Court Reverses Itself in Malpractice Insurance Ruling

, New York Law Journal

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the judges of the Court of Appeals
Standing, left to right: Judges Jenny Rivera, Robert Smith, Susan Phillips Read, Sheila Abdus-Salaam, and Eugene Pigott Jr. Seated, Judge Victoria Graffeo and Chief Judge Jonathan Lippman

ALBANY - The state Court of Appeals conceded Tuesday that it erred in a June 2013 ruling and reversed itself, determining that an insurer could try to prove in court that a lawyer's malpractice insurance policy did not cover a $3 million loss.

The court also threw out a 2010 change in the way Nassau County makes refunds to taxpayers in tax certiorari cases, finding that the county adopted the new procedures in violation of the state constitution and state tax law. In another tax matter, the court found that the state's method for determining residency was flawed.

In the legal malpractice case, K2 Investment Group v. American Guarantee & Liability Insurance Company, 6, the judges decided that their ruling last year contradicted another Court of Appeals' determination—Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 NY2d 419 (1985)—that held precedent over the issue.

The first time the judges ruled on the K2 Investment matter last year, they said American Guarantee could not invoke policy provisions that, according to the insurer, excluded coverage for attorney Jeffrey Daniels, whom the company had refused to defend.

On Tuesday, the judges said in a 4-2 decision that the insurer could argue the policy excluded malpractice coverage for Daniels, even though a default award of $3 million has been made against him.

"In short, to decide this case we must either overrule Servidone or follow it," Judge Robert Smith (See Profile) wrote for the majority. "We choose to follow it."

The court said Servidone stood for the position that an insurer could assert that it was not obligated to indemnify a policyholder who reaches a settlement with an injured party if its policy excluded such coverage.

"Under these circumstances, we seen no justification for overruling Servidone," Smith said in a ruling in which he was joined by Chief Judge Jonathan Lippman (See Profile) and Judges Susan Phillips Read (See Profile) and Jenny Rivera (See Profile). "Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985."

Smith added that both insurers and policyholders are entitled to "assume that the decision will remain unchanged unless or until the Legislature decides otherwise."

"In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case," Smith wrote.

In dissent, Judge Victoria Graffeo (See Profile) wrote that the majority was not drawing the proper distinction between American Guarantee's obligations to indemnify or not to indemnify policyholders under policy "exclusions" as opposed to areas of "noncoverage" that the policies never considered.

Since American Guarantee breached its duty to indemnify Daniels, it cannot now claim policy exclusions apply to shield itself from indemnification when third parties like K2 and ATAS bring suit, Graffeo argued.

"Applying these principles here, it is apparent that American Guarantee must satisfy the judgment that was entered against its policyholder," Graffeo wrote in a dissent that Judge Eugene Pigott Jr. (See Profile) joined. "Assuming Daniels was insured against this particular claim under the terms of the malpractice policy, American Guarantee should not now be allowed to avoid satisfying the judgment on the ground that the claim in the underlying lawsuit actually fell under a policy exclusion."

Graffeo said the court's ruling also opens the door for additional litigation by American Guarantee over issues that should have been resolved years ago.

Underlying the dispute was a real estate company owned in part by Daniels, Goldan LLC, which accepted nearly $3 million in loans from K2 and ATAS.

Goldan went into bankruptcy in 2009 without repaying the loans.

The two creditors sued Daniels, in part, for legal malpractice. They claimed he had agreed to represent them in the transactions but then failed to record mortgages to secure the loans and failed to obtain title insurance, according to the court's ruling.

Daniels did not appear in the malpractice action, and a court entered judgments against him of $2.4 million to K2 and $688,716 to ATAS, the court said.

The lawyer then assigned all of his claims against American Guarantee to K2 and ATAS, which sued, seeking recovery of their losses due to the alleged legal malpractice on Daniels' part.

American Guarantee is arguing that Daniels, in violation of his malpractice insurance policy, was acting both on behalf of K2 and ATAS and also on his own behalf as a principal of Goldan when he allegedly committed the malpractice involving the $3 million in loans.

Tuesday's ruling reversed the court's finding in K2 Inv. Group v. Am. Guar. & Liab. Ins. Co., 21 NY3d 384 (2013).

Kevin Coughlin of Coughlin Duffy in Manhattan represented American Guarantee.

Michael Haskel of Mineola argued for K2 and ATAS.

