author: Gabrielli, J. JASEN, J. Chief Judge Cooke

text:
    Warren Anderson et al., Appellants, v Edward V. Regan, as New York State Comptroller, et al., Respondents.
    Argued June 10,1981;
    decided July 6, 1981

      POINTS OF COUNSEL

      John F. Haggerty, Michael R. Lanzarone, Edward F. C. McGonagle and William Y. Crowell, III, for appellants.
    I. The plain language of section 7 of article VII of the New York State Constitution requires that the Legislature appropriate money received by the State from the Federal Government and deposited in the State treasury prior to its expenditure. (People v Carroll, 3 NY2d 686; Matter of Erie County Agric. Soc. v Cluchey, 40 NY2d 194; Quotron Systems v Gallman, 39 NY2d 428 ; Matter of Wendell v Laven, 246 NY 115; Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293; Finger Lakes Racing Assn. v New York State Racing & Wagering Bd., 45 NY2d 471; United States v American Trucking Assn., 310 US 534.) II. The history of section 7 of article VII indicates its applicability to money received from the Federal Government. (Saratoga Harness Racing Assn. v Agriculture & N. Y. State Horse Breeding Dev. Fund, 22 NY2d 119; Matter of Fay, 291 NY 198; Matter of Kolb v Holling, 285 NY 104; People ex rel. Einsfeld v Murray, 149 NY 367; People ex rel. Judge v Brundage, 78 NY 403; Girouard v United States, 328 US 61; Brooklyn Union Gas Co. v New York State Human Rights Appeal Bd., 41 NY2d 84; Matter of Hellerstein v Assessor of Town of Islip, 37 NY2d 1.) III. Judicial authority supports the requirement of legislative appropriation of money received from the Federal Government. (Saratoga Harness Racing Assn. v Agriculture & N. Y. State Horse Breeding Dev. Fund, 22 NY2d 119.)

      Robert Abrams, Attorney-General (Shirley Adelson Siegel and Maurice K. Peaslee of counsel), for James H. Tully and others, respondents.
    Section 7 of article VII of the State Constitution does not require legislative appropriation of Federal funds. (Jones v Beame, 45 NY2d 402; Saxton v Carey, 44 NY2d 545; Matter of Abrams v New York City Tr. Auth., 39 NY2d 990; New York Public Interest Research Group v Steingut, 40 NY2d 250; Saratoga Harness Racing Assn. v Agriculture & N. Y. State Horse Breeding Dev. Fund, 22 NY2d 119; People ex rel. Evans v Chapin, 101 NY 682; Wickham v Trapani, 26 AD2d 216; Matter of Fay, 291 NY 198; Matter of Kolb v Holling, 285 NY 104; People ex rel. Judge v Brundage, 78 NY 403.)
   OPINION OF THE COURT

Gabrielli, J.

At issue in this appeal is whether Federal funds which are received by the State and placed in a joint custody account within the State treasury must be appropriated by the Legislature before they may be disbursed by the Executive Department. The appeal requires us to interpret and apply section 7 of article VII of the State Constitution, which provides that “[n]o money shall ever be paid out of the state treasury or any of its funds, or any of the funds under its management, except in pursuance of an appropriation by law”. Relying upon past practices of the Executive Department and the Legislature, the Appellate Division concluded that the Federal funds in issue are not subject to this constitutional proscription. We now reverse and hold that because the money in question falls within both the literal language and the underlying purpose of the constitutional provision, it cannot be spent without legislative approval in the form of a duly enacted appropriation bill.

Over the past several decades, revenues derived from the Federal Government have played an increasingly important role in State governance. While the notion of Federal assistance to the States was all but unheard of in the mid-nineteenth century when the constitutional provision in issue was first adopted, such assistance now comprises approximately one third of the total budget for New York State. Indeed, the Federal Government now provides substantial subsidies for such traditional and diverse State activities as law enforcement, aid to the needy, housing, education and maintenance of public highways. The vast majority of Federal funding programs are subject to various “matching” formulae, and there are strict regulatory systems which circumscribe the manner in which some of the Federal funds may be spent. Nevertheless, it is undisputed that the State retains a measure of discretion in determining where and how some of the Federal moneys should be spent.

Yet, despite the significance of Federal assistance in the over-all State budget, there has heretofore been little or no legislative participation in the expenditure of Federal moneys. Instead, it has been the practice of the executive branch to place the Federal funds received in the State treasury for “administrative convenience” and from there to disburse them directly to the various responsible State agencies. It is this practice which plaintiffs are challenging in the instant action for declaratory relief.

Initially, we note that the wording of the constitutional provision governing the expenditure of State funds is clear and uncomplicated. Section 7 of article VII of the State Constitution, quite simply, requires that there be a specific legislative appropriation each time that moneys in the State treasury are spent. The constitutional provision does not differentiate among funds on the basis of their source, and there is thus no logical justification for excluding Federal funds from its ambit on the theory that they are derived from Federal taxation programs and are given to the States to promote national goals. So long as the funds are placed within the State treasury, the clear language of the Constitution prevents their removal without legislative authorization.

Contrary to defendants’ contentions, our ruling in Saratoga Harness Racing Assn. v Agriculture & N. Y. State Horse Breeding Dev. Fund (22 NY2d 119) does not suggest an alternative conclusion. To be sure, we noted in that case that “not every fund made up of public moneys raised through taxation or otherwise comes within the purview of section 7 of article VII” (22 NY2d, at p 123). Our holding in Saratoga, however, was clearly predicated upon the fact that the money in issue there, although raised through legislative assessment, never fiecame the property of the State and was never placed within the State treasury, but rather was immediately deposited in a separate fund administered by a legislatively created public benefit corporation. The issue with which we were concerned in Saratoga was thus limited to the narrow question whether a fund jftoi covered by the literal wording of section 7 of article VII should nevertheless be considered subject to its mandate in light of the underlying purposes of that constitutional provision (id., at pp 123-124; see, also, Metropolitan Transp. Auth. v County of Nassau, 28 NY2d 385; Matter of Clark v Sheldon, 106 NY 104; cf. People ex rel. Evans v Chapin, 101 NY 682). The ruling in Saratoga is obviously inapplicable in a situation such as this where the moneys in issue are included in the State treasury and are therefore unquestionably within the precise language of the constitutional proscription.

Similarly unpersuasive are defendants’ efforts to compare their present practices with respect to Federal moneys to the legislative practice of creating “off budget” funds by expressly providing that certain revenues shall not be placed within the State treasury nor deemed to be the funds of the State (e.g., Agriculture and Markets Law, § 294, subd [8] ; State Finance Law, § 121). Since the constitutional appropriation requirement is, by its terms, addressed only to funds in the State treasury or “funds under its management”, this simple expedient has heretofore enabled the Legislature to avoid the necessity of enacting a specific appropriation bill each time moneys in an “off budget” fund are expended.

While serious questions may be raised concerning the propriety of this practice in light of the purposes underlying section 7 of article VII (see 1939 Opns Atty Gen 145; but cf. Wickham v Trapani, 26 AD2d 216), we need not consider such questions in this context, since the Federal moneys at issue here have never been expressly designated by the Legislature as “off budget” funds. Although the Legislature has on occasion indirectly recognized the practice of the executive branch of spending Federal funds without legislative appropriation (see, e.g., State Finance Law, § 22, subd d), it has not unambiguously indorsed the practice by authorizing the State’s fiscal officers to segregate Federal moneys from the general treasury fund. The absence of such an authorization is particularly significant in light of the provisions of section 121 of the State Finance Law, which contain a complete and detailed list of the types of funds that may be withheld from the treasury-(cf. State Finance Law, § 11). Indeed, inasmuch as the Federal funds in issue have not been clearly designated by the Legislature as “off budget” funds and have, in fact, been deposited in the State treasury by the Comptroller, there can be no doubt that they are now within the literal mandate of the Constitution and any effort by defendants to analogize the present problem to that created by “off budget” funds can only be regarded as unavailing.

