[letterhead]

Franklin Mutual Advisers, LLC

51 John F. Kennedy Parkway
Short Hills, NJ 07078
tel 800/760-1955
 

October 28, 2003

VIA email to: cfletters@sec.gov

and FAX to 202.942.9525
  (Original and 6 copies via overnight delivery)

Grace K. Lee, Esquire
Division of Corporate Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re:       Farmer Bros. Co. (the “Company”)
Shareholder proposal (the “Proposal”) of Franklin Mutual Advisers, LLC
Response to the Company’s October 15, 2003 letter

Dear Ms. Lee:

You’ve suggested that it might be helpful to the staff’s determination of whether the Proposal should be included in the Company’s proxy materials if the Proponents[1] would submit an opinion of counsel in response to the Company’s submission of counsel’s opinion. I am a member of the bar of the State of California and I am prepared to opine to the best of my ability on matters which I believe pertain to your determination. But before I do, I’d like to frame the Proposal within a real world context and put the appropriate perspective on just what the essential issues are. Prior submissions from the Company and from Proponents have referred to and identified all the relevant (and each side would argue, some of the irrelevant portions of the California Corporations Code (“CCC”)) and no purpose would be served by rehashing chapter and verse here.

Instead, let’s consider how permissive indemnification typically works. Assume that the local newspaper headlines an investigative report in which a disgruntled former employee of California corporation X alleges that, more than a year ago, three members of senior management committed a number of accounting irregularities. None of the irregularities, the article explains, amounted to an outright fraud. Instead, the irregularities reflected choices in judgment which, in retrospect, appear highly questionable.

The named individuals respond in a number of ways. One immediately retains the best lawyer she can find. Another goes straight to the CEO of Company X, demanding that the company indemnify him for his future expenses incurred to clear his name. The third does nothing, taking comfort in the belief that he has done everything in accordance with GAAP. Stung by the negative publicity, Company X immediately conducts an internal investigation which concludes that there was no wrongdoing on the part of the first two individuals.

Given these facts, is there any doubt that Company X would readily agree to indemnify the person demanding indemnification?[2] Would anyone argue that there is no threatened action or proceeding at this juncture and therefore Company X would be prohibited from making a determination that the employee’s conduct qualified for Permissive Indemnification?[3]

As for the person who already hired a lawyer, would any one argue that Company X couldn’t determine that she qualified for Permissive Indemnification as well, even though she hadn’t asked for any reimbursement yet?[4]

As for the third person who believed himself blameless, let’s assume that Company X’s internal investigation revealed that this individual’s sense of innocence was entirely due to sheer incompetence and an utter lack of any reasonable sense of judgment. Company X’s investigation in fact concludes that this individual had acted in an unreasonably reckless manner. Would any one argue that Company X could not make a determination that this employee’s conduct fell below the standard of care described in CCC §317(b) or (c) and was thus ineligible for Permissive Indemnification? Would any one seriously suggest that a decision by Company X to deny Permissive Indemnification under these circumstances would constitute a breach of contract to the employee, or that such denial, being retroactive was therefore improper?[5]

CCC §317’s recitation of how and when a corporation can authorize Permissive Indemnification is fairly straightforward and provides the basis for each of the common sense reactions that one would have to the hypothetical but typical scenario described above. As previously cited, CCC §317(e) provides the authority for Company X to determine whether each of the three individuals’s conduct met the standards of CCC §317(b) and (c) and allow or disallow Permissive Indemnification. There is no condition that a “case” must have commenced before the company can make such determination. There only has to be a “proceeding” which is defined very broadly to include any “threatened” action or proceeding. The CCC does not define the term “threatened”, but nothing in the statute implies that the term should be read narrowly. In fact, as the hypothetical above makes clear, if the intent of Permissive Indemnification is to provide aid to agents of a company who have acted faithfully in the best interests of the company and its shareholders, and provide that aid when they most need it, one would expect the term “threatened” to be read very broadly, and in practice, it is.

