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Defense and Indemnification of Public Employees After Lancaster
Date: June 26th, 2014    Written by Jessica M. Baquet


Public employees may be exposed to liability in the performance of their duties.  At common law, a public entity could not lawfully fund the defense of or indemnify its public employees in a lawsuit, even if the case arose out of the employee’s official acts. [i]   In the late 1970s and early 1980s, however, the state legislature enacted sections 17 and 18 of the Public Officers Law, which provide for the defense and indemnification of public employees at the state and local levels, respectively.

Both public entities and public employees have certain obligations under these statutes, which Peter Bee and James Clemons described in detail in their article "Indemnities and Immunities for Municipal Officials,” published in the Winter 2014 issue of Municipal Lawyer. [ii]   In general, the public entity must fund the defense of a public employee in a lawsuit arising from his official acts and must indemnify him in the event of a settlement or adverse judgment so long as the public employee fully cooperates in his defense and fulfills the statute’s procedural requirements. [iii]

This article focuses on the obligation of public employees to fully cooperate in their defense.  Until recently, several important questions regarding the cooperation requirement remained largely unanswered: What must a public employee do to fulfill his duty to cooperate? What are the public entity’s obligations in the event the employee fails to cooperate?  What are the consequences of a public entity’s failure to withdraw an employee’s defense after he refuses to cooperate?  In Lancaster v. Inc. Village of Freeport,[iv] the Court of Appeals shed light on these issues for the first time.

The Lancaster Decision

Lancaster concerned the Village of Freeport’s ("Village”) withdrawal of its defense of various public employees in two federal lawsuits brought against them and the Village by two private plaintiffs.  These suits alleged, among other things, that the public employees had committed RICO violations and fraud and demanded $8,500,000 in damages plus treble damages and attorney’s fees. 

The Village and the public employees were represented by separate counsel in the federal lawsuits.  The Village, by its attorney, negotiated a settlement that provided for the discontinuance of the cases as against it and the public employees.  Although the Village was required to make a payment to the private plaintiffs as part of the settlement, the employees were not required to pay plaintiffs or to admit any wrongdoing.  The plaintiffs required only that the public employees agree to refrain from criticizing the settlement.

The employees refused to agree to the foregoing terms and, as a result, the settlement foundered with respect to the claims against them. Thereafter, the Village’s Board of Trustees voted to withdraw the public employees’ defense based on their failure to fulfill their duty to cooperate under Public Officers Law § 18 and Freeport Village Code § 130-6.[v]

The public employees then brought Article 78 proceedings against the Village seeking the reinstatement of their defense.  The Supreme Court dismissed the proceedings, finding that the employees, had, in fact, failed to cooperate. [vi]   The Second Department and the Court of Appeals subsequently affirmed. [vii]   Lancaster is one of only a handful of decisions to consider whether a public employee breached the duty to cooperate under the Public Officers Law and marks the first time that the Court of Appeals has weighed in on the issue.

The Lancaster decision expounded upon the duty to cooperate in two important respects. First, the Court found that the failure of a public employee to accept a reasonable settlement offer constitutes a breach of the duty to cooperate. [viii]   Second, the Court held that a public entity’s duty to defend its employees is akin to an insurer’s obligation to defend its insured. As such, like an insurer, a public entity is only justified in withdrawing an employee’s defense for non-cooperation where: (1) the entity acted diligently in seeking to bring about the public employee’s cooperation; (2) the efforts employed by the entity were reasonably calculated to obtain the employee’s cooperation; and (3) the attitude of the employee, after cooperation was sought, was one of willful and avowed obstruction. [ix] 

The Lancaster decision has significant implications for public employees and public entities alike: public employees must be aware of what they must do to fulfill their duty to cooperate, while public entities must understand the circumstances under which they are obligated to withdraw an employee’s defense for non-cooperation and the potential consequences of a failure to do so.  In this regard, cases construing an insured’s breach of the duty to cooperate with his insurer will prove instructive.

Obligations of the Public Employee

In the insurance context, courts have noted that the duty to cooperate is premised upon the fact that an insurer cannot properly defend a lawsuit without the participation of its insured. Courts have thus held that the duty to cooperate requires an insured to provide truthful disclosure of information demanded by the insurer, to aid in securing witnesses, to forward papers related to the lawsuit to counsel, to testify at depositions and at trial and to otherwise provide all reasonable assistance necessary to enable counsel to defend the lawsuit. [x]   Courts will likely find that public employees are subject to the same obligations.

Lancaster sets out another critically important element of the cooperation requirement: the duty to accept a reasonable offer of settlement.  There, the Court of Appeals found that, in the face of the multi-million dollar exposure associated with continuing to litigate, the public employees’ refusal to settle the lawsuits in exchange for nothing more than their agreement to refrain from criticizing the settlement was unreasonable.  The Court did not, however, articulate a test to be applied in determining whether an employee’s refusal to settle is unreasonable in other situations.

