author:
Froessel, J.
      Foster, J.

text:
    May E. Sperling, as Executrix of Richard H. Sperling, Deceased, Respondent, v. Great American Indemnity Company, Appellant.
    Argued January 19, 1960;
    decided March 24, 1960.

      Samuel Gottesman, Harold H. Wolgel and Gerald M. Smith for appellant.
    I. The rights of plaintiff under defendant’s policy are no greater than those of Christine Nystrom. (Jewtraw v. Hartford Acc. & Ind. Co., 280 App. Div. 150; Coleman v. New Amsterdam Cas. Co., 247 N. Y. 271; Fox v. Employers’ Liab. Assur. Corp., 243 App. Div. 325, 267 N. Y. 609; Wenig v. Glens Falls Ind. Co., 294 N. Y. 195; Weatherwax v. Royal Ind. Co., 250 N. Y. 281.) II. Christine Nystrom was not an insured under defendant’s policy because she was not at that time operating a ‘ ‘ non-owned automobile ’ ’ which was ‘ ‘ not regularly furnished” for her use. (Aler v. Travelers Ind. Co., 92 F. Supp. 620; Farm Bur. Mut. Auto. Ins. Co. v. Marr, 128 F. Supp. 67; Matter of Buechner, 226 N. Y. 440; Mack v. Rochester German Ins. Co., 106 N. Y. 560; Weinberg & Holman v. Providence Washington Ins. Co., 254 N. Y. 387; Davidson v. Fireman’s Fund Ind. Co., 4 A D 2d 759, 5 N Y 2d 838.) III. The automobile driven by Christine Nystrom was stolen by her; her subsequent adjudication as a youthful offender did not alter the quality or character of her crime. IV. To construe defendant’s policy as contended for by plaintiff is against public policy. (Messersmith v. American Fid. Co., 187 App. Div. 35, 232 N. Y. 161; Haser v. Maryland Cas. Co., 78 N. D. 893; Udisky v. Metropolitan Life Ins. Co., 264 App. Div. 890; Acme Ins. Co. v. National Ins. Co., 118 Col. 445.) V. Only the policy issued by defendant to Christine Nystrom’s mother and in force at the time of the accident is applicable here.

      Henry J. Smith for respondent.
    I. The coverage of Christine Nystrom by the language of the policy in proper context is clearly seen. (Greaves v. Public Serv. Mut. Ins. Co., 5 N Y 2d 120; Davidson v. Fireman’s Fund Ind. Co., 4 A D 2d 759, 5 N Y 2d 838.) II. Under the terms of the policy, the daughter of the named insured is included as an insured in operating a nonowned automobile. The policy may not be interpreted to require anything more than its terms specify to afford coverage for this accident. (Greaves v. Public Serv. Mut. Ins. Co., 5 N Y 2d 120; Messersmith v. American Fid. Co., 232 N. Y. 161; Devitt v. Continental Cas. Co., 269 N. Y. 474; Taylor v. United States Cas. Co., 269 N. Y. 360; Smith v. American Auto. Fire Ins. Co., 274 N. Y. 626; Bakker v. Ætna Life Ins. Co., 264 N. Y. 150; Ætna Cas. & Sur. Co. v. General Cas. Co., 285 App. Div. 767; Royal Ind. Co. v. American Cas. Co., 5 Misc 2d 533; Ar-Glen Corp. v. Travelers Ins. Co., 8 Misc 2d 589; Manhattan Cas. Co. v. Cholakis, 206 Misc. 287, 284 App. Div. 1041; Catania v. Hartford Acc. & Ind. Co., 4 A D 2d 440; General Acc. Fire & Life Assur. Corp. v. Katz, 3 Misc 2d 328; Lumbermen’s Mut. Cas. Co. v. Pulsifer, 41 F. Supp. 249; Rodenkirk v. State Farm Mut. Auto. Ins. Co., 325 Ill. App. 421; Vern v. Merchants Mut. Cas. Co., 21 Misc 2d 51.) III. Although the automobile driven by the insured, Christine Nystrom, was stolen by her prior to the accident, neither the policy of insurance nor any principle of public policy absolves the insurer from liability to plaintiff who has been damaged by the negligence of the insured. (People v. Marwig, 227 N. Y. 382; Udisky v. Metropolitan Life Ins. Co., 264 App. Div. 890; Acme Ins. Co. v. National Ins. Co., 118 Col. 445; Greaves v. Public Serv. Mut. Ins. Co., 5 N Y 2d 120; Messer

      smith v. American Fid. Co., 232 N. Y. 161; Haser v. Maryland Cas. Co., 78 N. D. 893; Jernigan v. Allstate Ins. Co., 269 F. 2d 353; Ferkin v. Board of Educ., 278 N. Y. 263; Clark v. Doolittle, 205 App. Div. 697; Switzer v. Merchants Mut. Cas. Co., 2 N Y 2d 575; De Persia v. Merchants Mut. Cas. Co., 268 App. Div. 176 ; City of Fulton v. Great Amer. Ind. Co., 11 Misc 2d 536, 7 A D 2d 832; Sky v. Keystone Mut. Cas. Co., 150 Pa. Super. Ct. 613; Davis v. Detroit Auto. Inter-Ins. Exch., 356 Mich. 454.)
   Froessel, J.

This is an action by a judgment creditor under section 167 of the Insurance Law to compel the defendant insurer to pay a judgment to the extent of its coverage under an automobile liability policy. Plaintiff is the widow and executrix of one Richard Sperling, who was killed in an automobile accident on December 30,1957. In a wrongful death action instituted against one Christine Nystrom, the latter’s negligence was adjudged to have been the proximate cause of the death of plaintiff’s husband, and plaintiff recovered a judgment of approximately $125,000.

The judgment debtor, Christine Nystrom (herein called Christine), was 16 years of age at the time of the accident. She had a learner’s permit to operate a motor vehicle. Sometime between 12:30 and 1:00 p.m. on December 30, 1957, she appropriated a 1956 Chevrolet automobile bearing Ohio license plates, without the permission of the owner. The car was parked on a public street in Mount Vernon, and Christine started the motor merely by turning the ignition switch. While driving south on Hutchinson River Parkway she was pursued by a police officer who recognized her, and whose suspicion was aroused by the Ohio plates. In her attempt to outrace him, the car she was driving swerved into the extreme right lane of southbound traffic, and she negligently struck the rear of decedent’s vehicle, as a result of which decedent was fatally injured. Christine was subsequently adjudged a youthful offender.

Ruth Nystrom, Christine’s mother, was the named insured in a “ Family Automobile Policy ” which was in full force and effect on the day of the accident. The policy specifically covered a 1956 Buick car owned by Mrs. Nystrom, and also provided family protection with respect to nonowned automobiles. Under the heading “Persons Insured”, the policy provided, in pertinent part:

‘ ‘ The following are insureds under Part I [Liability]:
“ (a) With respect to the owned automobile, (1) the named insured and any resident of the same household, (2) any other person using such automobile, provided the achial use thereof is with the permission of the named insured;
“ (b) With respect to a non-owned automobile, (1) the named insured, (2) any relative, but only with respect to a private passenger automobile or trailer not regularly furnished for the use of such relative; ” (emphasis supplied).

The term “ relative ” was defined in the policy as meaning “ a relative of the named insured who is a resident of the same household ”, and the term “non-owned automobile ” was defined as meaning ‘ ‘ an automobile or trailer not owned by the named insured or any relative, other than a temporary substitute automobile ”. An “ owned automobile ” was defined as meaning “ a private passenger or utility automobile or trailer owned by the named insured, and includes a temporary substitute automobile ” (used “as a substitute for the owned automobile” when “withdrawn from normal use”). The term “named insured ’ ’ was defined as including a spouse resident in the same household.

Thus, under the express terms of the policy, permission to operate an automobile was relevant only in the case of a nonresident third person driving Mrs. Nystrom’s Buick or a temporary substitute therefor. With respect to a nonowned vehicle, the coverage afforded the named insured was without qualification, i.e., it included any utility or private passenger automobile, while the coverage of a relative was limited to private passenger automobiles not regularly furnished for his or her use. In neither of the latter situations was the permission of the owner of the nonowned automobile called for.

The insurer refused to defend Christine in the wrongful death action, disclaiming liability under the policy, and refused to pay any part of the judgment entered against her. Plaintiff thereupon commenced the instant action to recover the policy limit of $100,000, plus costs awarded against Christine in the wrongful death action and interest on the judgment, and was awarded summary judgment as prayed for. It is conceded that plaintiff’s rights against the insurer under section 167 of the Insurance Law are no greater than Christine’s (Wenig v. Glens Falls Ind. Co., 294 N. Y. 195, 198-199, and cases therein cited).

On this appeal, the insurer ‘ ‘ concedes that Christine Nystrom, as the daughter of the named insured and a resident of the same household, is a relative within the definition of that term in defendant’s policy ”. It also concedes that the Ohio car “ was not regularly furnished for the use of Christine Nystrom ’ ’, since a “ stolen ” car is “ not ‘ furnished ’ at all ”. It contends, however, that ‘ ‘ the word ‘ furnished ’ implies consent and permission, so that the phrase ‘ not regularly furnished for the use of ’ can only he interpreted to mean an automobile voluntarily supplied by the owner to such relative for occasional as distinguished from regular use.”

Since permission to use a nonowned automobile was not made a condition of coverage with respect to a relative of the named insured, “ The court is not at liberty to inject a clause into the policy or to make a new contract for the protection of the insurance company” (Taylor v. United States Cas. Co., 269 N. Y. 360, 363). When the insurer wished to indicate that permission of the owner of a vehicle was a condition of coverage, it clearly did so, as noted, in the case of a nonresident third person driving the named insured’s vehicle, or a temporary substitute therefor. The policy did not exclude, as an insured, a relative who was driving a nonowned automobile without the permission of the owner, and, as the court noted in Ætna Cas. & Sur. Co. v. General Cas. Co. (285 App. Div. 767, 770), cited “with other reliable authorities” in Greaves v. Public Serv. Mut. Ins. Co. (5 N Y 2d 120, 125), “If an exclusion of liability is intended which is not apparent from the language employed, it is the insurer’s responsibility to make such intention clearly known. (Morgan v. Greater N. Y. Taxpayers Mut. Ins. Assn., 305 N. Y. 243, 248) .

To read the requirement of permission into the word “ furnished ” would not only entail rewriting the phrase “ not regularly furnished” so as to read “occasionally furnished, with the permission of the owner ” — thereby converting the negative condition “ not regularly furnished ’’into an affirmative condition that the car be “furnished” — but would distort the purpose which the limitation of coverage was plainly designed to serve. The exclusion of coverage for relatives driving nonowned automobiles was, by its terms, concerned with regularity of use, not permissiveness of use, and was designed to protect the company from being subjected to greatly added risk without the payment of additional premiums ” (Vern v. Merchants Mut. Cas. Co., 21 Misc 2d 51, 52 [App. Term]).

