Filed 2/13/15 Malkenhorst v. CalPERS CA2/7
                  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.


              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     SECOND APPELLATE DISTRICT

                                                DIVISION SEVEN


BRUCE V. MALKENHORST, SR.,                                           B247676

         Plaintiff and Appellant,                                    (Los Angeles County
                                                                     Super. Ct. No. BS141275)
         v.

CALIFORNIA PUBLIC EMPLOYEES’
RETIREMENT SYSTEM et al.,

         Defendants and Respondents.




         APPEAL from an order of the Superior Court of Los Angeles County, Robert H.
O’Brien, Judge. Affirmed.
         Law Offices of John Michael Jensen and John Michael Jensen for Plaintiff and
Appellant.
         Gina M. Ratto, Interim General Counsel, and Wesley E. Kennedy, Senior Staff
Attorney, for Defendants and Respondents.


                                         ________________________
                                    INTRODUCTION


       Bruce V. Malkenhorst, Sr. (Malkenhorst) appeals from an order sustaining without
leave to amend the demurrer filed by the California Public Employees’ Retirement
System (CalPERS) and its Board of Administration (Board) and dismissing the action. In
this action, Malkenhorst seeks to prevent CalPERS from reducing his pension and to
“abate” the ongoing administrative proceedings to address calculation of his pension.
This case follows Malkenhorst’s failed effort in the Orange County Superior Court (the
Orange County action) to obtain the same relief—indeed, in that action Malkenhorst
sought to stop the same administrative proceeding challenged here. In the Orange
County action, the trial court likewise sustained a demurrer and entered a judgment for
CalPERS, which was affirmed on appeal by the Fourth District. (Malkenhorst v.
California Public Employees’ Retirement System (Apr. 23, 2014, G047959) [nonpub.
opn.] [2014 Cal.App.Unpub. LEXIS 2869].)
       The trial court in this case sustained the demurrer on the grounds Malkenhorst
failed to exhaust his administrative remedies; the Orange County Superior Court had
exclusive jurisdiction over the matter because the then-pending Orange County action
raised the same issues; and Malkenhorst failed to join the City of Vernon (Vernon) as an
indispensable party.
       On appeal, Malkenhorst challenges each of these determinations. As to his
asserted failure to exhaust administrative remedies, Malkenhorst argues that in 2006
CalPERS determined that his pension complied with the Public Employees’ Retirement
Law (PERL; Gov. Code, § 20000 et seq.) and it is now barred by res judicata and
collateral estoppel from reducing his pension in the administrative proceeding
commenced in 2012. Malkenhorst argues that the trial court, not the Office of
Administrative Hearings (OAH) considering his administrative appeal, should decide the
questions of res judicata and collateral estoppel. Further, Malkenhorst contends he is
excused from exhaustion because there is no administrative procedure for raising res
judicata or collateral estoppel as a “threshold issue” in the administrative proceeding, but

                                             2
rather, he would first need to relitigate the validity of his pension under the PERL.
Notwithstanding this argument, Malkenhorst has asserted the doctrines of res judicata and
collateral estoppel as defenses in the administrative proceeding.
       Malkenhorst’s arguments have been raised and rejected in the Orange County
action as affirmed by the opinion of our colleagues in the Fourth District. While the
Fourth District addressed the question of exhaustion of administrative remedies with
respect to the constitutional issues raised in the Orange County action, we address
whether Malkenhorst must exhaust his administrative remedies with respect to his
defenses of res judicata and collateral estoppel raised below. We find that he does.1
       The OAH and the Board in the pending administrative proceeding can and should
address Malkenhorst’s affirmative defenses of res judicata and collateral estoppel prior to
Malkenhorst proceeding in a civil action. We therefore find this action is barred by
Malkenhorst’s failure to exhaust his administrative remedies and affirm on that basis.


                 FACTUAL AND PROCEDURAL BACKGROUND


A. CalPERS’s Administration of the PERL
       The PERL established CalPERS to administer the statute and manage pensions for
public employees. CalPERS’s Board manages and controls the system (Gov. Code,
§ 20120), makes “such rules as it deems proper” (id., § 20121), and determines who are
employees and which employees are entitled to receive retirement benefits (id., § 20125).
The Board “is the sole judge of the conditions under which persons may be admitted to
and continue to receive benefits” under the PERL (id., § 20125) and may hold a hearing


1       Because we affirm the court’s order finding that jurisdiction rested with CalPERS
and the Board in the first instance to address Malkenhorst’s claim that CalPERS’s action
was barred by res judicata and collateral estoppel and that Malkenhorst has failed to
exhaust his administrative remedies, we need not reach the questions of whether the
Orange County Superior Court had exclusive jurisdiction or whether Malkenhorst failed
to join Vernon as an indispensable party.


                                             3
“for the purpose of determining any question presented to it involving any right, benefit,
or obligation of a person under” the PERL (id., § 20134). The Board has the power to
correct errors and omissions with respect to active and retired members. (Id., §§ 20160,
20164.) Correction of errors and omissions is retroactive unless retroactive correction is
not possible or is not consistent with the purposes of the PERL. (Id., § 20160, subd. (e).)
       “Under the PERL, the determination of what benefits and items of pay constitute
‘compensation’ is crucial to the computation of an employee’s ultimate pension benefits.
The pension is calculated to equal a certain fraction of the employee’s ‘final
compensation’ which is multiplied by a fraction based on age and length of service.
[Citations.]” (City of Sacramento v. Public Employees Retirement System (1991) 229
Cal.App.3d 1470, 1478, fn. omitted; accord, Molina v. Board of Administration (2011)
200 Cal.App.4th 53, 64.) “‘Final compensation’ is the ‘highest average annual
compensation earnable by a member during the three consecutive years of employment
immediately preceding the effective date of his retirement’ or other designated
consecutive three-year period. [Citation.]” (City of Sacramento, supra, at pp. 1478-
1479, fn. omitted; accord, Molina, supra, at pp. 64-65.)
         “Compensation earnable” includes a member’s “payrate” and “special
compensation.” (Gov. Code, § 20636, subd. (a).) An employee’s “payrate” is “the
normal monthly rate of pay or base pay of the member . . . pursuant to publicly available
pay schedules, for services rendered on a full-time basis . . . .” (Id., § 20636, subd.
(b)(1).) The payrate does not include overtime, defined in part as pay for time spent in a
part-time position where the employee also provides services in a full-time position. (Id.,
§ 20635.) “Special compensation” includes “a payment received for special skills,
knowledge, abilities, work assignment, workdays or hours, or other work conditions.”
(Id., § 20636, subd. (c)(1).)
       Under the PERL, a member who is dissatisfied with a CalPERS action may appeal
to the Board by filing a written notice of appeal. (Cal. Code Regs., tit. 2, § 555.1.) The
member is then entitled to a hearing, and CalPERS must execute a statement of issues
(SOI). (Id., § 555.2.) An administrative law judge (ALJ) from the OAH conducts the

