Merit Decision: Judgment Creditor of City Employee Cannot Assert Right of Indemnification Against the City Under R.C.2744.07. Ayers v. Cleveland

“The statute cannot be applied in a way that subjects employees to financial ruin or that allows employees to control whether a legally qualifying judgment is paid.”

Justice Stewart, dissenting opinion

On March 25, 2020, the Supreme Court of Ohio handed down a merit decision in Ayers v. Cleveland, 2020-Ohio-1047. In a 6-1 opinion written by Justice Fischer, the Court held that only an employee of a political subdivision (here, Cleveland) can assert the right of indemnification set forth in former R.C. 2744.07(A)(2) (now R.C. 2744.07 (B)) against that political subdivision. Justice Stewart dissented.  The case was argued June 12, 2019.

Case Background

After being imprisoned for more than a decade, David Ayers was released from prison in 2011 on a on a federal writ of habeas corpus. Ayers then brought suit in federal court against the City of Cleveland and two police detectives, Michael Cipo and Denise Kovach, for violating his federal constitutional rights.  The trial court dismissed the claims against Cleveland, but the claims against Cipo and Kovach went to trial.  A jury awarded Ayers 13.2 million dollars. The trial court entered judgment in that amount against the two detectives, later adding costs and attorney fees. The detectives twice offered Ayers an assignment of their indemnification claims against the city in exchange for his agreement not to collect against them personally, but he declined their offers.

Cleveland did not actively try to indemnify the detectives, nor did the detectives seek to enforce any rights to indemnification from the city. Cipo died before paying anything to Ayers, and Ayers made no claim against his estate. The city provided Kovach with a lawyer, David Leneghan, who filed bankruptcy on her behalf, which discharged Kovach’s personal liability on the judgment.

After the bankruptcy proceedings were finished, Ayers filed a motion in federal court to reinstate his indemnification claim against Cleveland. Ultimately, the federal judge dismissed the claim from federal court for lack of subject-matter jurisdiction, deciding the matter was best determined in state court.

Ayers then filed suit in Common Pleas Court in Cuyahoga County against Cleveland, Leneghan, and Joseph Scott, the city’s assistant law director who represented both Cleveland and the two officers in the prior proceedings, asserting among other claims, and the one pertinent here, a claim for statutory indemnification pursuant to R.C. 2744.07(A)(2). The trial court granted Ayers’ motion for partial summary judgment on the issue of Ayers’ right to seek indemnification from Cleveland, and entered a judgment of $13,210,000 against the City, determining that R.C. 2744.07(A)(2) allowed Ayers to bring an indemnification claim directly against the City. All other claims were dismissed as moot.

The Appeal

In a split decision, the Eighth District Court of Appeals reversed the trial court’s grant of summary judgment in Ayers’ favor on the indemnification issue, and remanded the case with instructions for the trial court to address and resolve Ayers’ remaining claims not pertinent to this Supreme Court appeal. The majority held that Ayers, as a judgment creditor, did not have standing to bring a private cause of action against the city to enforce the city’s indemnification obligations to its employees, nor does a private cause of action arise by implication under R.C.2744.07(A)(2). The purpose of that provision is to shield employees from the financial ruin that could come from acts committed in good faith within the scope of employment, not to benefit injured parties. 

The dissenting judge would find that the intent of the statute is to satisfy judgments as a result of injuries by city employee actions in good faith and in the scope of their employment, and that a third party has standing to enforce the city’s obligation to pay the judgment when there is no dispute about the employee’s statutory right to indemnification. The dissenting judge would also find that Ayers, as a judgment creditor, is the real party in interest and thus has standing to assert the detectives’ statutory rights to indemnification against Cleveland.

Read the oral argument preview of the case here and the analysis here.