The “ greatly added risk ” which the insurer was unwilling to incur for a single premium was not the prospect of a relative appropriating a car without the owner’s permission and then negligently causing injury, but the multiplication of potential liability situations where a nonowned automobile was regularly used or available for regular use by a relative (see Vern v. Merchants Mut. Cas. Co., supra; Rodenkirk v. State Farm Mut. Auto. Ins. Co., 325 Ill. App. 421, 433; Lumbermen’s Mut. Cas. Co. v. Pulsifer, 41 F. Supp. 249, 251; Campbell v. Ætna Cas. & Sur. Co., 211 F. 2d 732, 736; Wyatt v. Cimarron Ins. Co., 235 F. 2d 243, 246; Pennsylvania T. & F. Mut. Cas. Ins. Co. v. Robertson, 259 F. 2d 389, 393).

While the insurer agreed, for a single premium, to afford coverage to the named insured while driving any nonowned vehicle, whether regularly furnished or not, it limited its single premium coverage of relatives of the named insured' to non-owned private passenger automobiles “ not regularly furnished for the use of” said relative. So long as the insurer is not called upon to indemnify a relative for any liability incurred while driving a car ‘ ‘ regularly furnished ’ ’ for his or her use, the limitation of coverage has been satisfied and the insurer has no just cause for complaint.

Moreover, if the policy is construed as affording coverage to a relative only when the owner of the “ non-owned automobile ” consented to its use, then the relative would, in many, if not most cases, be obtaining no more coverage that he would already have under the policy issued to the owner of that automobile. At the time the policy in question was issued (October 17, 1957), automobile liability insurance was compulsory (Vehicle and Traffic Law, art. 6-A, eff. Feb. 1,1957), and every policy issued to a car owner in this State had to contain an omnibus clause insuring, in addition to the named insured, any person operating the vehicle with the permission of the named insured (Insurance Eeg. 35; N. Y. Off. Comp, of Codes, Eules & Eegulations [12th Off. Supp.] p. 697; adopted pursuant to Insurance Law, § 21, and Vehicle and Traffic Law, § 93-a). The person so operating the vehicle with the permission of the owner is afforded coverage as an additional insured, and is treated as if he had a separate policy (Greaves v. Public Serv. Mut. Ins. Co., 5 N Y 2d 120, supra). By not requiring the permission of the oxvaer of a nonowned automobile in the policy before us, the insui >r must be deemed to have intended to afford additional covei age to relatives above and beyond the coverage that would autunatically attach under the owner’s policy to any person using the car with the owner’s consent.

What the insurer is really arguing here is that the policy was never “intended” to cover a relative who negligently caused injury with a “ stolen ” car, and had it been aware that the terms of the policy literally covered such a situation, it would have provided against it, as it has in the new, revised Family Automobile Policy. As Special Term correctly held, however, ‘ ‘ The company is bound by the plain terms of its policy rather than by what it may have intended”, since, in construing a “ plain contract, clear and explicit in its terms ”, a court is not at liberty, because of equitable considerations, “to obviate objections which might have been foreseen and guarded against” (Weinberg & Holman v. Providence Washington Ins. Co., 254 N. Y. 387, 390-391).

It could equally be argued that the policy was never “ intended ” to cover a named insured who negligently caused injury with a “ stolen ” car. Yet, were it Mrs. Nystrom (or her husband, assuming he was a resident in the same household), rather than Christine, who was involved here, there can be no question that she (or he) would have been covered, as the policy afforded blanket coverage to the named insured while driving any “ non-owned automobile”, whether “regularly furnished” or not. We see no logical basis of distinction between the named insured and a relative with respect to coverage while driving a “stolen” car. Such a distinction can be drawn only by giving the phrase ‘1 not regularly furnished for the use of” a strained and artificial construction, and applying it to a risk it was plainly not designed to guard against. The quoted phrase may not be read as meaning merely “furnished occasionally”; by its plain language it includes a car not furnished at all, and hence ‘ implications ’ ’ are completely irrelevant. It is not synonymous with ‘1 stolen ’ ’, but includes “stolen” cars, which are in the same class as cars taken without permission (Penal Law, §§ 1290, 1293-a), or on a “ joy-ride ” (Block v. Standard Ins. Co. of N. Y., 292 N. Y. 270, 274/.

In Wilson Sullivan Co. v. International Paper Makers Realty Corp. (307 N. Y. 20, 25), in answer to the argument “ that when read as a whole, the agreement implies that it was designed and dra vn with the sole idea that defendant would have a right to te'.mínate it by selling the building”, we stated: “A simple answer is that since no such term expressly appears, it cannot be supplied by the courts under the guise of construction or interpretation, their power being limited to giving effect only to the parties’ expressed intent [citing cases and other authority]. We ‘concern ourselves with what the parties intended, but only to the extent that they evidenced what they intended by what they ivrote ’ (Raleigh Associates v. Henry, 302 N. Y. 467, 473).” (Emphasis supplied.) The above rule is particularly applicable to a contract of insurance, since it ‘ ‘ was written by the insurer and any ambiguity is to be resolved against it ” (Greaves v. Public Serv. Mut. Ins. Co., supra, p. 125). “If the intent was to exclude” coverage where the vehicle was appropriated without the permission of the owner, “ it would have been easy to say so ” (Greaves v. Public Serv. Mut. Ins. Co., supra).

Davidson v. Firemen’s Fund Ind. Co. (4 A D 2d 759, affd. 5 N Y 2d 838), relied upon by the insurer, is not in point here. In that case, the named insured’s son borrowed his brother-in-law’s car when his father’s car would not start, and it was held that the borrowed car could not be considered a “temporary substitute automobile ” within the meaning of the policy since neither the named insured nor the owner of the borrowed ear consented to its use by the son. The son unsuccessfully argued that, since he had his father’s permission to drive the insured vehicle, that permission extended to the borrowed car. Permission was concededly a requirement for coverage under the policy, whereas here permission was not a condition of coverage with respect to the use of a nonowned automobile by a relative of the named insured.

The insurer further contends that it would be against public policy to require it to pay the bulk of the judgment recovered against Christine, since she 1 ‘ would accordingly be the beneficiary of the result of her own crimes ”. This argument is foreclosed by the decision of this court in Messersmith v. American Fid. Co. (232 N. Y. 161).

There was no proof in the wrongful death action that Christine intentionally collided with decedent’s car nor were there allegations to that effect in the complaint. On the contrary, the complaint was framed solely in terms of negligence in the operation of a motor vehicle, and the judgment in favor of plaintiff, as the insurer concedes, was based solely on ‘ ‘ the negligence of the infant defendant”. The fact that Christine had previously misappropriated the car with which she negligently caused the death of plaintiff’s husband was wholly irrelevant in the wrongful death action, since ‘ ‘ Injuries are accidental or the opposite for the purpose of indemnity according to the quality of the results rather than the quality of the causes.” (Messersmith v. American Fid. Co., supra, p. 165; emphasis supplied.) (See, also, Davis v. Detroit Auto. Inter-Ins. Exch., 356 Mich. 454, and Sky v. Keystone Mut. Cas. Co., 150 Pa. Super. Ct. 613.)

As Judge Cakdozo further pointed out in the Messersmith case (supra, pp. 163, 164), liability in tort for the negligent operation of a vehicle “ can seldom, if ever, be incurred without fault that is also crime”, and “ To restrict insurance to cases where liability is incurred without fault of the insured would reduce indemnity to a shadow ’ ’. The insurer here has been called upon to indemnify Christine against the consequences of her negligence in the operation of a motor vehicle, not against the criminal consequences stemming from her willful misappropriation of the vehicle. The manner in which she acquired the vehicle had nothing whatever to do with her liability for its negligent operation.

The judgment should be affirmed, with costs.

Foster, J.

(dissenting). This is an appeal from a summary judgment in favor of the plaintiff approximating the sum of $125,000. The action is one by a judgment creditor under section 167 of the Insurance Law to compel an insurer to pay a judgment, recovered in a negligence action, to the extent of the insurer’s coverage under an automobile liability policy. The insurer refused to defend and judgment was taken against the judgment debtor.

The judgment debtor is a girl who was 16 years of age at the time the accident happened. She had a learner’s permit to operate a motor vehicle but not a regular license. On the day of the accident she stole a car, which bore an Ohio license plate, from where it was parked on a public street in the City of Mount Vernon, and drove it away. When she was pursued by the police she drove the stolen car at a speed of 90 miles an hour, or more, and negligently crashed into the rear of another car, fatally injuring its occupant who was the testate of the plaintiff in this action.

The insurance policy in question was procured by the mother of the judgment debtor, with whom the latter resided, and contained these provisions under the heading Persons Insured

“ (a) With respect to the owned automobile, (1) the named insured and any resident of the same household, (2) any other person using such automobile, provided the actual use thereof is with the permission of the named insured;
“ (b) With respect to a non-owned automobile, (1) the named insured, (2) any relative, but only with respect to a private passenger automobile or trailer not regularly furnished for the use of such relative ’ ’.

Liability in the case has been predicated upon clause (2) of paragraph (b). In other words it has been determined that the judgment debtor was covered while operating a stolen vehicle because she was a relative and driving a private passenger car not regularly furnished for her use. I am constrained to disagree with this interpretation. A policy of liability insurance is a contract and the intent of the parties thereto is an element always to be considered unless some statutory requirement must be read into the context. No statutory requirement of context is involved here. The intent of the parties, therefore, must be found not only in the language used in the policy but also in the normal implications that flow therefrom. I find it quite impossible to believe it was the intent of the parties that the policy would cover the operation of a stolen car. The phrase most apposite to the phrase “ not regularly furnished”, and one that would commonly come to mind, is “ occasionally furnished ”. To adopt such a construction is not writing anything new in the policy. It is simply adopting the most natural implication that arises from the key word ‘ ‘ furnished ’ ’, and carries with it the idea of use with permission, express or implied. A stolen car is never 1 ‘ furnished ’ ’, and of course not operated with permission express or implied.

Research has disclosed no case precisely in point, probably for the simple reason that even in this age of insurance no one has conceived of a policy insuring against the operation of a stolen car where the operator was the thief. Messersmith v. American Fid. Co. (232 N. Y. 161) has been cited as an authority to support the judgment but that case did not reach the issue presented here. There, the car was operated by an unlicensed operator at the express invitation of the owner, and all the case held was that coverage existed irrespective of any violation of the law by the driver. Larceny was not involved in any degree, in fact it was implicit in the decision that the car was being operated with the consent of the owner.

