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March 23, 1999


The opinion of the court was delivered by: Kaplan, District Judge.


The plaintiff in this case is a law firm that is defending two former officials of the Town of Delaware, New York (the "Town"), in other litigation before this Court relating to a land use controversy. Plaintiff, as assignee of the Town's claim against its carrier, sues for certain of the costs of defense. The fundamental issue is whether pretrial rulings in the land use case resulted in the termination of the carrier's duty to defend. Assuming that it did not, the carrier disputes the reasonableness of plaintiff's charges. This is the Court's decision after trial.


The controversy concerning the alleged termination of the carrier's duty to defend depends upon the complex and interrelated histories of both the land use litigation in this Court and the coverage litigation in the state courts that preceded this action.

The Early Stages of the DeFalco Action

In September 1990, Joseph DeFalco and others sued William Dirie and V. Edward Curtis, both former Town officials, and other defendants in consequence of a land use dispute in the Town ("DeFalco").*fn1 The case initially was assigned to Judge Goettel.

The DeFalco complaint alleged three causes of action against Dirie and Curtis. The first alleged extortion in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO").*fn2 The second claimed deprivation of plaintiffs' civil rights in violation of 42 U.S.C. § 1983. The sixth sought review of certain administrative action by the Town, relief typically available in the state courts under Article 78 of the Civil Practice Law and Rules.

The DeFalco defendants moved to dismiss the complaint. Those motions resulted in a decision on April 24, 1991, in which, insofar as is relevant here, Judge Goettel dismissed the Section 1983 claim in its entirety with leave to replead. This prompted the DeFalco plaintiffs to file an amended complaint in May 1991 which, with modifications not relevant here, asserted the same claims as the original complaint against Dirie and Curtis. Certain defendants moved to dismiss the amended complaint as well, but the motions had not yet been decided by the time the coverage litigation that gave rise to this action was commenced. Thus, when the coverage litigation began, Dirie and Curtis were defendants in DeFalco on three claims for relief, one under RICO, one under Section 1983, and the third in substance a state court-style Article 78 proceeding.

The State Court Coverage Litigation and Developments in DeFalco

In December 1991, Dirie and Curtis commenced an action against Nutmeg in New York Supreme Court, Sullivan County, alleging breach of the insurance policy and seeking, inter alia, a declaration that they were entitled to retain counsel of their own choice at Nutmeg's expense (the "Coverage Case").*fn3

On March 31, 1992, while the Coverage Case was in its early stages, Judge Goettel ruled on the motions to dismiss the amended complaint in DeFalco. Insofar as is relevant here, he dismissed the Section 1983 and Article 78-type claims in their entirety against all defendants.*fn4 This left only the RICO claim pending against Dirie and Curtis. But just days later, the DeFalco plaintiffs, pursuant to leave, filed a second amended complaint. Insofar as it was brought against Dirie and Curtis, it alleged three causes of action: Count I was brought under RICO, Count II under Section 1983, and Count IV under CPLR Article 78. Thus, it purported to revive the Section 1983 and Article 78 claims previously dismissed by Judge Goettel.

In March 1993, Dirie and Curtis moved for partial summary judgment in the Coverage Case. Nutmeg cross-moved for summary judgment dismissing the complaint. On May 17, 1993, the Supreme Court, Sullivan County, granted Nutmeg's cross-motion and denied the motion of Dirie and Curtis, who promptly appealed to the Appellate Division, Third Department.

Dirie and Curtis prevailed on appeal. On May 12, 1994, the Third Department reversed the order appealed from and granted the Dirie-Custis motion for partial summary judgment. The court began from the proposition that an insurer's duty to defend is extremely broad and depends not upon a party's characterization of the claims, but upon the facts alleged.*fn5 It reasoned that an insurer seeking to deny coverage based on a policy exclusion, as was the case with respect to the DeFalco claim, must show that the "allegations of the complaint cast that pleading solely and entirely within the policy exclusion and, further, that the allegations, in toto, are subject to no other interpretation."*fn6 As the policy explicitly covered claims for violations of civil rights, the court held that "the underlying facts [were] covered by the subject policy" and that the carrier was obliged to defend.*fn7 It went on to hold that Dirie and Curtis were entitled to a defense by counsel of their choice, at Nutmeg's expense, because Nutmeg had a conflict of interest in that it would be obliged to indemnify for any civil rights liability, but would not be so obliged with respect to RICO liability, which was "clearly excluded under the policy."*fn8 It therefore declared that Nutmeg was obliged to defend DeFalco and to pay the reasonable expenses of counsel chosen by Dirie and Curtis.

Later Developments in the DeFalco Action

Following the Third Department's decision in the Coverage Case, DeFalco was reassigned to Judge Parker of this Court. Some months later, Dirie and Curtis, among others, moved to dismiss, or for summary judgment dismissing, the second amended complaint.

Judge Parker ruled on the pending motions on March 13, 1996. He noted that Judge Goettel, insofar as is relevant here, previously had dismissed the Section 1983 and Article 78 claims in the amended complaint and went on to conclude that "nothing in the second amended complaint changes Judge Goettel's original rulings."*fn9 The final decretal paragraph of the decision stated that defendants' motions were denied except that their "motion to dismiss Plaintiffs' claim pursuant to 42 U.S.C. § 1983 is granted."*fn10 The text of the decision, however, makes clear that the ...

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