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*C'44 FOR ,
CITY COUNCIL STAFF REPORT
DATE: JANUARY 18, 2017 NEW BUSINESS
SUBJECT: APPROVAL OF AN AGREEMENT WITH CROWELL MORING TO
PROVIDE SUPPLEMENTAL LEGAL SERVICES FOR THE CITY
FROM: David H. Ready, City Manager
BY: Douglas Holland, City Attorney
SUMMARY
The City Council will consider approval of an agreement with the law firm of Crowell
Moring to provide legal services for the City in connection with current investigations
and inquiries by local, state, and federal government entities.
RECOMMENDATION:
Approve an Agreement with the law firm of Crowell Moring to provide legal services for
the City in an amount not to exceed $60,000 and authorize the City Manager to execute
the Agreement on behalf of the City.
STAFF ANALYSIS:
Consistent with past discussions with the City Council, the City Attorney has identified a
need for the City to have legal representation in its interaction with the various agencies in
their review of prior actions and project approvals of the City. The City Attorney has
acknowledged he does not possess the expertise to adequately represent the City and its
current officials and employees in this situation. This law firm of Crowell Moring
possesses the expertise to perform this legal service. The firm would only represent the
City and City officials and employees in their official capacities. It remains the intent and
goal of the City Council to fully cooperate with these various agencies and retention of
Crowell Moring will facilitate such cooperation.
FISCAL IMPACT:
The cost for the agreement will be paid from the City's Risk Fund.
David Ready, City Man Douglaf Holland, City Attorney
Attachment: Agreement
REM N0.
515 South Flower St.,40th Floor,Los Angeles,CA 90071 .p213 622-4750.f213 622-2690
crowellrfmoring
Jeffrey H.Rutherford
(213)443.5596
jrutherfordecrowell.com
July 19, 2016
Douglas Holland
City Attorney, City of Palm Springs
Woodruff, Spradlin& Smart, PC
555 Anton Blvd., Suite 1200
Costa Mesa, CA 92626
Re: Retention of Crowell & Morino LLP
Dear Mr. Holland:
This letter will memorialize the agreement between the City of Palm Springs ("City")and
Crowell & Moring LLP ("Crowell &Moring")for Crowell &Moring to advise the City,as
requested by the City Attorney, in connection with investigations and inquiries by local, state,
and federal governmental entities. Crowell &Moring's current assignment for the City is
limited to the matter described above.
1 will be responsible for this matter. Other Crowell& Moring lawyers or paralegals may
also work on this matter from time to time under our supervision as the need arises.
Crowell &Moring will charge the City an hourly fee for the time that our lawyers and
paralegals spend on this matter. The current rates for the individuals likely to work on this
assignment are$600 an hour for my time, $7164384 an hour for other lawyers (partners and
associates), and$160 an hour for paralegals. Our rates generally are reviewed for adjustment
annually by the firm's Management Board in the fall. We also bill for expenses and other
services,including photocopies, word processing, travel,and messenger services. We will send
you regular monthly bills, and payment is due upon receipt of such bills. Crowell & Moring
carries professional liability insurance.
Crowell&Moring's client for purposes of this engagement is the City only. Crowell &
Moring is not undertaking the representation of any person or entity related to or affiliated with
the City, including,but not limited to, any government agency, parent entity, subsidiary,
member,officer, director, or employee(collectively referred to as"Related Entities"). Crowell
& Moring will not be precluded by reason of undertaking this or any future engagement of the
City from representing existing or future clients in legal matters relating to or adverse to any
Related Entities. Also, it is our understanding that in the future the City may ask Crowell &
Moring to represent one or more employees of the City in connection with the matter that is the
Q2
Douglas Holland
City Attorney
July 19, 2016
Page 2
subject of this letter. In such an event we will need to screen for client conflicts and execute a
new engagement letter with each such employee.
Since Crowell &Moring represents a large number of diverse clients, which may include
clients involved in activities affecting the City, we ask you to agree that the representation of the
City by Crowell &Moring in the present and any future matters will not be grounds for asserting
a conflict of interest in any work that the firm may do for other clients(including the City's
competitors and adversaries such as the adverse parties in this matter)that is unrelated to
Specifically,the City agrees
Crowell & Morin s current or future representation of the City. Specrf y, ty gr
g p
that Crowell &Moring may represent other clients in matters that do not involve any
confidential information that has been obtained by Crowell & Moring in the course of any
representation of the City, even though our representation of the other client or clients may be
adversarial to the City in business transactions, litigation, or judicial or administrative
proceedings. Accordingly, the City waives any conflict of interest in any such matter, and will
not assert any conflict of interest as a ground for disqualifying Crowell & Moring from
representing other clients in any such matter.
The City may terminate Crowell &Moring's services at any time by written notice.
After receiving such notice, Crowell &Moring will cease providing services. Crowell & Moring
may also terminate its services to the City at any time by written notice. If we terminate our
services, the City agrees to execute a substitution of attorney promptly and otherwise cooperate
in effecting that termination. In either event of termination, Crowell & Moring will cooperate
with the City in the orderly transfer of all related files and records to the City's new counsel.
Termination of our services, whether by you or by us, will not relieve the obligation to pay for
services rendered and costs incurred before our services formally ceased.
This agreement shall be governed by and construed in accordance with the laws of the
State of California without regard to principles of conflicts of laws. Any action to enforce or
interpret this Agreement shall be filed in the Superior Court of Riverside County, California or in
the United States District Court for the Central District of California.
Finally,unless we receive different instructions from you, we will retain files from this
matter for five years after its completion. At that time, documents other than those with intrinsic
value (such as a deed or contract) may be destroyed.
03
Douglas Holland
City Attorney
July 19, 2016
Page 3
This agreement is effective July 19, 2016. If these terms and conditions are acceptable,
please sign in the space below and return a copy of this letter to me within ten business days. If
we do not receive the countersigned letter or any objection to it within ten days,and with your
knowledge we begin work for you, we will treat the terms of this letter as having been accepted
by you.
Sincerely yours,
CROWELL &MORING LLP
Jeffrey H.Rutherford
AGREED:
THE CITY OF PALM SPRINGS
By:
Authorized Representative of the City of Palm Springs
04
Judy Deertrack
1333 South Belardo Road, Apt 510
Palm Springs, CA 92264
Wednesday, January 18, 2017
To the City Council
Palm Springs, California
5.D. APPROVAL OF AN AGREEMENT WITH CROWELL MORING TO PROVIDE SUPPLEMENTAL LEGAL SERVICES FOR
THE CITY: RECOMMENDATION: Approve an agreement with the law firm of Crowell Moring to provide legal services for the
City in an amount not to exceed $60,000 and authorize the City Manager to execute the agreement on behalf of the City.
To the Honorable City Council:
Firstly, this proposed contract is less than transparent, being Item 5D under New Business, very easy to miss, but better than the
Pacheco Incident. This time, at least, the matter was not illegally placed on Closed Session with a failure to report out.
Unfortunately, I find a lot of troubling resemblance in what I consider to be significant violations of the public interest, regardless,
and I equate this series of mishaps to the city's stubborn refusal to recognize there are still persons in the system making key
decisions, and almost the exclusive decisions, on matters that are directly related to the investigation, with every probability that
the city's decision makers are within a range of either indictment or witness, if only because of the critical public positions they
held during the time of the alleged acts against the public interest.
Of course, leaving staff and council with these dual interests in office will create chaos and further conflicts, and that is what I
see happening. A person cannot worry about their own vulnerability and clearly represent the public interest in remediation at
the same time. By saying this, I make absolutely no personal statement about anyone's conduct, guilt, or innocence. None of
us have sufficient information to know what has happened, but we know this is a serious and long-ranging investigation, if only
from the FBI receipts themselves, the volume of material produced, and number of officers involved in the raids-
(1) Crowell Moring (Jeff Rutherford) is a prominent firm renowned for its representation of white collar criminal criminal defense.
His own website states, "Mr. Rutherford places a particular emphasis on the representation of individuals and entities in high-
profile, high-stakes political corruption/public integrity, ..,.matters." So, why does the firm propose all in the same letter of
agreement to represent the city in its potential future claims against employees and city officials at the same time the firm
reserves the right to represent potential criminal defendants still within the system? This is quintessential conflict of interest. It
does not lead the city out of deep waters; it enmeshes the city in further controversy.
(2) Three members of the sitting City Council were decision makers on potential GC 1090 conflict of interest claims that may be
associated with the current FBI probe and ongoing investigation. How can they propose to vote (given the GC 1090 restrictions
against voting on one's own financial interest) on a matter that will provide them a legal defense in the future coming from public
funds? That is voting on a matter of personal financial interest,
(3) Why is this use of funds (commingled with defense representation) not a gift of public funds, given that the profile of the FBI
case leaves the victim as the public interest? Looking at City of Bell v. Robert Rizzo:
"We then consider the statutory provisions governing public entity indemnity for criminal prosecutions and
conclude 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."page
11 City of Bell v. Rizzo
"Public policy necessarily rejects the concept that a public entity allegedly victimized by a corrupt employee
must provide that employee with a defense to those charges.". . . . .
"Moreover, to the extent that we are concerned with the provision of a defense to criminal actions, a contract
could not require that result, even if the parties had intended it."page 33 City of Bell v. Rizzo
The City's staff report has not reported anything on the presence or absence of a Tort Act Indemnification Clause within the
employment contracts of any parties who may potentially be under investigation. If nothing else, since no indictments have been
obtained, it is premature to discuss defense against criminal acts arising out of the contracts of the involved individuals.
This whole proposal was shocking to me; and I believe it will be shocking to the general public; this is not a proper use of public
funds.
Judy Deertrack, Resident 1 tL1 � r� l L`� ICx1 J
ATTACHED: PEOPLE V. ROBERT RIZZO /CITY OF BELL V. ROBERT RIZZO CI _ 15�
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
CITY OF BELL, B247362
Petitioner, (Los Angeles County
Super. Ct. No. BC445497)
V.
COURT OF APPEAL - SECOND GIST.
SUPERIOR COURT OF THE Tp )I �� T' !D
STATE OF CALIFORNIA, COUNTY OF
LOS ANGELES, OGr
.IOSEPH A. LAND Clerk
Respondent;
ROBERT A. RIZZO,
Real Party in Interest.
ORIGINAL PROCEEDINGS in mandate. Ralph W. Dan, Judge. Petition
granted with directions.
Aleshire & Wynder, David J. Aleshire, Anthony R. Taylor and
Michael C. Huston, for Petitioner, City of Bell.
No appearance for Respondent.
Spertus, Landes & Umhofer and James W. Spertus for Real Party in Interest,
Robert A. Rizzo.
Robert Rizzo, the former Chief Administrative Officer of the City of Bell (City),
has been sued by the City, as well as the Attorney General acting on behalf of the City,
for restitution for his alleged looting of the City's coffers. He has also been criminally
charged with multiple counts of misappropriation of public funds. Rizzo, by complaint
for declaratory relief seeks a Judgment that the City is contractually obligated to
provide him with a defense to these civil and criminal actions. We conclude that, as
it matter of law, the City d0C5 iiot OWe RrG'zo SUCh a. defense.]
FACTUAL AND PROCEDURAL BACKGROUND
1. Underlying Factual Allegations
The City is a charter city with a population of 38,250. It was discovered that
Rizzo, as well as the assistant chief administrative officer and five City council
members, were receiving salaries well in excess of the amounts paid to similar
individuals in similarly sized cities, and that these seven individuals went to great
lengths to conceal their salaries from public knowledge. (People ex rel. Harris v. Rizzo
(2013) 214 Cal.AppAth 921, 928.) The receipt and approval of excessive salaries are
not, by any means, the only acts of wrongdoing alleged against Rizzo and the other
individuals. A criminal complaint against Rizzo charges multiple counts of
misappropriation of public funds (Pen. Code, § 424, subd. (a)) arising out of numerous
i As we explain below, this case is before us on a petition by the City for a writ of
mandate directing the trial court to vacate its order denying the City a jury trial on the
unstayed issues raised in Rizzo's complaint. In light of our discussion and conclusions
regarding the substantive merit of Rizzo's claim for a defense, however, we will have
no need to reach or decide the jury trial issue.
2
unauthorized "loans" Rizzo made of City funds to various City officers and employees,Z
and other entities. A full accounting of Rizzo's alleged misdeeds is unnecessary to the
resolution of this appeal. It suffices to say that, as the City alleged, "[tlhis lawsuit arises
out of a series of long running dishonest acts by . . . Rizzo . . . and other City
administrators running nearly 17 years. During this time, . . . Rizzo embezzled, stole,
and misappropriated millions of dollars in City funds by obtaining grossly excessive and
completely unwarranted compensation packages."
2. T'he Underlying Actions
There are five actions for which Rizzo seeks the City to pay his defense costs.
We briefly discuss each action.
The initial complaint against Rizzo was brought by the Attorney General, on
behalf of the City. We call this "the AG's action." At the time the AG's action was
filed, Rizzo and the City council members with whom he was allegedly in league were
still in office, a fact which prevented the City from taking action in its own name. The
complaint, filed on September 15, 2010, alleged causes of action for waste of public
funds, negligence, fraud, conflict of interest, and breach of fiduciary duty. The current
status of the AG's action is not indicated in the record in the instant writ proceeding.3
2 One such count alleges Rizzo made an unauthorized $80,000 loan to himself.
3 A demurrer to the Attorney General's first amended complaint was sustained
without leave to amend; the Attorney General successfully appealed. (People ex rel.
Harris v. Rizzo, supra, 214 Cal.AppAth at p. 929.) We concluded that the Attorney
General should have been granted leave to amend, in order to: (1) pursue the action on
behalf of the City; (2) modify the allegations of several of the causes of action already
alleged; and (3) allege several other causes of action the Attorney General argued that it
3
As we shall discuss, Rizzo tendered the AG's action to the City for a defense.
The City refused, which resulted in Rizzo filing a cross-complaint against the City,
seeking a declaration that the City must defend and indemnify him against the Attorney
General's action. This cross-complaint, in turn, prompted the City, on November 24,
2010, to bring it-. nwn cross-complaint ngaino Riz?n, We Pall this "the City's action."
The City alleged causes of action against Rizzo for intentional misrepresentation,
F ,A L«-.,.,.1. f r A. ,A. a.. 1:._„�„ 1]5 r• t_ --
COliStrtieti'vC AAaiiu, uA cai.lt of iIuaGiary uaty, ncgAlgence, conflict oA Imtei"Est, deciat atoi-y
relief, and unjust enrichment.
In addition to the two civil actions, Rizzo faces two criminal complaints, and one
indictment. The first complaint, filed September 20, 2010, charged 44 counts of
misappropriation of public funds (Pen. Code, § 424, subd. (a)), 3 counts of conflict of
interest (Gov. Code, § 1090) and 6 counts of falsification of public records (Gov. Code,
§ 6200, subd. (c)). The second criminal action charges 1 count each of
misappropriation of public funds and conflict of interest 5 The third criminal action was
instituted by an indictment filed March 29, 2011. It alleges 1 count of conspiracy to
could allege. (Id. at p. 951.) We also stated that, since the City had, in the interim,
brought a cross-complaint against Rizzo in its own name, we left it "to the trial court, on
remand, to decide whether and how to consolidate the City's action against Rizzo with
the Attorney General's action against Rizzo on behalf of the City." (Id. at p. 951,
fn. 31.)