Let us assume that the judgment debtor in this case paid the judgment and then sued the insurer. She would then be seeking indemnification for damages arising in part at least from her own theft. It is inconceivable to me that the law would condone such an action. Attention is drawn to the plight of the judgment creditor but his rights are no greater than those of the judgment debtor. If she could not recover against the insurer the judgment creditor may not (Devitt v. Continental Cas. Co., 269 N. Y. 474; Coleman v. New Amsterdam Cas. Co., 247 N. Y. 271). When this principle is considered, the erroneous basis of the judgment appealed from becomes even more apparent.

The judgment should be reversed and the complaint dismissed.

Chief Judge Desmond and Judges Dye and Burke concur with Judge Froessel ; Judge Foster dissents in an opinion in which Judges Fuld and Van Voorhis concur.

Judgment affirmed.

       All the cited cases involved the construction and application of a “ Use of Other Automobiles ” clause formerly contained in automobile liability policies. This clause excluded from coverage any automobile “ furnished for regular use ” to the named insured or a member of his household. The family policy involved here afforded much broader coverage with respect to “ non-owned automobiles ”,


source: Caselaw Access Project

author: Dye, J. Desmond, Ch. J.

license: Public Domain

text:
    In the Matter of United States Steel Corporation, Appellant, against Lawrence E. Gerosa, as Comptroller of the City of New York, Respondent.
    Argued January 14, 1960;
    decided March 31, 1960.

      A. Chauncey Newlin, Francis L. Casey, William L. Hearne and Arthur E. Hauser for appellant.
    I. The definition of “ financial business ” in the State Enabling Act precludes the city from so classifying a holding company such as petitioner. (Genet v. City of Brooklyn, 99 N. Y. 296; Gautier v. Ditmar, 204 N. Y. 20; County Securities v. Seacord, 278 N. Y. 34; Matter of Long Is. R. R. Co. v. Hylan, 240 N. Y. 199; Montello Salt Co. v. Utah, 221 U. S. 452; Jackson v. Citizens Cas. Co., 277 N. Y. 385; Matter of Sheppard, 189 App. Div. 370; People ex rel. Woolworth v. State Tax Comm., 200 App. Div. 287; People v. Fisher, 145 Misc. 406; Matter of Bush Term. Co., 93 F. 2d 659; City of Chicago v. Moore, 351 Ill. 510; White v. Moore, 46 Ariz. 48; Salomon v. Jersey City, 12 N. J. 379; Breitinger v. Philadelphia, 363 Pa. 512; Matter of Good Humor Corp. v. McGoldrick, 289 N. Y. 452; Matter of Grumman Aircraft Eng. Corp. v. Board of Assessors, 2 N Y 2d 500.) II. The history of the statute confirms that the State Legislature did not intend to permit taxation of holding companies as “ financial business ”, (Holmes Elec. Protective Co. v. City of New York, 304 N. Y. 202; Fox v. Standard Oil Co., 294 U. S. 87; Carey v. Donohue, 240 U. S. 430.) III. The Comptroller does not have the power to classify petitioner as a “ financial business ”. (Addison v. Holly Hill, 322 U. S. 607; Dun & Bradstreet v. City of New York, 276 N. Y. 198; Matter of Emigrant Ind. Sav. Bank v. McGoldrick, 268 App. Div. 277; Dollar Co. v. Canadian Car & Foundry Co., 220 N. Y. 270; Tauza v. Susquehanna Coal Co., 220 N. Y. 259; Acorn Employment Serv. v. Moss, 292 N. Y. 147.) IV. The assessment made cannot be sustained on the theory that, if illegal, it is less than the amount which legally might have been assessed. (People ex rel. Manila Elec. R. R. & Light. Co. v. Knapp, 229 N. Y. 502; People ex rel. Goodwin Sand & Gravel Co. v. Law, 207 App. Div. 567, 238 N. Y. 624; People ex rel. Butterick Co. v. Gilchrist, 213 App. Div. 533, 241 N. Y. 591; People ex rel. United Hotels Co.
      v. State Tax Comm., 208 App. Div. 754, 239 N. Y. 516; Matter of Colgate-Palmolive-Peet Co. v. Joseph, 308 N. Y. 333; People ex rel. Hopkins v. Board of Supervisors, 52 N. Y. 556; People ex rel. Ducas v. State Tax Comm., 260 N. Y. 525; People ex rel. Eitingon Schild Co. v. Lynch, 260 N. Y. 526; People ex rel. Schluter & Co. v. Lynch, 264 N. Y. 680.) V. The Comptroller is required to allocate dividends and interest received from controlled subsidiaries for purposes of both financial business tax and general business tax, and his regulations are invalid which require allocation to New York City of a minimum of 12%% for purposes of financial business tax. VI. Penalties and penalty interest were improperly and illegally assessed. (Matter of McCall Corp. v. Gerosa, 2 A D 2d 358; Matter of Twentieth Century-Fox Film Corp. v. Gerosa, 8 A D 2d 714.)

      Charles H. Tenney, Corporation Counsel (Solomon Portnow and Stanley Buchsbaum of counsel), for respondent.
    I. Appellant is subject to the General Business and Financial Tax Law. (Matter of Steinbeck v. Gerosa, 4 N Y 2d 302; Edwards v. Chile Copper Co., 270 U. S. 452; Phillips v. International Salt Co., 9 F. 2d 389, 274 U. S. 718; First Bank Corp. v. Minnesota, 301 U. S. 234; Magruder v. Realty Corp., 316 U. S. 69; United States v. Atlantic Coast Line Co., 99 F. 2d 6, 306 U. S. 645; Reynolds v. Hill, 184 F. 2d 294; People ex rel. Tobacco & Allied Stocks v. Graves, 250 App. Div. 149, 277 N. Y. 723; Matter of Simms Petroleum Co. v. Graves, 247 App. Div. 851.) II. Appellant may be taxed as a financial business. (McFeely v. Commissioner, 296 U. S. 102; Helvering v. Reynolds Co., 306 U. S. 110; Wilmette Park Dist. v. Campbell, 338 U. S. 411; Matter of Foscarinis [Corsi], 284 App. Div. 476; Matter of Dobess Realty Corp. v. Magid, 186 Misc. 225; Matter of Stupack, 274 N. Y. 198; Matter of Lazarus [Corsi], 268 App. Div. 547, 294 N. Y. 613; Matter of Realty Associates Securities Corp. v. Portfolio, 274 App. Div. 926; People ex rel. Pratt v. Goldfogle, 242 N. Y. 277; Shields v. Utah Idaho R. R. Co., 305 U. S. 177; Hampton & Co. v. United States, 276 U. S. 394; Matter of Village of Saratoga Springs v. Saratoga Gas, Elec. Light & Power Co., 191 N. Y. 123.) III. In the event appellant is not taxable as a financial business, it necessarily follows that it must be taxed as a general business. (People ex rel. Farrington v. Mensching, 187 N. Y. 8; Matter of Markland v. Scully, 203 N. Y. 158; People

      ex rel. Smith v. Schiellein, 95 N. Y. 124; Matter of Nash v. Lynch, 226 App. Div. 421, 253 N. Y. 564; Buffalo Gravel Corp. v. Moore, 201 App. Div. 242, 234 N. Y. 542; People ex rel. Term. & Town Taxi Corp. v. Walsh, 202 App. Div. 651; Reitz v. Mealey, 314 U. S. 33; Frost v. Corporation Comm., 278 U. S. 515; Truax v. Corrigan, 257 U. S. 312; Matter of Young v. Bragalini, 3 N Y 2d 602.) IV. Neither the due process clause nor the commerce clause of the Federal Constitution requires that a tax on the gross income or the gross receipts of appellant be allocated. Since allocation is unnecessary the tax can be imposed upon all of the income or receipts and, therefore, an allocation formula cannot be attacked on the ground that it fixes a minimum percentage to which the tax applies. (Matter of Gulf Oil Corp. v. Joseph, 307 N. Y. 342; Hawley v. Malden, 232 U. S. 1; New York ex rel. Cohn v. Graves, 300 U. S. 308; Welch v. Henry, 305 U. S. 134; Beidler v. South Carolina Tax Comm., 282 U. S. 1; Klein v. Board of Supervisors, 282 U. S. 19; Wheeling Steel Corp. v. Fox, 298 U. S. 193; First Bank Corp. v. Minnesota, 301 U. S. 234; Smith v. Ajax Pipe Line Co., 87 F. 2d 567, 300 U. S. 677; Southeast Power & Light Co. v. McCarroll, 200 Ark. 565; Matter of New Yorker Mag. v. Gerosa, 3 N Y 2d 362, 356 U. S. 339.) V. The Comptroller had the right to impose penalties for the failure to pay the full amount of the tax due. (Matter of Underpinning & Foundation Co. v. Gerosa, 3 A D 2d 415, 3 N Y 2d 707; Matter of New York World-Tel. Corp. v. McGoldrick, 272 App. Div. 806, 298 N. Y. 11; Matter of Twentieth Century-Fox Film Corp. v. Gerosa, 8 A D 2d 714.)
   Dye, J.

On this appeal from an order unanimously confirming a partial final determination by which respondent imposed upon United States Steel Corporation an assessment for a business tax deficiency for the years 1948, 1949 and 1950, in the principal amount of $176,767.28 plus penalties and interest totaling $144,388.62, the narrow question for decision is whether the prevailing ‘ ‘ financial business ” rate was the proper rate to use.

United States Steel is a New Jersey Corporation licensed to do business in New York and having its principal office at 71 Broadway, Ngav York City. During the tax years involved, it concededly functioned as a holding company, doing no other business than that of holding the stock of subsidiary operating ciompanies whos'e operative efforts it co-ordinated and supervised and at times financed in whole or in part. In turn, all dividends and interest on securities of the subsidiary companies were'paid to Steel at its New York office, and all such moneys, including securities, were deposited and held in New York banks. From time to time, as required by statute or by-laws, United States Steel made consolidated reports to stockholders and public agencies, and filed tax returns. Under protest, it filed a timely business and financial tax return for each of the controverted years, reporting its tax on approximately 2% of ‘ ‘ gross income ’ ’.

The deficiency assessment was made on an allocation to New York City of 12%% of the gross income received, and at the “financial business” rate of two fifths of 1%. The parties stipulated below that, had respondent elected to treat United States Steel as a “general business ”, and to apply the then prevailing “ general business ” rate of one fifth of 1% to “ gross receipts ”, without allocation, the principal tax would have amounted to $808,379.91. But, apart from its contention that it is entitled to be treated as a “ general business,’’ United States Steel has never conceded that the tax could have been imposed upon the basis of the entire gross receipts, without regard to apportionment.

