on all of Southern California and on the livelihoods of those citizens in the inland
region, LAWA officials and Los Angeles officials appear unwilling to take the necessary steps to
save 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, but
such efforts have continually been thwarted.

In connection with its rejection of the Ontario proposal, Los Angeles procured the Acacia
Report. Although the preparation of the Report was managed by Los Angeles, the Report is
highly 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 routes
because 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 its
structural strengths. The Airport "is uncongested in comparison to other airports in the
Region and has fewer noise abatement rules than other airports such as SNA, located in
Orange County and [Long Beach]. The Airport's long runways make it an important
alternate for international flights and offer the potential for intercontinental flights by
wide-body aircraft." (Id. at 45)
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 22

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

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

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

Significantly, Acacia concluded that it "is possible that there may be more value inherent in the
proposal 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 possible
repayment of approximately $125.0 million in LAX PFCs as compared to the other options
discussed." Id. at 68 (emphasis added).

II. CLAIMS FOR RELIEF

Ontario's preference is to resolve the issues relating to LAWA's operation, management

and 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 set
forth herein, Ontario intends to seek relief based on the following claims. Ontario also retains its
rights to amend or supplement these claims.

1. Los Angeles Has Continually and Materially

Breached the Joint Powers Agreement.

Los Angeles's treatment of ONT – as detailed above – constitutes an egregious and

material breach of section 9 of the JPA, which requires Los Angeles to "exercise its best efforts
to 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 85
percent. 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, and
continues to fall.

The culmination of Los Angeles's breach of the "best efforts" clause was BOAC's
decision on October 3, 2011 to approve a new marketing contract with LA, Inc. that focuses
solely on LAX, and excludes ONT from its scope, and the even more recent decision of the
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 23

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

A "best efforts" clause "requires a party to make such efforts as are reasonable in light of
that 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). An
obligation to use one's "best efforts" requires more than just "good faith." As the Samica court
explained:

Courts [and Plaintiffs] sometimes confuse the standard of best efforts with that of
good faith. . . . Good faith is a standard that has honesty and fairness at its core
and that is imposed on every party to a contract. Best efforts is a standard that
has diligence as its essence and is imposed only on those contracting parties
that have undertaken such performance. The two standards are distinct and that
of best efforts is the more exacting.2

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

As set forth above, Los Angeles's breach of the JPA and ONT's resulting loss of
passenger 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 demands
that 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 in
passenger volumes and airline service at ONT is due solely (or even primarily) to the state of
the economy. Despite the economic problems in the Greater Los Angeles Area, Los Angeles
has 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 it
has.

Nor can Los Angeles legitimately assert that it has no control whatsoever over the
decisions 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 wield
over airline decisions in terms of the costs incurred to serve an airport, and the marketing that is
aimed at airlines. After LAWA decided to subject ONT to excessive costs-per-enplaned
passengers by way of unnecessary staffing costs and the exorbitant "administrative fee," and to
slash the budget for marketing airlines to serve ONT, it is all too convenient for LAWA to throw
up its hands and say that airlines make their own decisions.
2
Whether 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).
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 24

Ontario requests recovery of the damages it has incurred because of Los Angeles's
failure to comply with its obligation to use "best efforts" to attract airline service to ONT. Ontario
also seeks rescission of the JPA and the Acquisition Agreement. A material breach of contract
warrants 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 rescission
upon the fact of a material breach").

2. Los Angeles has Breached the Implied Covenant

of 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 has
breached the covenant of good faith and fair dealing and frustrated Ontario's right to receive the
benefits 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 a
contracting party from engaging in conduct which (while not technically transgressing the
express 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) (citation
and internal quotations omitted). The covenant of good faith is particularly applicable where, as
here, one party is invested with a discretionary power affecting the rights of another -- such
power 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 obtain
additional regular scheduled airline service for ONT," but also to "use its best efforts to make
funds 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 such
airports [ONT and LAX], to Ontario, to Los Angeles and to the users of air transportation into
and out of Southern California in the event an efficient and equitable method of joint operation of
said airports could be arranged." Id. at 2. These terms, in addition to others, indicate that the
intent of the JPA was to turn over operation and management of ONT to Los Angeles for the
purposes of continued development of ONT, the development of further regularly scheduled
airline service for ONT, and the efficient and equitable operation of ONT for the benefit of
Ontario and the entire inland region's economic well being. Los Angeles' neglect and
mismanagement of ONT and other misconduct alleged herein has frustrated and injured
Ontario's right to receive the benefits of the JPA, resulting in economic and monetary damage to
Ontario.

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

3. Los Angeles Has Breached Its Fiduciary

Duty Owed to Ontario.

Through its treatment of ONT, Los Angeles has breached the fiduciary duty owed to
Ontario. "The existence of a fiduciary duty . . . depends on whether the parties were in a joint
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 25

venture with each other, since partners or joint venturers have a fiduciary duty to act with the
highest 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 confidential
relationship can arise when confidence is reposed by persons in the integrity of others, and if
the latter voluntarily accepts or assumes to accept the confidence, he or she may not act so as
to 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, like
a joint venture, Los Angeles and Ontario undertook to carry out "an efficient and equitable
method of joint operation of" LAX and ONT under the JPA. Exhibit 1 at 2. See Pellegrini, 165
Cal. App. 4th at 525 ("[t]he essential element of a joint venture is an undertaking by two or more
persons to carry out a single business enterprise jointly for profit").