4 The complaint was subsequently amended to add a 45th count of
misappropriation of public funds.
5 The complaint in the second criminal action does not specifically allege the facts
underlying these charges; however, it is alleged that the property involved had a value
exceeding $1,300,000.
4
misappropriate public funds, 2 counts of conflict of interest, 4 counts of secretion of
a public record (Gov. Code, § 6200), and I count of misappropriation of public funds.
3. Rizzo's Tender of the Actions for a Defense is Denied
Shortly after the AG's action, the City's action, and the criminal complaints were
filed, Rizzo tendered them to the City for a defense.6 Rizzo relied on a teen in his
employment contract with the City, as well as statutory provisions which govern the
defense of public entity employees by their public entity employers.?
We first set forth the language of the defense obligation in Rizzo's employment
contract. It is part of an indemnification clause,s which states as follows: "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. City
may compromise and settle any such claim or suit provided City shall bear the entire
cost of any such settlement."
6 The record does not reflect any tender of the second and third criminal actions
for a defense.
7 In addition, Rizzo relied on Labor Code section 2802. Rizzo's right to a defense
under any of the statutory provisions on which he relied is not before us; as we shall
discuss, the matter before us in the instant writ proceeding relates only to his contractual
defense rights. Nonetheless, we note that this argument appears to be foreclosed, at
least with respect to the criminal actions, by Los Angeles Police Protective League v.
City of Los Angeles (1994) 27 Cal.App.4th 168, 177.)
s Rizzo repeatedly represents that the City drafted the clause. Yet the contract
specifically states that the terms of the contract "have been negotiated and discussed
between the parties," and that the contract "reflects their mutual agreement." It
provides that, because of those negotiations, "it would be inappropriate to deem any
party to be the drafter."
5
Government Code section 995 provides that, subject to statutory exceptions,
a public entity is generally required to provide for the defense of a civil action brought
against an employee or former employee, on account of an act or omission in the scope
of the employee's employment. Under Government Code section 995.2, a public entity
may refuse to an employee or former emPin-yer �4141, a uidbrice to a civil action
if the public entity determines: (1) that the act or omission was not within the scope of
the employee's employment; (2) that the employee acted or failed to act because of
actual fraud, corruption, or actual malice; or (3) the defense of the action by the public
entity would create a conflict of interest between the public entity and the employee or
former employee. (Gov. Code, § 995.2, subd. (a).) The City declined to defend Rizzo
in the civil actions, relying on all three of these grounds.
Under Government Code section 995.8, a public entity "is not required to
provide for the defense of a criminal action or proceeding . . . brought against an
employee or former employee," but may do so if: (1) the criminal action is brought on
account of an act within the course and scope of the employee's employment; and
(2) the public entity determines that provision of a defense would be in its best interests
and the employee or former employee acted, or failed to act, in good faith, without
actual malice, and in the apparent interests of the public entity. Based on the findings
the City had made which justified its denial of a defense of the civil actions against
Rizzo, the City also denied a defense of the criminal actions against him-
6
4. Rizzo Seeks Declaratory Relief
As noted above, Rizzo filed a cross-complaint against the City (in the Attorney
General's action) alleging three causes of action for declaratory relief, each seeking
provision of a defense and indemnity. The first cause of action relied on Rizzo's
employment contract; the second relied on Government Code section 995; the third
relied on Labor Code section 2802.
Rizzo's complaint was filed prior to the City's action being filed against Rizzo.
It was also filed before the third criminal action, and possibly the second. As such,
Rizzo's complaint did not seek a defense for those actions. There is no indication in the
record before us that Rizzo ever amended or supplemented his complaint to seek
a defense of those actions. However, both parties proceeded as though these actions are
encompassed by Rizzo's complaint.
5. The Proceedings Leading to the City's Writ Petition
The procedural history leading to the instant writ petition is somewhat
convoluted. At one point, the City attempted to take Rizzo's deposition, but Rizzo
asserted his Fifth Amendment privilege and refused to answer all questions put to him
concerning relevant events. As a result, in January 2012, the City sought a stay of
Rizzo's claims against it, pending such time as he could meaningfully participate in
discovery. Rizzo did not oppose a stay—except he sought to pursue that part of his
cause of action based on his employment contract which sought a declaration that the
City must provide him with a defense. Rizzo argued that he was entitled to an
7
immediate defense, at City expense, of the civil and criminal proceedings, regardless of
whether he may ultimately be entitled to indemnification.
On April 30, 2012, the court ordered that both Rizzo's action against the City and
the City's action against Rizzo be stayed pending further order of the court.9 However,
the court did not stay Rizzo's partial cause of action against the City for a defense,
pursuant to his employment contract. In its order, the court analyzed the language of
Rizzo's cmliioymeni contract and controlling law, and concluded !hat tine 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.
The court's order indicated that the parties could "stipulate that the court's
construction of. . . Rizzo's contract would be unchanged by a trial . . . . .. Otherwise,
the court would set a trial date on Rizzo's partial cause of action for a declaration that
the City was required by its employment contract to provide him with a defense.'0
On May 16, 2012, the City demanded a jury trial. On September 5, 2012, Rizzo
moved to strike the City's demand for a jury trial. Rizzo argued that the sole issue for
trial was interpretation of his employment contract, which presented an issue of law for
the court. The City responded that numerous factual issues existed, including issues
9 At this time, the AG's action was stayed pending appeal.
to Rizzo argues the City should have appealed from this order and, having failed to
do so, is barred from challenging it now. But the order itself simply regarded the scope
of the stay, with which the City apparently had no quarrel. The trial court clearly
indicated its construction of the contract was preliminary, and that (unless the parties
stipulated otherwise) it was subject to change at trial.
8
relating to whether the contract was ambiguous and issues relating to its affirmative
defenses. The trial court, however, agreed with Rizzo and, on January 31, 2013,
ordered the City's jury trial demand stricken.
6. The City's Writ Petition and the Issues Raised
On March 8, 2013, the City filed its petition for writ of mandate, challenging the
trial court's order striking its jury trial demand. We issued a temporary stay and sought
preliminary opposition. In the City's reply to Rizzo's opposition, the City argued that
interpreting Rizzo's employment contract to require the City to provide a defense would
render the contract void as against public policy. In other words, the City raised the
issue that the employment contact should be interpreted, as a matter of law, not to
require the City to provide a defense to the actions. Rizzo immediately tiled a motion to
strike those portions of the City's reply which were not germane to the narrow issue of
whether the City was entitled to a jury trial. We did not rule on the motion at that time;
we will now deny it.
On May 8, 2013, we extended the stay order and issued an order to show cause.
We asked the parties to brief seven enumerated issues, specifically including: (1) "Does
Rizzo's employment contract obligate the [City] to provide indemnity to Rizzo against:
[¶] (a) Criminal charges involving allegations in which the City and/or the citizens
thereof were victims? [¶] (b) Civil actions alleging that Rizzo engaged in ultra vires
acts and/or the waste or misuse of funds belonging to the City and/or the citizens
thereof?" and (2) "If there is no obligation to provide indemnity for such claims under
the terms of Rizzo's employment contract, on what rationale and authority would the
9
City be obligated to provide a defense to such claims?" The parties briefed the issues as
requested.
As this court continued its review of the applicable law, we sought further
briefing on additional issues, including: (1) whether the indemnity clause in Rizzo's
employment contact was "a routine third-party .ndenm:ty clause which does .not extend
to first-party claims in the absence of clear and explicit language to that effect";
(2) whether the clause was "reasonably subject to ihC interpretation that the City
intended to pay for the defense of any action brought by the City, or on its behalf,
against Rizzo'; and (3) whether "Government Code section 9[9]6.6, which permits
a governmental entity to contract to give its employees additional [defense] rights,[11]
permit a governmental entity to agree to provide its employee a defense to future
criminal conduct, not yet committed." The parties briefed the issues as requested.12
ISSUES PRESENTED
We first consider the terms of Rizzo's employment agreement, and conclude that
the clause on which he relies is simply a third-party indemnification agreement, which
11 As we shall discuss, we have now concluded that our characterization of
Government Code section 996.6 was not entirely correct.
12 To some extent, Rizzo chose not to brief the issues. As the sole issue left
unstayed by the trial court related to the City's alleged contractual obligation to defend
Rizzo, Rizzo believed any issues relating to whether the City had a contractual
obligation to indemnify him were simply not ripe for review before this court. As Rizzo
argued that the City's contractual defense obligation is wholly unrelated to its
contractual indemnity obligation, Rizzo declined to address, in part, this court's
questions relating to indemnity. As we shall discuss, we conclude the contractual
provisions relating to defense and indemnity are inextricably intertwined, and the
determination of whether a duty to defend exists depends on whether there is a potential
for indemnity.
10
does not apply to civil actions, by or on behalf of, the City itself. As the indemnity
agreement does not apply to such actions, the duty to defend likewise does not apply to
them either. We then consider the statutory provisions governing public entity
indemnity for criminal prosecutions and conclude 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. Finally,
we address considerations of public policy, and conclude that they fully support our
result.
Rizzo argues that we should not reach these issues. I-Ie takes the position that if
the employment contract is to be interpreted as a matter of law, the trial court was
correct in striking the City's request for ajury trial, and we should simply deny the writ
petition and let the trial court interpret the contract in the first instance. Such a course
of action would, in our view, be a waste of judicial resources. The contract can be
interpreted as a matter of law; the parties have been given a full opportunity to brief the
issues before this court; and it appears, from the trial court's ruling on the stay motion,
that the trial court's present interpretation of the contract is erroneous.
We will conclude that the contract does not require the City to provide Rizzo
with a defense to the underlying actions. We will therefore grant the City's writ
petition, and direct that the trial court conduct no trial, bench or jury, on Rizzo's partial
cause of action for a defense under his employment contract, as the City is entitled to
judgment on that claim as a matter of law.
11
DISC'UWON
1. Interpreting the Language of the Agreement Itself
a. Standard of Review
The interpretation of a written instrument, even though it involves what might
properly be called ques ions of fact, is essentially a;r.rdreral 4;�netron to 1,e exer'crsed
according to the generally accepted canons of interpretation so that the purposes of the
H-Is rUillent i11ay be given of`iect. (Parsons v. Brisiol Development Co. (1965) 62 Cal.2d
861, 865_) Since indemnity agreements are construed under the same rules which
govern the interpretation of other contracts, the indemnity agreement must be
interpreted so as to give effect to the mutual intention of the parties. (Myers Building
Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Ca1.App.4th 949, 969; Civ.
Code, § 1636.) In interpreting an express indemnity agreement, the courts look first to
the words of the contract to determine the intended scope of the indemnity agreement.
(Smoketree-Lake Murray, Ltd. v. Mills Concrete Construction Co. (1991)
234 Ca1.App.3d 1724, 1737.) The intention of the parties is to be ascertained from the
"clear and explicit" language of the contract, and if possible, from the writing alone.
(Civ. Code, §§ 1638-1639.) Unless given some special meaning by the parties, the
words of a contract are to be understood in their"ordinary and popular sense," focusing
on the usual and ordinary meaning of the language used and the circumstances under
which the agreement was made. (Civ. Code, § 1644; Continental Feller Corp. v.
Amtech Mechanical Services, Inc. (1997) 53 Cal.AppAth 500, 504; Lloyd's
Underwriters v. Craig & Rush, Inc. (1994) 26 Cal.AppAth 1194, 1197-1198.)
12
When a dispute regarding the meaning of a contractual provision exists, the court
must first determine whether on its face the language is capable of differing or
inconsistent reasonable interpretations. (Southern Cal. Edison Co. v. Superior Court
(1995) 37 Cal.App.4th 839, 848.) The test "is not whether [the instrument] appears to
the court to be plain and unambiguous on its face, but whether the offered evidence is
relevant to prove a meaning to which the language of the instrument is reasonably
susceptible." (Pacific Gas & Electric Co. v. G. W Thomas Drayage & Rigging Co.
(1968) 69 Ca1.2d 33, 37; Founding Members of the Newport Beach Country Club v.
Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 955.) Accordingly, if
the instrument is reasonably susceptible to the interpretation urged, the court must
receive any relevant extrinsic evidence the party puts forth to prove its interpretation.
(Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.AppAth 1107, 1126.) If
there is no material conflict in the extrinsic evidence, the trial court must interpret the
contract as a matter of law. Otherwise, it is a factual conflict dependent on the
credibility of extrinsic evidence to be properly resolved by thejury. (Ibid.)
In this case, Rizzo is correct when he argues that there are no factual issues to
resolve. The dispute over the interpretation of the employment contract between the
City and Rizzo is entirely one of law. Our standard of review is therefore de novo.
b. Non-Insurance Indemnity Contracts
In Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 552 (Crawford,
the California Supreme Court articulated the appropriate standard of review for the
interpretation of noninsurance indemnity agreements: "subject to public policy and
13
established rules of contract interpretation, the parties have great freedom to allocate
such responsibilities as they see fit. . . . [11] Though indemnity agreements resemble
liability insurance policies, rules for interpreting the two classes of contracts do differ
significantly." (Id. at pp. 551-552.) Ambiguities in a policy of insurance rare construed
against the insurer because the. insurer has re,.eived prein i mis to provide the agreed
protection. (Ibid.) In a noninsurance indemnity agreement, however, it is the
indenmitee who may often have the superior bargaining power, and this gives rise to
public policy concerns which influence how such agreements are construed. (Ibid.)
C. Duty to Defend in Indemnity Agreernents
We now turn to the issue of the scope of the duty to defend in indemnity
agreements, and, specifically, its relation to the scope of the duty to indemnify. In the
absence of a contrary intention in the language used, the law will imply, in an
agreement to indemnify, an agreement to defend actions brought against the indemnitee
"in respect to the matters embraced by the indemnity." (Civ. Code, § 2778, subd. 4.) In
other words, in the absence of any contrary intention, the scope of the duty to defend
which is implied in an indemnification clause has the same scope as the duty to
indemnify. Conversely, if an action is brought against the indenmitee which is not
"embraced by the indemnity" duty, there is no duty to defend.
However, sometimes it will not be clear whether an action brought against the
indemnitee is within the scope of the indemnity until after the underlying action has
been resolved. In those situations, the duty to defend nonetheless arises. That is to say,
the law implies in every indemnity contract, unless the contract provides to the contrary,
14
the duty to defend claims which, at the time of tender, allege facts that would give rise
to a claim of indemnity. (Crawford, supra, 44 Cal.4th at p. 558.)
This rule of law presumes that there is no language to the contrary. The parties
are free to agree to a broader duty to defend; that is, the parties can agree that a defense
will be provided even in situations where the facts alleged would not give rise to a claim
of indemnity.13 The parties may also agree to a more narrow duty to defend, and
specifically agree that, for example, no defense will be provided, but defense costs will
be reimbursed only if the underlying claim was ultimately encompassed by the
indemnity. (Crawford, supra, 44 Cal.4th at pp. 556-557.) What matters is simply
whether the parties agreed to a different duty to defend than the one implied in all
indemnity contracts by Civil Code section 2778, subdivision 4; and, if not, whether the
underlying claims, at the time of tender, alleged facts that would give rise to a claim of
indemnity.