Insurance cases do not provide much additional insight on this point.  In the most relevant case, Cowan v. Ernest Cordelia, P.C., an insured refused to settle a lawsuit because the plaintiff would not agree to keep the settlement absolutely confidential. [xi]   The insured’s purported justification for insisting on confidentiality was that, if the fact that the case settled became known, it might create the perception that he had done something wrong.  He was particularly concerned about this because he was an attorney and had previously testified before the Character and Fitness Committee that he had not committed the acts that gave rise to the lawsuit. The Court found that the objections to the settlement were "phantom” and "illusory” insofar as there is no legal basis upon which a settlement that does not include an admission of wrongdoing could support a claim that the insured lied about his innocence in another proceeding.  As such, the Court found that the insured failed to cooperate by "thwart[ing] the ultimate settlement of [the] lawsuit.” [xii]

The principle to be gleaned from Lancaster and Cowan is that the reasonableness of an employee’s refusal to settle likely hinges on a balancing of: (1) the financial burden to be incurred by the public entity if litigation continues; against (2) the degree to which the employee will be injured or prejudiced by the settlement terms.  While the financial exposure to the public entity may be more easily determined, the extent of injury to the employee is harder to quantify.  The injury may not be monetary in nature, but might instead take the form of the relinquishment of a right or potential exposure to civil or criminal liability. If the employee can articulate a real and substantial harm that will inure to him under the settlement, it is unlikely that his refusal to settle will be considered unreasonable. The employees and insured in Lancaster and Cowan simply failed to meet that burden.

Obligations of the Public Entity

Faced with a public employee’s failure to cooperate, a public entity is not simply free to withdraw the employee’s defense.  Instead, there are several standards that must be met, and steps the entity must take in order to ensure that the withdrawal is proper.

First, cases in both the insurance and public employment contexts make it clear that a public employee’s lack of cooperation must be both material and substantial in order to warrant the withdrawal of his defense.[xiii]  The burden of proving materiality is on the public entity and it has been described as a "heavy one.”[xiv]  Before Lancaster, the Third Department considered two cases concerning the withdrawal of a public employee’s defense.  In Garcia v. Abrams, the court found that the employee had not committed a material breach of the duty to cooperate when he testified inaccurately about a prior arrest at his deposition because: (1) he quickly corrected the inaccuracy; (2) the inaccurate information was likely inadmissible; and (3) even if the testimony were admitted at trial, the defense would have an opportunity to explain the reason for the misstatement.[xv]  In N.Y.S. Inspection, Security and Law Enforcement Employees, District Council 82 v. Abrams, the court held that an employee’s failure to attend a deposition on a single occasion, where he otherwise completed all necessary paperwork and subsequently attended a rescheduled deposition, was not a material breach of the duty to cooperate.[xvi]

When, then, is a failure to cooperate material and substantial?  With respect to the failure to attend depositions or to provide requested information, several courts have held, in the insurance context, that the insurer is required to demonstrate an "unreasonable and willful pattern” of such conduct.[xvii]  In contrast, a single instance of the insured knowingly providing false information has been held sufficient to constitute non-cooperation.[xviii]  With the foregoing in mind, public entities should be guided by the principle that, where an employee has prevented counsel from effectively defending the claims against him, he has committed a material breach of the duty to cooperate.

If the employee has committed a material and substantial breach, the employer must then fulfill its obligations under Lancaster before withdrawing his defense.  Specifically, the entity must act diligently in seeking to bring about the public employee’s cooperation and it must employ efforts that are reasonably calculated to obtain the employee’s cooperation.  The employer is required to attempt to convince the employee to cooperate and must continue to do so until it is clear that "further reasonable attempts . . . will be futile.”[xix]  The Court of Appeals has held, in the insurance context, that further attempts may clearly be futile where an insured openly disavows its duty to cooperate, while a "longer period of analysis may be warranted” where an insured "has punctuated periods of noncompliance with sporadic cooperation or promises to cooperate.”[xx]  In sum, unless a public employee overtly declares that he will not cooperate, as the employees in Lancaster did, the public entity must make multiple attempts to procure cooperation over an extended period of time before it can legitimately withdraw the employee’s defense.

Finally, the public entity must be able to demonstrate that the public employee’s conduct was willful and avowed after the entity attempted to procure his cooperation.  Simply put, the public entity must be able to show that the employee’s continued failure to cooperate was deliberate rather than inadvertent.[xxi]  

If all of the foregoing requirements are satisfied, the public entity must withdraw the employee’s defense.  The entity’s failure to do so carries with it serious implications, as the unlawful expenditure of funds on an employee’s defense may violate the Gift and Loan Clause of the New York Constitution.  That clause provides that a public entity "shall [not] give or loan any money or property to or in aid of any individual or private corporation or association, or private undertaking . . . .”[xxii]  The magnitude of such a violation is severe; public officials can be held personally liable for such unlawful expenditures under General Municipal Law § 51.[xxiii]  Therefore, it is of critical importance that public entities keep abreast of their employees’ cooperation, or lack thereof, in the defense of a lawsuit and that they document evidence of non-cooperation as well as their attempts to convince the employee to cooperate.