Section 24-a of th% New York State General City Law (art. 2-B, General Business an! Financial Tax Authorization) authorizes the local legislators oi any city with a population of over one million or more to adopt or amend local laws “imposing in any such city a tax upon persons carrying on or exercising for gain or profit within such city, any trade, business, profession, vocation or commercial activity * * * or making sales within such city” at a rate “not to exceed one-fifth of o.ne per centum * * * and upon persons carrying on * * * any ‘ financial business ’ ” at a rate “ not to exceed two-fifths of one per centum ”.

A ‘ ‘ financial business ’ ’ is defined as including certain named categories of activities, to wit: “ 2. ‘ Financial Business. The services and transactions of private banks, private bankers, dealers and brokers in money, credits, commercial paper, bonds, notes, securities -and stocks, monetary metals, factors, and commission merchants ” (General City Law, § 24-a .[§§ 1, 2] ).

Local Law No. 44 of 1948 of New York City, enacted pursuant to the State enabling statute, contains identical language except for the addition of the words 1 ‘ holding companies ” (Administrative Code, § B46-1.0 [ch. 46, tit. B]). It is this difference in language that respondent points to as authority for classifying the taxpayer as a “ financial business ’ ’ and that the taxpayer points to in support of its challenge to the classification.

It is clear that holding companies are not included in the definition of “financial business ” contained in section 24-a, and that this omission indicates a legislative intent to preclude the City of New York from taxing the gross income of a holding company at the “ financial business ” rate.

In New York, the State Legislature has the exclusive power to tax, including the power to determine the class of persons to he taxed (N. Y. Const., art. Ill, § 1; Genet v. City of Brooklyn, 99 N. Y. 296; Gautier v. Ditmar, 204 N. Y. 20), which it may delegate to its municipal subdivisions, including the City of New York. But any taxes imposed by the latter must be within the expressed limitations (County Securities v. Seacord, 278 N. Y. 34) and, unless authorized, a tax so levied is constitutionally invalid (Matter of Long Is. R. R. Co. v. Hylan, 240 N. Y. 199). It is equally well settled that the Legislature may classify property for tax purposes in any manner it deems proper (People ex rel. Hudson Riv. Day Line v. Franck, 257 N. Y. 69). Its power in that regard is not without limitation, for the classification must have some reasonable basis (People ex rel. Farrington v. Mensching, 187 N. Y. 8). In this instance the State Legislature expressly stated that the classification ‘ ‘ shall mean or include” a list of named special classes of business (General City Law, art. 2-B, § 24-a [§§ 1, 2]), thereby evidencing an intention to restrict the application of the tax to the categories listed (Jackson v. Citizens Cas. Co. of N. Y., 277 N. Y. 385) and to exclude any business activity not so included. So viewed, the classification “ financial business ” in the State Enabling Act indicates an intention to preclude the city from classifying this taxpayer as a “ financial business ”.

If there is any doubt that the Legislature so intended to exclude holding companies as “ financial business ”, and we think there is none, the history of the Enabling Act points to the same result. The original enabling statute was enacted in 1934, and annually re-enacted. In 1941 it included a model local law, patterned on the then existing New York City law imposing the General Business and Financial Tax. In 1942 the New York City law included for the first time the term ‘ ‘ holding companies ” in its definition, but the Comptroller has since 1934 issued regulations treating holding companies as financial businesses. From this background information, the Comptroller reasons that the re-enactments of the enabling statute from 1934 through 1941 constituted a confirmation of the administrative construction. While it is true that repeated re-enactment points to legislative favoring of reasonable administrative interpretation (McFeely v. Commissioner, 296 U. S. 102 [1935]; Helvering v. Reynolds Co., 306 U. S. 110 [1939]; Wilmette Park Dist. v. Campbell, 338 U. S. 411 [1949]; Matter of Stupack, 274 N. Y. 198 [1937]), we ought not to attribute such an attitude to the Legislature’s silence in this area. First, the administrative construction was unreasonable under the circumstances. Second, from 1942 forward, the Legislature failed to add “holding companies ” to its definition, despite the city’s attempts to induce such an amendment (Assembly Int. No. 3519 and Senate Int. No. 3124, New York Legislative Record and Index, 180th Session, beginning January 9, 1957; Assembly Int. No. 3725 and Senate Int. No. 3186, New York Legislative Record and Index, 181st Session, beginning January 8, 1958). Third, the Legislature did include ‘1 holding companies ’ ’ in the definition of financial business contained in the enabling statute authorizing cities with a population of fewer than one million to impose a general business and financial tax similar to the New York City tax (L. 1948, ch. 651, amdg. L. 1947, ch. 278).

In the light of this historic background, the State Legislature clearly never intended to give the city authority to include holding companies in the definition of “financial business”. Thus the Comptroller assessed the deficiency tax without authority.

Respondent contends that, even if his classification was improper, his determination should nonetheless stand because the amount of tax imposed is less than what would have been imposed had United States Steel been classified as a general business. This premise, viz., that the general business tax would have been greater, is disputed by Steel. In any event we may not here decide the amount of the general business tax, if any, which respondent might have imposed.

The order appealed from should be reversed and the determination of the Comptroller annulled, with costs in this court and in the Appellate Division, and the matter remitted to the Comptroller for further proceedings not inconsistent with this opinion.

Desmond, Ch. J.

(dissenting). The question is not whether the Comptroller erred in calling appellant a 1 ‘ financial business ” for taxing purposes. The sole question for decision is whether appellant owes, to New York City, “ General Business and Financial Taxes ” in at least the amount assessed against it by the Comptroller (Lewis v. Reynolds, 284 U. S. 281, 283). The character and extent of appellant’s New York City activities are fully described in the record before us. That record makes it completely clear that the taxes as assessed are valid and owed.

The “ General Business and Financial Tax” authorized by the State (General City Law, § 24-a) and imposed by the city (Administrative Code of City of New York, ch. 46) is one tax, not two. The only difference between the taxation of “financial ’ ’ businesses and the taxation of other covered activities is that the city may levy against the former a tax up to two-fifths of 1% of gross income while the tax against the latter may not exceed one fifth of 1% of gross receipts. In other words, there are two separate maxima as to two kinds of businesses, not two kinds of tax. If the Comptroller, describing appellant as a financial business, had sent it tax bills computed at the rate of two fifths of 1% on its whole receipts, he would have acted illegally since the State law did not permit inclusion of holding companies like appellant in the list of “ financial businesses ”. But the Comptroller was, by State enabling law and city local law, empowered to tax any locally conducted business, whether “financial” or other kind, up to one fifth of 1% on its gross takings. The taxes here contested by appellant were figured at a rate much lower than that — two fifths of 1% of 12%%, that is, one twentieth of 1% on appellant’s gross receipts. Since that was well below the authorized tax on “ general businesses ” and since appellant, if not a “financial business ”, is certainly a taxable New York City business of some kind (Matter of Steinbeck v. Gerosa, 4 N Y 2d 302, 308, 309), the tax levied was valid and there is nothing to litigate (see Matter of Nash v. Lynch, 226 App. Div. 421, 423, affd. 253 N. Y. 564; Matter of National Gash Register Co. v. Joseph, 299 N. Y. 200, 203). There is in this record an express stipulation that, if the Comptroller had elected to treat this as a general business, the tax could on the undisputed facts have been four times as high as the actual levy here being litigated.

Appellant’s transactions were all carried on in New York City so there is no problem of allocation as between intrastate and interstate commerce. The Comptroller’s power to use, as to local New York City businesses, allocation formulae producing less than the maximum allowable tax has been upheld by this court (Olive Coat Co. v. City of New York, 283 N. Y. 733; Berkshire Fine Spinning Associates v. City of New York, 5 N Y 2d 347, 358, 359, appeal dismissed 361 U. S. 3; see Matter of New Yorker Mag. v. Gerosa, 3 N Y 2d 362, 369, appeal dismissed 356 U. S. 339).

We have often reminded ourselves that it is our duty “to ascertain and declare the whole law upon the undisputed facts ” spread before us (Oneida Bank v. Ontario Bank, 21 N. Y. 490, 504; Rentways v. O’Neill Milk & Cream Co., 308 N. Y. 342, 349; People v. Duell, 1 N Y 2d 132, 134; Cahill v. Regan, 5 N Y 2d 292, 298). We should perform that duty here.

The order should be affirmed, with costs.

Judges Fuld, Froessel, Van Voorhis and Foster concur with Judge Dye; Chief Judge Desmond dissents in an opinion in which Judge Burke concurs.

Order reversed, etc.


author: Per Curiam.

text:
    In the Matter of James P. Sullivan, Respondent, against Joseph P. Kelly, Individually and as Commissioner of Motor Vehicles of the State of New York, Appellant.
    Argued March 3, 1960;
    decided March 31, 1960.

      Louis J. Lefkowits, Attorney-General (Philip J. Fitzgerald and Paxton Blair of counsel), for appellant.
    I. Petitioner’s claim that he was convicted of speeding only is without substance. In any event, his dispute, if any, in this respect does not lie in this proceeding against the Commissioner of Motor Vehicles. (Matter of Christoff v. Kelly, 8 A D 2d 687; Matter of Banks v. Kelly, 6 A D 2d 512; Matter of La Victoire v. Kelly, 5 A D 2d 548; Matter of Gross v. Macduff, 284 App. Div. 786.) II. There was substantial evidence before the Commissioner that-petitioner was convicted of operating a motor vehicle while under the influence of intoxicating liquor. (Matter of Moore v. Macduff, 309 N. Y. 35; Matter of Bouchard v. Kelly, 7 A D 2d 774, 6 N Y 2d 705; Matter of Coleman v. Kelly, 12 Misc 2d 116.)

      Philip D. O’Donnell for respondent.
    The determination of the Commissioner of Motor Vehicles was not based on substantial evidence. (Consolidated Edison Co. v. Labor Bd., 305 U. S. 197; Matter of Stork Restaurant v. Boland, 282 N. Y. 256; Matter of Phinn v. Kross, 8 A D 2d 132; Matter of Moore v. Macduff, 309 N. Y. 35; Matter of Newbrand v. City of Yonkers, 285 N. Y. 164; Matter of La Victoire v. Kelly, 5 A D 2d 548; Matter of Bouchard v. Kelly, 7 A D 2d 774; State v. Thomas, 79 Idaho 372.)
   Per Curiam.

The Vehicle and Traffic Law, in section 71 (subd. 2, par. [b]), requires the revocation of an operator’s license for the conviction outside the State of “ an offense consisting of operating a motor vehicle or motor cycle while under the influence of intoxicating liquor ’ ’. In the case before us, there can be no possible doubt that the petitioner was convicted in Massachusetts of operating a motor vehicle while under the influence of intoxicating liquor in violation of section 24 of chapter 90 of the General Laws of Massachusetts. In the light of all the documents before respondent Motor Vehicle Commissioner and of the Massachusetts statute itself, of which judicial notice could be taken, it is of no significance that the Massachusetts “ Abstract of Court Record of Violation of Motor Vehicle Laws ” simply recited in abbreviated form that the petitioner had been convicted of “ Operating under the influence ”. The Commissioner was required, therefore, to revoke the petitioner’s license.