13 Rizzo relies on case authority discussing the somewhat related issue of whether
a duty to defend exists when an insurer agreed to defend a claim which, by statute or
public policy, an insurer is prohibited from insuring. (Mt. Hawley Ins. Co. v. Lopez
(2013) 215 Cal.App.4th 1385, 1417 [there is no public policy against insurers
contracting to provide a defense to insureds facing criminal charges]; Downey Denture
v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 487 [insurer agreed to indemnify for, and
defend claims alleging, malicious prosecution; coverage is barred by Insurance Code
section 533, but not defense]; (B & E Convalescent Center v. State Compensation Ins.
Fund(1992) 8 Cal.AppAth 78, 101 [an insurer and an insured are free to contract for
the provision of a defense to a claim which cannot be indemnified, although they did not
do so in this case].) We have no quarrel with this authority; it is simply not material.
The issue with which we are presently concerned is not whether the City could have
agreed to defend Rizzo for actions brought by City itself, but whether it did.
15
d. Indemnity Agreements are Generallv Not Exculpatory
As we noted above, in a noninsurance indemnity agreement, in contrast to an
insurance agreement, the indemnitee may often have the superior bargaining power,
and, as a result, public policy concerns influence how such agreements are construed.
As such if a party seeks, in a nomnsurance agreement, to be indemnified for prf:te t.onS
beyond those afforded by the doctrines of implied or equitable indemnity--for his or
trier own active negligence, or regardless of the indcrnnitor's Pauli the language on the
point must be particularly clear and explicit, and will be construed strictly against the
indemnitee. (Crawford, supra, 44 CalAth at p. 552.)
This rule applies when the indemnitee seeks to be indenmified for claims made
by the other parry to the contract—the indemnitor—itself. "[A] clause which contains
the words `indemnify' and `hold harmless' is an indemnity clause which generally
obligates the indemnitor to reimburse the indemnitee for any damages the indemnitee
becomes obligated to pay third persons. [Citation.] indemnification agreements
ordinarily relate to third panty claims." (Myers Building Industries, Ltd. v. Interface
Technology, Inc. (1993) 13 Cal.AppAth 949, 969.) "An indemnity agreement may
provide for indemnification against an indemnitee's own negligence, but such an
agreement must be clear and explicit and is strictly construed against the indemnitee."
(Rooz v. Kimmel(1997) 55 Cal.AppAth 573, 583.)
Cases which have interpreted an indemnification agreement to act as an
exculpatory clause between the parties to the agreement have involved agreements
which contain language clearly providing that the indemnification clause applied to
16
such claims. (E.g., Rooz v. Kimmel, supra, 55 Cal.App.4th at p. 586 [indemnification
clause provided that indemnitee had been requested to act as an accommodation and
without consideration; indemnitor agreed to protect indemnitee against " `all
liabilities . . . which may be sustained or incurred by [indemnitee] under, or arising
directly or indirectly out of" the acts it had been requested to perform].) putting it
another way, as one court explained, "If the parties go out of their way and say `we
really, really mean it,' language clearly contemplating exculpation may be enforced."
(Queen Villas Homeowners Assn. v. TCB Property Management (2007)
149 Cal.App.4th 1, 6 (Queen Villas).)
In Queen Villas, a management company attempted to rely on an indemnity
clause in its agreement with a homeowners association to defeat an action by the
association alleging the management company had breached the agreement.14 The
indemnification clause simply provided that the association would indemnify the
management company " `against any and all claims, costs, suits, and
damages . . . arising out of the perfonnance of this agreement or in connection with the
management and operation of the [a]ssociation . . . . ' " (Id. at p. 4.) The court noted
that the management company "seeks to conscript the indemnification agreement in this
case into a direct, two-party exculpatory clause," (id. at p. 5) and rejected the attempt.
The court found no language in the terms of the contract indicating an intent for the
indemnification clause to go "beyond the usual context of third party indemnification."
14 Rizzo argues that Queen Villas should not be relied upon in this case because it
involved only a claim for "indemnity," not defense. We disagree. In the context of this
case, that is a distinction without a difference.
17
(Id. at p. 7.) The court further noted "the reductio ad absurdurn of the . . . management
company's position vis-a-vis the association's contract claims . . . . Under
the . . . management company's interpretation, it could just outright plain fail to do any
work at all for the association, such as hiring a gardening company or arranging for
surance or the typical th.ngs that property ma..agers do, a.:d the clause would teGA
pr<,
it even from a breach of contract action by the association for having paid for services
never performed." (Id. at p. 8.)
e. The Instant Indemnification Agreement
We now turn to the terns of the instant agreement, and first consider whether the
duty to defend is, in any way, broader than the duty to indemnify. Clearly, it is not.
The duty to defend and duty to indemnify are not only discussed in precisely the same
terms, they are part of the same sentence. We repeat the language: "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. City may
compromise and settle any such claim or suit provided City shall bear the entire cost of
any such settlement." There is no defense obligation beyond the inderrmity obligation;
thus, there is no duty for the City to defend any claims which do not, at the time of
tender, allege facts which would fall within the scope of the indemnity.
Rizzo would separate the defense a_nd indemnity provisions, and argue_ that,
regardless of the scope of the City's obligation to indemnify (which will be resolved at
a later date), the City agreed to "defend . . . [Rizzo] against any claim, demand,
18
judgment or action, of any type or kind, arising out of any act or failure to act" as long
as the act or failure to act was alleged to be within the course and scope of Rizzo's
employment. Yet this overlooks the fact that the defense obligation is part and parcel of
the indemnity obligation, and the legal principle that the City need not defend if the
underlying actions do not allege claims that could at least potentially give rise to a duty
of indemnity.'s
Thus, it is critical to determine the scope of the indemnity obligation.
Specifically, as Rizzo seeks defense of the City's action and the AG's action on behalf
of the City, we must determine whether the indemnity clause can reasonably be
interpreted to include claims made by the City, or on its behalf. We believe that the
question must be answered in the negative.
As we have discussed, indemnity agreements generally apply only to third-party
claims. In order for an indemnity agreement to encompass claims between the parties to
the agreement, and to act as an exculpatory clause or release, there must be clear and
explicit language to that effect. No such language is present in the agreement before us.
Indeed, there is language indicating a contrary intent. The final sentence of the
rs At oral argument, Rizzo suggested that the defense agreement could be severed
from the indemnity clause under the employment contract's severability clause. That
clause provides, in full: "This Agreement is severable, and if any provision or part
hereof is judicially declared invalid, the remaining provisions shall . . . remain in force
and effect." 'phis provides no basis for Rizzo's attempt to parse the indemnity clause.
The indemnity language of the indemnity clause is in no way invalid. That the
indemnity language limits the scope of the defense obligation is no basis to strike the
indemnity language from the agreement. A party to an agreement cannot use the
severability clause to remove from the agreement legally valid enforceable language
which has the effect of limiting other language which he would prefer to be unlimited.
19
indemnification clause gives the City the right to compromise and settle "any such
claim or suit" (that is, a claim or suit within the scope of the indemnity agreement)
provided it bears the cost of the settlement. Such language can only be read to apply to
claims or suits by third parties. The idea that the City "may compromise and settle"
a suit brought by the Cr Ly against Rizzo, if it pays itself the sctticmcnt amount, won ld
snake no sense whatever. The language of this clause is that of a third-party indemnity
only. It is not reasonably susceptible of an interpretation that it also releases Rizzo from
any liability to the City itself.
As the indemnity agreement does not apply to first-party claims, the defense
obligation cannot extend to such claims either. The City is only obligated to defend
actions which allege facts which could potentially give rise to a claim of indemnity. As
both the City's action and the AG's action were brought on behalf of the City, and the
City has no duty to indemnify for such claims,16 it has no duty to defend them.
We believe the same conclusion applies to the issue of whether a defense is owed
for the criminal actions. The language of the indemnity clause clearly applies to
third-party civil actions, not criminal complaints and indictments. We again note the
provision allowing the City to settle the actions on behalf of Rizzo, as long as it pays the
settlement. This provision demonstrates that criminal actions were not contemplated by
the agreement; Rizzo could not agree to allow City to enter into a plea bargain on his
16 This determination does not turn on whether the acts alleged by the Attorney
General and the City were within the course and scope of Rizzo's employment. Instead,
it turns on the fact that the Attorney General and the City both brought actions against
Rizzo on behalf of the City. That fact alone excludes the actions from the scope of the
indemnity agreement as a matter of law.
20
behalf, nor could the City agree to serve a sentence on Rizzo's behalf. As the
indemnification clause, as a factual matter, did not extend to criminal actions, the
defense obligation could not do so either. However, there is a more fundamental reason
why the City owes Rizzo no duty to defend the criminal actions: it is statutorily
prohibited from doing so.
2. Government Code Limitations on Provision of a Defense
The Government Code contains various provisions relating to a public entity's
obligation to provide its employees, or former employees, with a defense to actions
arising out of acts taken in the course and scope of their employment.17 These
provisions are all found in the California "fort Claims Act, which was enacted in 1963
"in order to provide a comprehensive codification of the law of governmental liability
and immunity." (Los Angeles Police Protective League v. City of Los Angeles, supra,
27 Ca1.App.4th at p. 174.) At issue in the instant writ petition is whether, and to what
extent, a public entity and its employee are tree to contract around these provisions, in
order to give the employee greater defense rights. Rizzo concedes that, with respect to
the criminal actions, there is no statutory duty for the City to provide him with
a defense. We therefore consider whether the City is permitted to contract to provide
him a defense to the criminal actions. In order to do so, we first discuss the legislative
17 The statutes that we will discuss relate to actions against employees or former
employees for acts or omissions occurring within the course and scope of their
employment with the public entity. In the interests of brevity, and unless it is otherwise
clear from the context, when we use the phrase "public employee," it should be
understood to mean an employee or fonner employee alleged to have acted (or failed to
act) within the course and scope of public employment.
21
framework— briefly addressing provisions of the Tort Claims Act governing defenses to
civil and criminal actions — before turning to the key issue of the extent to which
a public entity may contract to provide additional defense rights in criminal actions.
a. Relevant Provisions of the Tort Claims Act
AS to the obIA Mon to defend a C1V21 action, there iS a general pri)vision,
followed by two exceptions. The general provision provides, "Except as otherwise
provided in Sections 995.2 and 995.4, upon request of[a public employee], a public
entity shall provide for the defense of any civil action or proceeding brought against
him, in his official or individual capacity or both . . . . " (Gov. Code, § 995.)
As already noted, Government Code section 995.2,provides: "(a) A public
entity may refuse to provide for the defense of a civil action or proceeding brought
against [a public employee] if the public entity determines any of the following: [¶]
(1) The act or omission was not within the scope of his or her employment. [¶] (2) He
or she acted or failed to act because of actual fraud, corruption, or actual malice. [¶]
(3) The defense of the action or proceeding by the public entity would create a specific
conflict of interest between the public entity and the [public employee]. For the
purposes of this section, `specific conflict of interest' means a conflict of interest or an
adverse or pecuniary interest, as specified by statute or by a rule or regulation of the
public entity."
Government Code section 995.4 provides: "A public entity may, but is not
required to, provide for the defense of: (a) An action or proceeding brought by the
public entity to remove, suspend or otherwise penalize its own [public employee], or an
22
appeal to a court from an administrative proceeding by the public entity to remove,
suspend or otherwise penalize its own [public employee]. [¶] (b) An action or
proceeding brought by the public entity against its own [public employee] as an
individual and not in his official capacity, or an appeal therefrom."
It is important to recognize that the language of each of these statutory
exceptions is permissive. That is to say, the provisions of Government Code
section 995.2, subdivision (a) indicate circumstances in which a public entity "may
refuse" to provide a defense for a public employee; they do not suggest that the public
entity may not provide a defense in those circumstances. Similarly, Government Code
section 995.4 specifically states that, when its circumstances exist, the public entity
"may, but is not required to" provide the defense.
The language set forth above is to be contrasted with the language of
Government Code section 995.8, which governs the provision of a defense to criminal
actions. It provides: "A public entity is not required to provide for the defense of
a criminal action or proceeding . . . brought against a [public employee], but a public
entity may provide for the defense of a criminal action or proceeding . . . brought
against an employee or former employee if: [¶] (a) The criminal action or proceeding is
brought on account of an act or omission in the scope of his employment as an
employee of the public entity; and [¶] (b) The public entity determines that such defense
would be in the best interests of the public entity and that the employee or former
employee acted, or failed to act, in good faith, without actual malice and in the apparent
interests of the public entity." This language is restrictive. It indicates that a public
23
entity "may provide" a defense for a public employee if the two circumstances set forth
in the statute exist; it does not in any way suggest that a public entity may also provide
a defense if those circumstances do not exist.
b. Government Code Section 996.6 Does Not Permit a Public Entity
to Provide Greater Defense Rights to a Public Employee
Facing Cr;_;_i Pi"va eC flail
Rizzo argues that an additional provision, Government Code section 996.6,
allows a public entity to agree to provide greater defense rights for public employees
charged with crimes than the limited rights set forth in Government Code section 995.8.
Government Code section 996.6 provides, in its entirety, "The rights of an employee or
former employee under this part are in addition to and not in lieu of any rights he may
have under any contract or under any other enactment providing for his defense."
There is little law interpreting this provision, although dicta in Los Angeles
Police Protective League v. City ofLos Angeles, supra, 27 Cal.AppAth 168, supports
Rizzo's interpretation. That language states, "public entities and employees can
voluntarily agree to change the indemnity structure of the Tort Claims Act by collective
bargaining. Government Code section 996.6 provides that if the City agrees to
indemnify the criminal defense costs of its employees,(i$j it may do so. Likewise, if the
City decides to provide greater indemnity rights to its employees under a City
ordinance, that ordinance will be upheld." (Id. at pp. 181-182.) To the extent that this
18 The facts in that case involved public employee criminal defendants who sought
indemnification for their criminal defense costs from their public entity employer after
they had been acquitted. Rizzo does not seek such limited relief, arguing that the City
has a contractual obligation to provide him with a defense to pending charges.
24
language suggests that a public entity can contract with its employees to provide
a criminal defense when the circumstances of Government Code section 995.8 which
allow such a defense are not present, we respectfully disagree.
The key language in Government Code section 996.6 provides that the defense
rights in the Tort Claims Act are "in addition to . . . any rights [the public employee]
may have under any contract . . . providing for his defense." Rizzo interprets this
provision to mean that the public entity may contract with the public employee to
provide him with greater rights than those permitted by the provisions of the Tort
Claims Act. An alternative interpretation, however, is that this language simply means
that the public entity is required to provide the public employee with a defense
according to the terms of the Tort Claims Act, regardless of whether the public
employee has a contract with a third party (e.g., an insurer) to also provide the employee
with a defense. (Pacific Indem. Co. v. American Mut. Ins. Co. (1972) 28 Ca1.App.3d
983, 993-994.) In determining which interpretation is correct, we consider statutory
analysis and legislative history.
