What’s On Their Minds: Can A Judgment Creditor Of A City Employee Directly Enforce Indemnification Against The City Under R.C. 2744.07(A)(2)? David Ayers v. City of Cleveland

“The City says, if you just release the officers from their personal liability, we will enter into this agreement where you can pursue indemnification. Why would you not accept that?”

Justice French, to counsel for Ayres

“Is it the City’s contention that the City is not responsible for the judgment to Mr. Ayres?”

Justice Stewart, to counsel for the City and Scott

On June 12, 2019, the Supreme Court of Ohio heard oral argument in David Ayers v. City of Cleveland, 2018-0852. At issue in this case is whether R.C. 2744.07(A)(2) provides judgment creditors with standing to enforce indemnification directly against a political subdivision.

Case Background

In December 2000, David Ayers was convicted of aggravated murder, aggravated burglary, and aggravated robbery of a 76-year-old woman. However, in 2011, the Sixth Circuit Court of Appeals granted Ayers’ petition for a writ of habeas corpus finding that the state had violated Ayers’ Sixth Amendment right to counsel by inducing Ayers to make incriminating statements without the assistance of counsel. The federal appeals court ordered Ayers to be released unless retried within 180 days. In his brief, Ayers asserts that DNA testing excluded him as the perpetrator. In its brief, the City of Cleveland asserts that Ayers’ “intimation that his conviction was overturned due to DNA evidence is false.” In any case, the state chose not to retry Ayers, who was released from prison September 12, 2011.

In March 2012, Ayers filed a civil complaint in federal district court against Detective Michael Cipo, Detective Denise Kovach, and the City of Cleveland (“the City”) for violating his civil rights in the underlying criminal case. The City provided Joseph Scott, an assistant city law director who also represented the City in the case, as counsel for the officers. The claims against the City were dismissed by the trial court, but the claims against Cipo and Kovach proceeded to trial. The jury ruled in favor of Ayers and against the officers in the amount of $13,210,000.

After the district court’s entry of judgment, the City failed to indemnify the detectives as required by R.C. 2744.07(A)(2), and Cipo and Kovach took no action to enforce this right against the City. Instead, the City engaged bankruptcy counsel, David M. Leneghan, to file for bankruptcy on behalf of Cipo and Kovach as a means of discharging the detectives’ $13,210,000 debt. After Cipo died in 2013, Leneghan filed for bankruptcy on Kovach’s behalf, and the bankruptcy court discharged Kovach of personal responsibility for the $13,210,000 debt.

In June of 2015, Ayers filed the present suit in the Cuyahoga Court of Common Pleas against the City, Leneghan, and Scott, asserting, among other claims, a claim for statutory indemnification pursuant to R.C. 2744.07(A)(2). The trial court granted Ayers’ motion for partial summary judgment 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 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 its indemnification obligations under R.C. 2744.07(A)(2). Only the police officers had standing to enforce their statutory right to indemnification.

The dissenting judge would find that the legislature did not intend to limit the private right of action to enforce indemnification under R.C. 2744.07(A)(2) to employees, because such a limitation would be inconsistent with the purposes of the statute.

Read the oral argument preview of the case here.

Key Statutes and Precedent

R.C. 2744.07(A)(2)(Defending and Indemnifying Employees)(political subdivisions must indemnify judgments entered against their employees for good faith conduct within the scope of employment.)

Cort v. Ash, 422 U.S. 66 (1975) (creating a three-part test to determine whether a private cause of action is impliedly created by a statute: (1) whether the plaintiffs belong to a class for whose special benefit the statute was enacted; (2) whether the legislature intended to create a private cause of action, or to deny a private cause of action; and (3) whether the creation of a private cause of action is consistent with the underlying purposes of the legislation.)

Fawcett v. G.C. Murphy Co., 46 Ohio St. 2d 245, 348 N.E.2d 144 (1976) (a private cause of action should not be interpreted into a statute absent the clear intent by the legislature to create such a remedy.)