The present case differs significantly from Matter of Moore v. Macduff (309 N. Y. 35) in that, in the latter, there was doubt, because of alternative grounds provided in the Canadian statute, whether the petitioner had been convicted of driving while his ability to do so had been impaired by “ alcohol ” or by a “ drug ”.

The orders should be reversed and the petition dismissed.

Chief Judge Desmond and Judges Dye, Fuld, Froessel, Van Voorhis, Burke and Foster concur.

Order reversed and determination of the Commissioner of Motor Vehicles reinstated, without costs.


author: Desmond, Ch. J. Fboessel, J. Van Voobhis, J.

text:
    Fred McConnell, Respondent, v. Commonwealth Pictures Corporation, Appellant.
    Argued January 20, I960;
    decided March 31, 1960.

      Saul E. Rogers and Sol Ringel for appellant.
    I. An agent cannot recover compensation for obtaining a contract for his principal where such agent resorts to illegal means to procure the same. (Oscanyan v. Arms Co., 103 U. S. 261; Carr v. Hoy, 2 N Y 2d 185; Reiner v. North Amer. Newspaper Alliance, 259 N. Y. 250; Sirkin v. Fourteenth St. Store, 124 App. Div. 384;
      Stone v. Freeman, 298 N. Y. 268; Sturm v. Truby, 245 App. Div. 357; Nathanson v. Brown & Williamson Tobacco Corp., 189 Misc. 1024; Tocci v. Lembo, 325 Mass. 707; Matter of Browning, 176 Misc. 308; Horbach v. Coyle, 2 F. 2d 702; Harrington v. Victoria Graving Dock Co., 3 Q. B. D. 549; Morgan Munitions Supply Co. v. Studebaker Corp., 226 N. Y. 94.) II. The contract or claim of an agent will not be enforced ivhere he indulges in conduct which is immoral, corrupt or contrary to public policy. (Riggs v. Palmer, 115 N. Y. 506; Sirkin v. Fourteenth St. Store, 124 App. Div. 384; Bierbrauer v. Moran, 244 App. Div. 87; Imperator Realty Co. v. Tull, 228 N. Y. 447; Segal v. Chemical Importing & Mfg. Co., 205 App. Div. 220; Doucet v. Massachusetts Bonding & Ins. Co., 180 App. Div. 599; McMullen v. Hoffman, 174 U. S. 639.) III. An agent cannot recover for the illegal performance of a contract even where his employer retains the benefits of his services. (Sturm v. Truby, 245 App. Div. 357.)

      Bernard D. Bergreen, Morris H. Bergreen and Charles W. Silver for respondent.
    I. New York law has long been settled that recovery may be had for services under a valid agreement, notwithstanding that in the course of the rendition of such services illegal acts had been committed which were not part of or contemplated by the agreement. (Merchants’ Line v. Baltimore & Ohio R. R. Co., 222 N. Y. 344; Chesebrough v. Conover, 140 N. Y. 382; Dunham v. Hastings Pavement Co., 56 App. Div. 244, 57 App. Div. 426; Messersmith v. American Fid. Co., 187 App. Div. 35, 232 N. Y. 161; Magazine Publishers Assn. v. Crowell-Collier Pub. Co., 12 Misc 2d 792; Hollister v. Ulvi, 199 Minn. 269; Traver v. Naylor, 126 Ore. 193; Josephs v. Briant, 108 Ark. 171; Ferkin v. Board of Educ., 278 N. Y. 263; De Persia v. Merchants Mut. Cas. Co., 268 App. Div. 176; Simon v. Chemical Bank & Trust Co., 166 Misc. 687, 256 App. Div. 711, 283 N. Y. 623.) II. As a matter of public policy, recovery for services should be had under a valid agreement, notwithstanding subsequent acts of misconduct not included in, nor contemplated by, nor within the intent of said agreement. A contrary rule would encourage the violation of valid agreements and subject every legal contract to possible claims of invalidity after the event and after full performance of the contract. At most, a remedy may be had by the person who may be damaged by misconduct, but not by one seeking to disaffirm obligations under the fully performed agreement resulting in benefit to that person and without such person suffering damage of any kind. (Diamond Match Co. v. Roeber, 106 N. Y. 473; Frost & Co. v. Mines Corp., 312 U. S. 38.) III. Section 439 of the Penal Law is wholly inapplicable and cannot be invoked by defendant since on the face of the first defense there is no allegation that its employee was bribed or that its interests had been adversely affected. (People v. Jacobs, 309 N. Y. 315; Merchants’ Line v. Baltimore & Ohio R. R. Co., 222 N. Y. 344; June Fabrics v. Teri Sue Fashions, 194 Misc. 267.) IV. Defendant has retained the full benefits of the contract which has been in existence for more than 12 years and now seeks to avoid obligations under the contract by interposing defense of illegality despite the fact that it has substantially benefited by virtue of services of plaintiff. (Twin City Co. v. Harding Glass Co., 283 U. S. 353; Zwirn v. Galento, 288 N. Y. 428.)
   Desmond, Ch. J.

The appeal is by defendant from so much of an Appellate Division, First Department, order as affirmed that part of a Special Term order which struck out two defenses in the answer.

Plaintiff sues for an accounting. Defendant had agreed in writing ithat, if plaintiff should succeed in negotiating a contract with a motion-picture producer whereby defendant would get the distribution rights for certain motion pictures, defendant . would pay plaintiff $10,000 on execution of the contract between defendant and the producer, and would thereafter pay plaintiff a stated percentage of defendant’s gross receipts from distribution of the pictures. Plaintiff negotiated the distribution rights for defendant and defendant paid plaintiff the promised $10,000 but later refused to pay him the commissions or to give him an accounting of profits.

Defendant’s answer contains, besides certain denials and counterclaims not now before us, two affirmative defenses the sufficiency of which we must decide. In these defenses it is asserted that plaintiff, without the knowledge of defendant or of the producer, procured the distribution rights by bribing a representative of the producer and that plaintiff agreed to pay and did pay to that representative as a bribe the $10,000 which defendant paid plaintiff. The courts below (despite a strong dissent in the Appellate Division) held that the defenses were insufficient to defeat plaintiff’s suit. Special Term’s opinion said that, since the agreement sued upon — between plaintiff and defendant — was not in itself illegal, plaintiff’s right to be paid for performing it could not be defeated by a showing that he had misconducted himself in carrying it out. The court found a substantial difference between this and the performance of an illegal contract. We take a different view. Proper and consistent application of a prime and long-settled public policy closes the doors of our courts to those who sue to collect the rewards of corruption.

New York’s policy has been frequently and emphatically announced in the decisions. “ ‘It is the settled law of this State (and probably of every other State) that a party to an illegal contract cannot ask a court of law to help him carry out his illegal object, nor can such a person plead or prove in any court a case in which he, as a basis for his claim, must show forth his illegal purpose ’ (Stone v. Freeman, 298 N. Y. 268, 271, citing the leading cases). The money plaintiff sues for was the fruit of an admitted crime and ‘ no court should be required to serve as paymaster of the wages of crime ’ (Stone v. Freeman, supra, p. 271). And it makes no difference that defendant has no title to the money since the court’s concern is not with the position of the defendant ’ but with the question of whether ‘ a recovery by the plaintiff should be denied for the sake of public interests ’, a question which is one ‘ of public policy in the administration of the law ’ (Flegenheimer v. Brogan, 284 N. Y. 268, 272). That public policy is the one described in Riggs v. Palmer (115 N. Y. 506, 511-512): ‘ No one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime. These maxims are dictated by public policy, have their foundation in universal law administered in all civilized countries, and have nowhere been superseded by statutes ’ ” (Carr v. Hoy, 2 N Y 2d 185,187).

We must either repudiate those statements of public policy or uphold these challenged defenses. It is true that some of the leading decisions (Oscanyan v. Arms Co., 103 U. S. 261; Stone v. Freeman, 298 N. Y. 268) were in suits on intrinsically illegal contracts but the rule fails of its purpose unless it covers a case like the one at bar. Here, as in Stone v. Freeman and Carr v. Hoy (supra), the money sued for was (assuming the truth of the defenses) “ the fruit of a crime.” To allow this plaintiff to collect his commissions would be to let him profit by his own fraud, or to take advantage of his own wrong, or to found [a] claim upon his own iniquity, or to acquire property by his own crime ” (Riggs v. Palmer, 115 N. Y. 506, 511). The issue is not whether the acts alleged in the defenses would constitute the crime of commercial bribery under section 439 of the Penal Law although it appears that they would. ‘ ‘ A seller cannot recover the price of goods sold where he has paid a commission to an agent of the purchaser (Sirkin v. Fourteenth Street Store, 124 App. Div. 384); neither could the agent recover the commission, even at common law and before the enactment of section 384-r of the Penal Law (now § 439) ” (Judge Crane in Reiner v. North American Newspaper Alliance, 259 N. Y. 250, 261). The Sirkin opinion (124 App. Div. 384) has been cited with approval by this court in Merchants’ Line v. Baltimore & Ohio R. R. Co. (222 N. Y. 344, 347) and Morgan Munitions Supply Co. v. Studebaker Corp. (226 N. Y. 94, 99). In unmistakable terms it forbids the courts to honor claims founded on commercial bribery.

We are not working here with narrow questions of technical law. We are applying fundamental concepts of morality and fair dealing not to be weakened by exceptions. So far as precedent is necessary, we can rely on Sirkin v. Fourteenth St. Store (124 App. Div. 384, supra) and Reiner v. North American Newspaper Alliance (259 N. Y. 250, supra). Sirhin is the case closest to ours and shows that, whatever be the law in other jurisdictions, we in New York deny awards for the corrupt performance of contracts even though in essence the contracts are not illegal. Sirkin had sued for the price of goods sold and delivered to defendant. Held to be good was a defense which charged that plaintiff seller had paid a secret commission to an agent of defendant purchaser. There cannot be any difference in principle between that situation and the present one where plaintiff (it is alleged) contracted to buy motion-picture rights for defendant but performed his covenant only by bribing the seller’s agent. In the Reiner case (supra), likewise, the plaintiff had fully performed the services required by his agreement with the defendant but was denied a recovery because his performance had involved and included “ fraud and deception ” practiced not on defendant but on a third party. It is beside the point that the present plaintiff on the trial might be able to prove a prima facie case without the bribery being exposed. On the whole case (again assuming that the defenses speak the truth) the disclosed situation would be within the rule of our precedents forbidding court assistance to bribers.