                                              4
hearing pursuant to the Administrative Procedures Act (APA; Gov. Code, § 11500 et
seq.). (Gov. Code, § 20134; Cal. Code Regs., tit. 2, § 555.4.) “All proposed decisions of
hearing officers shall be referred to the Board.” (Cal. Code Regs., tit. 2, § 555.4.) A final
decision by the Board is reviewable by petition for writ of administrative mandate. (Gov.
Code, § 11523; Code Civ. Proc., § 1094.5.)


B. Malkenhorst’s Employment with Vernon and CalPERS’s Initial Determination of
His Retirement Benefits
       Vernon hired Malkenhorst in September 1975. In September 1978, Vernon
created the position of City Administrator as its top administrative position, and the city
council appointed Malkenhorst to that position.
       In early 1995, CalPERS began an administrative investigation of Malkenhorst’s
pension. It requested information on the salary schedules for employees in the same
group or class of employees. Vernon responded “that there is not another closely related
management position. Mr. Malkenhorst serves as the City Administrator/City Clerk, City
Treasurer, Director of Finance and Personnel, Purchasing Agent, Executive Director of
Light & Power, and Executive Director of the Redevelopment Agency.” CalPERS
informed Vernon, “It would be logical that Mr. Malkenhorst would receive retirement
benefits calculated on the position of City Administrator/City Clerk. However, the other
duties for the positions listed . . . would be considered overtime.” CalPERS requested
information as to the duties and pay schedules for each of the positions and the
percentage of time spent in each position. In 1996, CalPERS ended its administrative
investigation without taking any action.2
       Malkenhorst retired effective July 1, 2005. On July 18, 2005, CalPERS notified
Vernon by letter that it had reviewed Malkenhorst’s reported compensation. Vernon had
reported Malkenhorst’s pay rate to be $44,128 per month, which included a 25 percent


2      The record is silent as to any communications between CalPERS and Malkenhorst
leading up to CalPERS ending its investigation.


                                             5
longevity payment.3 CalPERS stated its position that the longevity pay did not qualify as
special compensation within the meaning of the California Code of Regulations, title 2,
section 571, and therefore could not be included in his earnable compensation for
purposes of calculating his pension. CalPERS indicated in the letter that it intended to
calculate Malkenhorst’s retirement benefit based on a pay rate of $35,302, which
excluded the longevity benefit. CalPERS notified Vernon that it had 30 days in which to
appeal this decision pursuant to the California Code of Regulations, title 2, sections 555
through 555.4.
       On August 11, 2005, Vernon filed a notice of appeal with CalPERS. In its appeal,
Vernon claimed that its “Longevity Program” included city employees and city council
members in the same benefit class, and Malkenhorst’s base pay was “only for the single
full time job of the City Administrator which includes numerous duties.” Vernon took
the position that Malkenhorst’s entire pay, including longevity pay, should be considered
as part of his earnable compensation for the purpose of calculating his pension.
       In a September 23, 2005 letter, CalPERS responded that all of the positions held
by Malkenhorst, other than City Administrator, would be considered overtime and not
considered for calculation of his retirement benefits, and it rejected Vernon’s arguments
regarding its “Longevity Program.” CalPERS also requested additional information as to
Malkenhorst’s base pay. Malkenhorst alleges that CalPERS’s position was based in part
on the information it obtained in its 1995 investigation. In response, on November 3,
2005, Vernon again addressed both the longevity pay and overtime issues.
       Nine months later, on August 17, 2006, CalPERS sent a letter to Vernon finding
that Malkenhorst’s compensation, including calculation of his longevity pay “would be
allowed.” CalPERS states in the letter that it “has determined that setting differing levels



3      “Longevity pay” is defined under title 2, California Code of Regulations, section
571, subdivision (a)(1), as “[a]dditional compensation to employees who have been
with an employer, or in a specified job classification, for a certain minimum period of
time exceeding five years.”

                                             6
of payrate or special compensation by date of hire may be allowed.” CalPERS stated it
would notify the Benefits Division to adjust Malkenhorst’s retirement allowance.
CalPERS notified Malkenhorst on November 30, 2006 that his new monthly allowance
would be $40,022.66, based on final compensation of $44,128 per month, and that he
would receive a retroactive adjustment of $136,083.13.


C. CalPERS Makes a Preliminary Determination that Malkenhorst’s Retirement
Benefits Must Be Adjusted Downward
       On May 25, 2012, CalPERS notified Malkenhorst that it had conducted an audit of
Vernon and a review of the compensation reported by Vernon for Malkenhorst.
CalPERS states in its letter: “Based upon information provided by [Vernon] in its payroll
reports and additional information provided in the current audit process, CalPERS has
preliminarily concluded that your retirement allowance will require a downward
adjustment.” CalPERS stated that it had “investigated your final compensation amount
and has preliminarily concluded that it appears to have been erroneously calculated at the
time of your retirement because it included reported pay amounts that are not authorized
by the PERL.”
       CalPERS explained that the publicly available pay schedules provided by Vernon
in support of Malkenhorst’s pay amounts fail to comply with California Code of
Regulations, title 2, section 570.5, subdivision (a)(2), (4) and (6), in that they “fail to
show the payrate for each identified position” or “to indicate the time base” for each
position. CalPERS stated it could not identify a salary that meets the payrate definition
paid solely for the normal duties performed in the position of City Administrator.
Further, “[i]nformation provided by [Vernon] suggests that the payrate for City
Administrator was increased over the years as additional duties and positions were added
to [Malkenhorst’s] responsibilities. The pay associated with such additional duties and
positions does not constitute compensation earnable and should not have been used in the
calculation of [Malkenhorst’s] retirement benefits.” (Fn. omitted.)