Taylor v. Academy Iron Metal Company, 36 Ohio St. 3d 149, 522 N.E.2d 464 (1988) (a litigant’s injury must be within the “zone of interest” that a statute intended to protect to maintain standing.)

Stengel v. Columbus, 74 Ohio App. 3d 608, 600 N.E.2d 248 (10th Dist. 1991) (R.C. 2744.07(A)(2) creates a statutory obligation to indemnify and not an avenue for judgment enforcement.)

Piro v. Franklin Township, 102 Ohio App. 3d 130, 656 N.E.2d 1035 (9th Dist. 1995) (Where employees act in good faith related to a government or proprietary function, their employers are required to indemnify. The requirement of indemnification is distinct from imposing direct liability on the employer.)

Grey v. Walgreen, 2011-Ohio-6167 (suggesting that the Cort test may no longer be valid in determining whether a private cause of action exists in a statute.)

Vaughan v. City of Shaker Heights(N.D. Ohio 2013) (permitting the use of R.C. 2744.07(A)(2) as a private cause of action for a judgment creditor to pursue indemnification from an employer.)

Ajamu v. City of Cleveland, (N.D. Ohio 2016) (holding that an employee has the right of indemnification, and not a third party via a private cause of action.)

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.

At Oral Argument

Arguing Counsel

Daniel Twetten, Pro Hac Vice, Loevy & Loevy, Boulder Colorado, for Appellant David Ayres

Robert M. Wolff, Littler, Mendelson PC, Cleveland, for Appellees City of Cleveland and Joseph Scott

Ayres’ Argument

The text and purpose of R.C. 2744.07 (A)(2) are served by allowing judgment creditors to proceed directly against the City where, as here, the City is obligated as a matter of law to pay the judgment. The City defended its officers with no reservation of rights. All the prerequisites for indemnification have been satisfied, and the City should pay Mr. Ayres directly. The plain text of the statute says that the City “shall indemnify an employee in the amount of any judgment.” That clearly imposes an obligation on the City, and there has to be some mechanism to enforce that obligation. Where, as here, there’s no question that indemnification is appropriate and triggered, both an employee and a judgment creditor can enforce the City’s obligation.

The purpose of the statute is twofold. One is to protect the employees, but a second is to make sure that a judgment creditor, the tort victim, is made whole. That is inherent in the concept of any kind of indemnification provision.

Accepting the indemnification offer in this case would have risked the judgment. Had Mr. Ayres entered into a conditional assignment, where he agreed not to pursue the officers in any way, the City would have taken the position that there was no liability for it to indemnify and Mr. Ayres would have been right back where he started. So that was not an option. But the City was not offering to enter into the indemnification agreement. The offer was from the individual officers. If Mr. Ayres would agree to forbear any liability and any collection as to the individual officers, they would assign him their indemnification rights. The City never offered to pay the judgment. From Mr. Ayres’ position, accepting that offer would have put him at risk for losing the judgment. That is why Mr. Ayres didn’t accept the conditional assignment offer that was made.

The concept of indemnification in the amount of any judgment is an expansive one, as far as indemnification statutes go. The legislature could have said “indemnify against the loss associated with the judgment” but it said “indemnify in the amount of the judgment,” so there’s no notion that what the legislature was contemplating was that the employee would pay whatever he or she could pay and the municipality would cover that check, so to speak. That’s not reflected in the statute at all.

Indemnification and being held harmless are two different concepts. A person can be indemnified for the amount of a judgment and a person can also be held harmless for the other costs associated with the judgment. The use of the word “employee” is not intended to restrict who can enforce the City’s obligations. There is nothing in the statute that says that only an employee can enforce that obligation. The statute does not restrict the right of enforcement to an employee. All the use of the word “employee” does is define what the City’s obligation is, not how that obligation is enforced.

In this case what happened was the officer was not indemnified and was pushed into bankruptcy, and so the employee in this case was actually not protected. This case presents very real facts as to why it’s important to allow a judgment creditor to pursue a claim directly against the City in order to serve the purpose of protecting that employee.