Key Statutes and Precedent

R.C. 2744.07(A)(2) (“Except as otherwise provided in this division, a political subdivision shall indemnify and hold harmless an employee in the amount of any judgment, other than a judgment for punitive or exemplary damages, that is obtained against the employee in a state or federal court or as a result of a law of a foreign jurisdiction and that is for damages for injury, death, or loss to person or property caused by an act or omission in connection with a governmental or proprietary function, if at the time of the act or omission the employee was acting in good faith and within the scope of employment or official responsibilities.”)(Relevant language is now codified in R.C. 2744.07(B).)

R.C. 2744.01(B) (An “employee” is “an officer, agent, employee, or servant, whether or not compensated or full-time or part-time, who is authorized to act and is acting within the scope of the officer’s, agent’s, employee’s, or servant’s employment for a political subdivision.”)

Worth v. Aetna Cas. & Sur. Co., 32 Ohio St.3d 238 (1987) (Indemnification is a personal right and not a right that may be enforced by a third party.)

Wilson v. Stark Cty. Dept. of Human Servs., 70 Ohio St.3d 450 (1994) (Political subdivisions are shielded from liability for the acts of their employees. Exceptions to this general rule must be specifically provided for in a statute.)

Ayers’ Proposition of Law Accepted for Review

Subsection 2744.07(A)(2) reflects the legislature’s intent to permit a judgment creditor to proceed directly against an indemnitor.

Does the Court adopt Ayers’ Proposition of Law?

No

Merit Decision

Brief point of clarification abut the statute involved

The provision at issue in the decision is former R.C. 2744.07(A)(2). R.C. 2744.07 was amended after the appeals court decision was released, effective October 29, 2018.  The relevant provisions are now in R.C. 2744.07(B).

 Executive Summary

The language of R.C. 2744.07(A)(2) is clear and unambiguous. Only employees are indemnified, not third parties. So, a judgment creditor like Ayers cannot proceed directly against Cleveland here.

A Short Political Subdivision Immunity Romp

The general rule is political subdivision are not liable in damages in civil actions. There are five exceptions to this general rule, but none applies in this case. But despite this immunity, political subdivisions are required to indemnify employees in certain situations. Relevant is R.C. 2744.07(A)(2), the provision at issue in this case.

Position of the Parties

Ayres argues that R.C. 2744.07 (A)(2) permits a judgment creditor to go directly against a political subdivision. He argues that this view is supported by the statute’s legislative history, comports with the legislature’s intent and the common practice of political subdivision indemnification, protects public employees, provides a kind of public insurance, promotes judicial economy and avoids injustice and gamesmanship. He also argues he has third-party standing to enforce the statutory indemnification proceeding.

Cleveland argues that the plain language of the statute clearly and unambiguously limits indemnification rights to employees. Since the statute is unambiguous, there is no need to consider legislative history. And Ayers’ position would upset the entire immunity scheme set forth in Chapter 2744.

Analysis

The Limited Nature of What is at Issue Here

Just the issue of whether a judgment creditor can go directly against a political subdivision pursuant to R.C. 2744 (A)(2). While there are other issues, if preserved they can be addressed below in further proceedings.

Once Again, The Plain Language of the Statute

The majority finds no ambiguity in the language of this statute. The statute says a political subdivision must indemnify an employee in the amount of any judgment qualifying under the statute.  Employee is defined in R.C. 2744.01(B) as “an officer, agent, employee, or servant, whether or not compensated or full-time or part-time, who is authorized to act and is acting within the scope of the officer’s, agent’s, employee’s, or servant’s employment for a political subdivision.”

Ayers definitely is not an employee. He is a third-party judgment creditor. R.C. 2744.07(A)(2) says that a political subdivision “shall indemnify and hold harmless an employee,” which Ayers is not. It’s that simple. “Thus, the right of indemnification is personal to the employee,” wrote Fischer, noting that the statute does not say a political subdivision shall indemnify any judgment against an employee or that a third party can enforce this right on behalf of an employee. And it doesn’t matter if the right to indemnification comes from a contract or a tort.  It’s still personal and doesn’t exist to benefit a third party.

