It is now common for a local agency to require defense and indemnity as a result of subsequent litigation concerning an application. This obligation is created either as part of the application process or as a condition of a subsequent approval. A local agency formation commission took this to the next step when the San Luis Obispo Local Agency Formation Commission (“LAFCo”) required an applicant whose annexation application was denied to also indemnify LAFCo when the applicant sued LAFCo over the denial and lost in court. LAFCo’s indemnity demand was rejected by both the trial court and the Court of Appeal.
The facts before the Court of Appeal involved a proposed annexation to the City of Pismo Beach (“City”). The property was located within the City’s sphere of influence. The City and developer were both the applicants to LAFCo. The LAFCo application included a defense and indemnity provision, which included claims brought against LAFCo by the applicants. LAFCo denied the annexation request, the developer sued and lost. LAFCo then submitted a demand to be reimbursed for its legal fees ($400,000.00) which the City and developer rejected. LAFCo’s liability carrier reimbursed LAFCo and based upon an assignment of LAFCo’s claim, sued the City and developer. Notwithstanding the express provision in the agreement, the trial court and Court of Appeal both rejected LAFCo’s right to demand indemnity.
LAFCo argued that it had both express authority (the right to charge fees), as well as the implied authority to impose such a requirement. The Court of Appeal disagreed, concluding that the statutory authority to charge a fee did not extend to post-processing obligations. The Court also rejected the implied authority argument based in part on the provisions of the Code of Civil Procedure which provides as a general rule that in litigation each party bears its own litigation costs unless a statute provides an exception to the general rule. In those circumstances, it would be incorrect to imply a power which otherwise had to be codified by statute.
William Abbott is Of Counsel at Abbott & Kindermann, Inc. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.