(1) Statutory Analysis
"Our primary duty when interpreting a statute is to ` "determine and effectuate" '
the Legislature's intent. [Citation.] To that end, our first task is to examine the words
of the statute, giving them a commonsense meaning. [Citation.] if the language is clear
and unambiguous, the inquiry ends. [Citation.] However, a statute's language must be
construed in context, and provisions relating to the same subject matter must be
harmonized to the extent possible. [Citation.]" (Van Horn v. Watson (2008) 45 CalAth
25
322, 326.) A " `[1]iteral construction should not prevail if it is contrary to the legislative
intent apparent in the statute. The intent prevails over the letter, and the letter will, if
possible, be so read as to conform to the spirit of the act.' [Citation.]" (Id. at p. 327.)
Moreover, we avoid interpretations which would render other statutes unnecessary
surplusage. (Id. at p. 333.)
It is clear that Rizzo's interpretation would read the bulk of Government Code
section 995.8 out of existence. Government Code section 995.8 provides that a public
entity may provide a public employee a defense to a criminal action if the public entity
determines that the defense would be in the best interests of the public entity and that
the public employee had acted in good faith and without malice. If Government Code
section 996.6 is interpreted to mean that a public entity can contract to provide a public
employee with a criminal defense even when Government Code section 995.8 does not
specifically allow it, there is no need for the restrictions of Government Code
section 995.8. Government Code section 995.8 would effectively be rewritten to state
"A public entity is not required to provide for the defense of a criminal action brought
against a public employee, but may provide such a defense whenever it agrees to do so."
Had the Legislature sought to enact such a provision, it could have done so. Indeed, the
Legislature used such permissive language when discussing the provision of a defense
of a civil action brought by the public entity itself, stating that the public entity "may,
but is not required to,provide for the defense of' such an action. (Gov. Code, yS 995.4.)
As the Legislature used restrictive language in Government Code section 995.8, we
26
must assume that the Legislature intended to do so, and did not intend to undermine that
language with the general language in Government Code section 996.6.
(2) Legislative History
We are fortunate in that the legislative history of the key language in
Government Code section 996.6, as well as of Government Code section 995.8, is
available and is unambiguous. We first consider that of Government Code
section 996.6.
Prior to the enactment of the comprehensive Tort Claims Act, the predecessor
statute to Government Code section 996.6 was Government Code former section 2001,
subdivision (4). That language provided, "The rights of a public employee under this
section are in addition to and not in lieu of any rights the employee may have under any
other law, charter, ordinance or regulation providing for the defense of a public
employee." (Scats. 1961, ch. 1692, § 2, p. 3669.) At that time, the statute did not refer
to contracts in any way.
In 1963, the California Law Revision Commission issued its recommendations,
which would later provide the basis for the Tort Claims Act. The Law Revision
Commission stated, "The recommended legislation should be in addition to and not in
lieu of any rights the public employee may have under any contract ['footnote citing to
39 Ops. Cal. Atty. Gen. 71 (1962)] or under any other law, charter, ordinance or
regulation providing for his defense." (Recommendations Relating to Sovereign
Immunity, No. 4, Defense of Public Employees (Jan. 1963) 4 Cal. Law Revision Com.
Rep. (1963) p. 1309.) Clearly, then, the addition of the word "contract" to the language
27
then existing in Government Code former section 2001 was due to the cited Attorney
General opinion.
That opinion involved a police officer, who had, at his own expense, purchased
a false arrest insurance policy, and was seeking a defense from his employing entity.
k39 Opr. Cal. Att;'. Gen, at p. 71.) The qucstivn presented vv aS v✓hc ti ie *u e entity Quid
avoid paying the defense costs on the theory that its employee already had an insurance
policy which would provide a defense. The Attorney General rejected the argumem,
stating, "To permit the public entity to avoid a statutory duty by relying upon the
contractual duty owed by a third party would be akin to the creation of a novation
without the necessary consent or agreement of the obligee to release the additional
obligor [citation]. It is concluded, therefore, that the terms of the insurance contract
relative to the insurer's duty to defend have no bearing upon the statutory duty of the
public entity which upon request of the employee is responsible for providing a legal
defense at public expense against actions for false arrest and imprisonment or assault
and battery arising out of acts performed during the course of his duties." (Id. at p. 74.)
Thus, the addition of the word "contract" in what is now Government Code
section 996.6 was not intended to allow a public entity to contract to provide its public
employee with additional defense rights beyond those provided in the Tort Claims Act
itself, but merely to prevent a public entity from relying on the contractual obligations
owed by others to the public employee to satisfy its own statutory obligations.
This interpretation is consistent with the legislative history of Government Code
section 995.8, which was intended to provide a public entity with very limited rights to
28
provide a public employee with a criminal defense. The Law Revision Commission
explained, "A public entity should be authorized, but not required, to defend a criminal
action or proceeding brought against a public employee on account of an act or
omission occurring in the scope of his public employment if the public entity
determines that such defense would be in the best interests of the public entity and that
the employee acted in good faith, without actual malice and in the apparent interests of
the public entity. Public entities do not now have this authority. The Commission has
been advised, however, that cases occasionally arise where a criminal proceeding is
brought against a public employee who was simply carrying out his orders. For
example, one case brought to the attention of the Commission involved a school district
employee charged with criminal assault for ejecting a bully from a school playground.
Because the school district was not authorized to provide him with counsel, this
employee was required to secure his own attorney to make an appropriate motion to
dismiss the criminal proceeding brought against him. The Commission has concluded,
therefore, that it would be sound public policy to give public entities a limited
discretionary authority to defend criminal actions and proceedings brought against their
employees." (Recommendations Relating to Sovereign Immunity, No. 4, Defense of
Public Employees (Jan. 1963) 4 Cal. Law Revision Com. Rep. (1963) p. 1308, italics
added, footnote omitted.) The limited discretionary authority of Government Code
section 995.8 would be defeated by Rizzo's interpretation of Government Code
section 996.6.
29
We therefore conclude that Government Code section 996.6 simply provides that
a public entity's defense obligations, as set forth in the Tort Claims Act, are in addition
to any other contractual rights the public employee may have to a defense.19
Government Code section 996.6 does not permit a public entity to provide a defense
where Other SCCtiOnS Of the I,, ClaimS A Ct w'O^slid prOiiibit Such a dei�iise. A,,
Government Code section 995.8 prevents a public entity from providing its employee
a defense to a criminal action unless the public entiiy determines that the defense would
be in the best interests of the public entity and that the public employee had acted in
good faith and without malice, no contractual provision requiring a criminal defense
under any other circumstances can be enforced.20 Thus, although we conclude that the
City did not contract to provide Rizzo with a defense to any criminal action which
might have been brought against him, we further conclude that the City was prohibited,
in any event, from doing so.
19 In fact, the City had an insurance policy under which Rizzo was an additional
insured. Rizzo sought a defense under the policy from the City's insurer. Recently, the
district court granted the insurer's motion for summary judgment, on the basis that
policy exclusions applied. (Rizzo v. Insurance Company of the State of Pennsylvania
(C.D. Cal. Aug. 30. 2013,. CV 12-04347 DMG (FMOx)) 2013 WL 4675063.)
20 A public entity cannot agree in advance that any time its public employee is
subsequently charged with a crime, the provision of a defense would be in the best
interests of the public entity and the public employee will have acted in good faith and
without malice. These are determinations which, by necessity, must be made on a case
by case basis, after the criminal prosecution has begun. (See Recommendations
Relating to Sovereign Immunity, No. 4, Defense of Public Employees (Jan. 1963)
4 Cal. Law Revision Com. Rep. (1963) pp. 1308-1309.)
30
3. Public Policy Supports Our Conclusions
While we base our opinion on the language of the contract and controlling law, it
is also important to not lose sight of the policy issues implicated. Rizzo is alleged to
have "embezzled, stole, and misappropriated millions of dollars in City funds" over
a period of 17 years. When the City sought restitutionary relief for such losses, by
means of civil actions brought by itself and the Attorney General on its behalf, and the
District Attorney initiated criminal prosecutions, Rizzo's response was to demand that
the City defend him against the allegations in all such actions. This is not a case in
which the public entity has chosen to stand behind its employee, perhaps wrongly
accused by third parties. Instead, the entity has brought the accusations itself, and
(when asked to provide a defense) has made a specific finding that its employee acted
out of fraud, corruption, or malice.
Under these circumstances, we find it difficult to believe that any expenditure of
City funds to defend Rizzo would not constitute an impermissible waste of public funds.
In this regard, we are guided by Tenwolde v. County of San Diego (1993)
14 Cal.AppAth 1083. That case concerned a lieutenant in the sheriffs public affairs
division, who, at the request of the sheriff, distributed to the public materials which took
a position on a political matter. A suit was brought to enjoin the practice, and the
sheriff agreed to stop the distribution. Thereafter, both the sheriff and the lieutenant
were held liable for the plaintiffs' costs and attorneys fees in the underlying action. The
lieutenant sought reimbursement from the county for those funds. The trial court
ordered reimbursement, and the county appealed, "complaining the judgment require[d]
31
the taxpayers to indemnify [the plaintiff] for `having squandered taxpayer resources in
the first place.' " (Id. at p. 1088.)
On appeal, the judgment was reversed. The court noted that while the county
may be liable to indemnify the lieutenant if he had been held liable to a third party
in,nred by his lobbying activities, the instant situation was different. "This 'a✓as not
a case of injury to a third party. It was, instead, an action to block illegal activities by
a public agency. The injury resulting from the illegal activity was an injury io the
public itself. The title to the article here under discussion is `Indemnification of Public
Employees.' [Citation.] While the text of the statutes in question does not use the word
`indemnification,' it is clear that this is the principle with which we deal. Granted, these
indemnification provisions are statutory, and hence common law concepts are not
necessarily applicable. However, indemnification is typically a tripartite concept,
resting upon equitable principles. Ordinarily, it is the right of one who has satisfied
another's debt to a third party to recover from the principal obligor. [Citation.] It
makes no sense to talk about indemnification of a claim upon an indemnitee when the
clairn arises from damage by the indemnitee to the indemnitor. Here the wrong giving
rise to the expenditure of fees and costs was an illegal expenditure of County funds
a tort by the sheriff s lieutenant against his own employer. When the party committing
the wrong is stopped, and then assessed costs and fees, it would not be logical, and
certainly would not accord with equitable principles, to require the wronged party, the
County, to reimburse the employee." (Tenwolde v. County of San Diego, supra,
14 Cal.App.4th at p. 1092.)
32
The court went on to note that, although the plaintiff in the underlying action had
been a private party, the Attorney General could have brought the underlying action
instead, in its capacity as the "public entity generally authorized to enforce [the] laws of
the state." (Tenwolde v. County of San Diego, supra, 14 Cal.App.4th at p. 1093.)
"[H]ad the action been brought by the Attorney General, with the resulting halt in the
sheriffs political activities, and had thereafter costs been assessed against [the
lieutenant], would there have been any question about the denial of reimbursement of
those costs from the very entity sought to be protected by the lawsuit? We think not."
(]bid.) The award was for the benefit of the county and its citizens. "When, then, a cost
award including fees based on the `private attorney general doctrine' is made, it would
turn the objective of the suit on its head to require indemnification of the judgment by
the very governmental agency the suit sought to benefit." (Id. at p. 1094.)
We recognize that Tenwolde is distinguishable, in that it pertained to
indemnification rather than defense costs, and was specifically concerned with statutory
indemnification rather than contractual indemnification. We further recognize that the
statutes permit a public entity to choose to pay defense costs for an action it brings
against its own employee. Nonetheless, Tenwolde's discussion of the policy issues is
illuminating. The City is of the belief 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.
Public policy necessarily rejects the concept that a public entity allegedly
victimized by a corrupt employee must provide that employee with a defense to those
33
charges. The Tort Claims Act does not require such a result. A contract term intended
only to provide the employee with indemnification from, and a defense to, third party
actions, cannot be interpreted to require that result. Moreover, to the extent that we are
concerned with the provision of a defense to criminal actions, a contract could not
require that result even .f the part;eS had intended 4.
34
DISPOSITION
The petition is granted. The matter is remanded to the trial court with directions
to conduct further proceedings consistent with this opinion. Costs shall be awarded to
the City in these writ proceedings.
CERTIFIED FOR PUBLICATION
CROSKEY, J.
WE CONCUR:
KLEIN, P. J.
ALDRICH, J.
35
David Jennings Aleshire
Aleshire & Wynder LLP
18881 Von Karman Avenue
Suite 1700
Irvine, CA 92612
Case Number B247362
Division 3
CITY OF BELL,
Petitioner,
V.
SUPERIOR COURT OF LOS ANGELES COUNTY,
Respondent;
ROBERT RIZZO,
Real Party in Interest.
Scan§&rofiled/Doc#:
Calendared❑ n/a ❑ acpfn v fzzv
Client/Matter 005
Routing: Z 3 7-
Filing: Pleading Disc❑Corr❑
Other- / Filed By
Filed 3/20/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
THE PEOPLE ex rel. B236246
KAMALA D. HARRIS, as Attorney
General, etc., (Los Angeles County
Super. Ct. No. BC445497)
Plaintiff and Appellant,
V.
ROBERT A. RIZZO et al.,
Defendants and Respondents.
APPEAL from a judgment of dismissal of the Superior Court of Los Angeles
County, Ralph W. Dau, Judge. Judgment is reversed and remanded with directions.
Kamala D. Harris, Attorney General, Douglas J. Woods, Senior Assistant
Attorney General, Peter A. Krause and Mark R. Beckington, Deputy Attorneys General,
for Plaintiff and Appellant.
Law Offices of James W. Spertus, James W. Spertus, Ezra D. Landes and
Amy M. Hinkley, for Defendant and Respondent, Robert A. Rizzo.
Aleshire & Wynder, David J. Aleshire, Anthony R. Taylor and
Michael C. Huston, for Defendant and Respondent, City of Bell.
Law Offices of Russell G. Petti and Russell G. Petti, for Defendant and
Respondent, Pier'angela Spaccia.
Kaye, McLane & Bednarski and Ronald Kaye, for Defendant and Respondent,
George Cole.
Stanley L. Friedman, for Defendant and Respondent, Oscar Hernandez.
Byrne &Nixon, Daniel Nixon and Jennifer Derwin, for Defendant and
Respondent, Teresa Jacobo.
Law Office of Leo J. Moriarty and Leo J. Moriarty, for Defendants and
Respondents, Victor Bello and George Mirabel.
Paul Hastings, Thomas P. O'Brien, Katherine F. Murray and
Nicholas J. Begakis, for Defendant and Respondent, Randy G. Adams.
2
When it appears that a charter city is under the control of individuals who are
looting the city's coffers for their own benefit, can the Attorney General, on behalf of
the city, bring an action against the allegedly corrupt individuals, to remove the city
from their control and require them to pay restitution to the city? We conclude that the
Attorney General may bring such an action, and seek recovery from the corrupt
individuals to the extent their acts were unauthorized.