Despite the relative simplicity and clarity of the constitutional provision requiring appropriation of all treasury funds, it has been suggested in this case that the plain meaning of the provision should be ignored and that the contrary “practical construction” placed upon the clause by the Legislature should instead be adopted (see Matter of Kolb v Holling, 285 NY 104,112; People ex rel. Einsfeld v Murray, 149 NY 367). We find this suggestion to be unpersuasive, however, since there is really no justification in this instance for departing from the literal language of the constitutional provision. It has never been the law in this State that the clear and unambiguous wording of a statute or constitutional provision may be overlooked entirely when it is seemingly inconsistent with the practice and usage of those charged with implementing the laws (see, e.g., Matter of Hellerstein v Assessor of Town of Islip, 37 NY2d 1). To be sure, there have been instances in which we looked beyond the wording of a statute or constitutional provision when its applicability to a particular problem was uncertain (Matter of Kolb v Holling, supra) or when wooden application of the literal language would lead to an absurd conclusion (see New York State Bankers Assn. v Albright, 38 NY2d 430, 436-437). Where no such difficulty is present, however, “[t]he most compelling criterion in the interpretation of an instrument is, of course, the language itself” (People v Carroll, 3 NY2d 686, 689). As we noted in Matter of Wendell v Lanin (246 NY 115, 120), “[sjometimes the interpretation of a doubtful and obscure clause in an act of the Legislature, or in a Constitution, may be aided by the practice which has grown up under it, but plain and clear provisions of a Constitution require no such aid; they are to be enforced and brought to life early or late, and must not be smothered by the accumulations of customs or violations”.

Additionally, it must be stressed that the legislative view of the applicability of the constitutional appropriation requirement to funds derived from the Federal Government has not always been completely consistent. On the one hand, there are enactments such as subdivision d of section 22 and sections 53 and 53-a of the State Finance Law, which indicate that the Legislature assumed, at least at one time, that the Constitution does not mandate appropriation of Federal funds (see, also, Report of the Temporary Commission on the Constitutional Convention, 1967, Report No. 8, State Finance, at p 135). On the other hand, efforts by some as early as 1938 to amend the predecessor to article VI so that Federal funds would expressly be excluded from the treasury are indicative of a contrary understanding on the part of lawmakers (see New York State Constitutional Convention, 1938, Proposed Amendments, vol I, No. 271, Int 260). And, in a similar vein, a report of the Assembly Ways and Means Committee issued in 1976 demonstrates the belief of at least some of the members of the Legislature that the “broad power [to appropriate funds pursuant to section 7 of article VII] clearly could be interpreted to already include federal funds, even without further legislation” (Report of the Assembly Ways and Means Committee, Appropriating Federal Funds: A Proposal for New York State, Dec. 6, 1976, at p 14). In short, while long-standing legislative practice may be instructive in some contexts, the absence of consistency in the legislative approach to the problem presented here renders it particularly unsuitable for use as an analytical tool in this case.

On the other hand, an analysis of the intent of the framers of the Constitution in adopting the predecessor of section 7 of article VII does serve to shed light upon the proper application of the provision. Initially adopted in 1846 as part of the Third Constitution, the appropriations rule was part of an effort by the framers to stabilize the financial management of the State and to superimpose a measure of legislative control over the then unbridled power of the executive branch to spend. The problem to which the provision was addressed was described as follows: “Before 1846, there were apparently few checks on expenditures by administrative officers of the State. At any rate the Legislature was not in a position to check borrowing or spending by these officials. As long as the treasury held funds, the administrative officers would be paid and could pay since the power and duty to pay demands against the State treasury were vested in these officers. If the treasury lacked funds, the State Comptroller could have simply gone into the market to borrow on the credit of the State and replenish the treasury” (Report of the New York State Constitutional Convention Committee, 1938, Problems Relating to Legislative Organization and Powers, vol VII, at pp 97-98). The prohibition against the expenditure of funds in the treasury without specific legislative appropriation, coupled with the provision limiting the effectiveness of each appropriation to a two-year period (NY Const, art VII, § 7) would, it was hoped, “compel every new Legislature to see what money went for this, and what for that object, and the people, by reading the statutes, could then get some idea of how the money went, where it went, and how much was paid annually to carry on the government” (Remarks of Mr. Hoffman, Constitutional Convention of 1846, Proceedings and Debates, at p 941 [emphasis in original]; see 2 Lincoln, Constitutional History of New York, at pp 183-184).

Although the framers of the Constitution obviously could not have anticipated the massive role that Federal funds were to play in the composition of future treasuries, the concerns they expressed at the time that the appropriation rule was adopted remain of equal concern today. First, even though there are significant limitations upon the manner in which Federal funds may be spent, there is still a danger that the executive branch, if unchecked by the Legislature, could overspend in anticipation of Federal revenues and would thereby commit the State to obligations which will ultimately have to be met by the State’s taxpayers. This possibility alone would seem sufficient ground for requiring legislative participation in the spending process.

Even more important, however,- is the need to ensure a measure of accountability in government. As the framers of the Constitution astutely observed, oversight by the people’s representatives of the cost of government is an essential component of any democratic system. Under the present system, some one third of the State’s income is spent by the executive branch outside of the normal legislative channels. The absence of accountability in this sector of government is, manifestly, an unacceptable state of affairs in light of the framers’ intention that all of the expenditures of government be subjected to legislative scrutiny.

Finally, we note that application of the strictures imposed by section 7 of article VII to Federal funds is necessary to the maintenance of the delicate balance of powers that exists between the legislative and executive branches of government (see NY Const, art III, § 1; art IV, § 1). In our system, the right to establish and implement the policies of the State through the use of the spending power is shared by the executive and legislative branches, each of which has a distinct, constitutionally defined role to play in the budget-making process (see Matter of County of Oneida v Berle, 49 NY2d 515, 522-523). The right of the executive branch to participate in the process is ensured by section 7 of article IV and sections 2 and 4 of article VII, which authorize the Governor to submit a proposed budget to the Legislature and to veto specific appropriation measures on a line-by-line basis. The right of the Legislature to participate is, in turn, ensured by its general law-making power (NY Const, art III, § 1; see, e.g., People ex rel. Simon v Bradley, 207 NY 592) and by its power to pass upon all expenditures from the treasury in accordance with section 7 of article VII. When the appropriation rule is bypassed, as it presently is in the case of Federal funds, the Legislature is effectively deprived of its right to participate in the spending decisions of the State, and the balance of power is tipped irretrievably in favor of the executive branch.

It could, of course, be argued that the need for legislative participation at the State level is minimal where Federal funds are concerned, since the manner in which such funds may be spent is, in any event, heavily circumscribed by Federal regulations. Moreover, since the Legislature retains the right to determine whether and to what extent the State should partake of existing Federal aid programs in the first instance (see, e.g., Public Health Law, § 701, subd [a] ; Labor Law, § 21-c; Education Law, §§ 270, 377, subd 2; §§ 3713, 5713, subd 4; Social Services Law, § 20, subd 2, par [c]; §§ 29, 358, subd 2; § 363-a, subd 4), it might further be argued that the need for the Legislature to participate is, as a practical matter, exhausted well before the moneys in question are actually spent. Both of these arguments, however, are seriously flawed.

While there are severe limitations upon the manner in which Federal funds may be spent none of the Federal funding programs is self-executing. Indeed, it is undisputed that the States retain a measure of discretion in applying most of these funds to specific local needs. To the extent that such discretion exists, of course, the elected representatives of the people should be permitted to play a substantial role in the allocation of Federal assistance funds through the appropriation process. Of even greater significance, however, is the overriding need to vindicate the fundamental principle embodied in section 7 of article VII — i.e., that control of the pursestrings of the State treasury resides in the Legislature. As we noted in People ex rel. Burby v Howland (155 NY 270, 282): “The object of a written Constitution is to regulate, define and limit the powers of government by assigning to the executive, legislative and judicial branches distinct and independent powers. The safety of free government rests upon the independence of each branch and the even balance of power between the three. * * * It is not merely for convenience in the transaction of business that they are kept separate by the Constitution, but for the preservation of liberty itself, which is ended by the union of the three functions in one man, or in one body of men”.

We have no doubt that the past and present practice of disbursing Federal funds without the explicit approval of the Legislature represents a well-intended effort by the executive branch to facilitate the efficient use of existing Federal aid programs and is, in no way, indicative of an attempt on the part of the executive to usurp the powers of the Legislature. Nonetheless, because we are convinced that the practice violates both the letter and the spirit of section 7 of article VII of the State Constitution, we are duty bound to hold against defendants in this case.

