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Lexin v. City of San Diego

California Court of Appeals, Fourth District, First Division

December 23, 2013

CATHY LEXIN et al., Plaintiffs and Respondents,
CITY OF SAN DIEGO, Defendant and Appellant.

APPEAL from a judgment of the Superior Court of San Diego County No. 37-2011-00084354- CU-MC-CTL, William S. Dato, Judge.

Jan I. Goldsmith, City Attorney, and David J. Karlin, Deputy City Attorney for Defendant and Appellant.

Gibson Dunn & Crutcher and Nicola T. Hanna for Plaintiff and Respondent Cathy Lexin.

Coughlan Semmer Fitch & Pott and Raymond J. Coughlan, Jr. for Plaintiff and Respondent Ronald L. Saathoff.

Sheppard, Mullin, Richter & Hampton, Robert D. Rose, Karin D. Vogel; Polek Law Group and Frank J. Polek for Plaintiff and Respondent John A. Torres.

David A. Hahn for Plaintiff and Respondent Mary Vattimo.

Law Offices of Frank T. Vecchione and Frank T. Vecchione for Plaintiff and Respondent Terri A. Webster.

Damiani Law Group and Lisa J. Damiani for Plaintiff and Respondent Sharon K. Wilkinson.

Goldfarb & Lipman and James T. Diamond, Jr. for League of California Cities as Amicus Curiae on behalf of Defendant and Appellant.


This is the latest appeal arising from the City of San Diego's (the City) infamous underfunding of its employment retirement system. In 2002 the Board of Directors (board) of the San Diego City Employees' Retirement System (SDCERS) approved the City's proposal to modify the funding plan to delete the potential of a balloon payment if the underfunded ratio fell to a certain level, in exchange for the City's resolution to indemnify the board members from liability for "any claim or lawsuit" arising from the approval.[1] In Torres, supra, 154 Cal.App.4th at pp. 224-226, this court held the resolution required the City to pay attorney fees the board members incurred in enforcing their right to costs of defense in two civil actions brought against them by the then city attorney arising from their approval of the modification.

In this appeal, the issue is whether the City's resolution also requires it to pay the board members' criminal defense costs in Lexin, supra, 47 Cal.4th 1050, an action the San Diego County District Attorney brought against them for felony violation of the states' conflict of interest statute, Government Code section 1090.[2] The City appeals a summary judgment for the board members in their declaratory relief action, contending (1) the resolution does not apply to criminal proceedings and (2) section 995.8 precludes an award of defense costs because, after commencement of the criminal action, the city council did not hold a formal hearing to determine the provision of a defense would be in the City's best interests and the board members "acted... in good faith, without actual malice and in the apparent interests of the public entity" when it approved the modification. (§ 995.8, subd. (b).) The City asserts that despite its indemnity agreement, it had the right to arbitrarily deny a defense.[3]

We affirm the judgment. The plain language of the City's resolution requires it to pay criminal defense costs and there is no statutory impediment.


In 1996 the City modified its method of funding the pension fund under an agreement known as the "City Manager's Proposal 1" (MP1). Historically, an actuary had determined the annual rate, but the City began contributing a set rate, which caused the retirement system to be underfunded. MP1 included a trigger that required a balloon payment if the funded ratio dropped below 82.3 percent.

In 2001 SDCERS earnings began falling precipitously as the economy faltered. The City was concerned that the 82.3 percent trigger would be met, which would require it to contribute an additional $25 million to the pension fund in one year. During the same time, the City entered negotiations with municipal unions over new labor agreements and the unions sought enhanced retirement benefits. The balloon payment "would have seriously hampered the City's ability to deliver services and would have led to layoffs, " and consequently, "the City elected to condition any increase in pension benefits on its obtaining relief from the SDCERS [b]oard from the effect of hitting the trigger." (Lexin, supra, 47 Cal.4th at p. 1066.)

In 2002 the city council, in conjunction with the city manager, developed, wrote, and formally proposed to the board a modification to the MP1, known as "Manager's Proposal II" (MP2). The City originally proposed lowering the trigger to 75 percent, but ultimately MP2 retained the 82.3 percent trigger and provided that if it was met, the City would have until 2009 to reach the actuarial rate. The city attorney approved MP2 as to form and legality.

During the board's consideration of MP2, it had significant concerns about potential liability arising from its approval. The board's fiduciary counsel opined there was a "material risk" that if it approved the proposal, at least as it was originally designed to lower the trigger to 75 percent, a court would find it had not properly exercised its fiduciary responsibility and board members could be held personally liable. Further, the board was apprised that a local attorney had already threatened a lawsuit. The board members requested an indemnity agreement before approving MP2.

On November 18, 2002, the city council unanimously adopted resolution R-297335 to indemnify the board members. The board approved MP2, and an agreement, also dated November 18, memorializes the terms. Fiduciary counsel opined that the measure in its final ...

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