City’s and Scott’s Argument

The assignment offer that was made in this matter was not made by the City. Once the City was dismissed from the federal lawsuit, from that point on, Attorney Scott’s actions were solely in the interests of Officer Kovach. It’s easy to look back and say the interests may have diverged here, but they really didn’t, because there was no viable claim against the City in that federal case. Mr. Scott made the assignment offer on behalf of the Officer, and asked for nothing in return except that there be no execution against Officer Kovach’s meager assets. There is nothing in the record implying the City then would have said that offer was unenforceable.

While it is true there was no reservation of rights letter as there usually would be with private insurance, and it certainly would have been a better practice had there been, the City does not know what discussions were had with Officer Kovach, as attorney-client privilege has not been waived. There is no reason to believe that her situation and potential future liabilities were not explained to her, both by Mr. Scott, her counsel during trial, and Mr. Leneghan, her bankruptcy lawyer. And the City strongly disagrees that the officer was forced into bankruptcy. That is not what the record reflects.

It is the City’s position that the statute says shall indemnify and hold harmless the employee. The employee has not requested indemnification. The employee discharged the debt in bankruptcy. So there is no debt to indemnify. In this case the employee made no request for indemnification, and no longer has a debt to discharge. The City’s position is there is no ongoing indemnity obligation.

The record shows that Officer Kovach has some very compelling reasons to end this litigation. She wanted closure and finality. She twice offered to Mr. Ayres’ counsel that she was willing to give her indemnification rights. She didn’t even have any assets worth attaching. Once her offer to assign was not accepted, she had every reason to believe that Mr. Ayres would still proceed against her individually. He didn’t have to honor the City’s indemnification, he could have gone against her, and she also had every reason to think the City might assert its rights under the Collective Bargaining Agreement, capping its indemnity obligation at 1 million dollars. There is nothing in the statute that said Mr. Ayres had to collect the entire judgment from the City.

There was another risk to Officer Kovach, given the jury verdict against her and her now deceased partner for intentional infliction of emotional distress. That verdict definitionally would have taken her and her partner out of any right to indemnification. The City could have decided the officers’ actions were not made in good faith.

R.C. 2744.07(A)(1) provides a duty to defend, a duty which was still ongoing after the indemnification offer was refused. Officer Kovach was in retirement, and had every reason to want to dissociate herself from ongoing litigation, from the risk of holding the bag if the decision was made that she was not acting in the course and scope of her employment. The City viewed the bankruptcy representation as part of its ongoing obligation to provide Officer Kovach a defense.

What Was On Their Minds

Officer Kovach’s Bankruptcy

Here the bankruptcy court enters an order, as I understand it, that would have allowed Ayres to proceed against Officer Kovach in state court for the amount of the indemnification despite the bankruptcy injunction, noted Justice DeWine. Why didn’t he do that? Wouldn’t that have simplified things? Ayres had notice that there was a claim in bankruptcy that was going to be discharged, but didn’t do anything, did he? Why wouldn’t he go to the bankruptcy court and say don’t discharge this debt? He was listed as a creditor and had notice, DeWine commented, and that certainly would have resolved any issue about whether or not the debt was discharged in bankruptcy.

How does Officer Kovach’s bankruptcy affect the city’s responsibility under the statute, asked Justice Stewart? Is that a separate defense? Was it appropriate for the people of the City of Cleveland to pay for the officer’s bankruptcy proceedings? How is filing bankruptcy defending the officer? Technically, it’s protecting the city’s coffers, she commented.

The Assignment Offers

What exactly were the indemnification offers, asked Justice French? To assign the rights of indemnification? In order to agree with Mr. Ayres, wouldn’t the Court have to assume that the City, in bad faith, makes that kind of an offer, if you release our officers, you can have their indemnification rights assigned, but at the same time, they are thinking, we are going to fight you, we are not offering this in good faith, is that really what Mr. Ayres is saying? (answer: that is a fair reading of what he thinks the record says.)