This case concerns the City of Bell (City), a charter city with a population of
38,250. It was discovered that the Chief Administrative Officer of the City, the
Assistant Chief Administrative Officer, and five City Councilmembers were receiving
salaries well in excess of the amounts paid similar individuals in similarly-sized cities,
and that these seven individuals went to great lengths to conceal their salaries from
public knowledge. It was also revealed that the Chief Administrative Officer had hired
an individual to serve as Chief of Police at a high salary; the terms of his employment
contract were structured so as not to disclose the true extent of his salary.'
When the true salaries of these individuals were made public, a scandal erupted.
It became clear that legal action should be taken. However, as the City was still under
the control of the apparently corrupt officials, the City brought no action against them.
Therefore, the Attorney General brought the instant action, challenging the excessive
salaries and seeking reimbursement for the City. Shortly thereafter, the District
' The contract provided that the Chief of Police would be paid $17,577 "per pay
period." It did not define "pay period," which was, in fact, every two weeks.
3
Attorney filed criminal proceedings.2 Ultimately, following a recall election, city
management changed. Although the City had initially opposed the Attorney General's
pursuit of this action, the City now fully supports the Attorney General's right to bring
this action on its behalf.
The defendants demurred to the operative complaint, arguing, among other
things, the Attorney General's lack of standing, immunity for legislative acts, and the
doctrine of separation of powers. The trial court sustained the demurrers of defendants
without leave to amend,3 and dismissed the action. The trial court concluded that the
allegedly excessive salaries were legislative acts for which the defendants were
immune. Relying on the doctrine of separation of powers, the court concluded that the
judiciary had no jurisdiction to interfere with the City Council's legislative decisions
regarding compensation.
On appeal, we conclude that the Attorney General does have standing to pursue
this action on behalf of the City. We further conclude that, although separation of
powers and legislative immunity bar pursuit of this action with respect to acts within the
discretion of City officials, these doctrines do not prevent the action from proceeding
with respect to defendants' allegedly ultra vires acts. We therefore hold that the trial
court erred in sustaining the demurrers without leave to amend. Finally, we address the
trial court's denial of the Attorney General's motion to stay proceedings in this case
2 No criminal proceedings were filed against the Chief of Police.
3 The trial court granted leave to amend a single cause of action; the Attorney
General, however, elected not to amend.
4
pending resolution of the criminal actions against defendants. While we agree that the
trial court did not abuse its discretion in denying the motion, we note that subsequent
events may justify reconsideration of the motion.
FACTUAL AND PROCEDURAL BACKGROUND
1. Allegations of the Complaint
The operative complaint focuses on the excessive salaries and benefits paid
defendants, as well as efforts to hide those salaries and benefits from public knowledge.
We discuss the allegations against each defendant briefly.
Defendant Robert Rizzo was the Chief Administrative Officer of the City from
May 1993 through at least July 2010. Under section 603 of the Bell Charter, the Chief
Administrative Officer"shall be paid a salary commensurate with the responsibilities of
chief administrative officer of the City." Rizzo's base salary in 2010 was $787,500.
4 The operative complaint is the first amended complaint. The Councilmember
defendants argue that the trial court did not abuse its discretion in denying the Attorney
General leave to amend the operative complaint on the basis that the Attorney General
already had one opportunity to amend to cure the errors in its complaint. We disagree.
In response to the Attorney General's initial complaint, Rizzo filed a demurrer, in which
Spaccia joined. At the hearing on the demurrer, the trial court expressed concern
regarding the Attorney General's right to pursue this action, but noted that Rizzo's
demurrer was procedurally inadequate on all grounds except uncertainty. As a result,
the trial court overruled the demurrer to the extent it raised any substantive issues, and
sustained the demurrer (with leave to amend) only with respect to the ground of
uncertainty. The Attorney General therefore filed a first amended complaint responding
to the trial court's order sustaining the demurrer for uncertainty. As the trial court had
not sustained Rizzo's demurrer on the ground that the Attorney General lacked
standing, the Attorney General was under no obligation to amend the complaint to
address this ground. As such, when the trial court subsequently sustained the demurrers
to the first amended complaint without leave to amend, the Attorney General had not
been granted an opportunity to amend to address any purported defect other than
uncertainty.
5
This salary is allegedly "over three times what cities of comparable population in the
Los Angeles region pay to their city managers on average." In 2008, when other city
employees were being laid off, Rizzo received five new employment contracts
providing for 12 percent annual increases to his salary. Rizzo's 2008 contracts provided
that he would accrue service credit with the California Public Employees' Retirement
System at double the normal rate, allowing for double retirement benefits. In 2008,
Rizzo was provided with 107 vacation days and 36 days of sick leave (out of
approximately 250 working days) per year. In 2009, Rizzo sold back over 130 days of
leave time for over $360,000, bringing his total salary for that year to a total in excess of
$1.1 million. The Attorney General also alleged that Rizzo's 2008 contracts were
procedurally unauthorized; the contracts were not approved by the city council; instead,
they were signed by one councilmember, who signed as the purported mayor. However,
that councilmember was not the mayor at the time.
Defendant Pier'angela Spaccia was hired by Rizzo, first as Assistant to the Chief
Administrative Officer, then as Assistant Chief Administrative Officer. In 2010, her
base salary was $336,000. This amount is more than 40% higher than the salary for city
managers (not assistant city managers) in the Los Angeles region with populations
comparable to that of Bell. In 2008, when other city employees were being laid off,
Rizzo approved a contract providing Spaccia with a 20% raise and automatic
121/o increases thereafter. Like Rizzo, Spaccia was granted 143 days of vacation and
sick leave per year, which she was permitted to sell back to increase her pay. In 2009,
she sold back leave time for nearly $175,000.
6
Defendants Oscar Hernandez, Teresa Jacobo, George Mirabal, Victor Bello, and
George Cole (collectively, Councilmember defendants) were councilmembers (and
some, at times, served as mayor) of the City. Under section 502 of the Bell Charter,
Councilmembers "shall receive compensation for their services as may be prescribed by
ordinance or resolution, but with respect to service as a Council member not to exceed
the amount which Council Members of general law cities of similar population would
receive under State law." Under state law, a city with a population between 35,000 and
50,000 shall pay its councilmembers no more than $400 per months (Gov. Code,
§ 36516, subd. (a)(2)(B).) In 2010, the Councilmember defendants who were stilt on
the city council were to receive $8000 per month in salary.6
5 Annual 5% increases are permissible. (Gov. Code, § 36516, subd. (a)(4).)
6 On appeal, three of the Councilmember defendants (Cole, Hernandez and
Jacobo) requested judicial notice of certain resolutions and ordinances which designated
the members of the city council as the members of various commissions and authority
boards. The argument, apparently, is that some of their pay was earned not for serving
on the city council but for serving on these commissions and boards. We note that
Government Code section 36516, which governs the salary to be paid councilmembers
of general law cities, provides, "Unless specifically authorized by another statute, a city
council may not enact an ordinance providing for compensation to city council members
in excess of that authorized [as above]. For the purposes of this section, compensation
includes payment for service by a city council member on a commission, committee,
board, authority, or similar body on which the city council member serves. If the other
statute that authorizes the compensation does not specify the amount of compensation,
the maximum amount shall be one hundred fifty dollars ($150) per month for each
commission, committee, board, authority, or similar body." (Gov. Code, § 36516,
subd. (c).) Bell paid its councilmembers well in excess of$150 per month for serving
on various commissions and authorities. It is impossible to say for certain how much
the councilmembers were paid, as the resolutions indicate amounts to be paid "per pay
period," without defining"pay period." As other evidence suggests these Bell officials
defined a "pay period" as two weeks, it appears that, in fiscal year 2009-2010, Bell may
have paid its councilmembers in excess of$1375 per month per Board for their service
7
Randy Adams? was hired by Rizzo as the police chief of Bell from May 2009.
Adams had a base salary in excess of$457,000, an amount which "grossly exceeds"
salaries of police chiefs of cities of comparable population in the Los Angeles region.
Adams was also granted "excessive and wasteful benefits," including lifetime health
insurance benefits for his dependents. Rizzo also agreed, on behalf of the City, to
support Adams's claim for medical disability retirement upon his retirement from Bell.
This gives rise to the inference that Rizzo hired Adams at an excessive salary to perform
a job which Rizzo already believed Adams was, at least in part, disabled from
performing.
It was further alleged that the defendants defrauded the public as to the extent of
their compensation. Specifically, it was alleged that the Councilmember defendants
passed an ordinance which was titled as an ordinance "limiting compensation for
members of the City Council," (emphasis added) when, in fact, the ordinance nearly
doubled their compensation. We refer to this as the "misleading ordinance." Similarly,
it was alleged that in September 2008, at Rizzo's direction, a memorandum was
prepared to be given by the city clerk to any member of the public who inquired about
the salaries of city officers and employees. The memorandum falsely stated that
Councilmember defendants were paid $673 per month, when they were actually paid
on the Public Financing Authority Board, the Surplus Property Authority Board, and the
Community Housing Authority Board. (Bell Res. Nos. 2005-34, 2005-35 & 2005-36.)
7 Adams is in a somewhat different position from the other defendants; he
contracted for and received the allegedly excessive salary, but did not approve his own
salary— or that of anyone else—on behalf of the City.
8
$7,600 per month, and that Rizzo was paid $15,478 per month, when he was actually
paid over$52,000 per month. We refer to this as the "misleading memorandum."s
Finally, the complaint contained allegations relating to the City's Supplemental
Retirement Plan, which provided retirement benefits "to a small group of City officers
and employees," including the defendants. It was alleged that Rizzo and Spaccia
modified the terms of the retirement plan to provide "unique benefit[s] to them that
[were] not available to other" members of the retirement plan.
2. Causes of Action
Based on the above alleged facts, the Attorney General alleged the following
causes of action. First, the Attorney General pled a cause of action against all
defendants for waste of public funds under Code of Civil Procedure section 526a,9 with
respect to the excessive compensation paid all defendants. It will be critical to our
analysis whether the ordinances and employment agreements were within the discretion
of the city council and chief administrative officer or were, instead, unauthorized
ultra vires acts. In this respect, the Attorney General's complaint is not clear. That is to
say, the Attorney General alleged that the actions of defendants in approving the
8 In addition, when Adams was negotiating his employment contract with Spaccia,
Adams inserted a clause specifying the number of pay periods per year. Spaccia
instructed him to remove the clause, stating, "[w]e have crafted our Agreements
carefully so we do not draw attention to our pay. The word Pay Period is used and not
defined in order to protect you from someone taking the time to add up your salary."
Adams agreed to remove the pay period definition from his contract.
9 As we shall discuss, Code of Civil Procedure section 526a permits a taxpayer to
bring an action to enjoin government waste.
9
ordinances and contracts constituted both abuses of discretion and unauthorized
ultra vires acts.
The cause of action for waste was the only cause of action in the complaint
which named the City itself as a defendant. In connection therewith, the Attorney
General sought appointment of a receiver to facilitate operation of the City. The
Attorney General did not seek damages from the City, and, in fact, sought an order
requiring the other defendants to make restitution to the City for their excess
compensation.10
The second cause of action, against Rizzo and the Councilmember defendants,
was for negligence in authorizing the wasteful expenditures of public funds. It alleged
that the Councilmember defendants negligently failed to exercise due care and
reasonable diligence in approving the employment contracts of Rizzo and Spaccia. It
similarly alleged that Rizzo failed to exercise due care and reasonable diligence in
approving the employment contracts of Spaccia and Adams. Although this cause of
action did not specifically allege that the excessive salaries of Rizzo, Spaccia, and
Adams were unauthorized expenses, it incorporated by reference all earlier allegations.
The third cause of action, against Rizzo and the Councilmember defendants,
alleged fraud in connection with the misleading ordinance. The fourth cause of action,
against Rizzo alone, alleged fraud in connection with the misleading memorandum.
10 For this reason, when we refer to "defendants," we mean the individual
defendants only, not the City.
10
The fifth cause of action, against Rizzo and Spaccia, alleged violation of
Government Code section 1090, which prohibits city officers from entering into
contracts in which they have a personal financial interest. The Attorney General alleged
that Rizzo and Spaccia violated Government Code section 1090 by their modification of
the City's Supplemental Retirement Plan to "create[] particularized benefits to
themselves."
The sixth cause of action, against all defendants, alleged breach of fiduciary
duty." Specifically, the defendants were alleged to have "breached their fiduciary
duties to the City and its citizens" by awarding themselves excessive and wasteful
compensation. They were also alleged to have breached their fiduciary duties by
deceiving the public as to their full compensation.
3. Motion for a Stay
Shortly after the trial court ruled on Rizzo's demurrer to the initial complaint, the
Attorney General and the District Attorney (who was not a party)jointly moved to stay
this action pending resolution of the criminal proceedings against Rizzo, Spaccia, and
the Councilmember defendants. They argued that a stay was appropriate for three
reasons: (1) the defendants were improperly seeking civil discovery for benefit of their
criminal defenses; (2) conservation of judicial resources; and (3) defendants were
invoking their Fifth Amendment privilege against self-incrimination in civil discovery.
11 The cause of action also alleged violation of public trust. "The public trust
doctrine generally concerns the preservation of certain natural public resources, not
employment contracts." (Lucas v. Santa Maria Public Airport Dist. (1995)
39 Cal.AppAth 1017, 1025.) We therefore focus our discussion of this cause of action
on the breach of fiduciary duty allegations.
11
The trial court denied the motion, on the basis that the situation was entirely of
the Attorney General's own making, in that this action was brought when the Attorney
General knew that the defendants would be asserting their Fifth Amendment privilege.tx
As to any issues regarding potential abuse of the civil discovery process, the Attorney
General and District Attorney conceded at the hearing on the motion that there had not
yet been any violations of criminal discovery rules, only a potential for such a violation.
The trial court indicated that it would properly deal with any specific discovery issues if
and when they arose. Ultimately, the trial court concluded that the Attorney General
could choose to dismiss the instant action without prejudice and refile it after the
criminal proceedings were resolved.13
4. Demurrers
All defendants demurred to the operative complaint.14 Taken together, they
raised the following arguments: (1) the Attorney General lacks standing, both under
Code of Civil Procedure section 526a and in general,15 to pursue this complaint; (2) the
12 Indeed, the court noted that four of the defendants had invoked the privilege in
interviews sought by the Attorney General before the Attorney General had even filed
this action.
t3 At the hearing on the motion, the Attorney General raised potential statute of
limitation issues with that course of action. The trial court found that these concerns
were not sufficiently concretely presented.
14 Two of the Councilmember defendants did not initially demur; they filed their
demurrers after the trial court had sustained the demurrers of the other defendants.
Their demurrers were then sustained on the same bases as those of their co-defendants.
15 Rizzo argues that establishing the Attorney General lacks standing under Code of
Civil Procedure section 526a establishes that the Attorney General lacks standing to
12
action is barred because the Attorney General does not allege compliance with the Tort
Claims Act; (3) the doctrines of legislative immunity and separation of powers prevent
judicial review of a City Council's properly-enacted ordinances regarding
compensation; (4) Rizzo and the Councilmembers have statutory immunity for acts
taken within their discretion; and (5) the absolute privilege of Civil Code section 47,
subdivision (a) and the legislative privilege of Civil Code section 47, subdivision (b) bar
the fraud causes of action. The defendants also raised specific challenges to the
individual causes of action.
