Monday, Feb. 18, 2008 | An ongoing breach of contract and fraud lawsuit against a top city of San Diego official and the redevelopment wing she leads has shed light on state laws that provide public workers with immunity in certain instances and give them publicly funded legal representation.

California law generally offers public employees immunity from being personally sued when they are working in an official capacity, but that immunity vanishes in the presence of misconduct, as is alleged in the fraud lawsuit against redevelopment official Carolyn Y. Smith.

Not Immune

  • The Issue: Government employees are granted limited immunity from being sued personally for their professional work under state law.
  • What It Means: A top redevelopment official who has been sued claimed she had governmental immunity from a personal lawsuit, but a judge struck it down. The judge has sent the case to mediation.
  • The Bigger Picture: The law is intended to shield government employees from the burdens of lawsuits, but the immunity can be stripped when there is evidence of fraud, malice or corruption.

The idea behind the immunity is two-fold: Government officials can’t do their jobs if they’re bogged down in personal lawsuits, and it’d be difficult to recruit quality employees to public positions if they had to deal with the risk of paying for legal representation out of their own pocket.

“(The limited immunity exists) so that they can spend their time discharging the duties of their office rather than spending their time defending lawsuits,” said Thomas Barton, a law professor at California Western School of Law.

In the current suit here in San Diego, small business owners Mark and Sharon Petrarca allege that Smith, president of the Southeastern Economic Development Corp., the organization that oversees the revitalization of some of San Diego’s poorest neighborhoods, duped them into a legal settlement that she never intended to uphold.

Attorneys for Smith sought to have the complaint against Smith dismissed, claiming she had governmental immunity because she acted in her public capacity in urging the release of the claim on the land.

A judge disagreed, saying that the lawsuit contains allegations that, if true, would be sufficient to establish fraud; the case against Smith and the breach of contract allegations against SEDC as an entity have been forwarded to mediation.

With the claim against Smith remaining, there exists the possibility that she could be held liable personally in the case. She continues to be represented by publicly financed attorneys.

Under state law, a public entity is generally obligated to pay for the legal representation of a public employee in these types of cases. However, the SEDC board could refuse to do so if it determines that Smith acted with actual fraud, corruption or malice, or if it found that defending the employee would create a conflict with defending itself.

And, even if the board isn’t obligated to pay the legal bills, it can choose to do so under certain situations.

Bruce Gridley, an attorney from the Los Angeles firm Kane Ballmer & Berkman who is representing SEDC and Smith, said the state law obligates SEDC to pay its president’s legal tab and that its board had been presented a legal analysis of the issue in a session closed to the public.

“There’s a long way from allegation to proof,” Gridley said.

Smith didn’t return a phone call seeking comment for this story.

The dilemma over whether to back an employee’s legal fund isn’t a fresh one for the city of San Diego, as it’s been dealt with in various criminal and civil ordeals in recent years.

The City Council declined to pay the criminal defense of former City Councilmen Michael Zucchet and Ralph Inzunza after they were indicted in 2003 by the U.S. Attorney’s Office in the Strippergate case.

Employees and City Council members have also had their legal bills covered by taxpayer funds in the wake of Department of Justice and Securities and Exchange Commission investigations, nearly all as witnesses, something that has cost the city several million dollars since the probes began in 2004.

When it paid those bills, however, the city added a caveat: that it reserved the right to get those funds returned to them if an employee was charged and convicted of a crime, and stop paying the bills if an employee was indicted.

The retirement system has picked up the tab for its former top administrator and attorney in relation to their 2006 indictment; if they are found guilty or plead guilty, they will have to pay back what the pension system has paid out. And, when six pension officials were charged by the district attorney in relation to similar investigations, the City Council refused to pay their legal fees.

At the heart of the current controversy is a planned industrial development in a dusty, mostly vacant plot of publicly owned land in the Valencia Park neighborhood.

It was there that the Petrarcas had planned to expand their exotic bird business. But after their deal with an SEDC-selected developer fell through, they sued the developer. At the end of the trial, SEDC stepped in and offered the Petrarcas a settlement: SEDC would build the Petrarcas their building at the old price agreed to in exchange for dropping the suit against the developer.

The Petrarcas agreed and dropped a legal claim they had on the parcel upon SEDC’s asking, believing, they claim, that they were removing a final hurdle to the construction of their warehouse.

But they never got their building. They were later told the new developer chosen by SEDC to build the project, Santa Monica-based Pacific Development Partners LLC, wouldn’t be providing the warehouse in its plans. PDP claimed it was too expensive.

Instead, PDP, whose principals have an ongoing business relationship with SEDC’s board chairman, has since abandoned any plans to build industrial development there and instead is asking for permission to change the land’s zoning and build what’s expected to be a more valuable project — a Tesco supermarket.

To their surprise, the Petrarcas claim, they found out Smith and SEDC attorneys never took the settlement for final approval to the SEDC board or the final arbiter, the City Council, which oversees the Redevelopment Agency.

The Petrarcas have also sued SEDC for breach of contract in the same suit. They claim they’ve had to significantly shrink their business rather than expand it as the deal has dissolved over the last six years.

Gridley, attorney for Smith and SEDC, said the legal settlement called for more details to be worked out later. But, those terms were never agreed to by the two parties, he said, and the remedy for that would be to simply bring the settlement back to the original judge who approved it, not be the grounds for a separate breach and fraud suit.

John Moot, who served as the Petrarcas’ attorney in the first case and expects to be a witness in the second, argues that there is a conflict in the firm’s representation of both parties.

If SEDC argues that it isn’t responsible for the legal settlement because it never approved it, then Smith could be left on the hook in the case. Moot argues that the same firm can’t independently represent both SEDC and Smith in the case.

If, for example, a tidbit of information surfaced that would be beneficial to one party but damaging to the other, it might not be brought out because of the dual legal representation, Moot said.

“I think independent counsel, protecting the interests of their own client, are more likely to be candid about who is most responsible for what happened,” he said.

Moot made the argument in a Feb. 1 letter to City Councilman Tony Young, who represents much of the area that falls within SEDC’s boundaries:

“Yet, the same attorneys who (were) representing SEDC at the time the settlement agreement was entered in to and who are witness(es), are now representing SEDC in this Complaint even though, at least in my opinion, both Carolyn Smith and SEDC should have independent counsel who are not and will not be called as a witness.”

Gridley, the attorney representing SEDC, said an analysis of whether or not his firm should represent SEDC and Smith has been prepared by the law firm for the SEDC board. “Lawyers like us always clear with their client an issue such as [this] one,” he said.

Please contact Andrew Donohue directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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