Was there ever an offer by the City to pay the judgment, asked Justice Stewart? Wasn’t it to the benefit of the officers for the City to make the offer so they wouldn’t have to file bankruptcy in the first place? But what would be the motivation or benefit for the City to make the offer, because at least one of the officers is discharged in bankruptcy, so there’s no pursuit there anyway, and the other detective is deceased so maybe going after the estate is fruitless, too?

The Indemnification Statute and the City’s Responsibility

Is the purpose of the statute to protect the officers or is it a direct responsibility from the City to the victim in this case, asked Chief Justice O’Connor? Later she commented that in this situation, the inequity and the size of the judgment and the fact that the bankruptcy intervened were the reasons this case was here, but that would not always be the situation.

So in other words, the statute is written in such a way that any employee of the City can avoid a tort victim being able to recover a judgment by filing bankruptcy, asked Justice Stewart? How does the employee trigger indemnification? If the employee doesn’t trigger indemnification, then nothing happens? Regardless of the litigation, the cost, the judgment, the jury verdict, it is the employee who can always control whether the judgment creditor gets paid? If the employee makes no request, then the statute is a waste of ink and paper? It has no teeth whatsoever? After the judgment, why did the City continue representing the officers? (Mr. Wolff noted that after judgment the City was out of the case and the officers were represented by Mr. Scott.) No counsel for either detective was paid for by city funds after judgment was rendered?

The statute for indemnification covers an employee who was acting in good faith and within the scope of the employment, noted Justice Donnelly. Isn’t it a fact that the behavior that was alleged that resulted in this 13 million dollar verdict was that of officers who were not acting in good faith? Who were in fact acting in bad faith? Just reading the complaint before going to trial, you would expect the lawyers to say, hey, if these allegations are true, you need your own counsel in this case because under the statute this is not something we’re obligated to indemnify. While I wouldn’t expect the City to pay for outside counsel, I would say to the officers, if you did this, if you fabricated evidence, that’s not within the scope of your employment. You go out and hire your own counsel. Wouldn’t that have been the course?

Indemnify and Hold Harmless Language

Isn’t the statutory language “indemnify and hold harmless”, asked Justice Fischer? That is a reimbursement clause, is it not? Why is the phrase “hold harmless” in the statute? And the statute says indemnify and hold harmless an employee, he noted.

Doesn’t hold harmless also include the fact that the City then couldn’t pursue anything against the officer, asked Justice Stewart?

Isn’t that language a one-way street to protect the municipal employee, and not, in this case, Mr. Ayres or someone similarly situated with a judgment against the employee, asked Chief Justice O’Connor? If the City is going to hold them harmless for all things, how does that translate to benefit Mr. Ayres? If the legislature meant to cover anybody who’s a creditor or is in any other way owed by an employee, it could have said that, too, she noted.

What about the plain meaning of the word indemnify, which means to secure, protect against hurt, loss or damage, to exempt from incurred penalties or liabilities, to make compensation for incurred loss or damage, noted Justice DeWine. These all refer to things about protecting another person from damage, not to provide compensation to an injured victim. It’s the employee that’s protected, right?

Definition of Employee

Employee means an officer, agent, employee or servant, whether or not compensated who’s authorized to act and has acted within the scope of that individual’s employment for a political subdivision, noted Justice Fischer. So an employee is defined as somebody who is acting on behalf of the political subdivision, and Mr. Ayres was not an employee.

No Reservation of Rights Letter

With the statutory indemnification provision existing, why did the City represent without a reservation of rights letter, asked Justice Fischer, commenting that seemed unusual, to say the least.

Officer Cipo’s Debt

Is the City still liable for Officer Cipo’s debt, asked Justice French? If at the time Mr. Ayres and his counsel had pursued Officer Cipo, perhaps had pursued the estate, at that point would the City have been responsible? How would an indemnification request have been made, if it was after his death? Could the estate then ask for indemnification? Following up, the Chief clarified that there would first have to be a judgment against the estate, and then the estate would ask for indemnification.