                                               7
       CalPERS also noted that Malkenhorst received 25 percent longevity pay, while
“all other similarly situated city management positions received only 20 percent of base
pay for 25 years of service.” His longevity pay therefore did not meet the criteria listed
in California Code of Regulations, title 2, section 571, subdivision (b)(2).
       CalPERS took the position that if the compensation of an employee has been
reported in error and “that amount does not constitute compensation earnable as defined
in the PERL, then CalPERS has a duty to correct the error.” CalPERS gave Malkenhorst
until June 25, 2012 to submit documentation supporting his claim to compensation at the
current rate. CalPERS informed Malkenhorst that, if after review of that documentation
CalPERS’s preliminary determination remained unchanged, it would reduce
Malkenhorst’s benefits and it might also seek to collect overpayments made to him.
       Malkenhorst submitted a response on July 25, 2012. He claimed that CalPERS
had no jurisdiction to reduce his pension because it was collaterally estopped by its prior
decision to approve his pension, the statute of limitations for correcting a mistake had
run, and his current pension was a property interest that could not be reduced without a
hearing. Malkenhorst additionally claimed that CalPERS’s decision to reduce his
pension violated Vernon’s constitutional autonomy and Malkenhorst’s “constitutionally
protected and vested contract rights.” Malkenhorst also argued that his compensation
met PERL requirements.


D. Malkenhorst Files an Action Against CalPERS in Orange County Superior Court
       On August 3, 2012, prior to CalPERS issuing its final decision, Malkenhorst filed
a complaint for declaratory and injunctive relief and petition for writ of mandate against
CalPERS and the Board, naming Vernon as a real party in interest. (Malkenhorst v.
Board of Administration (Super. Ct. Orange County, 2012, No. 00588466).)4 The
complaint sought “to prohibit CalPERS from violating Malkenhorst’s rights and the



4      Malkenhorst filed the action in Orange County as a resident of that county.


                                             8
constitutional autonomy of [Vernon], a Charter City, on internal governance and
compensation issues.” Specifically, the complaint sought a declaration that CalPERS
cannot use the PERL or its regulations to reduce the compensation for Malkenhorst
designated by Vernon, as a Charter City; an injunction to prevent CalPERS from
reducing his compensation; and a writ of mandate to compel CalPERS to use the highest
base pay designated in Vernon’s pay schedules to calculate Malkenhorst’s pension.
      CalPERS demurred on the ground Malkenhorst had failed to exhaust his
administrative remedies and the court therefore lacked jurisdiction over the matter under
Code of Civil Procedure section 430.10, subdivision (a). On October 18, 2012, the court
sustained the demurrer without leave to amend for Malkenhorst’s failure to exhaust his
administrative remedies.


E. Malkenhorst Seeks Reconsideration of the Ruling in the Orange County Action
      On October 29, 2012, Malkenhorst filed a motion for reconsideration of the
Orange County Superior Court’s order sustaining CalPERS’s demurrer without leave to
amend. Malkenhorst based his motion on asserted new precedent to require the court to
rule on Vernon’s “home rule” autonomy and its authority to designate employee
compensation for pension purposes. Malkenhorst also argued that the new cases “do not
authorize an administrative process.” On December 28, 2012, the court denied the
motion on the ground the cases cited did not constitute new or different law within the
meaning of Code of Civil Procedure section 1008. Judgment was entered in the Orange
County action on January 23, 2013. Malkenhorst filed a notice of appeal from that
judgment on January 25, 2013, which appeal is discussed further below.


F. CalPERS Makes Its Final Determination that Malkenhorst’s Retirement Benefits
Must Be Adjusted Downward
      While Malkenhorst was litigating his claim in the Orange County action, CalPERS
continued with its administrative process. On October 22, 2012, CalPERS wrote to
Malkenhorst that it had affirmed its preliminary determination and issued a final

                                            9
determination to reduce Malkenhorst’s pension amount. CalPERS explained that the
information Vernon provided “has not altered the determination that Mr. Malkenhorst’s
retirement allowance will require a downward adjustment.” CalPERS found that the
most recent payrate reported by Vernon that meets the definition of “payrate” on a
publicly available pay schedule “was $7,785 per month for the single position of Acting
City Clerk, as provided in Resolution 8780, signed June 29, 2005, effective July 1, 2005.”
CalPERS declined to use Malkenhorst’s compensation for City Administrator because it
found that his compensation included services for other simultaneous positions, which
constituted overtime under the PERL.
      CalPERS also adjusted Malkenhorst’s longevity payment to 20 percent of
compensation. It adjusted his final compensation downward from $44,128 to $9,450 per
month, based on a payrate of $7,875 plus a longevity payment of $1,575.60. Based on
this calculation, CalPERS reduced Malkenhorst’s monthly retirement allowance to
$9,654.09.5 CalPERS notified Malkenhorst that he had a right to appeal this decision by
filing a written appeal with CalPERS within 30 days under Government Code section
20134 and California Code of Regulations, title 2, sections 555 through 555.4.