Accordingly, the order of the Appellate Division should be reversed, without costs, and a judgment granted in favor of plaintiffs declaring that the expenditure and payment of moneys received from the Federal Government and retained in the joint custody funds of the State treasury without an appropriation violate section 7 of article VII of the New York State Constitution.

JASEN, J.

(concurring). I concur in the result reached by the court today solely because I am impelled to do so by the clear wording of the Constitution. Section 7 of article VII of the Constitution states that “[n]o money shall ever be paid out of the state treasury or any of its funds, or any of the funds under its management, except in pursuance of an appropriation by law”. (Emphasis added.) Although the Constitution does not define the term “treasury”, it provides us with a clear direction that all funds under the “management” of the treasury be appropriated by the Legislature. Whatever doubt there may be as to the abstract limits of the treasury itself, there is no doubt whatever as to how it is “managed”. It is “managed” jointly by the Comptroller and the Commissioner of Taxation and Finance. (State Finance Law, § 7.) The funds in issue here are under the same “management”. That the source of these funds is the Federal Government cannot change this essential fact. Nothing in the record before the court has persuaded me that the Federal funds held within the so-called “joint custody accounts” are not, at the very least, funds under the management of the treasury. Hence, I can only conclude that the Constitution requires legislative appropriation of such funds.

The dissenters suggest that to allow the definition of the term “treasury” to turn upon the acts of the Comptroller, in placing the funds in issue into joint custody accounts, is to sanction an “illogical result” (dissenting opn, at p 371), stating that the task of defining this term should be reserved to the members of this court. The dissent then proceeds, however, not to define the term treasury, but, rather, to state that the bounds of the New York State Treasury are to be implicitly drawn by the Congress of the United States. If the Congress impresses its grant of funds to the State with express conditions, say the dissenters, the funds, upon arrival in New York, are without the treasury. If, on the other hand, no such conditions are imposed by the Congress, the treasury may be expanded to include them. If the position of the dissenters is premised on a desire to prevent a “day to day” variance in the meaning of the term treasury, I fail to see how linking that term to the whim of the Congress is any less illogical than linking it to the practice of the State Comptroller. In either case, the definition of the term remains fluid and, for that matter, without express limitation prescribed by this court.

It would seem to me far preferable to take the Constitution at its word that funds under the management of the treasury are to be appropriated by the Legislature. It is, of course, true that the term “management”, as well as the term “treasury”, is undefined by the Constitution. However, inasmuch as there is no doubt whatever as to how the funds within the treasury are managed, it takes no great imagination to conclude that funds held and disbursed in precisely the same way as the treasury and by the same officers are funds under the management of the treasury within the meaning of the Constitution. If the phrase “funds under its management” is not to be so defined, it is difficult, indeed, to understand what the framers of the Constitution meant by the use of those words. In short, I would prefer to ascribe to the term “management” its plain meaning based upon current practice and would resist the temptation to imbue the term “treasury” with a strained definition which varies according to the source of the funds in issue. Hence, I cast my vote for reversal.

Although I must vote for reversal, I should point out that I do not agree with the members of the plurality that principles of “governmental accountability” or “separation of powers” compel the result reached by the court. Rather, the express wording of the Constitution requires it and this expression of organic law is binding upon this court.

Finally, I must also emphasize that we need not reach and do not decide whether “off budget” funds may be created by future legislative or executive action.

Chief Judge Cooke

(dissenting). Very plainly, the State Constitution does not require that all funds received by the State from the Federal Government be appropriated by the Legislature before they can be spent. The language of section 7 of article VII of the State Constitution is far from clear on its face. Its failure to define what constitutes, money in the State treasury creates an ambiguity that must be resolved through extrinsic factors. The background of the provision, its interpretation by the Legislature and the limitations placed on legislative action in this sphere by the Federal Constitution establish that legislative appropriation of all such funds is not required. I therefore dissent and vote to modify as indicated.

In this action plaintiffs seek a declaration that all funds received from the Federal Government and held in the joint custody of the State Comptroller and the State Commissioner of Taxation and Finance must be appropriated by the Legislature before the funds can be applied to their Federally designated purposes. Plaintiffs maintain that section 7 of article VII of the State Constitution compels this conclusion.

Section 7 of article VII states, in pertinent part, that “ [n] o money shall ever be paid out of the state treasury or any of its funds, or any of the funds under its management, except in pursuance of an appropriation by law.” Although at first glance this provision might appear simple and straightforward, any attempt to apply it immediately reveals its facial ambiguities. In order to determine what money must be appropriated, it is necessary to establish what constitutes money in the State treasury. The Constitution, however, offers no such definition. Without some concrete reference point, the “treasury” mentioned in section 7 of article VII is merely a theoretical label, impossible to apply in practice. This lack of definition raises two issues — how “treasury” should be defined and who should define it.

The plurality, while conceding that not every public fund comes within the constitutional provision (p 360) in essence maintains that it is unnecessary to precisely define the boundaries of the State treasury, because the Comptroller has put these Federal funds into what he considers to be the treasury. Under the plurality’s reasoning, the inquiry would end at this point. Because the Comptroller has chosen to place certain funds received from the Federal Government into joint custody accounts, the plurality in effect asserts that therefore these funds are in the treasury for purposes of the State Constitution’s appropriation requirement. This tautological exercise would permit a bookkeeping decision by a State official to control the meaning of a provision of the State Constitution. The flaws in such a position are obvious. If the Comptroller’s office can determine what money falls within the constitutional appropriation requirement merely by placing the money in a certain type of account, the Comptroller could just as easily circumvent the requirement by placing the money in some other type of account. The meaning of “treasury” could vary from day to day. Certainly the plurality does not intend to sanction such an illogical result.

In attempting to ascertain the meaning of “treasury” in section 7 of article VII, it bears emphasizing that “[i]t is emphatically the province and duty of the judicial department to say what the law is” (Marbury v Madison, 5 US 137, 177; see United States v Nixon, 418 US 683, 705). It is therefore the court’s role to interpret this constitutional provision. In performing this function, this court should consider the intent of the drafters, the provision’s interpretation over the years and the commands of the Federal Constitution and laws.

The provision that is now section 7 of article VII was added to the Constitution in essentially identical form by the Constitutional Convention of 1846. The convention debates show that the purpose of the section was to ensure “that every administration, state and municipal, should collect and pay as it went” (2 Lincoln, Constitutional History of New York, at p 183 [emphasis added]). Without such a provision, one of its sponsors said, “the executive government might go on for years without the legislature, the power and duty to pay all demands against the treasury being vested in the public officers, and if there was no money in the treasury they could go into the market and borrow, and borrow again to repay” (id.). The convention came at a time when “the state’s financial affairs were rapidly approaching a crisis” due to the accumulation of large debts for canal construction (id., at p 81), and adoption of the legislative appropriation requirement was accompanied by adoption of limits on the amount that the Legislature itself could appropriate without approval of the public at large. The purpose of this section, as recognized by this court in the past (see Saratoga Harness Racing Assn. v Agriculture & N. Y. State Horse Breeding Dev. Fund, 22 NY2d 119, 124), was therefore to place greater control over the State government’s ability to incur financial obligations. Courts in other jurisdictions have reached similar conclusions about such constitutional provisions. The Supreme Court of Arkansas found that State’s appropriation requirement was designed “to prevent the expenditure of the people’s tax money without having first procured their consent” (Director of Bur. of Legislative Research v MacKrell, 212 Ark 40, 46).

With this purpose in mind, it is clear that the State Constitution does not require that all Federal funds go through the legislative appropriation process. First, the Federal funds have been raised through Federal taxation, not through the collection of State tax revenues or fees. The allocation of these funds by the State adds no burden to the State’s taxpayers. It is true that much of the Federal money is channeled through programs that require some form of matching State funding. Such matching funds, however, do go through the appropriation process in the Legislature. With regard to the Federal funds, so long as the Federal directives and conditions for spending such funds are followed by State officials, these funds cannot be “overspent”.

The majority expresses concern that without a constitutional appropriation requirement the executive branch “could overspend in anticipation of Federal revenues and would thereby commit the State to obligations which will ultimately have to be met by the State’s taxpayers” (p 364). It is difficult to conceive how requiring legislative appropriation would have any effect on this problem. If the executive branch has “overspent” by incurring greater obligations than are covered by the Federal funds, it has done so either by disregarding the quantitative limits set by the Federal Government or by failing to meet qualitative requirements, as in distributing funds to persons who do not meet a program’s eligibility standards. If the executive branch was going to overspend in such a fashion, it could just as easily disregard or unintentionally misapply directives of the Legislature as it could those of the Federal Government. Requiring legislative appropriation would therefore add no protection against overspending.