It is argued that a reversal here means that the doing of any small illegality in the performance of an otherwise lawful contract will deprive the doer of all rights, with the result that the other party will get a windfall and there will be great injustice. Our ruling does not go as far as that. It is not every minor wrongdoing in the course of contract performance that will insulate the other party from liability for work done or goods furnished. There must at least be a direct connection between the illegal transaction and the obligation sued upon. Connection is a matter of degree. Some illegalities are merely incidental to the contract sued on (see Messersmith v. American Fid. Co., 187 App. Div. 35, affd. 232 N. Y. 161; De Persia v. Merchants Mut. Cas. Co., 268 App. Div. 176, affd. 294 N. Y. 708; Ferkin v. Board of Educ., 278 N. Y. 263, 268). We cannot now, any more than in our past decisions, announce what will be the results of all the kinds of corruption, minor and major, essential and peripheral. All we are doing here is labeling the conduct described in these defenses as gross corruption depriving plaintiff of all right of access to the courts of New York State. Consistent with public morality and settled public policy, we hold that a party will be denied recovery even on a contract valid on its face, if it appears that he has resorted to gravely immoral and illegal conduct in accomplishing its performance.

Perhaps this application of the principle represents a distinct step beyond Sirkin and Reiner (supra) in the sense that we are here barring recovery under a contract which in itself is entirely legal. But if this be an extension, public policy supports it. We point out that our holding is limited to cases in which the illegal performance of a contract originally valid takes the form of commercial bribery or similar conduct and in which the illegality is central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract.

There is no pertinence here of the rule which makes such defenses unavailable to one who is a mere depository or escrowee — that is, one who is holding money or goods for one of the parties without himself being a party to the transaction sued upon (see Southwestern Shipping Corp. v. National City Bank of N. Y., 6 N Y 2d 454). That exception is used when, in execution or satisfaction of an illegal transaction, one of the parties thereto turns over money or property to a third person (not a party to the illegal deal) for the- use of one who is a party. In our case there were two parties only — plaintiff and defendant. There is no third person holding money or property.

The sufficiency of defendant’s counterclaim (for the return of its $10,000) was litigated below but it is not before us on this appeal.

The order appealed from should be reversed, with costs, the certified question answered in the negative, and plaintiff’s motion, insofar as it attacks the sufficiency of the two separate defenses, should be denied.

Fboessel, J.

(dissenting). Plaintiff sues for an accounting and related relief under a clearly lawful contract, whereby defendant agreed to make certain payments in connection with plaintiff’s negotiation, on behalf of defendant, of an agreement with Universal Pictures Company, Inc., for distribution rights with respect to 40 western feature films and 4 serial motion pictures. The payments agreed upon were $10,000 upon the execution of a contract with Universal, and 20% of all the gross receipts received by defendant from the distribution of said pictures after defendant had recouped the amount of $100,000 from 60% of the gross receipts. Upon negotiation of the distribution rights, defendant paid plaintiff said sum of $10,000, but thereafter declined upon demand to pay plaintiff any further moneys.

Two defenses set forth in the answer were stricken below. The first defense alleged that plaintiff secured the Universal contract as a result of influencing an agent of Universal and United World Films, Inc., to cause United to execute the contract with defendant, for which he paid the agent $10,000, in claimed violation of section 439 of the Penal Law. The second defense reiterated the allegations of the first, and alleged that the enforcement of the contract would be contrary to public policy. These allegations are denied, except of course as they are deemed admitted as a matter of law by challenging their legal sufficiency. It is to be noted that defendant does not charge that its own agent was bribed or that its contract with plaintiff contemplates any illegal act. Moreover, neither the answer nor the affidavit in opposition suggests that Universal or United has in anywise questioned the distribution contract or that defendant has not enjoyed the full fruits thereof.

The narrow question before us as framed by Special Term is “ whether the unlawful acts imputed to the plaintiff in performance are fatal to recovery under a lawful contract ”. We agree with the courts below “ that recovery for services under a valid agreement may be had, notwithstanding that the plaintiff has in the course of their rendition committed illegal acts ”. This was implicit in our holding in Chesebrough v. Conover (140 N. Y. 382) and it was so squarely held in Dunham v. Hastings Pavement Co. (56 App. Div. 244) where the court correctly stated the applicable rule of law as follows (pp. 251-252): “If the contract contemplated legal service and that alone, we do not think that it would be rendered illegal by the fact that the plaintiff did illegal acts in its performance. The question is and continues, was the contract in fact for the performance of illegal service. If it was not, then it is valid and can be enforced.” (See, also, 57 App. Div. 426.)

This is not a case where the contract sued upon is intrinsically illegal (cf. Stone v. Freeman, 298 N. Y. 268; Reiner v. North American Newspaper Alliance, 259 N. Y. 250); or was procured by the commission of a crime (Sirkin v. Fourteenth St. Store, 124 App. Div. 384); or where a beneficiary under a will murdered his ancestor in order to obtain the speedy enjoyment of his property (Riggs v. Palmer, 115 N. Y. 506). In the Sirhin case, so heavily relied upon by the majority, the plaintiff obtained the very contract he was seeking to enforce by paying secret commissions to defendant’s own purchasing agent. In Merchants’ Line v. Baltimore & Ohio R. R. Co. (222 N. Y. 344, 347) we pointed out that in Sirhin 11 the plaintiff reached and bribed the man who made the contract wider which he was seehing to recover ” (emphasis supplied). In Morgan Munitions Supply Co. v. Studebaker Corp. (226 N. Y. 94, 99) we likewise cited the Sirhin case for the proposition that “ a contract procured by the commission of a crime is unenforceable even if executed ’ ’ (emphasis supplied).

In the instant case, the contract which plaintiff is seeking to enforce is perfectly valid, and it was not intended or even contemplated that plaintiff would perform the contract by illegal or corrupt means. Having received and retained the full benefits of plaintiff’s performance, defendant now seeks to “inject into ” its contract with plaintiff, “ which was fair and legal in itself, the illegal feature of the other independent transaction ” (Messersmith v. American Fid. Co., 187 App. Div. 35, 37, affd. 232 N. Y. 161). This court is now adopting a rule that a party may retain the benefits of, but escape his obligations under, a wholly lawful contract if the other party commits some illegal act not contemplated nor necessary under the contract. By way of a single illustration, an owner may thus avoid paying his contractor for the cost of erecting a building because the contractor gave an inspector a sum of money to expedite an inspection.

The majority opinion seeks to distinguish between “ major ” and “ minor ” illegality and “ direct ” and “ peripheral ” corruption. It decides this case on the ground that the manner in which plaintiff performed his admittedly valid contract with defendant was ‘ ‘ gravely immoral and illegal ’ ’. Such distinctions are neither workable nor sanctioned by authority. If a contract was lawfully made, and did not contemplate wrongdoing, it is enforcible; if, on the other hand, it was procured by the commission of a crime, or was in fact for the performance of illegal services, it is not enforcible. These are the criteria distinguishing enforcible from unenforcible contracts — not “nice” distinctions between degrees of illegality and immorality in the performance of lawful contracts, or whether the illegal act of performance was “ directly ” or “ peripherally ” related to the main contract.

Moreover, a reversal here would be contrary to the spirit, if not the letter, of our holding in Southwestern Shipping Corp. v. National City Bank (6 N Y 2d 454). The broad proposition for which that case stands is that a party unconnected with an illegal agreement should not be permitted to reap a windfall by pleading the illegality of that agreement, to which he was a stranger. There, the contract between the plaintiff and the bank was entirely lawful, and the bank attempted to avoid the consequences of its breach of contract and negligence by asserting the illegality of a different contract between plaintiff and a third party. Here, the contract between plaintiff and defendant was perfectly legal, and defendant is seeking to avoid its obligations under the contract — of which it has reaped the benefits for some 12 years — by asserting the illegality of a different and subsequent agreement between plaintiff and a third party. This it should not be permitted to do.

The order appealed from should be affirmed, with costs, and the question certified answered in the affirmative.

Van Voobhis, J.

(dissenting). Public morals and fair dealing are likely to be advanced by limiting rather than by enlarging the rule that is being extended to the facts of this case. This rule is grounded on considerations of public policy. Courts will not intervene between thieves to compel them to divide the spoils. But in a situation like the present, it seems to me that the effect of this decision will not be to restrain the corrupt influencing of agents, employees or servants but to encourage misappropriation of funds and breaches of faith between persons who do not stand in corrupt relationships with one another. The public interest is not served best by decisions which put a premium on taking unconscionable advantage of such situations, or which drive the enforcement of obligations of this kind underground. I concur in the dissenting opinion by Judge Fboessel.

Judges Dye, Fuld, Burke and Foster concur with Chief Judge Desmond ; Judge Fboessel dissents in an opinion in which Judge Van Voobhis concurs in a separate memorandum.

Order reversed, with costs in all courts, and matter remitted to the Appellate Division for further proceedings in accordance with the opinion herein. Question certified answered in the negative.


author: Fuld, J. Froessel, J.

text:
    In the Matter of the Arbitration between the Board of Education, Union Free School District No. 7, Town of North Hempstead, Great Neck, Nassau County, New York, Respondent, and Heckler Electric Company, Inc., Appellant.
    Argued January 11, 1960;
    decided March 31, 1960.

      Norman Roth and Max E. Greenberg for appellant.
    I. Section 3813 of the Education Law has application only to proceedings in court and not to an arbitration proceeding. (Matter of Baker [Bd. of Educ.], 309 N. Y. 551; Matter of River Brand Rice Mills [Latrobe Brewing Co.], 305 N. Y. 36.) II. The contract between the parties requires arbitration concerning disputes as to progress and the interpretation of the plans and specifications. Heckler’s demand for arbitration falls within these classifications. (Matter of Marchant v. Mead-Morrision Mfg. Co., 252 N. Y. 284; Smith & Sons Constr. Co. v. State of New York, 266 App. Div. 886, 292 N. Y. 691; Afgo Eng. Corp. v. State of New York, 244 App. Div. 395, 268 N. Y. 716; Rusciano d Son Corp. v. State of New York, 278 App. Div. 999; People ex rel. Wells & Newton Co. v. Craig, 232 N. Y. 125; Weil Plumbing Corp. v. State of New York, 267 App. Div. 247.) III. A stay of the arbitration demanded by Heckler may not be granted under the circumstances here presented. (Matter of Paloma Frocks [Shamokin Sportswear Corp.], 3 N Y 2d 572; Matter of Crosett v. Mount Vernon Housing Auth., 275 App. Div. 1051; Matter of American Mach. & Foundry Co. [Fay], 193 Misc. 990.) IV. All questions with regard to Heckler’s compliance with rules governing the arbitration of the several claims are within the jurisdiction of the arbitrators. (Matter of Wilkins, 169 N. Y. 494; Matter of Wagner [Russeks Fifth Ave.], 281 App. Div. 825; Matter of Pine St. Realty Co. [Coutroulos], 233 App. Div. 404; Matter of Lipman [Haeuser Shellac Co.], 289 N. Y. 76; Matter of Tuttman [Kattan, Talamas Export Corp.], 274 App. Div. 395; Matter of W. S. Ponton, Inc. [United Off. & Professional Workers of America], 278 App. Div. 561.)