G. Malkenhorst Files an Appeal of CalPERS’s Administrative Determination
      On December 21, 2012, while Malkenhorst’s motion for reconsideration was
pending in the Orange County action, Malkenhorst filed a timely appeal in the
administrative action. On September 26, 2013, CalPERS filed an SOI in the
administrative proceedings before the Board (In the Matter of the Calculation of Final
Compensation of Bruce Malkenhorst, Sr. and City of Vernon (Agency Case No. 2012-
0671, OAH No. 2013080917).) It identified the issue on appeal as “whether CalPERS
has correctly determined . . . Malkenhorst’s retirement allowance pursuant to the
applicable provisions of the Government Code and Regulations.”


5    The reason Malkenhorst’s monthly retirement allowance is greater than his final
compensation is not explained in the CalPERS letter.


                                           10
       The appeal raises both CalPERS’ determination to reduce longevity pay and its
decision to reduce Malkenhorst’s pension on the basis that most of his pay was for
overtime above his duties as City Administrator. Following a status and trial setting
conference on March 27, 2014, the administrative appeal was set for hearing on
August 25, 26 and 27, and September 3 and 4, 2014.6 The administrative appeal is still
pending.7


H. Malkenhorst Files the Instant Action Against CalPERS in Los Angeles County
Superior Court
       While his administrative appeal was pending—and before judgment was entered
in the Orange County action—on January 16, 2013, Malkenhorst filed the instant action


6       We grant Malkenhorst’s first request for judicial notice pursuant to Evidence Code
section 452, subdivision (c), and section 459, as to Exhibit 1, the status and trial setting
conference order in the administrative proceedings (Steed v. Department of Consumer
Affairs (2012) 204 Cal.App.4th 112, 121 [court may take judicial notice of entry of order
in file but not factual findings made in order]; Fowler v. Howell (1996) 42 Cal.App.4th
1746, 1749-1750 [taking judicial notice of decision of State Personnel Board]) and
exhibit 2, a March 6, 2014 letter from CalPERS to Malkenhorst’s attorney stating that
Malkenhorst’s retirement allowance would be reduced effective April 1, 2014 (In re
Social Services Payment Cases (2008) 166 Cal.App.4th 1249, 1271 [court may take
judicial notice of government letters as official acts of the state’s executive department]).
We also grant Malkenhorst’s second request for judicial notice as to exhibits 3 and 4,
which are prehearing orders. (Steed, supra, at p. 121; Fowler, supra, at pp. 1749-1750.)
        We deny Malkenhorst’s second request for judicial notice as to exhibit 5, a letter
from his attorney to the administrative law judge. “‘“We have found no authority and
none has been cited for the proposition that materials prepared by private parties and
merely on file with state agencies may be judicially noticed pursuant to subdivision (c)
[of Evidence Code section 452].” [Citations.]’ [Citations.]” (Stevens v. Superior Court
(1999) 75 Cal.App.4th 594, 608.)
7      Malkenhorst filed his third request for judicial notice post-argument, requesting
that we take judicial notice of the final hearing date in the administrative appeal set for
February 19, 2015. We grant Malkenhorst’s request for judicial notice pursuant to
Evidence Code section 452, subdivision (c). However, we have denied his motion to stay
the administrative proceedings for the reasons set forth in this opinion.


                                             11
in Los Angeles County Superior Court against CalPERS.8 Again, he sought declaratory
and injunctive relief and a writ of mandate, and he added a cause of action for
administrative mandate. He sought to have the court order CalPERS to terminate its
administrative process, cease all efforts to reduce Malkenhorst’s pension based on issues
decided “years ago,” and preserve Malkenhorst’s higher pension. The complaint alleges
that “[i]n 2005, CalPERS initiated a formal appeal process about Malkenhorst’s (i)
reported compensation; (ii) longevity pay special compensation; and (iii) the positions
that Malkenhorst held while employed” by Vernon. “After CalPERS’ and Malkenhorst’s
attorneys exchanged extensive communications and documents for more than a year,
CalPERS determined that Malkenhorst was entitled to the higher pension and ended the
administrative process. No formal evidentiary hearing was held.” Malkenhorst alleges
that based on the 2005 proceedings, collateral estoppel and res judicata bar CalPERS
from reopening issues regarding his pension.
       Malkenhorst also alleged in his complaint that he had “initiated a jurisdictional
challenge” in the Orange County Superior Court “on the issue of whether CalPERS can
invade the constitutional ‘home rule’ autonomy of charter cities to determine
compensation and office structure.” (Fn. omitted.) The complaint asserts that the Orange
County court ruled that Vernon’s autonomy was preempted, and that Malkenhorst
intended to appeal denial of his motion for reconsideration upon entry of judgment.


I. CalPERS and the Board File the Demurrer in the Instant Action
       CalPERS and the Board filed their demurrer on February 14, 2013. The bases of
the demurrer were that the court lacked jurisdiction due to Malkenhorst’s failure to
exhaust his administrative remedies, it lacked jurisdiction under the doctrine of exclusive
concurrent jurisdiction, and Malkenhorst failed to join Vernon as an indispensable party.


8       In this action, Malkenhorst did not name Vernon as a real party in interest. He
alleged Los Angeles was the proper venue for the action because CalPERS maintained an
office in Glendale.


                                            12
(Code Civ. Proc., § 430.10, subds. (a), (d).) CalPERS and the Board also claimed that
both the Orange and Los Angeles County actions involved the same parties, arose out of
the same facts and transactions, and involved the same primary right, and Malkenhorst
was impermissibly attempting to split his causes of action “and shopping them before
different courts.”
       On March 19, 2013, the trial court sustained the demurrer without leave to amend
on the ground it lacked jurisdiction over the matter. The court held that Malkenhorst “has
failed to exhaust his administrative remedies of [CalPERS’s] October 12, 2012,
determination of his pension status. [He] filed a Notice of Appeal which is pending. [¶]
Further, [Malkenhorst’s] Orange County case which raises the same issues and rights is
pending and that county has exclusive jurisdiction. Moreover, the [C]ity of Vernon is an
indispensable party and has not been joined. [¶] Counsel for [Malkenhorst] did not offer
any substantial matter that he could amend and thus, the demurrer is sustained without
leave to amend.”
       Malkenhorst filed his notice of appeal from the March 19, 2013 minute order on
March 21. A signed order of dismissal was filed on April 16.9