Legislative oversight over State expenditures is also a rationale behind the constitutional provision. Construing section 7 of article VII to require legislative appropriation of Federal funds where Congress has designated purposes and conditions would not, however, add any significant oversight to the expenditure of these funds. The Legislature already exerts close control over the scope of programs and projects receiving Federal dollars. For instance, the Legislature has authorized the Department of Health to receive Federal funds for maternal, child care and related health services (Public Health Law, §§ 700-703), has authorized the Industrial Commissioner to enter into agreements with Federal agencies to obtain benefits under a variety of programs (Labor Law, § 21-c), and has directed the method of handling Federal funds for aid to dependent children (Social Services Law, § 358). All that is left to the executive in such instances is the essentially ministerial act of actually implementing the Federal and State legislation governing the programs.

The Legislature’s treatment of Federal funds as they have grown over the years is as instructive as the background of the constitutional appropriation requirement. This treatment leads to only one conclusion — that the Legislature itself has viewed the Constitution as imposing no blanket appropriation requirement on Federal funds merely because they have been placed in a certain type of State account. At the outset, it should be noted that the distribution of Federal funds to the States is not something that has blossomed overnight. To be sure, it was essentially unknown when the constitutional provision was first enacted. Nonetheless, since the Social Security Act of 1935 and other New Deal legislation, Federal funds have been available to the States in significant amounts and these sources of money have grown steadily since that time.

At the time that the Federal money first became available, a legislative committee reviewing fiscal policy recommended that Federal funds be listed in the State budget for the information of the Legislature, but the committee made no mention of any requirement that the money be appropriated by that body (Report of Joint Legis Comm on State Fiscal Policies, NY Legis Doc, 1938, No. 41, p 30). Although, as the majority notes, the 1938 Constitutional Convention rejected an amendment that would have expressly placed all Federal funds outside the general fund of the treasury (see New York State Constitutional Convention, Proposed Amendments, vol I, No. 271, Int 260), neither the proposal nor its rejection can be interpreted as a statement that the Federal funds must be appropriated by the Legislature. This is clear from the passage in 1940 (L 1940, ch 593) of an amendment to the State Finance Law (§ 22, subd d) stating that the Governor’s budget should reflect “moneys * * * not paid into the general fund and not appropriated by the legislature received during the preceding fiscal year by the state or by any department, state institution or other agency of the state by gift, bequest, grant or otherwise, including any moneys from the federal government” [emphasis supplied]. The Legislature thus, in express statutory language, viewed such funds as not subject to appropriation. A similar view of Federal funds as outside the constitutional appropriation requirement was reflected in the 1967 report of the Temporary State Commission on the Constitutional Convention (see Report of Temporary State Commission on Constitutional Convention, 1967, Rep No. 8, State Finance, pp 135, 137-140).

Over the years, the Legislature has acted in a variety of other areas dealing with Federal funding, yet these actions have been consistent with an interpretation of the State Constitution as not requiring legislative appropriation of all such funds. For instance, the Legislature has authorized the Social Services Department to “distribute, reimburse and grant as herein provided the funds appropriated by the legislature for such participation and also such funds as may be received from the federal government for such purpose or purposes” (Social Services Law, § 20, subd 2, par [c] [emphasis added]). The Social Services Department is also authorized to act as agent of Federal relief agencies in the distribution of relief moneys, again without mention of any legislative appropriation requirement (Social Services Law, § 29). Section 11 of the State Finance Law requires legislative approval before. any agency accepts a conditional grant, gift or bequest, but the section explicitly creates a notable exception for conditional Federal grants (see, also, Executive Law, § 539 [grants to Office of Aging]; Education Law, § 270 [grants or gifts to libraries]; Executive Law, § 837 [Federal grants to Division of Criminal Justice Services]).

Although statements by the Legislature could not, of course, overcome a clear constitutional requirement, the statutory expressions here do shed considerable light on the ambiguous provision now before this court. The various statutory enactments, ranging over the lengthy time span in which Federal payments to the States have burgeoned, regardless of the differing political affiliations then dominant in the executive department Dr legislative halls, reflect a consistent interpretation of the State Constitution dramatically at odds with the relatively recent position adopted by plaintiffs here.

The proposition that all funds received from the Federal Government need not be appropriated by the Legislature before expenditure by the State is founded, as well, on the power of Congress and the supremacy clause of the United States Constitution. “The Congress shall have the Power To * * * provide for the * * * general Welfare of the United States” (US Const, art I, § 8) and the “Constitution, and the Laws of the United States which shall be made in Pursuance thereof * * * shall be the supreme Law of the Land” (US Const, art VI, par 2). These provisions were explained in Helvering v Davis (301 US 619): “Congress may spend money in aid of the ‘general welfare’ * * * The line must still be drawn between one welfare and another, between particular and general. * * * The discretion belongs to Congress, unless the choice is clearly wrong, a display of arbitrary power, not an exercise of judgment” (at p 640) and “The issue is a closed one. It was fought out long ago. When [Federal] money is spent to promote the general welfare, the concept of welfare or the opposite is shaped by Congress, not the states” (at p 645).

“[T]he Federal Government * * * may impose the terms and conditions upon which its money allotments to the States shall be disbursed, and * * * any state law or regulation inconsistent with such federal terms and conditions is to that extent invalid”, subject, of course, to constitutional limitations (King v Smith, 392 US 309, 333, n 34; see Boddie v Wyman, 434 F2d 1207, affd 402 US 991; Taylor v Martin, 330 F Supp 85, 87, affd sub nom. Carleson v Taylor, 404 US 980). Stated somewhat differently, “[t]he State’s statutes and regulations may not be construed inconsistently with the Federal statute which controls the disbursement of these funds” (Matter of Boines v Lavine, 44 AD2d 765, 766, cert den 419 US 1040; Townsend v Swank, 404 US 282, 286). Indeed, “[w]ithin the field of its powers, whatever the United States rightfully undertakes, it necessarily has warrant to consummate. And when judicial authority is invoked in aid of such consummation, state constitutions, state laws, and state policies are irrelevant to the inquiry and decision. It is inconceivable that any of them can be interposed as an obstacle to the effective operation of a federal constitutional power” (United States v Belmont, 301 US 324, 331-332; Moscow Fire Ins. Co. v Bank of N. Y. & Trust Co., 280 NY 286, 303, affd 309 US 624 [emphasis added]). There would, of course, be no violation of the supremacy clause if Congress by specific expression “evinces a clear intention that state constitutional spending proscriptions not be pre-empted as a condition of accepting federal funds” (Wheeler v Barrera, 417 US 402, 417; cf. Shapp v Sloan, 480 Pa 449, app dsmd sub nom. Thornburgh v Casey, 440 US 942). Here, however, plaintiffs have not demonstrated or even asserted that any of the funds for which they seek a declaration involves such an expression by Congress.

Quite simply, these basic constitutional principles make it clear that when Federal moneys come to the State burdened with terms and conditions as to how they may be spent by the State, the State must respect those conditions. Appropriation by the Legislature therefore would be an empty gesture, since the Legislature could not contravene the Federal terms. From a practical standpoint, the moneys have been appropriated by the United States Government and general terms for their distribution and use have been fixed. And, where necessary, the Legislature has authorized participation in the Federal programs. Legally, the supremacy clause of the United States Constitution made the provisions of the Federal statutes, operating within the State and pertaining to money grants to the State, as much the policy of the State as if the enactment thereof had emanated from the Legislature (see Mondou v New York, New Haven & Hartford R. R. Co., 223 US 1, 57; Teeval Co. v Stern, 301 NY 346, 365, cert den 340 US 876).

These considerations, when combined with the goals that section 7 of article VII of the Constitution was intended to achieve, make it clear that the requirement of legislative appropriation does not apply to Federal funds simply because the funds are held in the joint custody accounts. This, of course, does not mean that the Legislature could not exert control over the expenditure of Federal funds by the executive through legislation, so long as the legislation does not intrude into the Federal domain and is not inconsistent with the conditions attached to the Federal money (see Moscow Fire Ins. Co. v Bank of N. Y. & Trust Co., 280 NY 286, 303, affd 309 US 624, supra). Likewise, this does not mean that Federal funds given to the State without Federally designated purposes and conditions would not fall under the command of section 7 of article VII. In this regard, it should be noted that Federal revenue sharing funds, which are a general grant, are currently appropriated by the Legislature.