While the court has historically granted motions for reargument of cases very rarely, the pace has quickened recently.

It granted only one such motion between 2003 and 2011, but it reheard one previously decided case in 2012 and granted three reargument motions in 2013.

Judge Sheila Abdus-Salaam (See Profile) did not take part in the Tuesday ruling.

Nassau Tax Refund Dispute

In the Nassau County tax case, Matter of Baldwin Union Free School District v. County of Nassau, 9, the county found itself pitted against 41 of its school districts, other local governments and individual taxpayers.

Under a 1948 state law, Nassau County was given what was known locally as the "county guaranty," a special state tax law which made the county responsible for both property tax assessments and for the payment of refunds when courts decide in certiorari litigation that taxpayers are due them because of overassessments.

A 2010 change by the Nassau County Legislature kept the county responsible for the assessments, but made school districts, towns and other local taxing authorities liable to pay a share of tax refunds.

A 7-0 Court of Appeals ruled that the county legislature did not have the authority to make the 2010 change embodied in Local Law 18 without state approval.

"The State Legislature has not delegated to the County the prerogative to supersede a special State tax law, and this lack of authority is fatal to Local Law 18," Abdus-Salaam wrote for the court.

She added that the county's law represented an "impermissible intrusion" on the power of taxation that the state has reserved for itself in its constitution.

Local Law 18 was enacted as part of the county's decade-long effort to escape a deficit that county fiscal managers have blamed in part on the county's chronic need to pay certiorari awards of $80 million or more a year.

Critics contended that the 2010 law was Nassau County's attempt to shift fiscal responsibility for its faulty tax assessment process to local taxing units such as school districts.

David Yaffe of Hamburger, Maxson, Yaffe, Knauer & McNally of Melville, represented Baldwin and other school districts.

"The county had no right to place the burden of its incompetent tax assessments onto school districts, and its act of doing so was clearly, as the Court of Appeals held, unconstitutional," Yaffe said. "The county is responsible for its own errors."

Yaffe said the county's assessments for school taxes account for the largest portion of the refunds made each year through certiorari proceedings. Of the $80 million in court-ordered refunds annually, about $53 million are in overcharges on school taxes and were shifted to the districts for repayment.

Maureen Liccione of Jaspan Schlesinger of Garden City represented the Town of North Hempstead and other municipal plaintiffs. "The decision is correct," Liccione said Tuesday. "It comports with the bedrock principle of New York law that the Legislature is the sole jurisdiction with respect to taxing. Local governments have no authority to enact tax laws without the state's approval."

Catherine Battle of the New York State United Teachers in Manhattan represented individual taxpayers Barbara Hafner and Linda Wiener.

Ronald Rosenberg of Rosenberg Calica & Birney in Garden City argued for Nassau County.

Tuesday's ruling affirmed a determination by the Appellate Division, Second Department that also found the 2010 Nassau County tax change unconstitutional.

Resident, Residence

Also Tuesday, the court decided in Matter of Gaied, 26, that the state tax department's traditional way of defining what a "permanent place of abode" means for purposes of establishing a person's place of residence is not correct.

The 7-0 court said in a ruling by Pigott that a taxpayer may "maintain" a dwelling place within the state without "residing" in it for purposes of qualifying as a resident.

Pigott wrote that there is "no rational basis" in tax statutes for the state's interpretation that the mere act of "maintaining" a residence qualifies as being a resident. He said the tax department must prove more in order to establish that a dwelling qualified as a residence, and that taxpayers were residents who were subject to state taxes.

"The legislative history of the statute, to prevent tax evasion by New York residents, as well as the regulations, support the view that in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, have a residential interest in the property," Pigott wrote.

Tax laws say that if people spent at least 183 days a year in the state they are residents for that year, but the statutes are less precise about situations like that of John Gaied, according to the court.

While he bought an apartment house on Staten Island, he did so primarily for investment and to give his parents a place to live. He contended that he lived in New Jersey and did not stay in the apartment from 2001 to 2003, except when he had to get up early the next day to take his parents to doctor's visits.

However, the tax department said his ownership of the Staten Island building qualified him as a New York resident. The state Tax Tribunal affirmed the tax department's reading of the law.

Robert Goldfarb of the state Division of Taxation argued for the state.

Timothy P. Noonan of Hodgson Russ in Albany represented Gaied.

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