      Howard A. Rochford, C. Ellis Schiffmacher and Eugene T. Cullen for respondent.
    I. Heckler’s failure to comply with section 3813 of the Education Law bars and prevents the arbitration of any of its claims. (Strauss v. Union Cent. Life Ins. Co., 170 N. Y. 349; People ex rel. City of New York v. Nixon, 229 N. Y. 356; Matter of Scott, 158 Misc. 481, 249 App. Div. 542, 274 N. Y. 538; Matter of Ruppert, 2 Misc 2d 744, 2 A.D 2d 670, 3 N Y 2d 576; Matter of Interocean Mercantile Corp., 204 App. Div. 284, 236 N. Y. 587; Matter of Hosiery Mfrs. Corp. v. Goldston, 238 N. Y. 22; Webb v. Parker, 130 App. Div. 92; Matter of Interocean Mercantile Corp. [Buell], 207 App. Div. 164; Winter v. City of Niagara Falls, 190 N. Y. 198; Matter of Baker [Bd. of Educ.], 309 N. Y. 551; Matter of Brown v. Board of Trustees of Town of Hamptonburg School Dist., 303 N. Y. 484; Matter of Martin v. School Bd. of Union Free Dist. No. 28, 301 N. Y. 233; Todd v. Board of Educ. of City of Syracuse, 297 N. Y. 873; Kinner v. Board of Educ., 6 A D 2d 204; Schluter v. Sutton, 4 A D 2d 757.) II. Heckler’s failure to comply with the other conditions precedent in the contract prevent arbitration of its major claim in item “ (a) ” of its demand for arbitration. (Matter of Cauldwell-Wingate Co. v. New York City Housing Auth., 262 App. Div. 829; Matter of Duke Labs. [Lutz Co.], 9 Misc 2d 779.) III. The contract excludes from arbitration claims based on delays because of failure to co-ordinate work and acts of other contractors. (Matter of Kennelly [Theodoro Adv. Serv.], 197 Misc. 667; Matter of Bullard v. Grace Co., 240 N. Y. 388.)

      David H. Moses for Eamapo Central School District No. 2, Clarkstown Central School District No. 1, and Union Free School District No. 8, Town of Clarkstown and Orange town,
      amici curiæ.

    I. No judgment may be entered against a school district unless and until a claim has first been filed and rejected or not acted upon for 30 days as provided in section 3813 of the Education Law. (Kinner v. Board of Educ., 6 A D 2d 204; Schluter v. Sutton, 4 A D 2d 757; Todd v. Board of Educ. of City of Syracuse, 297 N. Y. 873; Brooklyn Public Lib. v. City of New York, 222 App. Div. 422, 250 N. Y. 495; Winbush v. City of Mt. Vernon, 306 N. Y. 327.) II. School districts like other governmental agencies have no inherent right to create obligations to be paid by public funds. Certain statutory formalities must be adhered to before the necessary taxes can be levied to meet these obligations. III. Public policy requires strict adherence to the statute. (Pierce v. Board of Educ., 125 Misc. 589; Lutzken v. City of Rochester, 7 A D 2d 498; Seif v. City of Long Beach, 286 N. Y. 382; Marcus v. Village of Mamaroneck, 283 N. Y. 325; City of Yonkers v. Rentways, 304 N. Y. 499; New York City Employees’ Retirement System v. Eliot, 267 N. Y. 193.)
   Fuld, J.

On January 3,1956, the respondent Board of Education entered into a contract with Heckler Electric Company for the electrical work in the Junior and Senior High Schools which were to be constructed at Great Neck, New York. This contract was made ‘ ‘ pursuant to the provisions of the Education Law” and subject to annexed “General Conditions”. These “ General Conditions” provide that “the Architect shall, within a reasonable time, make decisions on all claims of the Owner or Contractor and on all other matters relating to the execution and progress of the work or the interpretation of the Contract Documents ” and that arbitration may be had either upon the architect’s decision or upon his failure to make a decision within 10 days after the parties have presented their evidence. Notice of the demand for arbitration must be made within 10 days after receipt of the architect’s decision, or, if the architect fails to make a decision, within a reasonable time after the dispute has arisen.

According to its contract, Heckler was required to perform its work “ as construction progresses and not later than — in accordance with the progress of the General Contractor ”. And under the general construction contract, reference to which is made in Heckler’s contract, July 31, 1957 was established as the completion date. Furthermore, Heckler’s contract, as well as those of all the other contractors, requires that the contractor for general construction and all other contractors and subcontractors “ coordinate their work with adjacent work and coordinate with other trades so as to facilitate general progress of work”; it also provides that, “ in event of any dispute arising as to possible or alleged interference among various Contractors which may retard progress of work, same shall be adjusted by Architects whose decision as to parties at fault and as to manner in which matter may be adjusted shall be binding and conclusive on all parties ”, The final relevant contractual provision bind ing on all of the contractors is that under which the Board of Education is empowered to compel progress toward timely completion through the exercise of a termination clause against any contractor who fails “to prosecute the work or any part thereof with [sufficient] * * * diligence ” or otherwise substantially violates any of its contractual obligations.

In April of 1957, Heckler wrote a letter to the board in which it complained that the work of the general contractors was “ slow, sporadic and lax” and had been “ permitted [by the Board of Education] to lag” and requested an extension of time under their contract. In July of 1958, and again in August of 1958, Heckler wrote letters, this time addressed to the Board of Education as well as to the contract architects, claiming that it had ‘ been substantially delayed in the performance and completion” of its work as a result of “the failure of [the board] to coordinate the work of the several contractors and by acts of the other contractors ”; it estimated its damages as a result of this delay as $312,477.28 and made a claim against the board in that amount invoking the contractual provision for a determination of its claim by the architects.

No decision having been made by the architects, Heckler, in early September, 1958, made a demand for arbitration in which it advanced two claims: (1) $312,477.28 as damages sustained by reason of “ delays of and interferences in the performance of work * * * by reason of acts of the Board of Education, the failure of the Board of Education to coordinate the work of the several contractors performing work at the site of the project involved and the acts óf the other contractors ” and (2) $11,979.67 for extra work. About two weeks later, the board moved for a stay of arbitration, alleging that, first, there had not been compliance with the notice provisions of section 3813 of the Education Law; second, the primary claim set forth in the demand for arbitration is not arbitrable under the contract between the board and Heckler; and, third, the primary claim in the demand for arbitration is “so indefinite, uncertain and vague as to make it an improper submission for arbitration The court at Special Term denied the requested stay, but the Appellate Division, two justices dissenting, reversed and granted it, assigning as the primary ground for reversal Heckler’s failure to comply with section 3813.

Before considering whether section 3813 is applicable to arbitration proceedings and, if it is, whether it bars Heckler’s right to arbitration in this case, we must determine whether the applicability of the section is to bo decided by the court or by the arbitrators. In our opinion, it is clearly the kind of issue for the court to pass upon, involving as it does a condition precedent to Heckler’s very right to arbitration and the arbitrator’s very jurisdiction.

Although, on occasion, this court has used very broad language to the effect that “ the only issues a court may deal with on * * * [an application for a stay of arbitration] are as to ‘ the making of the contract or submission or the failure to comply therewith’” (Matter of Paloma Frocks [Shamokin Sportswear Corp.], 3 N Y 2d 572, 574; see, also, Matter of Lipman [Haeuser Shellac Co.], 289 N. Y. 76, 80), we did not mean thereby to suggest that the arbitrator possesses the power to decide whether the conditions precedent to the institution of the arbitration proceeding itself had been fulfilled. In fact, in Matter of Lipman (Haeuser Shellac Co.) (289 N. Y. 76, supra), where the matter of the cancellation of a contract of arbitration was held to be an issue for the arbitrators rather than the court, we expressly noted that a different question would be here * * * if there were any conditions precedent ” (p. 79). And in Matter of Cauldwell-Wingate Co. (New York City Housing Auth.) (287 N. Y. 853), in which an application to compel arbitration was denied on the ground that the petitioner had failed to demand arbitration within the time prescribed by the contract, it was this court’s view that the contract itself made compliance with its “ time ” provisions a condition precedent to arbitration, with the consequence that failure to act within the specified time deprived the petitioner of its right to arbitration. (See, also, Matter of Levine Bros. Iron Works Corp. [Constitution Sg.], 279 App. Div. 912, motion for leave to appeal denied 304 N. Y. 986; Matter of Ketchum & Co. [Allied Trades Council], 20 Misc 2d 736; Matter of Shine’s Restaurant [Waiters & Waitresses Union], 20 Misc 2d 737; Matter of Mark Cross Co. [Ellis], 15 Misc 2d 947, 949-950; Boston Mut. Life Ins. Co. v. Insurance Agents’ Int. Union, 258 F. 2d 516, 522.)

Section 3813 of the Education Law provides, in effect, that no action or special proceeding may be maintained against a school district or board of education ‘ ‘ unless it shall appear * * * that a written verified claim upon which such action or special proceeding is founded was presented” to the district’s governing body “ within three months after the accrual of such claim ”. This unquestionably constitutes the making of a claim to the school district within three months after its accrual a condition precedent to an action or special proceeding. Accordingly, if section 3813 applies to arbitration proceedings, it establishes a condition precedent to arbitration and, therefore, whether or no the condition was satisfied is for the court, not the arbitrators.

As we have already noted, section 3813 explicitly and broadly refers to any action or special proceeding ”, and section 1459 of the Civil Practice Act in so many words provides that ‘ ‘ Arbitration of a controversy under a contract * * * shall be deemed a special proceeding”. The enactment of section 1459 was motivated by the desire to overcome the effect of Matter of Interocean Mercantile Corp. (Hoops) (204 App. Div. 284, 286, affd. 236 N. Y. 587) — holding that arbitration was not a special proceeding under section 308 of the Civil Practice Act which sanctioned the taking of testimony by deposition “ in a special proceeding” (see Matter of Hosiery Mfrs. Corp. v. Goldston, 238 N. Y. 22, 26; Matter of Interocean Mercantile Corp. [Buell], 207 App. Div. 164,165) —but that does not mean that the Legislature denominated arbitration a ‘ ‘ special proceeding ” solely for the purpose of sanctioning the taking of depositions under section 308. In the light of the language adopted by the Legislature, broad and unlimited as it is, there is no warrant for saying that the salutary purpose of section 3813 of the Education Law — to give a school district prompt notice of claims so that investigation may be made before it is too late for investigation to be efficient” (Winbush v. City of Mt. Vernon, 306 N. Y. 327, 333) — applies any less to arbitration of claims asserted against a school district than to actions brought against it.

