Opinion ID: 1953501
Heading Depth: 2
Heading Rank: 2

Heading: Whether AT & T Has Standing To Sue As the Directors' Equitable Subrogee

Text: We turn next to the second issue raised on this appeal: whether AT & T is entitled to sue the D & O insurers on a theory of equitable subrogation. [31] We conclude that it is, and that the Superior Court erred in holding otherwise. As the Superior Court correctly found, to be equitably subrogated under California law, a party paying the debt of another must satisfy the following prerequisites: (1) Payment must have been made by the subrogee to protect its own interest. (2) The subrogee must not have acted as a volunteer. (3) The debt paid must be one for which the subrogee was not primarily liable. (4) Subrogation must not work any injustice to the rights of others. [32] The sole issue relating to subrogation, as the trial court properly noted, is whether AT & T acted as a volunteer when it made the payments on behalf of the At Home Directors. The Superior Court held that AT & T acted as a volunteer, because the complaint does not allege that AT & T was legally obligated to indemnify those Directors. [33] In concluding that AT & T must have been legally obligated to indemnify the At Home Directors in order not to be deemed a volunteer for subrogation purposes, the Superior Court misread California law. AT & T claims that it indemnified the At Home Directors not because it was legally obligated to do so, but because it was protecting its own interests. The narrow issue is whether the complaint states a cognizable claim that AT & T indemnified those Directors to protect its own interest. Under California law, a subrogee need not have a legal obligation to indemnify a subrogor in order to have an interest worthy of protection for subrogation purposes. The California courts: . . . have given a very liberal interpretation of the interest required to distinguish a person from being a volunteer. It would seem that one acting in good faith in making his payment, and under a reasonable belief that it is necessary to his protection, is entitled to subrogation, even though it turns out that he had no interest to protect. [34] Under California law, a volunteer has been defined as a stranger or intermeddler who has no interest to protect and is under no legal or moral obligation to pay under the circumstances. [35] Although AT & T was not legally obligated to indemnify the At Home Directors, the complaint alleges ample facts that, if taken as true, would establish an interest that AT & T, as a reasonable member of the business community, was entitled to protect. AT & T was the majority stockholder of At Home and, as such, was entitled to select the persons it would designate to the subsidiary's board. But for AT & T having requested them to do so, the At Home Directors would not have served as directors of At Home, and would not have been sued in the Underlying Litigation. The complaint specifically alleges that the At Home Directors were sued for actions they took as directors and officers of At Home, an AT & T subsidiary. Because AT & T had other subsidiaries and would likely acquire subsidiaries in the future, it is inferable that AT & T knew it would likely ask other AT & T employees to serve as those subsidiaries' officers and directors. To persuade its employees to do that, AT & T must be able credibly to assure those employees that they would be protected from financial ruin while serving as a director or officer of an AT & T subsidiary. In these circumstances, AT & T had a legally cognizable interest that it was entitled to protect by paying indemnification that AT & T was not legally obligated to provide. The Superior Court interpreted California law to require that AT & T must have been legally (even though not primarily) obligated to indemnify the At Home Directors in order to have a protectible interest for subrogation purposes. In so doing, the trial court erred.