Since R.C. 2744.07(A) doesn’t say anything about third parties enforcing an employee’s right of indemnification against a political subdivision, the Court isn’t going to read that into the statute.

Ayers’ Third Party Standing Argument Beyond Scope of Appeal

The Court finds this argument isn’t properly before it. It goes beyond Ayers’ proposition of law, the court of appeals rejected the argument, and Ayers did not raise it in his jurisdictional memorandum.

Bottom Line

Judgment of the court of appeals is affirmed. Ayers as a judgment creditor cannot proceed directly against the city of Cleveland under the statute involved.

Justice Stewart’s Dissent

Stewart disagrees with the majority’s holding that only an employee can invoke a political subdivision’s duty to indemnify the amount of a judgment awarded against an employee.  She thinks a judgment creditor can seek indemnity directly against the political subdivision and she chides the majority for not giving R.C. 2744.07(A)(2) a “just and reasonable” interpretation.

Stewart notes that this statute, unlike others she cites, doesn’t contain any language setting forth the procedure for an employee to trigger the city’s indemnification obligation. She would find that the absence of such language shows an absence of legislative intent to limit the city’s indemnification obligation only to its employees. 

The purpose of the statute is to protect employees from financial ruin by paying qualifying judgments against them. In the absence of any statutory procedure, a political subdivision could meet its indemnification obligation by reimbursing an employee who pays a judgment (reminder, if you have lost track of the facts, the judgment in this case was 13.2 million dollars). But to Stewart it is clear that employees shouldn’t have to pay the judgment before they get reimbursed., because the statute indemnifies employees against judgments, not losses they suffer for having to pay a judgment.  In other words, employees should not have to pay the judgment first before they can be indemnified. How could requiring an employee to pay up first meet the statutory purpose of protecting employees from financial ruin? Despite Stewart’s understandably strong feelings about this point, the question of whether city employees must first satisfy the judgment before seeking indemnification is not before the Court in this case, although the appeals court noted in its decision that Cleveland had never required anyone to do this before.

Stewart also wrote that the only other option offered under the majority decision would be for the employee to invoke his or her right to have the political subdivision pay the judgment. But this would give the employees against whom the judgment was made the ultimate say over whether the judgment was paid, which she also is convinced cannot be the legislative intent here.

In response to the majority’s point that Ayers twice declined the detectives’ offer of an assignment of their indemnification rights in exchange for an agreement not to collect against them personally, Stewart asks why the detectives didn’t just invoke their right to have the city pay the judgment, which would have left Ayers nothing to collect from them. “Thus, the offer to assign any claims the employers ‘might have had against the city’ in exchange for forbearance of collection efforts is suspect,” wrote Stewart.

Stewart would hold that “the political subdivision’s obligation to pay the judgment can be enforced when a qualifying judgment is obtained against an employee and the judgment creditor proceeds against the political subdivision for payment of the judgment.”

Concluding Observations

The opinion in this case is totally stripped bare of all the ethical and conflict issues raised, particularly those raised in the amicus brief filed by the Ohio law professors. I thought these would be of particular interest and concern to Justice Fischer, who has a longstanding track record in these areas.  Yet not a word from him as majority opinion author. The opinion also contains not a word about what got Ayers that $13 million judgment in the first place. Learn more about Ayers’ ordeal here.

On the other side of the coin, I still don’t understand why Ayers turned down the detectives’ offers to assign him their rights to indemnification in exchange for forbearance from collecting from them.  Wouldn’t all of this have been unnecessary had he done that? Or am I missing something? Couldn’t he have accepted the assignment only on the condition that the City agreed to the indemnification, and if not, he could collect against the officers?