Nor does any provision of the particular contract before us indicate that section 3813 was not intended to be applicable to the present case.

Under the statute, the contractor must present his claim to the Board of Education within three months after its accrual, and the board is given 30 days in which to arrive at a decision. Under the contract, if the decision of the boárd is adverse to the contractor, he may submit the dispute to the architect (art. 39). And, if he is dissatisfied with the architect’s decision, he is privileged to seek arbitration, but “ the demand therefor shall be made within ten days ” of the receipt of the decision (art. 40). As is manifest, neither the provision of the contract for the architect’s decision of disputes nor the provision for an ‘ ‘ appeal ’ ’ therefrom to arbitration comes into effect until the contractor first presents Ms basic claim to the board pursuant to section 3813. This being so, Heckler is mistaken in urging that it is impossible to comply with the contractual reqmrement that arbitration be demanded within 10 days after the architect’s decision as well as with the statutory demand that the board have 30 days in which to consider any claim. The 30-day period afforded the board for consideration of the claim occurs before the matter is presented to the architect for decision, while the 10-day period within which arbitration must be demanded begins to run only after the architect’s decision. Thus, the supposed conflict between the provisions of the statute and the provisions of the contract simply does not exist.

Since, therefore, section 3813 applies to the present .arbitration proceeding, and since Heckler has concededly failed to comply with its provisions, the stay of arbitration granted to the Board of Education by the Appellate Division was proper. '

The order of the Appellate Division should be affirmed, with costs.

Froessel, J.

(dissenting). We agree with the views expressed in the dissenting opinions below. Appellant Heckler’s claim is clearly an arbitrable one under article 11 of the contract, which expressly provides for arbitration of “ any disagreement [which] shall arise between the .parties hereto” (De Lillo Constr. Co. v. Lizza & Sons, 7 N Y 2d 102; Matter of Lipman [Haeuser Shellac Co.], 289 N. Y. 76). Article 11 embraced disputes with regard to delays attributable to “the failure of the Board of Education to coordinate the work of the several contractors performing work at the site of the project involved ”, and claims for damages resulting therefrom.

As to the principal ground upon which the majority of the Appellate Division reversed Special Term, namely, the failure of appellant to comply with section 3813 of the Education Law, we are of the opinion that this is a matter to be determined by the arbitrators. As Judge Ftjld wrote for a unanimous court in Matter of Terminal Auxiliar Maritima (Winkler Credit Corp.) (6 N Y 2d 294, 298), “ It "is settled that under a broad provision for arbitration, such as we have here, arbitration may be had as to all issues arising subsequent to the making of the contract. [Citing cases] ”. In Matter of Paloma Frocks (Shamokin Sportswear Corp.) (3 N Y 2d 572, 574), we expressly held that the “ only issues a court may deal with on such a stay application are as to ‘ the making of the contract or submission or the failure to comply therewith ’ (Civ. Prac. Act, § 1458; Matter of Kramer & Uchitelle, Inc., 288 N. Y. 467, 472; Matter of Western Union Co. [American Communications Assn.], 299 N. Y. 177) and ‘ all acts of the parties subsequent to the making of the contract which raise issues of fact or law, lie exclusively within the jurisdiction of the arbitrators ’ (Matter of Lipman [Haeuser Shellac Co.], 289 N. Y. 76, 80).” And in Matter of Lipman (*Haeuser Shellac Co.) (supra) we added (p. 79): '“ A different question would be here if the issue was whether the contract never came into existence and hence was void, or if, although the contract was made, there arose an issue of fraud, duress or other impediment which rendered the contract voidable, or if there were any conditions precedent.” The language just quoted clearly indicates that the words ‘ if there were any conditions precedent ’ ’, in association with the language preceding, relate to the inception of the contract — not to an act or omission occurring after a valid contract came into existence.

Thus, in Matter of Uraga Dock Co. (Mediterranean & Oriental S. S. Corp.) (6 A D 2d 443, affd. 6 N Y 2d 773), where written contracts for the Construction and purchase of tankers provided they were not to “become effective” until the buyer made timely payment of the first installment, we held that an issue as to the timeliness of the first payment was for the appropriate arbitration tribunal, not for the courts, to decide, since timely payment of the first installment was a condition precedent, not to the formation of valid and binding contracts, but to the duty of subsequent performance by the builder, i.e., its obligation to commence construction of the vessels. Here, section 3813 of the Education Law is at most a provision relating to the presenting of a claim under an admittedly valid contract, and hence the issue as to the applicability of section 3813 is for the arbitrators, not the courts, to decide.

In Matter of Cauldwell-Wingate Co. (New York City Housing Auth.) (262 App. Div. 829), where the contract expressly provided that the timely filing of a notice of claim, as well as other notices, were conditions precedent to the right of arbitration, it was held that the issue of timely compliance was for the courts, not for the arbitrators, to decide. We denied.leave to appeal (287 N. Y. 853). That case was not followed in Matter of Tugee Laces (Mary Muffet, Inc.) (273 App. Div. 756, affd. 297 N. Y. 914); Matter of Hatzel & Buehler (Fuller Co.) (278 App. Div. 647, affd. 303 N. Y. 836), or Matter of Levine Bros. Iron Works Corp. (Constitution Sq.) (279 App. Div. 912, motion for leave to appeal denied 304 N. Y. 986), all of which cases held that the question of the timeliness of the demand for arbitration was for the arbitrators, not the courts, to decide. Given a broad arbitration clause such as we have here, the modern rule, as heretofore indicated, is that all issues of fact or law arising subsequent to the making of the contract are for the appropriate arbitration tribunal, not for the courts, to decide.

We see no distinction whatever between the case at bar and cases such as Lipman (supra); Paloma (supra); Matter of Terminal Auxiliar (supra), and Uraga Dock Co. (supra) relating to the cancellation or termination of a contract, or conditions precedent to performance. All relate to matters — whether of omission or commission — arising “ subsequent to the making of the contract”, and, whether “ issues of fact or law”, they “ lie exclusively within the jurisdiction of the arbitrators ”.

Moreover, we do not think that section 3813 of the Education Law was intended to apply to arbitration proceedings. That statute provides that “ No action or special proceeding * * * shall be prosecuted or maintained against any school district * * * unless it shall appear by and as an allegation in the complaint or necessary moving papers that a written verified claim upon which such action or special proceeding is founded was presented” (emphasis supplied). It is clear from the italicized words that this section has no reference to an arbitration proceeding but refers to the conventional action or special proceeding.

Section 11-a of the General Construction Law provides: ‘ ‘ ‘ Action ’ when applied to judicial proceedings, signifies an ordinary prosecution in a court of justice, by a party against another party, for the enforcement or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense. Actions are of two kinds: civil and criminal.” (Emphasis supplied.) (See, also, Civ. Prac. Act, § 4.) Section 46-a of the General Construction Law provides: ‘ ‘ Every prosecution by a party against another party in a court of justice which is not an action is a special proceeding.” (Emphasis supplied.) (See, also, Civ. Prac. Act, § 5.) An arbitration proceeding is not had “ in a court of justice ”; it is not founded on a complaint or moving papers as those words are generally understood. The very purpose of arbitration is to avoid the courts insofar as resolution of the controversy is concerned.

It is true that section 1459 of the Civil Practice Act provides that arbitration “shall be deemed a special proceeding, of which the court * * * shall have jurisdiction ”, but, as we said in Matter of Hosiery Mfrs. Corp. v. Goldston (238 N. Y. 22, 26), “ The new section merely makes the arbitration a special proceeding to meet our decision to the contrary. (204 App. Div. 284; affd., 236 N. Y. 587.) ” The last-cited case had held that arbitration was not a special proceeding so as to permit the grant of an order under section 308 of the Civil Practice Act to examine a party outside the State, which is itself a court proceeding.

Respondent’s contention that section 3813 is applicable here leads to an absurd result. Appellant gave respondent timely notice of the delays in April, 1957. In July and August, 1958 it wrote both respondent and the architects of its claims by reason of such delays, amounting to the sum of upwards of $300,000, and requested a hearing before and ruling by the architects. The latter having failed to comply, demand for arbitration followed. Assuming a prompt adverse decision by the architects, article 40 of the contract requires that “if the arbitration is an appeal from the Architect’s decision, the demand therefor shall be made within ten days of its receipt ”. It follows that it would be impossible under such circumstances for appellant to serve a notice of claim under section 3813 thirty days before serving a demand for arbitration, when the demand for arbitration had to be served ten days after the architects’ decision.

To overcome this impossible result, respondent maintains that section 3813 requires that a written verified claim must be served even before presentation of the dispute to the architects, but we simply cannot find any language in the statute that even remotely suggests this requirement. Indeed, such a result would require that the statute be rewritten. Under the contract, appellant is first required to exhaust its remedy before the architects, and until then it has no claim against respondent. If the majority were correct, and the architects in their decision adjusted and modified the claim in various respects, how could a new modified claim be filed 30 days before demand for arbitration when the demand must be served within 10 days after the architects’ decision? As Judge Cabdozo pointed out in Outlet Embroidery Co. v. Derwent Mills (254 N. Y. 179, 183), “If literalness is sheer absurdity, we are to seek some other meaning whereby reason will be instilled and absurdity avoided ”.

The order of the Appellate Division should be reversed and the order of Special Term reinstated, with costs.

Chief Judge Desmond and Judges Burke and Foster concur with Judge Fuld; Judge Froessel dissents in an opinion in which Judge Dye concurs; Judge Van Voorhis dissents and votes to reverse and to reinstate the order of Special Term upon the ground that section 3813 of the Education Law does not apply to this situation.

Order affirmed.

      . Section 3813 of the Education Law, insofar as relevant, reads as follows:
      “ 1. No action or special proceeding, for any cause whatever, except as hereinafter provided, relating to district property or claim against the district, or involving- its rights or interests shall be prosecuted or maintained against any school district, board of education, or any officer of a school district or board of education, unless it shall appear by and as an allegation in the complaint or necessary moving papers that a written verified claim upon which such action or special proceeding is founded was presented to the governing body of said district within three months after the accrual of such claim, and that the officer or body having the power to adjust or pay said claim has neglected or refused to make an adjustment or payment thereof for thirty days after such presentment.”