J. Malkenhorst Seeks a Stay from This Court to Stop the Administrative Proceeding
       On September 30, 2013, Malkenhorst filed a petition for writ of supersedeas or
prohibition and request for stay in this court. He sought to halt the administrative
proceedings during the pendency of his appeal.10 We summarily denied his petition on



9      Although Malkenhorst purports to appeal from the nonappealable minute order
sustaining the demurrer without leave to amend, we treat the notice of appeal as a
premature but valid appeal from the subsequent appealable order of dismissal. (Maxwell
v. Dolezal (2014) 231 Cal.App.4th 93, 96, fn. 1; In re Social Services Payment Cases,
supra, 166 Cal.App.4th at p. 1262, fn. 4; see Cal. Rules of Court, rule 8.104(e)(2).)
10     Malkenhorst previously filed a petition for writ of supersedeas or prohibition and
request for stay on April 2, 2013. We summarily denied that petition on April 10.


                                             13
October 3. He filed a petition for review in the Supreme Court on October 11. The
Supreme Court denied his petition on October 15.


K. The Court of Appeal Affirms the Dismissal of the Orange County Action
       On April 23, 2014, the Fourth District filed its opinion on appeal in the Orange
County action. (Malkenhorst v. California Public Employees’ Retirement System, supra,
G047959 [2014 Cal.App.Unpub. LEXIS 2869].) The court focused on Malkenhorst’s
argument that he did not need to exhaust his administrative remedies because (1) his
complaint sought class-wide relief on behalf of all employees of charter cities and
counties; and (2) his complaint raised constitutional and charter issues that could not be
addressed by the CalPERS administrative process. (Id. at pp. 2-3.) The court rejected the
first prong of this argument, stating that “Malkenhorst’s claim that he is pursuing relief
on behalf of a class of persons employed by charter cities and counties does not entitle
him to sidestep the requirement that he exhaust administrative remedies. First, the mere
assertion of a class action does not automatically exempt a party from the obligation to
exhaust his administrative remedy. [Citation.] . . . [¶] Second, notwithstanding
Malkenhorst’s characterization, his complaint does not actually allege any facts
suggesting either that he has been authorized to act in a representative capacity or that
this case might be suitable for class action treatment.” (Id. at pp. 11-12.)
       The court also rejected the second prong of Malkenhorst’s argument that CalPERS
lacked jurisdiction to adjudicate the issues he raised. The court held: “There is simply
no question but that the determination of a retiree’s pension amount is properly handled
within CalPERS’s administrative process. Government Code section 20123 gives the
CalPERS board authority to ‘determine and . . . modify benefits for service and
disability’ in accordance with PERL and the rules it promulgates thereunder. And
Government Code section 20134 gives the board authority to ‘hold a hearing for the
purpose of determining any question presented to it involving any right, benefit, or
obligation of a person under this part.’. . . In light of this broad authorization . . .
Malkenhorst can raise whatever arguments he believes establish support for his pension

                                               14
claim—whether based on constitutional precepts, charter law, or preemption analysis—
within the administrative process.” (Malkenhorst v. California Public Employees’
Retirement System, supra, G047959 [2014 Cal.App.Unpub. LEXIS 2869 at pp. 16-17].)
The court affirmed the judgment against Malkenhorst.


                                       DISCUSSION


A. Standard of Review
       On appeal, when a demurrer has been sustained, we examine the complaint de
novo to determine whether it states facts sufficient to state a cause of action. (Zelig v.
County of Los Angeles (2002) 27 Cal.4th 1112, 1126; Brown v. County of Los Angeles
(2014) 229 Cal.App.4th 320, 322; Keffeler v. Partnership Healthplan of California
(2014) 224 Cal.App.4th 322, 335, fn. 10.) Further, “[w]e follow the well-settled rule that
‘[w]hen reviewing a judgment dismissing a complaint after the granting of a demurrer
without leave to amend, courts must assume the truth of the complaint’s properly pleaded
or implied factual allegations.’ [Citation.]”11 (Loeffler v. Target Corp. (2014) 58 Cal.4th
1081, 1100; accord, Zelig, supra, at p. 1126.) We do not, however, “‘assume the truth of
contentions, deductions or conclusions of law.’ [Citation.]” (Loeffler, supra, at p. 1100;
Zelig, supra, at p. 1126).12



11      We also deem to be true facts contained in the exhibits attached to the complaint
(Van Horn v. Department of Toxic Substances Control (2014) 231 Cal.App.4th 1287,
1292; Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 225,
fn. 1) and those subject to judicial notice (Van Horn, supra, at p. 1292; Brown v. County
of Los Angeles, supra, 229 Cal.App.4th at p. 322).
12     Malkenhorst argues that we must accept as true his allegations that he exhausted
his administrative remedies in the 2005-2006 proceeding. These allegations are
conclusions of law, not allegations of fact and, as such, we do not assume the truth of the
allegations. Further, as we discuss below, this is an issue to be decided in the
administrative appeal in the first instance, and not by this court.


                                             15
       When a demurrer is sustained without leave to amend, “‘we decide whether there
is a reasonable possibility that the defect can be cured by amendment: if it can be, the
trial court has abused its discretion and we reverse.’ [Citations.]” (Loeffler v. Target
Corp., supra, 58 Cal.4th at p. 1100; accord, Zelig v. County of Los Angeles, supra, 27
Cal.4th at p. 1126.) “‘The burden of proving such reasonable possibility is squarely on
the plaintiff.’ [Citations.]” (Zelig, supra, at p. 1126.)


B. Exhaustion of Administrative Remedies
       Malkenhorst argues that the trial court, not the administrative proceeding, is the
proper forum for deciding whether modification of his pension was barred by res judicata
or collateral estoppel. He also contends that this question is one of common law properly
the subject of a civil action, not a subsequent administrative proceeding. He argues that
he has no adequate administrative remedy because he cannot raise the question of res
judicata or collateral estoppel as a “threshold issue,” but rather, must wait until
completion of the administrative proceeding to have this issue determined.13 Finally, he
argues that exhaustion would be futile.
       We address each argument in turn.