What is involved here, however, is a claim that the State Constitution requires legislative appropriation of all Federal funds in joint custody accounts, even though they have already been appropriated once at the Federal level for specific purposes. At the State level, when an option is available to the State, the Legislature has an active role in determining which Federally funded programs the State will join and in establishing the degree of participation. To hold that the Constitution also requires that the Legislature go through the empty gesture of passing these designated funds through a second appropriation process strains the language and rationale of the constitutional provision, and also defies common sense.

In conclusion, the constitutional provision at issue here is unclear and ambiguous. It is therefore necessary for this court to look at the purposes for which the provision was created, the actions of the Legislature since its enactment and the constraints on legislative action in this area created by the Federal Constitution. The strained reading of the provision that the plurality adopts runs counter to all of these considerations. Where Congress has designated a specific purpose and attached terms and conditions to a grant, requiring legislative appropriation creates no greater protection against overspending, does not give the Legislature any greater role in policy decisions than it already has, goes against years of contrary legislative treatment of such funds and is generally a hollow gesture in light of the conditions Congress has attached to the funds. Where a Federal grant did not attach conditions or specify a particular purpose, of course, it would clearly fall within the ambit of the legislative appropriation requirement. This is because of the rationale behind section 7 of article VII of the State Constitution, however, not merely because a State official has labeled such funds as part of the State treasury. Thus, to the degree that the Federal funds in the joint custody accounts have been designated for particular purposes and have been encumbered with general terms and conditions by the Federal Government, the State Constitution does not require appropriation by the Legislature. Furthermore, the plurality and the concurrer essentially disregard the express holding of the Supreme Court in the Wheeler case and a substantial body of State and Federal precedents with respect to Federal supremacy.

For these reasons, I dissent. I do not vote for affirmance, however, because the Appellate Division order declared that the State Constitution “does not require legislative appropriation of Federal funds”. This is too sweeping a statement, encompassing as it does all Federal funds, even those to which Congress may have attached no purpose or conditions whatsoever. Accordingly, I would modify by declaring that section 7 of article VII of the State Constitution does not require appropriation by the Legislature of those moneys received by the State from the Federal Government as to which the Federal Government has designated their purpose and set forth general terms or conditions for use or distribution.

Judges Jones and Wachtler concur with Judge Gabrielli; Judge Jasen concurs in a separate opinion; Chief Judge Cooke dissents and votes to modify in another opinion in which Judges Fuchsberg and Meyer concur.

Order reversed, etc.

      . The constitutional provision in question was originally adopted as section 8 of article VII of the Constitution of 1846. It was incorporated without change as section 21 of article III of the Constitution of 1894 and has remained a part of the constitutional law of this State to the present day.

      . This State received some $6.6 billion in Federal funds during the fiscal year 1980-1981. The figure is expected to climb to some $7.2 billion out of total State expenditures of $23.8 billion for the fiscal year 1981-1982.

      . The funds in question are presently deposited in “joint custody funds”, which are held within the treasury and are under the dual control of the Comptroller and the Commissioner of Taxation and Finance.

      . In most instances, the funds are disbursed directly upon warrant of the Comptroller.

      . Plaintiffs moved for summary judgment below, and, as a consequence, the case is before us in summary judgment posture. It should be noted that plaintiffs have not requested injunctive relief, since they assume that defendants, as public servants, will adhere to the mandate of this court as embodied in our declaration.

      . Contrary to the assumption of the dissenters, we do not mean to suggest that the accounting practices of the Comptroller are dispositive on the question of what funds must be placed in the treasury and appropriated pursuant to section 7 of article VII. That question, of course, can only he resolved after an analysis of the history and purposes of the constitutional provision. At this point, however, it should be sufficient to note that we are not here faced with the problem of determining whether a particular decision by the Comptroller to withhold funds from the treasury without legislative sanction could be reconciled with the requirements of the Constitution, since the Comptroller has in fact made no such decision with respect to the Federal funds in issue.

      . It should be noted that in most instances where legislative practices have been used to shed light upon the meaning of a constitutional provision, the courts have looked to the prevailing practice at the time the particular provision in issue was adopted. The rationale for using contemporaneous legislative practice as an analytical tool has been stated as follows: “It is not unlikely that the Legislature was composed of some of the same persons who composed the constitutional convention. At all events the discussions in and out of the convention were then fresh, and the Legislature would naturally be governed by considerations similar to those which actuated members of the convention” (People ex rel. Joyce v Brundage, 78 NY 403, 406; see Matter of Kolb v Holling, 285 NY 104, 112; People ex rel. Williams v Dayton, 55 NY 367, 378). Such a rationale is of limited utility in this case, however, since the problems posed by massive Federal assistance to the States could not have been contemplated by those who were present at the framing of the 1846 Constitution, in which the predecessor of section 7 of article VII first appeared.

      . (See, also, Social Services Law, §20, subd 2, par [c]; Mental Hygiene Law, § 45.07, subd [h]; Executive Law, §§ 539, 837, subd 9; Highway Law, § 80, subd 3.)

      . The dissenters suggest that legislative appropriation of Federal funds would not diminish the danger of overspending by the executive branch, since an executive who is willing to disregard Federal spending guidelines “could just as easily disregard or unintentionally misapply directives of the Legislature” (p 373). This suggestion, however, simply proves too much. Executive overspending is far less likely to result from willful disregard for Federal law than from simple miscalulation or misunderstanding of what the Federal rules and regulations require (see, e.g., State of New York v Harris, Civ No. 80-1265, July 11, 1980, US Dist Ct of DC [Pratt, J.]). Since .there is no necessary connection between overspending and executive lawlessness, it cannot be assumed that an executive who would exceed Federal spending guidelines would also be willing to consciously defy State law by spending more Federal dollars than the Legislature has appropriated. And, while Federal rules and regulations may leave room for misinterpretation and consequent overspending of Federal aid by the executive branch, it is highly unlikely that an executive will “unintentionally” overspend a legislative appropriation because he misunderstands the simple budgetary limitations that have been imposed upon his spending authority.

      . It has been argued that statutes such as subdivision d of section 22 and sections 53 and 53-a of the State Finance Law, which require the executive branch to report proposed expenditures of Federal moneys to the Legislature, are sufficient to ensure the necessary degree of accountability. Reporting requirements established by statute, however, cannot serve as substitutes for the constitutionally mandated requirement of direct legislative oversight through lawful appropriations. While present lawmakers may feel that such reporting requirements are adequate, they obviously have no power to override the method that was chosen by the framers of the Constitution to ensure governmental accountability.

      . The dissenters apparently would limit application of the appropriation rule to Federal funds that are not encumbered by “general terms and conditions” (p 380). Because of the complexity of the regulations governing the various Federal aid programs, however, the distinction proposed by the dissenters is simply too vague and ill-defined to support a meaningful constitutional rule. The central difficulty with the dissenters’ analysis is its failure to recognize that Federal funding programs cannot readily be classified as either strictly circumscribed by rules and regulations or not encumbered at all. Apart from those programs involving direct financial assistance to the needy under which the State acts as a virtual conduit for Federal moneys, most of the Federal funding plans leave to the States a measure of discretion in allocating the funds while imposing some “general terms and conditions”, including the purposes for which the funds may be spent. Although the dissenters’ rationale suggests that at least some of these funds must be appropriated, since disbursement of such funds necessarily entails the making of certain policy choices, they have not articulated a rational method for distinguishing among the numerous Federal funding programs, which contain varying degrees and types of constraints. Thus, the dissenters’ approach itself gives rise to a number of ambiguities, and consequently it cannot serve as an adequate tool for resolving the problem presently before the court.

