Jaspan Schlesinger Defeats Appeal Challenging Withdrawal of Defense and Indemnification
Date: November 19th, 2013
Location: Garden City, New York

On November 19, 2013, the New York State Court of Appeals affirmed the dismissal of two article 78 petitions brought by several current and former officers of the Village of Freeport against the Village, its Board of Trustees, the current Village Attorney and the Village’s Claims Administrator.

In or about 2008, two plaintiffs commenced a civil lawsuit against, among others, the Village and the officers alleging Civil RICO (Racketeer Influenced and Corrupt Organization Act) violations, conspiracy claims, civil rights violations and fraud, and demanded $8,500,000 in damages, plus treble damages and attorney’s fees. At that time, the Board adopted a resolution which authorized the Village to defend and indemnify the officers pursuant to N.Y. Public Officers Law §18. The officers’ defense and indemnification was statutorily conditioned on, among other things, their full cooperation in the defense of the action.  A settlement was ultimately negotiated which would have resulted in the dismissal of plaintiffs’ claims against the officers without any monetary payment or any admission of wrongdoing by them. In exchange, the plaintiffs requested that the officers agree not to criticize the very settlement of which they were receiving the benefit (“Non-Disparagement Clause”).  After many attempts by the Village to convince them to cooperate, the officers refused to accept the settlement. The Board subsequently voted to withdraw the officers’ defense and indemnification based on their failure to cooperate in settling the lawsuit.

In 2010, two separate groups of the officers filed petitions pursuant to Article 78 of the CPLR against the Village, the Board, the current Village Attorney and the Village’s Claims Administrator. These petitions requested, in essence, that the New York State Supreme Court order the Village to reinstate their defense and indemnification. The Supreme Court dismissed the petitions, finding that the Village had properly withdrawn the officers’ defense and indemnification based upon their failure to cooperate.  On appeal, the Appellate Division, Second Department affirmed the Order of the Supreme Court.  The officers then appealed to the New York State Court of Appeals as of right on constitutional grounds, alleging that the Village’s withdrawal of their defense and indemnification based upon their refusal to agree to the Non-Disparagement Clause violated their First Amendment rights.

The Court of Appeals ruled in favor of the Village and, in doing so, gave finality to an issue of first impression.  Specifically, the Court agreed with Jaspan Schlesinger LLP’s argument that a municipal official’s statutory duty to cooperate in the defense of a lawsuit encompasses a duty to accept a reasonable settlement offer.  The Court found that it is “inconceivable that the legislature intended such a restricted meaning of the ‘cooperation’ provision [of Public Officers Law § 18] as to permit a current or former public employee to refuse a generous settlement offer and expose a municipality to potentially ruinous liability”.  The Court went on to state that a ruling in favor of the officers would permit them “to dictate unilaterally, without any accountability to the taxpayers, how the Village manages public funds and litigation risk. This cannot be, and is not, the law.”

In addition, the Court of Appeals found that, despite their arguments to the contrary, the officers’ First Amendment rights had not been violated because: (1) the plaintiffs in the underlying lawsuit were private parties who “were entitled to offer settlement on whatever terms they saw fit”; (2) the Village’s purpose in warning the officers that their refusal to accept the settlement would result in the withdrawal of their defense and indemnification was designed to “end the litigation and save public funds, not to suppress speech”; and (3) the Village had not retaliated against the officers in violation of the First Amendment by withdrawing their defense and indemnification, but “simply declined to fund [their] defense after they unreasonably refused to settle.”

The Court of Appeals’ decision in this case marks a significant development in the law which will impact both municipalities and public officials.

Jaspan Schlesinger LLP Partner Stanley A. Camhi and Associates Jessica M. Baquet and Daniel E. Shapiro represented the Village, the Board, the current Village Attorney and the Village’s claims administrator in the article 78 proceeding before the Supreme Court and on appeal to the Appellate Division and to the New York State Court of Appeals.

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Stephanie A. Speirs is sworn in at the Appellate Division, Second Judicial Dept.

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