All that said, here’s what I wrote after the argument:

“To borrow from Hamlet, something seems rotten in the City of Cleveland here. I think on the sole issue actually before the Court, the Chief and Justices French, DeWine and Fischer seem likely to hold that a judgment creditor of a city employee cannot directly enforce indemnification against the City. And yet, I found this entire argument unsettling-it seemed like gamesmanship upon gamesmanship, especially given the City’s position that since Kovach never requested indemnification, and the debt was discharged in bankruptcy, there was nothing left to indemnify.  I still don’t fully understand why Ayres declined the officers’ assignment offers, why he thought doing so would put the judgment at risk, why he didn’t intervene in the bankruptcy, or why he did not pursue a claim against Officer Cipo’s estate. On the other hand, to me, Officer Kovach’s bankruptcy felt manipulated by the City, and protective of the City’s own interest more than the officer’s.

“The bench was certainly hot, and all over the place.  Mr. Wolff never even got to start his argument–he spent all his time fielding questions.  And yet, Mr.Wolff very smoothly made it seem as if Officer Kovach was somehow the victim here, rather than Ayres, whose own ordeal seemed entirely lost during the argument. Verdicts that high don’t just fall from the sky-what allegedly happened to Ayres was awful, and Justice Donnelly rightfully called out the officers’ alleged behavior as being potentially beyond the scope of what can be indemnified, but for some apparent agreement by the City that the officers were within the scope of employment and in good faith.

“Honestly, to me, this one just kind of reeks. More than anyone else, Justice Stewart seemed to feel outrage about the City’s posture here, but I don’t think that will carry the day. Ayres may well end up with nothing. Whether there are lessons to be learned from this I cannot say, but I hope something like this doesn’t happen again.”

Ok, and now some more.

The specific resolution of this case was to affirm the judgment of the court of appeals that only an employee could seek indemnification under RC 2744.07(A)(2). But while the appeals court reversed the trial court on this issue, it also remanded Ayers’ remaining claims for  tortious interference, breach of contract, aiding and abetting, abuse of process, unjust enrichment, specific performance, and civil conspiracy and directed the trial court to “address Ayers’ remaining causes of action to determine whether the defendants’ actions following Ayers jury award, including the City’s failure to comply with the R.C. 2744.07(A)(2) and the circumstances surrounding Kovach’s bankruptcy proceedings, subjected the City or defendants Scott and Leneghan to civil liability.”

And while the majority and the dissent in the appellate decision may disagree about who can seek indemnification under the statute, there was no disagreement about the City’s conduct in this case:

Here’s a snippet from the majority opinion from the appeals court:

 “We emphasize that our resolution of this appeal relies solely on our interpretation of R.C. 2744.07(A)(2). It is not an endorsement of the City’s actions in this matter. To the contrary, the City’s post-judgment involvement in the detectives’ representation appears to be, as characterized by Ayers, unprecedented…It is equally unclear whether the City zealously represented its employees or merely protected its own interests…

“The dissent’s concerns with the City’s conduct are justified. However, it is this court’s hope that this decision will avoid future analogous fact patterns in this county by strongly reiterating to employees of political subdivisions that, subject to restricting contractual language, they have the absolute right to be held harmless for judgments rendered against them under R.C. 2744.07(A)(2), regardless of the representations made to them by the political subdivision. Moreover, if the developed facts of this case demonstrate, as the dissent concludes, that the City perpetrated an undisclosed conflict of interest, engaged in practices that are against public policy, or illegally orchestrated scheme to deprive Ayers of the judgment, the City will be held accountable for their conduct upon resolution of Ayers’ remaining claims.”

Let’s hope so.

And this, from the dissent in the appellate decision:

“The statute clearly does not allow for the City to finance the liable employees’ personal bankruptcies in lieu of indemnifying them. In most cases, it would likely be more cost effective for the City to require the employee to declare personal bankruptcy than to indemnify the judgments. The purpose of the statute is for the City to pay the judgment, without a triggering event, not for the City to help its employees evade the financial consequences of judgment that resulted from their tortious conduct.”

So, the blog will continue to follow this case.