Attorney-Client Privilege

If the discussions were between the City through its attorney, and the officer, what privilege is there, asked Justice Fischer? Isn’t the City almost admitting it is adverse to the officer?

How It Looks From the Bleachers

To Professor Emerita Bettman

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.

To Student Contributor Madeline Pinto

I found this case difficult to call from the bleachers and I believe it will be a close one. Throughout the oral argument, Chief Justice O’Connor and Justice Stewart made their opposing positions clear and each used their questions to persuade the remaining Justices to agree with their own interpretation of the issue. Chief Justice O’Connor appeared to side with the City of Cleveland. In particular, she seemed unconvinced by Ayers’ argument that the statute’s use of the word employee simply defines the actor to whom the City owes an obligation and in no way limits who can enforce that obligation. Chief Justice O’Connor’s questions suggested that had the legislature intended to allow judgement creditors to enforce the statute, it could have indicated as such, but it clearly chose not to do so.

In contrast, Justice Stewart appeared to side with Ayers. Justice Stewart took particular issue with the City’s argument that once Kovach declared bankruptcy and the judgment was discharged, the City was no longer responsible for the judgment to Ayers. Justice Stewart commented that, under the City’s interpretation, the statute “is technically a waste of ink on paper, it has no teeth whatsoever” because it allows any city employee to prevent a tort victim from recovering a judgment debt by simply filing for bankruptcy.

Justice Fischer appeared to lean towards the City’s position. He seemed convinced that the plain meaning of the statute indicated that only an employee could enforce the City’s obligation and that the statute’s only purpose was to protect employees from damage.

Justices DeWine and French also appeared more inclined to rule in favor of the City. Both Justices seemed to question Ayers’ decision not to pursue alternative options for collecting the judgment debt. Justice French in particular was critical of Ayers’ decision to reject the offer to assign indemnity rights to Ayers in exchange for a release of the officers’ liability.

Justice Donnelly’s position was the most difficult to discern. However, his questions indicated that he was concerned that the City had continued to represent Kovach despite a conflict of interest.

On the whole, I believe the Court will likely rule in the City’s favor. Although I had a difficult time discerning several of the Justices positions on the issue, the tone and content of the Justices’ questions indicated that a majority of the Court is slightly more inclined to rule in favor of the City.

To Student Contributor Maggie Pollitt

The Court did not appear taken with either argument. First, the Court appeared unpersuaded by the idea posited by Ayers’ counsel that a judgment creditor could enforce a judgment directly against a City. The Court seemed stuck on the idea that a third party creditor was not an “employee” under the statute and therefore could not obtain the rights to what, statutorily at least, appears to be a reimbursement clause. Additionally, the Court pressed Ayers’ counsel on the choice not to intervene in the bankruptcy proceedings, which would have prevented the officer’s debt from being discharged and thus more clearly maintained the City’s obligation to indemnify.

Given the Court’s criticism of Ayers’ argument, one would assume that the Court favored the City’s argument. However, the Court seemed reluctant to accept the City’s interpretation of the statute that an employee must request indemnification by its own employer, though this is not statutorily mandated. The Court points out that, given this interpretation, an employee could choose whether a judgment creditor was paid by the City. When read this way, the statute would force employees to enforce a judgment against their employer and thus fail in its intended purpose of protecting employees.

Because of the complexity of the facts of the case, the oral arguments seemed to jump around from concept to concept without spending sufficient time discussing the statutory interpretation. Additionally, it is difficult to view this case without regard to policy considerations or the extreme inequity that Ayers may face if the Court rules in favor of the City. Regardless, I think that the Court will rule in favor of the City. The Court does not seem enthusiastic about creating a right for third parties to seek indemnification against a municipality. Additionally, apart from Justice Stewart, the Court seemed generally less concerned about the policy concerns behind the statute of protecting employees. For these reasons, I think the Court will ultimately rule in favor of the City and find that the statute only permits the employee to seek indemnification.