The fiduciary duty owed by Los Angeles to Ontario requires, at a minimum, that Los
Angeles not subordinate the interests of Ontario and ONT to those of LAX. Yet that is precisely
what Los Angeles has done. After the economy experienced a downturn, Los Angeles decided
to "protect" its favored airport – LAX – to the detriment of ONT. Los Angeles failed to ensure
that the CPE at ONT was reasonable, and slashed the marketing budget at ONT, the
combination of which ensured that airline service and passenger levels at ONT would
significantly decline. By contrast, during the same period Los Angeles managed to ensure that
LAX continued to thrive. See O'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 steps
to manage the property to preserve it for the purpose and uses for which it was constructed and
granted 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 manifestly
harmful to the party to which it has obligations").

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

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

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

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

• Gutting and virtually eliminating the marketing and advertising budget for ONT, and
excluding ONT from the scope of the LA, Inc. marketing contract approved by the BOAC
in October 2011.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 26

• 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 concrete
efforts 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 programs
and initiatives, including, without limitation, the TBIT construction projects.

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

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

• Rejecting the suggestions of the Regionalization Consultant to increase air service and
passenger 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 and
public statements of City officials that LAX needs to "be protected" from competition with
ONT.

Los Angeles has made sure that the interests of LAX are paramount, even when
decisions are made regarding ONT. Los Angeles should have recognized its inherent conflict of
interest in operating both LAX and ONT and taken measures to ensure an appropriate level of
independence 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, general
partner set up "independent special committee" to evaluate the transaction on behalf of limited
partners). Where, as here, a fiduciary has conflicting loyalties, affirmative steps must be taken
to eliminate or at least minimize the impact of the conflict. Thus, once LAWA decided to
promote 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 Rescinded

And ONT Should Be Returned to Ontario and OIAA.

The JPA is invalid and should be rescinded, in whole or in part, because it improperly
purports to last for an infinite period of time. California law only authorizes joint powers
agreements for a "definite term." Cal. Gov't Code sec. 6510 states:
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 27

The agreement may be continued for a definite term or until rescinded or

terminated. The agreement may provide for the method by which it may be
rescinded or terminated by any party. (Emphasis added).

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

Under California Civil Code section 1689(b)(6), rescission is appropriate if "the public
interest will be prejudiced by permitting the contract to stand." The public interest of the citizens
of the City of Ontario will be severely prejudiced if the JPA and Acquisition Agreement are
permitted 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 because
Ontario officials lacked authority to relinquish ownership and control of the local airport for an
indefinite and possibly infinite time period. A contract that purports to surrender or impair
governmental power is "invalid as contrary to public policy if the contract amounts to a
municipality'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 Mobilehome
Positive Action Com., Inc. v. County of San Diego, 62 Cal. App. 4th 727, 736, 73 Cal. Rptr. 2d
409 (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 its
governmental . . . functions, a municipality cannot make contracts which will embarrass or
control its legislative powers and duties, or which amount to an abrogation of its governmental
function or its police power") (citation and internal quotation marks omitted).

Operation of a local airport is a key municipal function, and Ontario officials had no
authority to convey the city airport out from under the city – especially not to a third party
municipality which owned its own, competing airport and which has an untenable conflict of
interest 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 powers
agreement, "a city may not delegate discretionary powers in such a way that results in a total
abdication 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 of
duration, "California courts have not hesitated to imply a term of duration when the nature of the
contract 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 continuing

performance or forbearance which contain no express term of duration, must
always be that of implying a term of duration commensurate with the intentions of
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 28

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

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

An implied term of reasonable duration should be read into the JPA, after which any
party 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 to
immediately terminate the JPA and take back management and control of ONT.

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

III. INFORMATION REQUIRED BY CALIFORNIA

GOVERNMENT CODE SEC. 910

1. The Name and Post Office Address of the Claimant.

City of Ontario
c/o Mr. Chris Hughes
City Manager
City of Ontario
303 East B Street
Ontario, California 91764-4196
chughes@ci.ontario.ca.us

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

Claim Desires Notices to be Sent.

Roy Goldberg, Esq.

Sheppard Mullin Richter & Hampton, LLP
1300 I Street, N.W.
Suite 1100 East
Washington, D.C. 20005-3314
Tel. (202) 218-0007
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 29

Fax (202) 312-9425

Email: rgoldberg@sheppardmullin.com

Andre J. Cronthall, Esq.

Sheppard Mullin Richter & Hampton, LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071-1448
Tel. (213) 620-1780
Fax (213) 620-1398
E-Mail: acronthall@sheppardmullin.com

3. The Date, Place and Other Circumstances of the Occurrence or

Transaction 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 of
the 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 civil
case.

IV. CONCLUSION

For the reasons stated above, claimant City of Ontario respectfully requests that the City
of 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 Airport
to the City of Ontario and OIAA; (3) immediately transfer management of ONT to the OIAA while
the details of items (1) and (2) are worked out between the parties – so as to avoid any further
financial harm to ONT, Ontario and its citizens;(4) cease and desist from violating the "best
efforts" 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) cease
and desist from breaching the fiduciary duty owed to Ontario in connection with the operation of
ONT; (7) eliminate the onerous 15 percent administrative fee charged to ONT; (8) pay damages
to Ontario in an amount sufficient to compensate 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.
Ms. Sandra J. Miller, et al.
April 11, 2013
Page 30

Sincerely,

/s/ Roy Goldberg

/s/ Andre J. Cronthall

Roy Goldberg
Andre J. Cronthall
for SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
SPECIAL Counsel for City of Ontario, California
SMRH:200806799.1

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

cc: Gina Marie Lindsey, Executive Director, LAWA

Michael A. Lawson, Esq., President, Board of Airport Commissioners
Raymond S. Ilgunas, General Counsel, LAWA
Hon. Antonio Villaraigosa, Mayor, City of Los Angeles
Herb Wesson, President, City of Los Angeles City Council

(VIA MESSENGER)