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
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
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 ...