With respect to every cause of action except the fifth, for violation of
Government Code section 1090, the trial court sustained the demurrers without leave to
amend. The court concluded that the amount of reasonable compensation paid City
officials and employees is entrusted to the legislative body of the City, and the doctrines
of separation of powers and legislative immunity prevented court intervention on the
issue. At the hearing on the motion, the Attorney General argued, "we have not only
alleged that [the compensation] is wasteful and excessive, we've alleged that it's
illegal." Moreover, the City noted that information had since been discovered that some
of Rizzo's employment contracts were backdated and never approved by the City
Council. If true, this would establish that the contracts were not only excessive but
unauthorized. Nonetheless, the trial court concluded that the Attorney General alleged
pursue all causes of action in the complaint, as they are all based on the waste of public
funds. The conclusion does not follow. That a plaintiff may lack standing to bring
a cause of action under a particular statute does not mean the plaintiff lacks standing
under another statute or the common law.
13
only excessive compensation approved by ordinance, which triggers legislative
immunity. The court found this issue dispositive of all causes of action except violation
of Government Code section 1090, and therefore did not reach the issue of standing
with respect to anything but enforcement of Government Code section 1090.
Concluding that the Attorney General had standing to enforce the statute, but that the
Attorney General did not clearly identify the contract purportedly made in violation of
the statute, the trial court granted leave to amend that single cause of action.
The Attorney General elected not to amend the sole remaining cause of action.
An order of dismissal followed. The Attorney General filed a timely notice of appeal.
5. Ongoing Proceedings
While the order of dismissal finally disposed of all causes of action brought by
the Attorney General, it was not the end of the action. Rizzo had brought
a cross-complaint against the City, seeking, among other things, an order requiring the
City to provide him a defense to the criminal actions pending against him. The City had
also filed a cross-complaint against Rizzo; the operative pleading alleged causes of
action for intentional misrepresentation, breach of the covenant of good faith and fair
dealing, violation of Government Code section 1090, rescission and restitution of
money wrongfully obtained, and declaratory relief. According to the City, all of the
causes of action pending between Rizzo and the City, except Rizzo's cause of action for
the City to defend him in the criminal actions, have been stayed pending resolution of
the criminal charges against him.
14
ISSUES ONAPPEAL
We first consider whether the Attorney General had standing to bring this action.
The Attorney General and the City both argue that the Attorney General brought the
action on behalf of the City. We accept this argument and conclude the Attorney
General had the power to bring this action on the City's behalf. As such, we reject any
contention that the Attorney General had to comply with the Tort Claims Act in order to
pursue this action on behalf of the City. Second, we turn to the issues of legislative
immunity, separation of powers, and discretionary act immunity. We conclude that
these doctrines immunize acts within legislative (or executive) discretion, but not
ultra vires acts. As the Attorney General alleged both types of acts, we conclude the
immunity does not bar the complaint in its entirety, and the Attorney General should
have been granted leave to amend to better allege (if the Attorney General could
honestly do so) unauthorized acts. Third, we conclude that the Civil Code section 47,
subdivision (b) legislative privilege applies to the cause of action for fraud based on the,
misleading ordinance, but not the cause of action for fraud based on the misleading
memorandum. Fourth, we discuss the causes of action alleged, and related causes of
action which the Attorney General may be able to allege if leave to amend is granted.
Fifth, we conclude the trial court did not err in denying the stay, but note that changed
circumstances may justify a reconsideration of that ruling.
15
DISCUSSION
1. Standard of Review
"In reviewing the sufficiency of a complaint against a general demurrer, we are
guided by long-settled rules. `We treat the demurrer as admitting all material facts
properly pleaded, but not contentions, deductions or conclusions of fact or law.
[Citation.] We also consider matters which may be judicially noticed.' [Citation.]
Further, we give the complaint a reasonable interpretation, reading it as a whole and its
parts in their context. [Citation.] When a demurrer is sustained, we determine whether
the complaint states facts sufficient to constitute a cause of action. [Citation.] And
when it 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; if not, there has been no abuse of discretion and
we affirm. [Citations.] The burden of proving such reasonable possibility is squarely
on the plaintiff[Citation.]." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) "To meet
[the] burden of showing abuse of discretion, the plaintiff must show how the complaint
can be amended to state a cause of action. [Citation.] However, such a showing need
not be made in the trial court so long as it is made to the reviewing court."
(William S. Hart Union High School Dist. v. Regional Planning Com. (1991)
226 Cal.App.3d 1612, 1621.)
2. The Attorney General May Pursue This Action on Behalf of the City
California Constitution, article V, section 13 provides, "Subject to the powers
and duties of the Governor, the Attorney General shall be the chief law officer of the
16
State. It shall be the duty of the Attorney General to see that the laws of the State are
uniformly and adequately enforced." "The attorney-general, as the chief law officer of
the state, has broad powers derived from the common law, and in the absence of any
legislative restriction, has the power to file any civil action or proceeding directly
involving the rights and interests of the slate, or which he deems necessary for the
enforcement of the laws of the state, the preservation of order, and the protection of
public rights and interests. [Citations.]" (Pierce v. Superior Court (1934) 1 Cal.2d 759,
761-762.)
We need not consider whether the Attorney General, under its common law
power, has the right to pursue this action as one deemed "necessary for the enforcement
of the laws of the state, the preservation of order, and the protection of public rights and
interests." Certainly, an argument can be made that, when a municipality is under the
control of individuals who would pay themselves excessive salaries and grant
themselves exceptional benefits, without any apparent regard for the city's inability to
meet these financial obligations, the "preservation of order" and"protection of
public . . . interests" permit, if they do not affirmatively require, action by the Attorney
General.
In this case, however, the Attorney General argues that this action was brought
on behalf of the City. Indeed, although the Attorney General purported to bring the
action on behalf of the "People of the State of California," the allegations of the
complaint sought relief on behalf of the City. When the Attorney General alleged
a breach of fiduciary duty, the fiduciary duty at issue was allegedly owed "to the City
17
and its citizens," not the State. The complaint sought an order requiring defendants to
make restitution to the City, not the State. It is apparent, then, that despite the caption
of the action, the Attorney General brought the action on behalf of the City. When an
action is brought in the name of the wrong party, leave to amend should be granted to
substitute the real party in interest. (Cloud v. Northrop Grumman Corp. (1998)
67 Cal.App.4th 995, 1004-1005.) As the Attorney General clearly brought this action
on behalf of the City, an amendment to change the name of the plaintiff should be
permitted.16
Defendants suggest that the action could not have been brought on behalf of the
City because the Attorney General named the City as a defendant. In this regard, we
believe Code of Civil Procedure section 382 governs. That section provides, "If the
consent of any one who should have been joined as plaintiff cannot be obtained, he may
be made a defendant, the reason thereof being stated in the complaint . . . . .. Here, the
complaint was originally filed on September 15, 2010, when the City was still under the
control of defendants.17 The initial complaint alleged, "[u]pon information and belief,
16 The action is properly brought in the name of the City, not the people of the City.
(Cf. People of Stanislaus County ex rel. Smith v. Myers (1860) 15 Cal. 33, 34 ["The
people of the county are not a corporation, nor are they recognized in law as capable of
suing or being sued. If any objection is taken, or can be taken, to [a county contract], it
must be by the county, which is a corporation . . . . "].)
17 The City represents that the city council was replaced on March 8, 2011. It
states, "[t]he new council in Bell, on behalf of its citizens, . . . , asks that this Court act
to allow the [Attorney General] to proceed and seek justice for our community."
Indeed, as counsel for the City stated at oral argument, "We need their help." Counsel
represented that the City was hemorrhaging funds and could ill afford to pursue
defendants alone.
18
the City continues to pay defendants their excessive and wasteful salaries." The
complaint sought a declaration that "all defendants have vacated their public offices,"
and an order appointing a receiver to "facilitate the operation of the City." These
allegations are sufficient to meet the requirements of Code of Civil Procedure
section 382; the City was named as a defendant because it was still under the control of
defendants and was therefore unable to be joined as a plaintiff.19
Although we discuss the cause of action for government waste later in this
opinion, it is useful to address the cause of action with respect to standing at this point.
Code of Civil Procedure section 526a provides that a taxpayer can bring an action
against a government officer to enjoin a threatened act of government waste. Code of
Civil Procedure section 526a provides standing to taxpayers; it does not limit standing
to bring actions for waste to taxpayers. Indeed, the statute expressly states, "[tlhis
section does not affect any right of action in favor of a county, city, town, or city and
county, or any public officer." Thus, the Attorney General, on behalf of the City, may
pursue an action for government waste, even if the City does not meet the standing
requirements for a taxpayer action under Code of Civil Procedure section 526a.19
18 See also Osburn v. Stone (1915) 170 Cal. 480, 483, which stated, "The general
rule is that the municipality itself, upon the refusal of its officers to maintain the action,
should be impleaded as a party defendant, but of course it is fundamental that where
a demand would be unavailing, as is shown to be the case under the present complaint,
a demand upon the municipal authorities so to commence proceedings is unnecessary."
19 Our conclusion is not unique to the City of Bell, and would apply to any city in
which it appeared that city officials were acting outside the scope of the law, and the
city itself could not pursue the miscreants as they still controlled the city.
19
3. The Tort Claims Act Does Not Apply
Defendants argue that, as this action seeks relief against public employees, the
Attorney General was required to file a claim pursuant to the Tort Claims Act in order
to pursue the action. We disagree.
The Tort Claims Act provides that all claims for money or damages 20 against
local entities shall first be presented to the governmental entity. (Gov. Code, § 905.)
Similarly, claims against public employees or former public employees for injuries
resulting from acts or omissions in the course of their employment must be presented if
a claim against the employing entity for the same injury must be presented. (Gov.
Code, § 950.2.) This is so because a public entity is required to pay a judgment against
its employee "for an injury arising out of an act or omission occurring within the scope
of his or her employment as an employee of the public entity." (Gov. Code, § 825(a).)
"The general proviso that a public entity may not be sued for money or damages until it
has received, and had the chance to act upon, a written claim is intended to allow the
entity to investigate while the facts are fresh, to settle short of litigation where
appropriate, and to engage in fiscal planning for potential liability." (Wells v. One2One
Learning Foundation (2006) 39 CalAth 1164, 1214.)
20 Although this action seeks restitution of funds paid to the defendants, it is not
a claim "for specific recovery of property" which is exempt from the Tort Claims Act.
(City of Los Angeles v. Superior Court (2008) 168 Cal.AppAth 422, 428.) Only
restitution claims in which the defendant had a duty to return seized property are
exempt; claims for restitution of funds improperly paid are subject to the Tort Claims
Act. (Id. at pp. 425, 430.)
20
None of this applies, however, when the plaintiff is the employing public entity
itself. Here, as we have discussed, the Attorney General brought the instant action on
behalf of the City. It would turn the Tort Claims Act on its head to even suggest that the
City is required to file a claim with itself before bringing suit against its employees for
acting outside the scope of their employment. As the action here was brought on behalf
of the City, compliance with the Tort Claims Act was not required. (Cf. Stanson v. Mott
(1976) 17 Cal.3d 206, 225 [stating, "indemnification provisions of the [T]ort [C]laims
[A]ct are not directly applicable to an action by or on behalf of a public entity to recover
moneys . . . illegally expended by a public employee"].)
4. Separation of Powers, Legislative Immunity, and Discretionary Act
Immunity Do Not Bar Causes of Action Based on Ultra Vires Acts
The heart of this matter, and the issue found dispositive by the trial court, is the
issue of separation of powers. More specifically, the question raised by this case is: To
what extent can the judiciary review compensation decisions taken by the City Council
(and Chief Administrative Officer) of a charter city?
We begin with the doctrine of separation of powers, which is enshrined in our
constitution. "The powers of state government are legislative, executive, and judicial.
Persons charged with the exercise of one power may not exercise either of the others
except as permitted by this Constitution." (Cal. Const., art. III, § 3.) Separation of
powers means that "legislators have absolute immunity from damage suits based on
legislative acts." (Steiner v. Superior Court(1996) 50 Cal.AppAth 1771, 1784.) It
applies to suits for declaratory and injunctive relief, as well as suits for damages. (Ibid.)
21
Furthermore, this rule applies to municipal legislators, when acting in a legislative
capacity. (D'Amato v. Superior Court (2008) 167 Cal.App.4th 861, 869.) It also
encompasses local administrators, when they act in direct assistance of legislative
activity. (Steiner v. Superior Court, supra, 50 Cal.App.4th at p. 1784.) In short"legal
action may not be taken against [municipal legislators] for their activities involving
planning or enacting legislation." (Id. at p. 1785.)
This doctrine has been manifested in a statute providing for immunity for
legislative acts. "A public employee is not liable for an injury caused by his adoption of
or failure to adopt an enactment . . . . .. (Gov. Code, § 821.) Similarly, statutes provide
for immunity for acts taken within a public employee's discretion.21 "Except as
otherwise provided by statute, a public employee is not liable for an injury resulting
from his act or omission where the act or omission was the result of the exercise of the
discretion vested in him, whether or not such discretion be abused." (Gov. Code,
§ 820.2.) Taken together, these statutory immunities provide that there is no liability for
discretionary choices made by legislators and executives, operating within the scope of
their offices.
With the doctrines governing immunity thus established, we next turn to the
issue of whether municipal salaries are within the discretion of municipal legislators.
"[A]II questions of policy and wisdom concerning matters of municipal affairs are for
21 Discretionary act immunity is not, strictly speaking, an application of the
separation of powers doctrine. However, as we are here concerned with potential
judicial review of discretionary acts of a legislative body (the City Council) and an
executive officer (the Chief Administrative Officer), it is, in this case, akin to separation
of powers.
22
the determination of the legislative governing body of the municipality and not for the
courts." (Wheeler v. Gregg (1949) 90 Cal.App.2d 348, 361.) It cannot be disputed that
setting officer and employee compensation is an exclusively municipal matter, over
which the legislative body of a charter city has exclusive control. (Cal. Const., art. X1,
§ 5, subd. (b)(4)); Sonoma County Organization of Public Employees v. County of
Sonoma (1979) 23 Ca1.3d 296, 317.)
This does not, however, mean that such decisions are completely immune from
judicial review. Courts have the power to "determine whether or not the municipal
bodies acted within the limits of their power and discretion." (Wheeler v. Gregg, supra,
90 Cal.App.2d at p. 361.) When the issue is one of municipal officer or employee
compensation, courts have not hesitated to consider whether the compensation paid was
within the scope of the city council's authority as granted by the city's charter. (See
City and County of&F. v. Boyd(1943) 22 Cal.2d 685, 688, 690 (Boyd) [charter allowed
board of supervisors to set salaries in accordance with generally prevailing rates]; Stohl
v. Horstmann (1944) 64 Cal.App.2d 316, 323 [charter allowed city council to fix
salaries but not to create a new rank or salary grade].) If the compensation set by
ordinance is outside the authority of legislative body, the ordinance is to be struck
down.