      . Wheeler v Barrera (417 US 402), cited by the dissent, is not persuasive. It holds only that if the Federal Government prescribes the objects and uses to which Federal funds made available to a State are to be applied, the accepting State may not, in response to the dictates of its Constitution or statute, divert the funds from such objects and uses. There is no basis, however, for assuming that our Legislature, having once elected to authorize State participation in a Federal program, would use its appropriation authority to violate Federal law or divert Federal funds from their intended purpose. And, since the mere application of the appropriation requirement to Federal funds received by the State is not inherently at odds with any of the existing Federal mandates, the dissenters’ invocation of the supremacy clause and concerns about the potential for conflict between the State and Federal governments may only be regarded, at best, as premature.

      . By statute (State Finance Law, § 7) funds in the treasury must be held in the joint custody of the Comptroller and Commissioner of Taxation and Finance. Although it does not inescapably follow that, because treasury funds must be held in joint custody accounts, all joint accounts are therefore in the treasury, the Comptroller does appear to have equated for internal purposes such joint accounts with the treasury.

      . Section 11 provides, in pertinent part, that “[n]o gift, grant, devise or bequest, other than grants from the United States, shall hereafter be received or accepted by the state or by any department, board, bureau, or officer thereof without specific statutory authority unless such gift, grant, devise or bequest is unconditional” [emphasis added].

      . (Cf. McGowan v Mayor of City of N. Y., 53 NY2d 86, 94.)

      . Section 121 of the State Finance Law is not apposite in this regard. Whatever the propriety of the “off budget” treatment of certain State funds, the section is neither indicative nor determinative of the Legislature’s intentions regarding Federal funds. The fact that the Legislature made no express provision for “off budget” treatment of Federal funds received by the State demonstrates nothing. Such an omission could just as easily indicate a legislative assumption that no statute was needed to place Federal funds outside the regular appropriation process, as it could show an intention to include Federal funds within the appropriation process. As previously noted, the exclusion in subdivision d of section 22 of the State Firiance Law of “any moneys from the federal government” from budget appropriation requirements is far more indicative of legislative intent in this area.
      Also of significance is section 53 of the State Finance Law, which provides requirements in the event of expenditure of “moneys received by the state * * * which are not appropriated by the legislature.”

      . Plaintiffs’ argument that any money placed in what is labeled the State treasury must be appropriated also fails to recognize this court’s holding nearly a century ago in People ex rel. Evans v Chapin (101 NY 682).

      . In some situations, of course, it may not be entirely clear at first glance whether a certain grant of Federal money is sufficiently broad or unspecific to require appropriation by the Legislature. In such cases, the purposes and rationale behind section 7 of article VII of the State Constitution will provide guidance. While such an approach may upon occasion require an individual determination with regard to a specific account containing Federal funds, it offers more meaningful guidance than the mere adoption of labels that the plurality in effect approves. Indeed, the impracticality of the plurality’s approach is highlighted by the fact that plaintiffs even include among the Federal funds in the State “treasury” the Federal Withholding Tax Fund, which contains Federal income taxes withheld from State employees pending their payment to the Federal Government. Under the plurality’s rationale, because such tax receipts are in the “treasury” they cannot be forwarded to the Federal Government without first being appropriated by the Legislature.

      . The plurality recognizes that the State may not divert Federal funds from the purposes specified by the Federal Government and states that .concern over legislative violation of Federal terms and conditions is “premature” (at p 368, n 12). Certainly there is no reason to assume that the Legislature would violate the Federal conditions. But if the Legislature follows these Federal terms and conditions, its role is confined to acting as a mere rubber stamp, as the plurality in effect concedes (at p 368, n 12).


source: Caselaw Access Project

author: Jasen, J. Chief Judge Cooke

license: Public Domain

text:
    Marine Midland Bank-Southern, Appellant, v Bradbury K. Thurlow et al., Respondents.
    Argued June 10,1981;
    decided July 7, 1981

      POINTS OF COUNSEL

      Richard Denton and Edward B. Hoffman for appellant.
    I. Conelec’s equipment was pledged to plaintiff to support defendants’ “indebtedness”, as that word is used in the security agreement signed by them. II. The actions of the parties show they intended that the equipment secured defendants’ loan. III. The parol evidence rule excludes evidence of any oral statement by Mr. Noch which varies or contradicts the written documents. (Thomas v Scutt, 127 NY 133; Nau v Vulcan Rail & Constr. Co., 286 NY 188; Commissioner of Internal Revenue v Dwight, 205 F2d 298, 346 US 871; Green v Wachs, 254 NY 437; Brainard v New York Cent. R. R. Co., 242 NY 125; Hartigan v Casualty Co. of Amer., 227 NY 175.) IV. If defendants claim to be third-party beneficiaries of the letter of January 23,1969 from Conelec to the bank, their claim is subject to equities and defenses between the parties to the letter. (Hanrihan v Parker, 19 Misc 2d 467; Siegel v Henry Fippinger, Inc., 264 App Div 203; Flagg v Munger, 9 NY 483; Beveridge v New York El. R. R.Co., 112 NY 1; Berger & Son Co. v Duys, 174 Misc 976; Muzak Corp. v Hotel Taft Corp., 1 NY2d 42.) V. If the equipment secured the bonds, plaintiff is entitled to recover. (Merritt v Bartholick, 36 NY 44.) VI. If the Conelec equipment secured both defendants’ loan and the bonds, plaintiff is entitled to recover. (Nau v Vulcan Rail & Constr. Co., 286 NY 188; Merritt v Bartholick, 36 NY 44.) VII. The decision of the court below on the first appeal may have decided the jury trial.

      James L. Burke for respondents.
    I. There is ample evidence to indicate a three-way oral agreement in which the bank agreed to hold Conelec’s equipment to secure debentures intended to secure the bank’s loan to respondents and violated that agreement. II. The parol evidence rule is inapplicable to this factual situation, for the reason that there is no written integrated agreement in existence. (Mesibov, Glinert & Levy v Cohen Bros. Mfg. Co., 245 NY 305; Ruppert v Singhi, 243 NY 156; Traders’ Nat. Bank of Rochester v Laskin, 238 NY 535; Thomas v Scutt, 127 NY 133; Eighmie v Taylor, 98 NY 288; Rose Stone & Concrete v County of Broome, 76 AD2d 998.) III. The security agreement alone, or in conjunction with any other written document is incomplete and does not bar oral testimony to show the bank’s subsisting obligation to apply the pledged equipment solely to secure respondents’ debentures. (O’Neil Supply Co. v Petroleum Heat & Power Co., 280 NY 50; Lamb v Noverores Bros. Co., 208 NY 427.) IV. Respondents’ proof is that the equipment was pledged to secure the debentures. V. There was no agreement between respondents and the bank that the bank, in event of default, should first proceed against respondents’ filed security before proceeding against the debentures and equipment.
   OPINION OF THE COURT

Jasen, J.

The sole question presented on this appeal is whether the parol evidence rule precludes the defendants from establishing that the plaintiff misapplied the proceeds of certain collateral security held by it.

On January 31, 1969, in order to obtain a $100,000 loan from the plaintiff, the defendants signed and delivered to plaintiff their notes totaling $100,000. In addition, the defendants executed a security agreement in plaintiff’s behalf whereby they pledged $100,000 of Conelec, Inc. (Conelec), convertible debentures and certain shares of stock of Scan-Data Corporation and Data-Ram Corporation. Among other things, this security agreement authorized the plaintiff “without notice or demand and without affecting [defendants’] obligations hereunder, from time to time * * * to take from any party and hold collateral * * * for the payment of the Indebtedness or any part thereof, and to exchange, enforce or release such collateral or any part thereof.” The agreement further authorized the plaintiff, in the event of default by the defendants in the payment of their notes, “to direct the order or manner of the disposition of the Collateral and any and all other collateral and the enforcement of any and all indorsements and guaranties relating to the Indebtedness or any part thereof as [plaintiff], in its sole discretion, may determine.”

The proceeds of the loan were turned over to Conelec in payment for the Conelec debentures which, in turn, were pledged by the defendants to the plaintiff as security for the loan. At the time, Conelec was contemplating a public offering and was in need of interim financing. In order to induce the plaintiff to make the loan to the defendants so that they could purchase the debentures, Conelec also executed a security agreement in plaintiff’s favor whereby Conelec pledged all its machinery and equipment as security for “any and all indebtedness of [Conelec] to [plaintiff], whether now existing or hereafter incurred, of every kind and character, direct or indirect.” A letter from Conelec to the plaintiff which accompanied this security agreement stated that the pledge of collateral was to induce plaintiff into making the loan to the defendants and secured the “obligation” of the Conelec “debentures” pledged by the defendants. The letter further provided that upon default by the defendants on their notes, the debentures would become due, but that before realizing on the security interest in the Conelec machinery and equipment the plaintiff was to proceed first against the security supplied by the defendants and the defendants individually.