Conclusion

Lancaster has brought clarity to the obligations of public entities and public employees under the Public Officers Law.  While there is room for further judicial clarification of the broad concepts of reasonableness of a settlement, materiality of an employee’s breach, and futility of further attempts by the public entity to procure an employee’s cooperation, public entities can now tailor their policies and procedures to ensure, in large part, that the requirements of Public Officers Law sections 17 or 18 are satisfied.

Jessica M. Baquet represented the Incorporated Village of Freeport in Lancaster.  She is a litigation associate at Jaspan Schlesinger LLP in Garden City and her practice focuses on the defense of municipal and corporate employers.

[i] See generally James D. Cole, Defense and Indemnification of Local Officials: Constitutional and Other Concerns, 58 Alb. L. Rev. 789 (1995).

[ii] Peter A. Bee & James A. Clemons, Indemnities and Immunities for Municipal Officials, 28 Mun. Lawyer 10 (2014).

[iii] N.Y. Pub. Officers Law §17(4) (2013) (requiring public employee to deliver initiatory papers to attorney general within five days of being served therewith and providing that delivery of those papers shall be deemed a request that state fund his defense); N.Y. Pub. Officers Law §18(5) (2013) (requiring public employee to deliver initiatory papers to chief legal officer of public entity within ten days of being served therewith along with written request that public entity fund his defense).

[iv] 22 N.Y.3d 30, 978 N.Y.S.2d 191 (2013).

[v] This section of the Village Code adopts the provisions of Public Officers Law § 18.

[vi] Lancaster v. Inc. Vill. of Freeport, 2010 N.Y. Slip Op. 32341(U) (Sup. Ct., Nassau Co. 2010).

[vii] Lancaster v. Inc. Vill. of Freeport, 92 A.D.3d 885, 939 N.Y.S.2d 122 (2d Dep’t 2012), aff’d, 22 N.Y.3d 30, 978 N.Y.S.2d 191 (2013).

[viii] 22 N.Y.3d at 34.

[ix] Id. at 39.

[x] See generally 70A NY Jur. Insurance § 2121.

[xi] Cowan v. Ernest Cordelia, P.C., 2001 U.S. Dist. LEXIS 185, 98 Civ. 5548 (S.D.N.Y. 2001).

[xii] Id. at *15.

[xiii] Garcia v. Abrams, 98 A.D.2d 871, 872, 471 N.Y.S.2d 161, 163 (3d Dep’t 1983); State v. Aetna Casualty & Surety Co., 43 A.D.2d 988, 988, 352 N.Y.S.2d 65, 65 (3d Dep’t 1974).

[xiv] City of New York v. Cont’l Casualty Co., 27 A.D.3d 28, 31-32, 805 N.Y.S.2d 391, 393-94 (1st Dep’t 2005).

[xv] 98 A.D.2d at 872, 471 N.Y.S.2d at 163.

[xvi] 135 A.D.2d 304, 525 N.Y.S.2d 402 (3d Dep’t 1988).

[xvii] See, e.g., N.Y. Cent. Mut. Fire Ins. Co. v. Rafailov, 41 A.D.3d 603, 603, 840 N.Y.S.2d 358, 358 (2d Dep’t 2007); Anthony Sicari, Inc. v. Fireman's Ins. Co., 200 A.D.2d 542, 542, 606 N.Y.S.2d 695, 695 (1st Dep’t 1994).

[xviii] See, e.g., United States Fidelity & Guaranty Co. v. Von Bargen, 7 A.D.2d 872, 872, 182 N.Y.S.2d 121, 121 (2d Dep’t 1959).

[xix] Continental Cas. Co. v. Stradford, 11 N.Y.3d 443, 450, 871 N.Y.S.2d 607, 611 (2008).

[xx] Id.

[xxi] Matter of Liberty Mut. Ins. Co. v. Roland-Staine, 21 A.D.3d 771, 773, 802 N.Y.S.2d 6, 9 (1st Dep’t 2005).

[xxii] N.Y. Const. art. VIII § 1; see also Cole, supra n. 1.

[xxiii] N.Y. Gen. Mun. Law § 51 (2014); see also Jessie Beller, Assistant Counsel of New York City Conflicts of Interest Board, Use of Municipal Resources for Personal Purposes, 23 Mun. Lawyer 17 (Spring 2009).

Reprinted with permission from:  Municipal Lawyer, Summer 2014, Vol. 28, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.
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