The rule was established in Boyd, supra, 22 Cal.2d 685, that when the charter
imposes limitations on the salaries which can be set by the municipality's legislative
body (in that case, the salaries were required to be in accordance with generally
prevailing rates), the legislative body has discretion to determine whether proposed rates
23
meet the limitation. "The courts will not interfere with that determination unless the
action is fraudulent or so palpably unreasonable and arbitrary as to indicate an abuse of
discretion as a matter of law."22 (Id. at p. 690; see also Carrier v. Robbins (1952)
112 CA.App.2d 32, 35.) Thus, the fact that a city's legislative body has enacted an
ordinance setting forth an officer's or employee's salary is the beginning of the analysis,
not the end of it. The courts can and will strike down the ordinance if it violates the
limitations set forth in the city's charter. (See Walker v. County of Los Angeles (1961)
55 Cal.2d 626, 639 [charter required salaries to be in accord with prevailing wages;
salaries adopted did not consider prevailing wages].) Indeed, the Councilmember
defendants concede on appeal that the court can strike down legislation conflicting with
a superseding legal mandate.
Our discussion above relates to salaries set by ordinance. The instant case
involves both salaries set by ordinance and employment contracts. Just as courts will
strike down an ordinance which violates the city's charter, courts will declare void
a contract which was made without authority. "Any act that is violative of or not in
compliance with the charter is void." (Domar Electric, Inc. v. City of Los Angeles
(1994) 9 Cal.4th 161, 171.) In numerous cases, courts have voided contracts
purportedly made with cities when the city officials who executed the contracts were
22 Interestingly, the dissent in Boyd argued that a stricter rule should apply when the
charter sets out a specific limitation on the legislature's discretion (such as parity with
generally prevailing rates), and that the standard of striking down the legislative body's
decision only if it is fraudulent or so palpably unreasonable and arbitrary as to indicate
an abuse of discretion as a matter of law"would be applicable if the only duty of the
commission and the board of supervisors were to fix a `reasonable' salary." (Boyd,
supra, 22 Cal.2d at p. 700 (Edmonds, J. dissenting).)
24
not authorized to do so. (E.g., Katsura v. City of San Buenaventura (2007)
155 Cal.App.4th 104, 109 [striking down an oral contract for additional work when the
charter had no provision authorizing oral contracts]; G.L. Mezzetta, Inc. v. City of'
American Canyon (2000) 78 Cal.AppAth 1087, 1089 [voiding an oral contract when
relevant statutes prohibited city from entering into oral contracts]; Foxen v. City of
Santa Barbara (1913) 166 Cal. 77, 81-82 [plaintiff denied recovery for injuries suffered
when working on a city project because city had been required to let the contract out to
the highest bidder, not employ workers directly; result would have been the same had
plaintiff sued for wages].)
The issue next arises as to the damages, if any, a city may recover, and from
whom, when its officers made an illegal or unauthorized contract. First and foremost,
as the contract is void, the city is entitled to restitution from the party who had
purportedly contracted with the city.23 This is true even if the individual believed the
city officer with whom he was contracting had the authority to bind the city. "Persons
dealing with a public agency are presumed to know the law with respect to any agency's
authority to contract. [Citation.] "'One who deals with the public officer stands
23 At oral argument, counsel for Adams suggested that, if a city improperly awards
a contract and the contract is subsequently fully performed, the city is not entitled to
seek restitution. In this regard, we note Advance Medical Diagnostic Laboratories v.
County ofLos Angeles (1976) 58 Cal.App.3d 263. In that case, a county's contract with
a medical test provider was executed by the county's purchasing agent, rather than the
Board of Supervisors, as was required. Although the contract had been fully performed,
the fact that it was unauthorized rendered it void. (Id. at pp. 272-273.) The court
ultimately held that under the circumstances, equitable estoppel might bar the county
from obtaining restitution, but such a result was by no means guaranteed. (Id. at
pp. 273-274.)
25
presumptively charged with a full knowledge of that officer's powers, and is bound at
his . . . peril to ascertain the extent of his . . . powers to bind the government for which
he . . . is an officer, and any act of an officer to be valid must find express authority in
the law or be necessarily incidental to a power expressly granted." ' [Citation.]"
(Katsura v. City of San Buenaventura, supra, 155 Cal.AppAth at p. 109.) Indeed, as
a general rule, a party who mistakenly believed it was validly contracting with a city
cannot even recover on a quasi-contract theory. " '[N]o implied liability to pay upon
a quantum meruit could exist where the prohibition of the statute against contracting in
any other manner than as prescribed is disregarded.' [Citation.] The reason is simple:
` "The law never implies an agreement against its own restrictions and prohibitions, or
[expressed differently], `the law never implies an obligation to do that which it forbids
the party to agree to do.' " ' [Citation.] In other words, contracts that disregard
applicable code provisions are beyond the power of the city to make [Citation.]."24 (Id.
at p. 110.)
Second, we consider whether a city is entitled to restitution from its officer who,
acting outside the scope of his or her authority, purported to authorize an unauthorized
expenditure of public funds. The question was answered by our Supreme Court in
Stanson v. Mott, supra, 17 Cal.3d 206. In that case, the Director of the California
Department of Parks and Recreation spent $5000 of public funds to advocate for
24 However, under certain circumstances, if the entity could approve the contract,
public policy would not be frustrated, and equitable considerations justify it, the entity
may be equitably estopped to deny the validity of the contract. (Advance Medical
Diagnostic Laboratories v. County of Los Angeles, supra, 58 Cal.App.3d at
pp. 273-274.)
26
passage of a parks-related bond issue. The Supreme Court concluded that the
expenditure was unauthorized, and turned to the issue of the Director's personal liability
to the State for the unauthorized expenditure. Finding no statutory provision expressly
governing the liability of public officials for this type of improper expenditure, the court
created a rule: if the official does not use due care or reasonable diligence in
authorizing the expenditure of public funds, the official may be subject to personal
liability for the improper expenditure. (Id. at pp. 226-227.) It must be remembered that
this is a standard for determining when a public official is liable for restitution for an
ultra vires act. It does not mean that every public expenditure which was not made with
due care or reasonable diligence is a violation of duty; it simply means that when an
expenditure of public funds is wholly unauthorized, the public official who authorized
the expenditure can be liable for restitution if he or she acted unreasonably. (Harvey v.
County of Butte (1988) 203 Cal.App.3d 714, 719.)
In sum, the doctrines of separation of powers, legislative immunity, and
discretionary act immunity prevent courts from considering the wisdom of legislative
and executive decisions, including those pertaining to compensation, which have been
entrusted to the discretion of municipal authorities. There can be no liability for such
a decision when made within the discretion of such officials. However, if the decision
made was outside the authority of the officials—either as an ordinance outside of the
city council's authority under the charter, or a contract made by someone without the
authority to bind the city to it—courts can strike down the ordinance or contract as void.
If that occurs, the recipient of funds under the void ordinance or contract may be liable
27
to the city in restitution, and the city officials who purported to authorize the
unauthorized expenditure may also be liable in restitution, if they failed to use due care
or reasonable diligence in authorizing it.
It is apparent that, in this case, the Attorney General sought to impose liability on
Rizzo and the Councilmember defendants for some acts which are clearly protected by
legislative immunity. For example, the second cause of action seeks to hold the
Councilmember defendants liable for their negligence in approving the employment
contracts of Rizzo and Spaccia, and to hold Rizzo liable for his negligence in approving
the employment contracts of Spaccia and Adams. As alleged, these acts are within the
authority of the defendants; there is no liability for their negligent approval of contracts.
However, it also appears that the Attorney General has alleged, or reasonably could
allege, acts outside the scope of the defendants' authority. For example, the first
amended complaint alleges that Rizzo, as Chief Administrative Officer, was entitled by
the City Charter to a salary" 'commensurate with the responsibilities of chief
administrative officer of the City,' " and that the Councilmember defendants provided
him compensation far in excess of this limitation. Similarly, the City Charter limited
the Councilmembers' salaries to "the amount which Council Members of general law
cities of similar population would receive under State law." It was alleged that their
compensation greatly exceeded this limitation. In both instances, the Attorney General
alleged, or reasonably could allege, the salaries approved by the Councilmembers were
so palpably unreasonable and arbitrary as to indicate an abuse of discretion as a matter
of law, and were thus ultra vires acts which should be struck down.
28
5. The Legislative Act Privilege Bars Only the Cause of Action
Based on the Misleading Ordinance
Civil Code section 47 subdivision (b)(1) declares as absolutely privileged any
publication made in any legislative proceeding. The privilege is "broad and
comprehensive, including proceedings of all legislative bodies, whether state or
municipal." (Scott v. McDonnell Douglas Corp. (1974) 37 Cal.App.3d 277, 286, fn. 7.)
Malice will not defeat the privilege as long as "it is shown that the statement . . . bears
some connection to the work of the legislative body." (Id. at p. 285.)
The third cause of action alleges fraud for the misleading ordinance. We can
conceive of few statements which come so completely within the scope of the
legislative privilege more than the title and text of actual legislation. The Attorney
General cannot pursue a cause of action based on the misleading ordinance.
We reach a different conclusion, however, with respect to the misleading
memorandum. It was alleged that Rizzo provided a false memorandum to the city clerk
with directions to provide it to anyone who inquired as to the salaries of Rizzo and the
Councilmembers. Creation and dissemination of a memorandum stating officials'
salaries is not a legislative act, nor does it bear any connection to the work of the
legislative body.25
25 We similarly reject any contention that the cause of action for fraud based on the
misleading memorandum is barred by the privilege for a statement made "[i]n the
proper discharge of an official duty" (Civ. Code, § 47, subd. (a)) or the privilege for
a statement made "in any . . . official proceeding authorized by law" (Civ. Code, § 47,
subd. (b)(3)). There is nothing on the face of the operative complaint indicating that
drafting the memorandum about salaries and directing its distribution were part of
Rizzo's official duties or performed as part of any official proceeding.
29
6. The Causes of Action Alleged and Other Causes of Action
Which Could Be Alleged
Having discussed, in general terms, the challenges brought by defendants to the
Attorney General's complaint, we now turn to the specific causes of action alleged. In
the course of our discussion, we will conclude that, although some of the causes of
action were barred, leave to amend should have been granted to permit allegations of
similar causes of action based on the same or similar facts.
a. Government Waste
The first cause of action was for government waste. The Attorney General
brought this cause of action under Code of Civil Procedure section 526a, the statute
providing for taxpayer actions to enjoin, and obtain restitution to the government for
(Osburn v. Stone, supra, 170 Cal. at p. 482), government waste. As we have discussed,
the City on whose behalf the action was brought does not have standing as a taxpayer
under Code of Civil Procedure section 526a. However, Code of Civil Procedure
section 526a does not prevent the City from itself suing to enjoin, and obtain restitution
for, government waste. Thus, although the Attorney General should not have brought
this cause of action under Code of Civil Procedure section 526a, a cause of action for
government waste could nonetheless be alleged.
Specifically, we believe the appropriate cause of action is one to declare void
ultra vires ordinances and contracts and to obtain restitution from the appropriate
parties. Considering the allegations of the complaint, the language of the City Charter
30
and contracts in the record,26 as well as facts which the Attorney General and City have
subsequently indicated they could allege, it appears that the Attorney General, on behalf
of the City, can meet this standard. We briefly consider the employment contracts at
issue.
The Councilmembers' salaries were limited by the City Charter to "the amount
which Council Members of general law cities of similar population would receive under
State law." The Councilmembers' compensation, however, was alleged to be so
dramatically out of line with the amount which councilmembers of general law cities of
similar population would receive under state law, it could reasonably be argued that the
compensation was "fraudulent or so palpably unreasonable and arbitrary as to indicate
an abuse of discretion as a matter of law." If so, the ordinances setting such
compensation were ultra vires, and may be declared void as a matter of law, entitling
the City to restitution from the Councilmembers who received the improper salaries.
Similarly, Rizzo's compensation was limited, in the City Charter, to a salary
"commensurate with the responsibilities of chief administrative officer of the City." It
was alleged, however, that Rizzo's compensation was dramatically out of line with the
compensation of chief administrative officers of cities of comparable size. As such, it
could be alleged that the contracts setting Rizzo's compensation were void as a matter
of law, entitling the City to restitution from Rizzo, and from the Councilmember
defendants, if they failed to use due care in authorizing the unauthorized expenditures.
26 On appeal, Adams requests that we take judicial notice of his employment
contract and the addendum thereto. We do so.
31
Moreover, it was alleged that some of Rizzo's contracts were not properly authorized by
the right officials, as required by the City Charter. If so, this would constitute an
alternative basis for voiding the contracts, and recovering restitution from Rizzo and the
Councilmembers who, without due care, purported to authorize the contracts.
As to Adams, his employment contract was executed by Rizzo on behalf of the
City.27 The City Charter, however, provides that the City will not be bound by
a contract unless made in writing, approved by the City Council, and signed by the
Mayor. (Bell Charter, § 519.) The charter also provides that, by ordinance or
resolution, the City Council may authorize the Chief Administrative Officer to bind the
City"with or without a written contract, for the acquisition of equipment, materials,
supplies, labor, services or other items included within the budget approved by the City
Council." (Ibid.) There is, however, no indication that the City Council gave such
authorization to Rizzo to enter into the employment contract with Adams on behalf of
the City. To the contrary, the Attorney General alleged that Rizzo approved Adams's
contract without consultation with, or obtaining the approval of, the City Council.
Should the Attorney General be able to more explicitly allege that Rizzo was
unauthorized to execute Adams's contract on behalf of the City, the Attorney General
27 The first page of the contract twice states that the City"is a general law city."
This is incorrect; Bell had adopted its charter in 2005, more than three years prior to the
execution of this contract. Whether this obvious error should have put Adams on notice
that the contract might not have been properly authorized is not before us.
32
can seek to void that contract, and obtain restitution from both Adams28 and Rizzo, if he
authorized the contract without due care.
The record is not entirely clear as to whether the Attorney General can allege that
Spaccia was the recipient, or the maker, of an unauthorized contract. However, if such
allegations can reasonably and honestly be made, the Attorney General should be
granted leave to amend to state such a cause of action against Spaccia, as well.
b. Negligence
The negligence cause of action seeks to recover against Rizzo and the
Councilmember defendants for negligently authorizing the wasteful expenditures of
public funds. As it stands, the cause of action is barred by legislative immunity. As
discussed above, the Attorney General may seek restitution against Rizzo and the
Councilmember defendants only for authorizing, without due care, the unauthorized
expenditures of public funds.