In the months that followed, plaintiff made additional loans directly to Conelec based upon the pledge of the security interest in its machinery and equipment. Although initially crediting the Conelec security to the pledge supporting defendants’ loan, the plaintiff withdrew the Conelec pledge in May of 1970. The Conelec machinery and equipment were thereafter listed in plaintiff’s records as security for the loans made directly to Conelec.

Unfortunately, Conelec never was able to make the public offering it had planned and, in February, 1972, the company went bankrupt. The Conelec machinery and equipment were liquidated and the proceeds paid to the plaintiff in partial satisfaction of the loans made directly to the company under the after-incurred debts clause of the Conelec security agreement.

On April 17, 1973, plaintiff demanded payment on the 1969 notes executed by the defendants and then commenced this action to recover the unpaid balance of $95,000 plus interest. As an affirmative defense, the defendants asserted that, contrary to an oral agreement between themselves, the plaintiff and Conelec, the proceeds from the sale of the collateral security of the Conelec machinery and equipment had been misapplied by the plaintiff to satisfy its own loans to Conelec, rather than in satisfaction of the indebtedness owed by the defendants.

Special Term granted plaintiff summary judgment, holding that the parol evidence rule precluded the defendants from establishing that the plaintiff misapplied the proceeds from the sale of the Conelec collateral security. On appeal, a unanimous Appellate Division reversed. While acknowledging that the plaintiff “was authorized to withdraw the Conelec security and [that] to permit parol evidence would render the [defendants security] agreement a nullity”, the court below was of the view that the defendants were attempting to establish that the machinery and equipment were pledged by Conelec as security for the de bentures which were held by the plaintiff as security for the defendant’s loan. As such, the Appellate Division held that this pledge was “separate and distinct from the security agreement of defendants with the [plaintiff] and is not in any way within the parol evidence rule which applies to the loan transaction with defendants by the bank.” (54 AD2d, p 388.) We cannot agree.

The principle of law applicable to the facts of this case is well established. Briefly, absent fraud or mutual mistake, where the parties have reduced their agreement to an integrated writing, the parol evidence rule operates to exclude evidence of all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing. (Fogelson v Rackfay Constr. Co., 300 NY 334; Thomas v Scutt, 127 NY 133.) Although at times this rule may seem to be unjust, “on the whole it works for good” (Mitchill v Lath, 247 NY 377, 380) by allowing a party to a written contract to protect himself from “perjury, infirmity of memory or the death of witnesses.” (Thomas v Scutt, 127 NY 133, 142, supra; see, generally, Richardson, Evidence [10th ed], §§ 601-634.)

In this case, the security agreement executed by the defendants clearly authorized the plaintiff to accept and release additional collateral that might be pledged by “any party” as security for defendants’ loan. This agreement further provided that in the event of default by the defendants, the plaintiff was entitled to direct the “order or manner of the disposition” of all the pledged collateral as plaintiff, “in its sole discretion”, determined. Moreover, in pledging its machinery and equipment to plaintiff, Conelec expressly agreed that its pledge would secure any future loans made directly to it by the plaintiff. Defendants’ attempt to establish the existence of an oral agreement pursuant. to which plaintiff was obligated first to apply the Conelec security in satisfaction of their loan clearly contravenes the express terms of these agreements and completely negates the plaintiff’s right under the defendants’ security agreement to release and apply the Conelec collateral as it deemed appropriate. As such, proof of this extraneous oral agreement is barred by the parol evidence rule.

Nor does the reasoning of the Appellate Division alter this result. Contrary to the opinion of the court below, the Conelec pledge of collateral security was not “separate and distinct” from the defendants’ agreement with the plaintiff. Conelec pledged its machinery and equipment in order to induce the plaintiff to make the loan to the defendants and so that plaintiff would make future loans to Conelec itself. Focusing solely on the transaction between the defendants and Conelec, the court below would admit parol evidence of an agreement concerning the use of the Conelec collateral to secure the pledged debentures. While such evidence may serve to explain the nature of the debt between the defendants and Conelec, the simple fact of the matter is that that transaction is not in issue. The present case concerns the agreement between defendants and plaintiff as memorialized in their security agreement and proof of any oral promise by plaintiff as to the initial application of the Conelec collateral directly contradicts the provisions of that written contract. It is in this sense that the proffered evidence runs afoul of the parol evidence rule and, therefore, should have been excluded.

One final comment is in order. The dissent would allow the introduction of evidence of an oral agreement between the plaintiff and Conelec, supplementing the provisions of Conelec’s letter to the plaintiff dated January 23, 1969 by which the plaintiff is alleged to have agreed to apply Conelec’s machinery and equipment only as collateral for Conelec’s obligations under its convertible debentures. We agree that the rights as between Conelec and the plaintiff might be so determined. What the dissent appears to lose sight of is that we are here confronted, not with the rights of Conelec against the plaintiff, but with the determination of the rights of defendants as individual borrowers against the plaintiff as their lender. The definition of the rights of the plaintiff in this relationship must be determined by the provision of the security agreement dated January 31,1969 between defendants and the plaintiff and no parol evidence, whatever its source, may be received which is inconsistent with the express terms of that written agreement.

Accordingly, the order appealed from and the order of the Appellate Division brought up for review should be reversed, with costs, and plaintiff’s motion for summary judgment granted.

Chief Judge Cooke

(dissenting). The majority today wholly misapplies the parol evidence rule to a situation where it is simply not involved.

This case involves two separate and distinct agreements, with different parties and different subject matter. The majority overlooks this basic fact.

The parol evidence rule states “that evidence of what was said between the parties to a valid instrument in writing, either prior to or at the time of its execution, cannot be received to contradict or vary its terms” (Thomas v Scutt, 127 NY 133, 137 [emphasis added] ; see, also, 9 Wigmore, Evidence [3d ed], § 2426, p 79; Richardson, Evidence, [10th ed], §§ 601-603, pp 598-599). The majority recognizes that the rule applies to “all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing” (p 387 [emphasis added]).

As this court stated, “[difficulties may arise in the application of the so-called parol evidence rule, but it has never been held that a written agreement between two parties excludes proof of an additional parol agreement between one of these parties and a third party” (Traders’ Nat. Bank of Rochester v Laskin, 238 NY 535, 542; see, also, Fisch, New York Evidence [2d ed], § 46, pp 26-27; 1 Mottla, New York Evidence, Proof of Cases [2d ed], § 143, p 163).

Here, there were two separate, discrete agreements. One was the security agreement executed between defendants and plaintiff Marine Midland in return for the bank’s loan to defendants of the money to buy Conelec’s debentures. The other agreement involved Marine Midland and Conelec itself. As expressed in Conelec’s letter of January 23, 1969 to the bank, Conelec pledged its equipment as security for both the loans to defendants and for Conelec’s own debentures.

The majority asserts that any attempt to introduce evidence of an oral conversation in which plaintiff allegedly promised to apply Conelec’s equipment first in case of default by defendants on their notes to plaintiff is barred by the parol evidence rule. Standing by itself, this would be correct, because such a conversation would be introduced to contradict or vary the terms of the security agreement between defendants and plaintiff, which stated that plaintiff could accept or release additional collateral for the notes.

The parol evidence rule does not, however, bar consideration of the separate agreement between Conelec and plaintiff. This point seems to be the one missed by the majority. As explained, this is because it is simply a different agreement by different parties, not an attempt by defendants and plaintiff to modify or contradict the terms of their security agreement. With respect to the discrete agreement between Conelec and plaintiff, parol evidence of a promise by plaintiff to apply Conelec’s equipment first upon any default by Conelec on the debentures merely explains Conelec’s letter to plaintiff and does not contradict it. Such evidence is therefore not barred by the parol ‘evidence rule. Although the Conelec-Marine Midland letter states that plaintiff should look to defendants personally before looking to Conelec’s equipment, this condition was applicable only if defendants defaulted on the notes. In fact, Conelec defaulted on its own debentures nearly three years before defendants defaulted, and the condition therefore did not come into play. The evidence concerning plaintiff’s alleged promise to apply Conelec’s equipment to the debentures was therefore not barred by the parol evidence rule, and could be considered in connection with defendant’s claim that plaintiff should have applied Conelec’s equipment to the debentures rather than to direct loans made by plaintiff to Conelec. It should be noted that Justice Herlihy’s opinion at the Appellate Division was joined by all members of the court on this point.

