City Not Required to Provide a Defense to Former Administrative Officer Accused of Looting City’s Coffers

The City of Bell (“City”) sued Robert Rizzo (“Rizzo”), its former chief administrative officer, for restitution after he allegedly looted the City’s coffers.  Rizzo, who also faced criminal charges, asserted that the City was obligated to provide him with a defense to the criminal and civil actions.  The court of appeal concluded that the City did not owe Rizzo a defense.  (City of Bell v. Superior Court of the State of California, County of Los Angeles (— Cal.Rptr.3d —-, Cal.App. 2 Dist., October 4, 2013.)

Facts

Rizzo, the assistant chief administrative officer, and five City council members received salaries well in excess of the salaries paid for their positions in similarly sized cities.  They attempted to conceal the amount of their salaries from the public.  The Attorney General brought a complaint against Rizzo on behalf of the City.  Rizzo tendered the Attorney General’s action to the City for a defense.  After the City refused, Rizzo filed a cross complaint against the City.  City then brought its own cross complaint against Rizzo for misrepresentation, fraud, negligence, conflict of interest, breach of fiduciary duty, and unjust enrichment.  A criminal complaint was filed against Rizzo and he was ultimately convicted of a total of 69 counts.

Rizzo alleged that a term in his employment contract and statutory law supported his position that City is required to provide him a defense.  The contract provided, “City shall defend, hold harmless and indemnify Employee against any claim, demand, judgment or action, of any type or kind, arising out of any act or failure to act, by Employee, if such act or failure to act was within the course and scope of Employee’s employment.”  It further provided, “City may compromise and settle any such claim or suit provided City shall bear the entire cost of any such settlement.”

The trial court concluded “City was required ‘to defend Rizzo from the time he tenders the defense of a claim arising out of any act or failure to act,’ regardless of whether the act or failure to act was within the course and scope of his employment.”

Decision

The court of appeal held that the City does not owe Rizzo a defense.  The court found that the clause on which Rizzo relied to assert that the City owed him a defense was “simply a third-party indemnification agreement, which does not apply to civil actions, by or on behalf of City.”

As a general rule, indemnity agreements only apply to third-party claims.  If an indemnity agreement is to encompass all claims between the parties who are entering into the agreement and “act as an exculpatory clause or release, there must be clear and explicit language to that effect.”  Rizzo’s employment agreement did not include such language.  Because the indemnity agreement did not apply to first-party claims, the obligation to defend cannot extend to first-party claims.  The City must defend only those actions alleging facts that could potentially give rise to an indemnity claim.  Here, the civil actions were brought by or on behalf of the City.  The City had no duty to indemnify the claims and therefore it had no duty to defend the claims.

The court concluded “that, even if the City had contracted to provide Rizzo a defense to criminal prosecutions, such an agreement would be unenforceable, as the City has no statutory power to make such an agreement.”  Pursuant to the restrictive language of Government Code section 995.8, a public entity can only provide a defense if the criminal action was brought against the employee on account of an act or omission performed within the scope of his employment and the public entity determines that a defense would be in its best interests.  These requirements were not met.  Even if the City contracted to provide Rizzo with a defense in the criminal action, such a provision could not have been enforced because of the requirements of section 995.8.

The court also held that its decision that City did not owe Rizzo a defense was supported by public policy.  The court stated that, because the City believed “that Rizzo stole millions of dollars from its coffers; the idea that the City must pay Rizzo additional funds in order provide him a defense against the very actions seeking to obtain justice for the City is unacceptable.”

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Bruce A. Scheidt, Kristianne T. Seargeant, Mona G. Ebrahimi or Maggie W. Stern | 916.321.4500