Smith's Termination Agreement Could Stymie Lawsuits

A clause in outgoing-SEDC President Carolyn Smith's separation agreement gives her some protection against potential lawsuits. Photo: Sam Hodgson

Wednesday, Aug. 13, 2008 | A termination agreement drafted behind closed doors between the Southeastern Economic Development Corp. and its president, Carolyn Y. Smith, could stymie the city attorney's efforts to recoup hundreds of thousands of dollars Smith paid herself and her staff in taxpayer-funded bonuses.

The document effectively states that SEDC, a city of San Diego agency, will not sue Smith after she leaves the agency. A clause in the agreement “releases” her from "any and all loss, liability, claims, demands, causes of action or suits of any type related to Smith's employment with SEDC."

City Attorney Mike Aguirre said that the agreement could hamper the lawsuit he filed against Smith on Friday because Smith could use it to argue in court that the city has agreed not to sue her. Two local legal experts agreed that the document could be interpreted by a court as a contractual agreement by the city not to bring legal action against Smith.

Aguirre said the way the termination agreement was drafted -- in a closed session of an SEDC board meeting last month -- was questionable because the City Attorney’s Office was not represented at the meeting and the public was not informed of the content of the agreement before it was signed by Smith and SEDC board Chairman Artie M. “Chip” Owen.

"If SEDC is going to waive their rights against Ms. Smith, then the public needs to have had the ability to read the contract ahead of time and it needs to have been properly noticed," Aguirre said.

Ruben Garcia, an associate professor of law at California Western School of Law, said the termination agreement specifically releases Smith from lawsuits brought against her by SEDC. He said such clauses are common in termination agreements because they prevent legal battles from erupting between corporations and ex-employees.

But, because the city of San Diego oversees SEDC, the document could also release Smith from claims made against her by the city as a third party, Garcia said.

The agency is a nonprofit arm of the city’s Redevelopment Agency and is funded and overseen by the City Council. As such, Garcia said, Smith could argue in court that the termination agreement implicitly releases her from lawsuits brought by the city, including the one already filed by Aguirre.

"The argument can be made that there is a symbiosis between the city and SEDC," Garcia said. "It depends on a factual determination of who is covered by this release."

Orly Lobel, an associate professor of law at the University of San Diego, said the termination agreement appeared to have been broadly drafted to protect Smith from exposure to lawsuits not just from SEDC itself but also from third parties.

"The purpose of it is that she will get out of the relationship with the company thinking that she won't be sued by anybody," Lobel said.

Aguirre’s lawsuit has two claims: It alleges that Smith breached her contract with SEDC by paying herself and her staff hundreds of thousands of dollars in bonuses without authority to do so and also that she breached her fiduciary duty to the city and the citizens of California by approving unauthorized expenditures to herself and others.

Aguirre said the second of those two should not be affected by the termination agreement because the agreement contains a separate clause that limits the scope of the release agreed upon between SEDC and Smith. That clause states: "nothing in this Release exonerates Smith from responsibility or liability for Smith’s own wrongful act or omission."

Aguirre said the second claim in his suit alleges that Smith performed a wrongful act by paying herself and her staff unauthorized payments and that therefore the termination agreement will not affect that part of his lawsuit.

Smith was fired by the board of directors of SEDC in a lengthy board meeting on July 23. Three council members and the mayor called for her resignation after a voiceofsandiego.org investigation revealed that Smith had paid herself and her staff more than $1 million in non-budgeted bonuses and extra compensation that was not approved by SEDC’s board of directors.

The meeting included more than two hours of closed session discussion between the board, Smith and two lawyers hired by SEDC. The City Attorney's Office was not represented in the meeting, nor were any other representatives of the city.

The board decided to pay Smith more than $100,000 in severance pay. Her last day at the agency is Oct. 21.

Correction: The original version of this story incorrectly stated the date of the meeting in which Smith was fired. We regret the error.

Please contact Will Carless directly at will.carless@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.