       1. Res judicata and collateral estoppel are affirmative defenses properly
          raised in the administrative process.
       The affirmative defenses of res judicata and collateral estoppel are properly raised
in the administrative proceeding before CalPERS and the OAH. (Hughes v. Board of


13     In the ALJ’s order re pretrial motions, attached as Exhibit 4 to Malkenhorst’s
second request for judicial notice, the judge denied Malkenhorst’s motion in limine to
exclude “All Evidence and Testimony Subject to Judicial Estoppel by Prior Filings in the
2005-2006 Administrative Process.” However, the same order makes clear the intent of
the ALJ to rule on the issues of res judicata and collateral estoppel, stating: “Whether
CalPERS’s determination was an ‘adjudication’ is a question of law and is not dependent
on the beliefs of counsel for the parties involved in the process leading to that
determination.”


                                              16
Architectural Examiners (1998) 17 Cal.4th 763, 794 [doctrine of collateral estoppel
“prevents an administrative agency from reconsidering, in the absence of new facts, its
prior final decision made in a judicial or quasi-judicial capacity in the context of an
adversary hearing”]; Hollywood Circle, Inc. v. Dept. of Alcoholic Beverage Control
(1961) 55 Cal.2d 728, 731-732 [res judicata applies to decision of administrative agency
in judicial capacity, including decision revoking petitioner’s liquor license];14 Berg v.
Davi (2005) 130 Cal.App.4th 223, 231 [“[i]t is well established that collateral estoppel
principles apply in an administrative proceeding to prevent the impeachment of a prior
final judgment”]; California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th
1575, 1582 [“if the elements of fraud have been proved in the civil action, collateral
estoppel principles bar the licensee from attempting to relitigate those facts at the
administrative proceeding”]; Pacific Coast Medical Enterprises v. Department of Benefit
Payments (1983) 140 Cal.App.3d 197, 214 [“[i]t is now generally recognized that res
judicata applies in administrative proceedings to decisions of an administrative agency
made pursuant to its judicial function”].)
       As the Supreme Court held in Hollywood Circle, Inc. v. Dept. of Alcoholic
Beverage Control, supra, 55 Cal.2d at pages 731-732: “The doctrine of res judicata
‘. . . is based upon the sound public policy of limiting litigation by preventing a party who
has had one fair trial on an issue from again drawing it into controversy.’ [Citation.]
This policy can be as important to orderly administrative procedure as to orderly court
procedure.” Further, “‘“[t]he exhaustion doctrine is principally grounded on concerns
favoring administrative autonomy (i.e., courts should not interfere with an agency
determination until the agency has reached a final decision) and judicial efficiency (i.e.,
overworked courts should decline to intervene in an administrative dispute unless



14     The Supreme Court in Hollywood Circle distinguished the agency’s exercise of its
judicial function from its rulemaking power in which res judicata does not apply.
(Hollywood Circle, Inc. v. Dept. of Alcoholic Beverage Control, supra, 55 Cal.2d at
p. 732.)


                                             17
absolutely necessary).”’ [Citation.]” (City of San Jose v. Operating Engineers Local
Union No. 3 (2010) 49 Cal.4th 597, 609.)
       The facts in Berg v. Davi, supra, 130 Cal.App.4th 223 are similar to those here. In
Berg, the Department of Real Estate denied Berg a real estate license based on his prior
disbarment by the State Bar. (Id. at pp. 225, 227.) The appellate court upheld an ALJ’s
decision to apply res judicata to bar Berg from collaterally attacking the State Bar Court’s
findings. (Id. at pp. 230-231.) Similarly, in this case, it is the OAH that must decide in
the first instance whether CalPERS can reduce Malkenhorst’s pension or whether it is
barred from doing so as a result of its 2006 proceedings.
       Malkenhorst argues that he has no procedure for asserting res judicata and
collateral estoppel at the administrative proceeding, requiring him to relitigate CalPERS’s
reduction of his pension. However, the APA specifically provides that a party may file a
notice of defense in response to an SOI or accusation that “[o]bject[s] to the accusation
. . . upon the ground that it does not state acts or omissions upon which the agency may
proceed,” or “[p]resent[s] new matter by way of defense.” (Gov. Code, § 11506, subd.
(a)(2), (5).) Indeed, Malkenhorst has raised these affirmative defenses in the
administrative proceeding currently pending before OAH.


       2. Malkenhorst’s argument that res judicata and collateral estoppel are common
          law rights properly brought in a civil action is without merit.
       Malkenhorst contends that because res judicata and collateral estoppel can be
asserted under common law, he need not exhaust his administrative remedies, citing to
Rojo v. Kliger (1990) 52 Cal.3d 65, and Farmers Ins. Exchange v. Superior Court (1992)
2 Cal.4th 377. However, the Supreme Court in Rojo addressed a different issue—
whether a plaintiff asserting common law wrongful termination claims was required to
exhaust administrative remedies under the Fair Employment and Housing Act (FEHA;
Gov. Code, § 12900 et seq.) before filing a civil action. The court there held that FEHA
does not have a “‘pervasive and self-contained system of administrative procedure’” for
regulating or monitoring employer-employee relations, nor are the factual issues of a

                                             18
“complex or technical nature beyond the usual competence of the judicial system.”
(Rojo, supra, at pp. 87, 88.) Therefore an employee must exhaust the FEHA
administrative remedy before bringing suit, but exhaustion is not required before filing a
civil action alleging nonstatutory causes of action. (Id. at p. 88; accord, Farmers Ins.
Exchange, supra, at pp. 396-398, 401 [finding “‘pervasive and self-contained system of
administrative procedure’” available to insurance commissioner under McBride Act to
determine challenges to good driver discount policies, requiring plaintiffs to exhaust
administrative remedies before pursuing civil action asserting Insurance Code
violations].)
       Malkenhorst’s argument ignores the fact that the central issue in this case is one of
statutory law—whether his pension under the PERL properly includes the longevity pay
and pay for work done other than as City Administrator—issues properly addressed in the
first instance through the administrative procedure under the PERL. CalPERS has the
expertise necessary both to address Malkenhorst’s pension issues under the PERL and to
determine whether its 2012 recalculation of Malkenhorst’s pension is barred by its action
in 2006, just as the insurance commissioner had the expertise in Farmers Ins. Exchange
to address issues raised under the Insurance Code.