28 Adams states, in his brief on appeal, that"there is nothing alleged in the
[operative complaint] to indicate that Adams knew, or had reason to believe, that there
was any impropriety surrounding his hiring." The issue is beside the point; if the
Adams contract is void as unauthorized, Adams is liable for restitution even if he did
not know the contract was unauthorized. Moreover, we are not here concerned with the
allegations of the operative complaint, but the allegations the Attorney General could
amend to allege. In this regard, we note that, in a writ proceeding before this court
arising from a criminal proceeding against Spaccia, Spaccia included, as an exhibit to
her petition, an e-mail exchange she had with Adams during the contract negotiations,
in which Adams, on the advice of counsel, asked Spaccia for a copy of the document by
which the City Council had authorized Rizzo to enter into the contract on the City's
behalf. Spaccia responded, in part, " 'We have painstakingly and carefully, and with
attorney assistance made sure of what authority [Rizzo] has vs. what the City Council
has. So, for your attorney's information [Rizzo] has the proper authority to enter into
a Contract with you, and we are not interested in educating him on how we did that.' "
(Spaccia v. Superior Court(2012) 209 Cal.AppAth 93, 97, fn. 5.)
33
C. Fraud by the Misleading Ordinance
As discussed above, the cause of action for fraud arising from the allegedly
misleading ordinance is wholly barred by the legislative privilege. The demurrer was
properly sustained without leave to amend this cause of action.
d. Fraud by the Misleading Memorandum
The cause of action against Rizzo for fraud arising from the misleading
memorandum is not, on its face, barred by any privilege. However, the cause of action
is not properly alleged. " 'The well-established common law elements of fraud which
give rise to the tort action for deceit are: (1) misrepresentation of a material fact
(consisting of false representation, concealment or nondisclosure); (2) knowledge of
falsity(scienter); (3) intent to deceive and induce reliance; (4)justifiable reliance on the
misrepresentation; and (5) resulting damage. [Citations.] . . . It is essential . . . that the
person complaining of fraud actually have relied on the alleged fraud, and suffered
damages as a result. [Citations.]' [Citation.] `Fraud is required to be pleaded with
specificity.' [Citation.]" (Bower v.AT&T Mobility, LLC (2011) 196 Cal.App.4th 1545,
1557.)
Our concern is with the fourth and fifth elements,justifiable reliance causing
damages. As to reliance, the Attorney General, on behalf of the City, only alleged on
information and belief that "the memorandum was provided to members of the public,"
and that they "relied on the misrepresentations in the memorandum, and thus they were
deprived of the motive and opportunity to challenge the excessive and wasteful
salaries." The damages to the City are alleged to be nothing more than the excessive
34
salaries themselves. These allegations are not sufficiently specific. They do not
identify with any specificity: (1) the individuals to whom the memorandum was
provided; (2) when the memorandum was provided to them; (3) the acts the individuals
took, or failed to take, in reliance on the memorandum; and (4) how the City was
damaged by the individuals' reliance on the misleading memorandum.
On appeal,however, the Attorney General represented that, if given an
opportunity to amend, the Attorney General could identify a specific individual to
whom the memorandum was given, the circumstances of the provision of the
memorandum, the recipient's reliance, and subsequent damages to the City. As such,
on remand, the Attorney General should be permitted an opportunity to amend this
cause of action.
e. Government Code Section 1090
Government Code section 1090 provides, in pertinent part: "Members of the
Legislature, state, county, district,judicial district, and city officers or employees shall
not be financially interested in any contract made by them in their official capacity, or
by any body or board of which they are members." " 'The evil to be thwarted by
section 1090 is easily identified: If a public official is pulled in one direction by his
financial interest and in another direction by his official duties, his judgment cannot and
should not be trusted, even if he attempts impartiality.' [Citation.] Where public and
private interests diverge, the full and fair representation of the public interest is
jeopardized." (Lexin v. Superior Court (2010) 47 Cal.4th 1050, 1073 (Lexin).) There
are various exceptions, both statutory and common law, to this rule. For example, an
35
officer or employee is not deemed to be interested in a contract if his or her interest is
only "[t]hat of an officer in being reimbursed for his or her actual and necessary
expenses incurred in the performance of official duties." (Gov. Code, § 1091.5,
subd. (a)(2).) Similarly, officials are sometimes permitted to negotiate contracts
affecting their own salaries under a "rule of necessity." (Lexin, supra, 47 Ca1.4th at
p. 1085.)
The allegations in this case are that Rizzo and Spaccia modified the City's
Supplemental Retirement Plan to provide themselves with unique benefits not provided
any other members of the plan. The trial court sustained the demurrer with leave to
amend this cause of action, on the basis that the contract itself was not sufficiently
identified. Rizzo and Spaccia argue that the trial court should have sustained the
demurrer without leave to amend, on the basis that a statutory exception applies.
Government Code section 1091.5, subdivision (a)(9) provides that an officer or
employee is not deemed to be interested in a contract if his or her interest is only "[t]hat
of a person receiving salary, per diem, or reimbursement for expenses from
a government entity, unless the contract directly involves the department of the
government entity that employs the officer or employee, provided that the interest is
disclosed to the body or board at the time of consideration of the contract, and provided
further that the interest is noted in its official record."
While this statute is "no model of clarity," (Lexin, supra, 47 Cal.4th at p. 1080),
our Supreme Court has expressly held that it "was never intended to permit government
officials to negotiate prospective changes in their own government compensation." (Id.
36
at p. 1085.) At issue in Lexin were agreements by which the board administering
a city's retirement system agreed to allow the city to limit its funding of the retirement
system in exchange for the city's agreement to provide increased pension benefits to
city employees, including the boardmember defendants.29 (Id. at p. 1062.) The court
concluded that the exception of Government Code section 1091.5, subd. (a)(9) "was
intended to apply to situations where the body or board of which an official is a member
is contemplating a contract with—or on behalf of—a governmental entity for which the
official also works." (Lexin, supra, 47 Ca1.4th at p. 1079.) That is to say, if"a contract
an official considers in his or her official capacity is with the official's government
employer and involves direct 'financial gain, the official is prohibited from participating
under section 1090. . . . [I]f the contract involves no direct financial gain, does not
directly affect the official's employing department, as is only with the general
government entity for which the official works, the interest is a minimal or noninterest
under section 1091.5(a)(9) and no conflict of interest prohibition applies." (Id. at
p. 1081.) The Supreme Court rejected the defendants' argument that Government Code
section 1091.5, subdivision (a)(9) "insulates any interest, so long as it is an interest in
29 The court ultimately found dispositive another exception to Government Code
section 1090, which provides that an officer shall not be deemed to be interested in
a contract if his or her interest is that of"a recipient of public services generally
provided by the public body or board of which he or she is a member, on the same terms
and conditions as if he or she were not a member of the body or board." (Gov. Code,
§ 1091.5, subd. (a)(3).) Thus, the boardmembers whose pensions increased on the same
terms and conditions as all other city employees did not violate Government Code
section 1090, but the boardmember who, under the agreement, received a unique
pension benefit may well have. (Lexin, supra, 47 Cal.4th at p. 1063.) It appears that the
Attorney General alleged that Rizzo and Spaccia modified the Supplemental Retirement
Plan to provide themselves unique benefits in order to fall within the scope of Lexin.
37
government salary," as "considerably too broad. It would permit board members to
freely select and hire themselves out for any number of new government positions, or to
act in their official capacities to modify their own individual salaries without resort to
the rule of necessity. This is not now, nor has it ever been, the law." (Lexin, .supra,
47 CalAth at p. 1084, In, 15.) Indeed, the court rejected the assertion that this
subdivision permitted the defendants to negotiate changes to their own pension plans.
"[D]irect changes to personal compensation[] do not come within the exception for
existing interests in government salary in the first instance." (Id. at p. 1085.) As such,
Rizzo and Spaccia's reliance on the Government Code section 1091.5,
subdivision (a)(9) exception is misplaced; that subdivision does not permit them to
change the City's Supplemental Retirement Plan to benefit themselves. The trial court
did not err in granting leave to amend this cause of action.
f. Breach of Fiduciary Duty
The final cause of action alleged was for breach of fiduciary duty. "The
elements of a cause of action for breach of fiduciary duty are: (1) existence of
a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by
the breach." (Stanley v. Richmond(1995) 35 Cal.AppAth 1070, 1086.) " ' "A fiduciary
relationship has been defined as `any relation existing between parties to a transaction
wherein one of the parties is . . . duty bound to act with the utmost good faith for the
benefit of the other party. Such a relation ordinarily arises where a confidence is
reposed by one person in the integrity of another, and in such a relation the party in
whom the confidence is reposed, if he voluntarily accepts or assumes to accept the
38
confidence, can take no advantage from his acts relating to the interest of the other party
without the latter's knowledge or consent.' . . . " ' " (Hydro-Mill Co., Inc. v. Hayward,
Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, l 156-1157.)
Spaccia argues that, as a more employee, she owed no fiduciary duty to the City.
The argument is without merit. While Spaccia may have been a mere employee when
she was first hired as assistant to the Chief Administrative Officer, she ultimately
became Assistant Chief Administrative Officer herself. Surely, a City reposes trust and
confidence in its Assistant Chief Administrative Officer. (See County of
San Bernardino v. Walsh (2007) 158 Cal.AppAth 533, 543 [the Chief Administrative
Officer was a "government official[] with a fiduciary duty to the County"].)
However, Adams's argument that he owed the City no fiduciary duty in the
negotiation of his contract is well-taken. Adams was not a City employee when he
negotiated his contract; any fiduciary duty he owed the City as its Chief of Police came
into existence only after his employment contract was executed. The Attorney General
offers no argument for its assertion that Adams owed the City a fiduciary duty. We
therefore conclude that Adams's demurrer was appropriately sustained without leave to
amend this cause of action.
Neither Rizzo nor the Councilmember defendants suggest that they did not owe
the City a fiduciary duty. They simply argue that this cause of action is derivative of the
other causes of action and barred for the same reasons. Yet, as we have discussed, the
Attorney General, on behalf of the City, can allege causes of action against each of
39
these defendants for restitution arising from unauthorized acts. As such, it can similarly
allege a cause of action for breach of fiduciary duty against them.30
g. Summary of Conclusions
In sum, we conclude that the demurrer should not have been sustained without
leave to amend as to all causes of action except the fifth cause of action, for violation of
Government Code section 1090. Instead, leave to amend should have been granted to
permit the Attorney General to: (1) pursue this action on behalf of the City;31 (2) allege
causes of action for restitution of unauthorized funds received by Rizzo, the
Councilmember defendants, Adams, and, if the facts support such a cause of action,
Spaccia; (3) allege causes of action for restitution of unauthorized funds expended by
Rizzo and the Councilmember defendants; (4) pursue the City's cause of action against
Rizzo for the misleading memorandum; (5) pursue the City's cause of action for
violation of Government Code section 1090 against Rizzo and Spaccia; and (6) pursue
the City's cause of action for breach of fiduciary duty against Rizzo, Spaccia, and the
Councilmember defendants. Leave to amend the complaint was properly denied with
respect to: (1) the second cause of action, for negligence; (2) the third cause of action,
30 "Disgorgement of profits is particularly applicable in cases dealing with a breach
of a fiduciary duty, and is a logical extension of the principle that public officials and
other fiduciaries cannot profit by a breach of their duty." (County of San Bernardino v.
Walsh, supra, 158 Cal.App.4th at p. 543.)
31 As the City is already pursuing a cross-complaint against Rizzo, we leave it to
the trial court, on remand, to decide whether and how to consolidate the City's action
against Rizzo with the Attorney General's action against Rizzo on behalf of the City.
At oral argument, counsel for Adams represented that the City is pursuing Adams in
a civil action as well. The trial court should consider any consolidation issues with
respect to the City's action against Adams if and when they arise.
40
for fraud; and (3) the sixth cause of action, for breach of fiduciary duty, with respect to
defendant Adams only.
7. The Trial Court Did Not Abuse Its Discretion in Denying the Stay Motion
The Attorney General argues that the trial court erred in denying the motion of
the Attorney General and the District Attorney to stay this action pending resolution of
the criminal actions against the defendants. "We review the trial court's denial of
plaintiffs' motion for a stay under the abuse of discretion standard of review," (Rains v.
Moores (2009) 172 Cal.AppAth 445, 480.) The determination whether to stay an action
pending resolution of criminal proceedings should be made in light of the particular
circumstances and competing interests involved. (Id. at p. 483.) The decisionmaker
should consider the extent to which Fifth Amendment rights are implicated. In addition,
factors to be considered include: (1) the interest of the party opposing the stay in
proceeding expeditiously with the action, and the potential prejudice to the party
opposing the stay of a delay; (2) the burden which any particular aspect of the
proceedings may impose on the party seeking the stay; (3) the convenience to the court
in management of its cases and the efficient use of judicial resources; (4) the interests of
persons not parties to the civil litigation; and (5) the interest of the public in the pending
cases. (Ibid.) While the privilege against self-incrimination is a factor to be considered,
the issue of a stay itself does not implicate constitutional issues. (Avant! Corp. v.
Superior Court(2000) 79 Cal.AppAth 876, 882.)
In this case, the trial court did not abuse its discretion in denying the stay. The
Attorney General brought the action knowing that several defendants had already
41
asserted their Fifth Amendment rights, but nonetheless chose to file the action.
Although there were concerns that the criminal defendants might seek to obtain
information unavailable through criminal discovery by means of civil discovery (and
similar concerns of overburdening City officials with too many discovery requests)
none of these issues had yet manifested and the trial court could resolve them with
appropriate orders if and when they arose. Additionally, one defendant, Adams, was
not named in the criminal actions, and he had an interest in seeing the instant civil case
through to completion as early as possible; as all causes of action against Adams
implicate defendant Rizzo, severance would be impractical. In short, the trial court
balanced the relevant factors and concluded a stay was unnecessary.
While we affirm the trial court's denial of a stay, our conclusion is without
prejudice to revisiting the issue on remand in light of intervening events. Specifically, it
appears that the trial court did stay all causes of action pending between Rizzo and the
City, except Rizzo's cause of action for the City to provide him a defense in the
criminal action, pending resolution of the criminal actions against him. If this is so, it
would appear improper to require the Attorney General's action on behalf of the City to
proceed, while the City's own action against Rizzo is stayed.
42
DISPOSITION
The judgment of dismissal is reversed. The matter is remanded to the trial court
with directions to (1) vacate its order sustaining the demurrer without leave to amend
the First, second, third, fourth and the sixth causes of action, (2) enter a new and
different order consistent with the views expressed in this opinion and (3) conduct such
further proceedings as may be appropriate. The parties shall each bear their own costs
on appeal.
CERTIFIED FOR PUBLICATION
CROSKEY, J.
WE CONCUR:
KLEIN, P. J.
ALDRICH, J.
43
Terri Milton
From: Judy Deertrack <judydeertrack@gmail.com>
Sent: Wednesday,January 18, 2017 3:29 PM
To: Terri Milton
Subject: ITEM 5D / CITY COUNCIL AGENDA/WED, JANUARY 18 2017
Attachments: 2017.01.18 CCSR ITEM SD J.DEERTRACK COMMENT LETTER.pdf.pdf; 152175_1 CITY OF
BELL V. ROBERT RIZZO.pdf
To the Honorable City Clerk
City of Palm Springs
To Whom It May Concern:
Please place the following letter on the agenda for 5D tonight. A second legal case from People v.
Rizzo will be attached under separate cover.
Thank you.
Judy Deertrack
760 325 4290
i