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Agency May Inadvertently Obligate Itself to Pay Employee Criminal Defense Costs

On December 23, 2013, the Court of Appeal decided a case that has important implications for how public agencies go about providing a defense to employees sued for acts or omissions related to their employment.  In Lexin v. City of San Diego, the Court ruled that a broadly worded resolution passed by the San Diego City Council required the City of San Diego (“City”) to pay for the criminal defense costs of certain employees, despite the fact that the resolution did not include formal determinations required by the Government Code when agreeing to pay such criminal defense costs.  Instead the Court was willing to imply such findings and broadly interpreted the City’s resolution to include criminal defense when the resolution did not expressly include such.  As a result of the Court’s decision, public agencies should cautiously draft resolutions providing an employee’s defense to ensure that they are not so broad as to include criminal matters where this is not intended.

The Lexin case has a long history.  In 2002, the San Diego City Council proposed that the Board of Directors of the San Diego City Employees’ Retirement System (“Board”) approve a proposal to modify the City’s pension funding plan.  The Board members had concerns about their potential liability in approving the City’s plan, and requested that the City agree to defend and indemnify them before approving the City’s plan.  The City Council agreed to do so, and passed a resolution stating that the City would defend and indemnify Board members in connection with “any claim or lawsuit” arising from future acts within the scope of the Board members’ employment.

In 2005, the San Diego County district attorney criminally charged the Board members with violating Government Code 1090, prohibiting a financial interest in any contract made by a public official,  as a result of the Board members’  alleged financial interest in the pension funding plan.  When the City Council declined to provide the Board members’ defense in the criminal action, the Board members hired private counsel to defend themselves.  Ultimately, the California Supreme Court ruled that the Board members had not violated Government Code 1090 (Lexin v. Superior Court (2010) 47 Cal.4th 1050).  However in achieving that result  the Board members expended substantial sums.  The Board members then sued the City, seeking a declaration that the City Council’s 2002 resolution entitled them to the costs of their defense in the criminal action.

In deciding the Lexin case in favor of the Board members, the Court of Appeal decided two issues, both of which may impact how public agencies in the future consider employees’ requests to provide a defense: 

First, the Court held that the language “any claim or lawsuit” in the City’s resolution meant that the City must provide a defense in both civil and criminal actions.  The Court decided that by adopting such broad language, the City Council by implication agreed to defend Board members in both civil and criminal actions, and that if the City Council intended something different or narrower, it should have said so.

Second, the Court held that the City Council followed the procedures outlined in the Government Claims Act for granting requests for defense of criminal actions even though the City Council made no specific findings or determinations in its resolution as required by Government Code section 995.8(b). That section states that in order to provide an employee with a defense in a criminal action, a public agency must “determine” that the defense would be in the best interests of the public agency and that the employee acted in good faith, without malice, and in the interests of the agency.  The Court  held that specific written determinations or findings are not required, and that the City implicitly made the required determinations merely by adopting the resolution, broadly interpreted to include criminal defense. 

As a result of Lexin, a public agency wishing to refuse, or to reserve its right to refuse, an employee’s request to provide defense or indemnity in a criminal action should expressly do so or at least expressly indicate that it has reserved the agency’s right to make the required determinations under Government Code section 995.8 at a later date.