       3. Malkenhorst has no due process right to determination of the collateral
          estoppel and res judicata issues prior to the administrative hearing.
       Malkenhorst contends that he “is entitled to assert collateral estoppel/res judicata
to bar a second hearing at the threshold, yet the administrative process denies him this
basic due process right.”15 (Italics omitted.) Malkenhorst does not cite to any authority


15      Malkenhorst cites to the holding by the appellate court in Kramer v. State Board
of Accountancy (1962) 200 Cal.App.2d 163, 175, that a hearing officer cannot entertain a
demurrer or motion to dismiss where the hearing officer is alone hearing the case.
However, other appellate courts have held to the contrary that a party to an administrative
proceeding has “the right to test the sufficiency of the complaint against him while the
proceeding was yet before the board, either by demurrer or after some other method . . . .”
(Dyment v. Board of Medical Examiners (1922) 57 Cal.App. 260, 264; accord, Marlo v.

                                             19
for this proposition, instead arguing as a policy matter that without a right to assert these
defenses “at the threshold, the agency is allowed to cause the harm (re-litigation)
otherwise prevented by collateral estoppel and res judicata.” (Fn. omitted.)
       None of the cases relied upon by Malkenhorst establishes a due process right to
have the issue of collateral estoppel and res judicata decided prior to an administrative
hearing. Malkenhorst relies heavily on the holdings in Murray v. Alaska Airlines, Inc.
(2010) 50 Cal.4th 860 and Takahashi v. Board of Education (1988) 202 Cal.App.3d 1464
for his argument that the trial court should decide these issues in the first instance. But
neither case addresses the question of whether the administrative tribunal or civil court
should decide the question of collateral estoppel or res judicata, nor do they address the
question of when the determination needs to be made, i.e., “at the threshold” as argued by
Malkenhorst.
       In Murray, the court held, “[w]e conclude that under the particular facts and
procedural posture of this case, Murray may be precluded from relitigating the factual
issue of causation against Alaska in his state court wrongful termination action . . . .”
(Murray v. Alaska Airlines, Inc, supra, 50 Cal.4th at p. 877.) While the court found that
collateral estoppel applied to prevent Murray from relitigating his claim that he was
terminated for his whistleblowing activities, the question of whether this issue should be
decided by the court or administrative agency or when it should be decided was not
before the court. (Ibid.; see also Takahashi v. Board of Education, supra, 202
Cal.App.3d at p. 1482 [applying res judicata to bar wrongful termination civil lawsuit
where agency previously found the plaintiff was dismissed based on incompetence].)




State Bd. of Medical Examiners (1952) 112 Cal.App.2d 276, 279 [notice of defense
“performs essentially the office of an answer and demurrer in the ordinary civil action”].)
We need not reach the question of whether Malkenhorst can assert a demurrer or motion
to dismiss in the administrative proceeding because that issue is not before us and,
further, we find that Malkenhorst has no due process right to have his affirmative defense
of res judicata or collateral estoppel decided prior to the administrative hearing.


                                              20
Malkenhorst cites to no other authority that he had a due process right to have the issues
of collateral estoppel and res judicata decided prior to an administrative hearing.


       4. The administrative agency should decide whether it has jurisdiction.
       Malkenhorst argues that the trial court should have decided the issue of
jurisdiction in the first instance. The question whether the trial court or administrative
agency should decide whether the administrative agency has jurisdiction over a matter
was addressed by the Third District in Public Employment Relations Bd. v. Superior
Court (1993) 13 Cal.App.4th 1816 (Public Employment Relations Bd.), cited by both
Malkenhorst and CalPERS. The court there held, citing to our Supreme Court’s holding
in United States v. Superior Court (1941) 19 Cal.2d 189 at page 195, that “‘it lies within
the power of the administrative agency to determine in the first instance, and before
judicial relief may be obtained, whether a given controversy falls within the statutory
grant of jurisdiction.”’ (Public Employment Relations Bd., supra, at p. 1828.)
       The courts have considered three factors in deciding whether an agency lacks
jurisdiction to decide the threshold question of whether it lacks authority to resolve the
underlying dispute: “the injury or burden that exhaustion will impose, the strength of the
legal argument that the agency lacks jurisdiction, and the extent to which administrative
expertise may aid in resolving the jurisdictional issue.” (Coachella Valley Mosquito &
Vector Control Dist. v. California Public Employment Relations Bd. (2005) 35 Cal.4th
1072, 1082 (Coachella Valley Mosquito); accord, Public Employment Relations Bd.,
supra, 13 Cal.App.4th at p. 1830.)
       In Coachella Valley Mosquito the court held that exhaustion was excused where
there was “a significant public interest in obtaining a definitive resolution of this
fundamental legal question” of the applicable statute of limitations, and there was a
strong legal argument that the agency did not have jurisdiction because of the statute of
limitations bar. (Coachella Valley Mosquito, supra, 35 Cal.4th at pp. 1082-1083.)
       In Public Employment Relations Bd., the court considered whether the trial court
should have deferred to the Public Employment Relations Board for its initial