By its very nature, the determination of whether an action or proceeding is “threatened” is subjective. Yet, would any one argue that the executive in the hypothetical who hired a lawyer did not reasonably believe herself “threatened” with a potential action and would have a reasonable expectation that her legal expenses would be paid by the company? And would Company X or any other company in similar circumstances refuse to authorize Permissive Indemnification for that individual on the grounds that there was no actual or threatened proceeding?

The bylaws of Farmer Bros Co. itself indicate how broadly it interprets the term “threatened”. [6] With respect to the Company, where its shareholders have pointedly and publicly suggested that the Company appears to have violated federal securities laws and directors may have breached their duty to non-controlling shareholders, and actual litigation is pending in which one of the directors is alleged to have abused, among other things, his role as Chairman of the Company, is there any doubt that the Company would authorize a request for Permissive Indemnity rather than deny on the grounds that there was no actual or threatened proceeding?

Under CCC §317(e), each of the three decision points in the hypothetical can be determined by disinterested directors, independent legal counsel, disinterested shareholders, or by a court. All the Proposal does is afford the Company’s disinterested shareholders their opportunity to make the determination that CCC §317(e) explicitly gives them. Nothing more. Nothing less.

Company’s Counsel raises a hue and cry that such an action by the shareholders conflicts with the Company’s bylaws, articles, and CCC §317 itself. I respectfully disagree. Article VI, Section 2 of the Company’s bylaws explicitly exclude the right to indemnification, among other things, for acts or omissions that

(b)(iv) … involve intentional misconduct or a knowing and culpable violation of law;

(b)(v) … the Indemnitee believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the Indemnitee;

(b)(vii) … show a reckless disregard for the Indemnitee’s duty to the Company or its shareholders in circumstances in which the Indemnitee was aware, or should have been aware, in the ordinary course of performing the Indemnitee’s duties, of a risk of serious injury to the Company or its shareholders;

b(viii) … constitute an unexcused pattern of inattention that amounts to an abdication of duty to the Company or its shareholders.

The Proposal merely provides the Company’s disinterested shareholders with the opportunity to exercise the power given to them by CCC §317(e) and the Company’s own bylaws to make the determination whether or not the directors’ conduct met the standards articulated therein. Nor does the Proposal contravene the Company’s Articles, which Company’s counsel concedes do no more than allow indemnification to the fullest extent permissible under California law. As stated before, the Proposal only implements what California law grants to shareholders. Consequently, it is my opinion that the Proposal does not contravene the Company’s bylaws, articles, or CCC §317.

All the myriad issues of state law which Company’s Counsel raises obscure the central question to be determined. The law is clear that shareholders have a right to make the determination necessary for authorization of Permissive Indemnification. Company’s Counsel claims that the consequences of the Proposal being approved would be illegal. Overlooked is the fact that the Company would suffer no prejudice as compared to the disinterested shareholders if the Proposal is included in its proxy materials because the Company would be free to seek clarification from a state court if and when the Proposal is approved by disinterested shareholders of the Company. If the Company’s Counsel is right regarding the impact of the Proposal, a state court would be the appropriate venue to confirm that. On the other hand, if the Proposal is excluded from the Company’s proxy materials, disinterested shareholders would be denied an explicit statutory right and disenfranchised in a way that would be irreversible[7].

The issue before the staff is very simple. Is a shareholders’ meeting the proper forum for shareholders to have the opportunity which CCC §317(e) explicitly gives them to make the determination under the Company’s bylaws and CCC §317(b) and (c) whether or not the directors’ conduct met the standards for Permissive Indemnification?

If you have any questions or require any other information, please do not hesitate to contact me via telephone (973.912.2152), fax (973.912.0646) or email at (bradt@msfi.com).

Yours truly,

Bradley Takahashi

cc: jgiunta@skadden.com