                                              21
determination that it had jurisdiction over a claim that the Governor committed unfair
labor practices under the Ralphs C. Dills Act (Gov. Code, §§ 3512-3524) by failing to
meet and confer with the unions prior to proposing legislation that altered the terms of
employment of state workers. (Public Employment Relations Bd., supra, 13 Cal.App.4th
at pp. 1818-1819.) The court held that the trial court should have allowed the
administrative process to go forward because there was “no clear lack of Board
jurisdiction which affords a warrant for judicial intervention prior to a final determination
by the Board.” (Id. at p. 1832.) In reaching its holding, the court found that the injury
resulting from the cost of participating in the agency proceedings did not support judicial
preemption. Second, the court found that “the considered determination of meaning by
the agency charged with administration of a statute is of interest.” (Id. at p. 1831.)
Finally, the court noted that the constitutional issue raised was novel, and the question of
jurisdiction was not clear. (Id. at p. 1832.)
       Applying the three factors to this case, we find it was proper for the administrative
agency to determine jurisdiction in the first instance. First, Malkenhorst has not shown
irreparable injury from being required to litigate the issues of collateral estoppel and res
judicata in the administrative proceeding. He argues that pending a determination, he is
suffering an 80 percent reduction in his retirement compensation, but he fails to cite
specifically to how this has caused him irreparable harm. If he prevails on his claim, he
can seek to recover from CalPERS any compensation amount that should have been paid
to him. It is also not clear from the record that Malkenhorst would obtain a resolution of
his pension claim more quickly from a trial court than from the agency. Further, as the
court held in Public Employment Relations Bd., the cost of participating in the
administrative proceedings, “is invariably present and, absent some unusual or
extraordinary burden, does not favor judicial preemption.” (Public Employment
Relations Bd., supra, 13 Cal.App.4th at p. 1830.)
       Second, unlike Coachella Valley Mosquito, it is clear here that the agency has
jurisdiction to decide the res judicata and collateral estoppel issues as well as the
underlying pension dispute. Finally, CalPERS has expertise in administration and

                                                22
interpretation of the PERL, both as to whether the 2005-2006 proceeding was a final
adjudication and on the underlying compensation issues.


      5. Malkenhorst’s claim does not fall within an exception to the
          exhaustion doctrine
      As we discuss below, a party can be excused from exhaustion of administrative
remedies where the administrative procedure is inadequate or exhaustion would be futile.
Neither exception applies here.


                a. The administrative procedures are adequate to address
                   Malkenhorst’s claims.
      Malkenhorst argues that exhaustion of administrative remedies is not required
where the challenged administrative procedures “are the very source of the asserted
injury for which [the plaintiff] sought a remedy.” (Chrysler Corp. v. New Motor Vehicle
Bd. (1979) 89 Cal.App.3d 1034, 1038-1039.) In that case, however, Chrysler challenged
the procedure by which the New Motor Vehicle Board decided challenges to the
establishment of new dealerships, where new dealers sat on the Board. (Id. at p. 1039;
accord, Brown v. City of Los Angeles (2002) 102 Cal.App.4th 155, 168 [no requirement
to exhaust administrative remedies for challenge to adequacy of administrative appeal
procedures].)
      Malkenhorst’s challenge is not to the CalPERS procedures themselves, but rather,
to the determination by CalPERS that his pension should be reduced. Likewise, he does
not claim that the CalPERS appeals process is inadequate other than his complaint that
under the administrative procedure he cannot have his res judicata and collateral estoppel
defenses resolved until the end of the administrative proceeding. (Cf. Glendale City
Employees’ Assn., Inc. v. City of Glendale (1975) 15 Cal.3d 328, 343 [employee
association not required to exhaust administrative remedies where availability of
employee grievance procedure would not be adequate to resolve complex case involving
effect of memorandum of understanding].)

                                             23
              b. Malkenhorst has not shown that exhausting his administrative
                 remedies would be futile.
       Malkenhorst argues that exhausting his administrative remedies would be futile
because the issues have already been fully argued and decided in the administrative
process and “there is no administrative remedy in the APA or OAH to preclude a second
hearing . . . .” While futility is an exception to the exhaustion requirement, the exception
“requires that the party invoking the exception ‘can positively state that the [agency] has
declared what its ruling will be on a particular case.’ [Citation.]” (Jonathan Neil &
Assoc., Inc. v. Jones (2004) 33 Cal.4th 917, 936 [finding administrative proceeding to
resolve premium billing dispute by Department of Insurance not futile]; accord, San
Diego Municipal Employees Assn. v. Superior Court (2012) 206 Cal.App.4th 1447, 1459-
1460 [finding administrative process not futile even though agency had filed for
temporary injunctive relief to preserve status quo].) “That administrative procedures may
or even probably would have been unavailing does not excuse appellant’s obligation to
pursue them.” (Park ‘N Fly of San Francisco, Inc. v. City of South San Francisco (1987)
188 Cal.App.3d 1201, 1208 [requiring exhaustion of administrative remedies as to
reclassification as commercial parking facility under ordinance, but allowing challenge to
constitutionality of ordinance].)
       As we discuss above, the lack of his ability to raise res judicata and collateral
estoppel “at the threshold” of the administrative proceeding does not deprive
Malkenhorst of a remedy. Similarly, there is nothing to suggest that the OAH will not
afford Malkenhorst a fair hearing on the question of whether CalPERS is estopped from
recalculating his pension given its actions in 2006 or that it has predetermined the issue.
Accordingly, Malkenhorst has not established futility.


C. Conclusion
       We affirm the trial court’s sustaining of the demurrer on the ground that
Malkenhorst’s civil action is barred by his failure to exhaust his administrative remedies.
In light of this holding, we need not address the other grounds on which the trial court

                                             24
sustained the demurrer. On appeal, Malkenhorst does not contend that the trial court
abused its discretion in denying him leave to amend nor does he set forth any facts he
could add to his complaint to state a cause of action. He therefore has failed to meet his
burden to show an abuse of discretion in denial of leave to amend. (Zelig v. County of
Los Angeles, supra, 27 Cal.4th at p. 1126; In re Social Services Payment Cases, supra,
166 Cal.App.4th at p. 1263.)


                                     DISPOSITION


       The order is affirmed. CalPERS and the Board are awarded their costs on appeal.



                                                 FEUER, J.*


We concur:



       PERLUSS, P. J.



       WOODS, J.




*       Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.

                                            25