The majority asserts that “no parol evidence, whatever its source, may be received which is inconsistent with the express terms” of the security agreement between defendants and plaintiff. This is not a statement of the parol evidence rule, but rather the creation of a new rule of law that bars introduction of any evidence, even a completely separate contract between other persons, that bears in any way upon the rights of the parties to a security agreement. The majority has given no reason for making such a radical departure from well-settled rules of law.

For these reasons, the order appealed from and the order of the Appellate Division brought up for review should be affirmed.

Judges Jones, Fughsberg and Meyer concur with Judge Jasen; Chief Judge Cooke dissents and votes to affirm in a separate opinion in which Judges Gabrielli and Wachtler concur.

Order appealed from and order of the Appellate Division brought up for review reversed, etc.

       We find any reliance on Traders’ Nat. Bank of Rochester v Laskin (238 NY 535) to be misplaced. There, this court held that the parol evidence rule did not preclude the defendants from introducing proof of an oral promise by the plaintiff as to how certain collateral pledged by a third party was to be applied. Unlike the present case, however, the terms of the oral agreement which the Traders’ Nat. Bank defendants were attempting to establish did not contradict the express provisions of any written contract between themselves and the plaintiff. Hence, the parol evidence rule was no bar to the proof of this additional agreement.


author: Jasen, J.

text:
    Public Service Mutual Insurance Company, Appellant, v Saul Goldfarb et al., Respondents.
    Argued June 9, 1981;
    decided July 7, 1981

      POINTS OF COUNSEL

      William H. Morris and Nathan Cyperstein for appellant.
    I. By definition of insurance contract and for reasons of public policy, no contract of indemnity insurance should be deemed to insure against the civil consequences of intentional acts defined as criminal by statute and which are malum in se. (Messersmith v American Fid. Co., 232 NY 161; Burr v Commercial Travelers Mut. Acc. Assn. of Amer., 295 NY 294; Morgan v Greater N. Y. Taxpayer’s Mut. Ins. Assn., 305 NY 243.) II. If the policy of insurance afforded coverage, there has been a breach of a condition of the policy requiring notification of the insurer of an “unusual occurrence” for breach of which the insurer disclaimed coverage. (Hartogs v Employers Mut. Liab. Ins. Co. of Wis., 89 Misc 2d 468; Burr v Commercial Travelers Mut. Acc. Assn. of Amer., 295 NY 294.) III. No coverage is afforded under the policy of insurance for any award of punitive damages in New York. (Hartford Acc. & Ind. Co. v Village of Hempstead, 48 NY2d 218.) IV. The court below should not have determined the question of timely notice as that question was not before the court as, under the agreed statement of facts, the parties have stipulated that the only question for the court to determine is if there is coverage for the causes of action alleged by Jacqueline Schwartz, the question of indemnity for any judgment that to defend the causes of action instituted by Jacqueline Schwartz, the question of indemnity for any judgment that may be obtained by Jacqueline Schwartz is to be determined after the trial of her action, as at this time the proof that Jacqueline Schwartz may submit is unknown and we have no way of determining if the sexual assault occurred during the course of treatment by defendant Saul Goldfarb. (Goldberg v Lumber Mut. Cas. Ins. Co. of N. Y., 297 NY 148; Utica Mut. Ins. Co. v Cherry, 38 NY2d 735; International Paper Co. v Continental Cas. Co., 35 NY2d 322; Prashker v United States Guar. Co., 1 NY2d 584; Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364, 28 NY2d 859.)

      Philip Hoffer, Charles H. Gaffney, Rose L. Hoffer, Harold S. Herman and Charles H. Gaffney, Jr., for Saul Goldfarb, respondent.
    I. The issue of “timely notice” is without merit. (Public Serv. Mut. Ins. Co. v Levy, 57 AD2d 794; Melcher v Ocean Acc. & Guar. Corp., 226 NY 51; 875 Forest Ave. Corp. v Aetna Cas. & Sur. Co., 37 AD2d 11, 30 NY2d 726; Hartford Ins. Co. v County of Nassau, 47 NY2d 951; Kolmer-Marcus, Inc. v Winer, 32 AD2d 763, 26 NY2d 795.) II. Plaintiff’s policy specifically covers defendant Goldfarb for the acts alleged in the underlying action brought by Schwartz. (Long Is. Ins. Co. v Graziano, 64 AD2d 944; Messersmith v American Fid. Co., 232 NY 161; Miller v Continental Ins. Co., 40 NY2d 675; Baldinger v Consolidated Mut. Ins. Co., 11 NY2d 1026; Public Serv. Mut. Ins. Co. v Levy, 57 AD2d 794; Hartogs v Employers Mut. Liab. Ins. Co. of Wis., 89 Misc 2d 468.) III. Plaintiff should not be permitted to deny coverage for punitive damages where it has issued a group policy which specifically offers such coverage. (Hartford Acc. & Ind. Co. v Village of Hempstead, 48 NY2d 218; Padavan v Clemente, 43 AD2d 729; Teska v Atlantic Nat. Ins. Co., 59 Misc 2d 615; Lampke v Metropolitan Life Ins. Co., 279 NY 157; Weinberg v Insurance Co. of North Amer., 88 Misc 2d 82.) IV. Should it be decided that there is no coverage for punitive damages, plaintiff carrier should pay for counsel chosen by its insured to defend the underlying lawsuit. (Utica Mut. Ins. Co. v Cherry, 45 AD2d 350, 38 NY2d 735; Knibbs v Wagner, 14 AD2d 987; Gill v Montgomery Ward & Co., 284 App Div 36; Faulk v Aware, Inc., 35 Misc 2d 302, 19 AD2d 464, 14 NY2d 899, 380 US 916.)
   OPINION OF THE COURT

Jasen, J.

The question before us is whether a policy of professional liability insurance issued by plaintiff affords coverage to a dentist in a civil suit commenced by a former patient grounded upon an act of sexual abuse alleged to have occurred in the course of dental treatment.

Plaintiff Public Service Mutual Insurance Company, a multiline insurer, issued a “Dentist’s Professional Liability Policy” to the Dental Society of the State of New York. Defendant, Saul Goldfarb, a member of the society, obtained coverage under that policy. Defendant Jacqueline P. Schwartz is a former patient of Dr. Goldfarb who received dental treatment from him on May 23, 1977. She claims that in the course of receiving such treatment, she was sexually abused by Dr. Goldfarb. This claim, which is the subject of a pending civil suit, also formed the basis of professional disciplinary proceedings against Dr. Goldfarb and resulted in a criminal conviction of the crime of sexual abuse in the third degree (Penal Law, § 130.55). In this declaratory judgment action, plaintiff has asked the court to determine whether its policy of insurance provides coverage for the civil claim seeking compensatory and punitive damages.

Special Term held that no coverage was provided. The court found that the acts complained of by Jacqueline Schwartz were never intended to fall within the protective scope of the professional liability policy because they were undertaken for the personal satisfaction of the practitioner and not in the course of proper dental treatment. The Appellate Division, First Department, reversed, noting that the policy specifically provided coverage for “assault” and “undue familiarity” as well as for dental malpractice. The court concluded that this broad langague indicated an intent that a claim based upon sexual abuse in the course of treatment be covered and that the insurer would be liable for both compensatory and punitive damages. Two Justices dissented, however, taking the view that no coverage for punitive damages was allowable because any award for such damages would contravene public policy.

On this appeal, plaintiff argues that its policy of insurance was not intended by the parties to provide coverage against a claim of sexual abuse and that, in any event, no adequate notice of claim was given to the insurer by defendant Goldfarb as required by the terms of the policy. It is further argued that even if, as a contractual matter, coverage exists, it should not be enforced in this case because the public policy of this State does not allow contractual indemnification for civil liability which arises out of the commission of a crime.

Defendant argues that the broad language of the insurance policy in issue specifically provides coverage for a claim of sexual abuse in the course of dental treatment and that he has provided adequate notice of claim in accordance with the terms of the policy. He further argues that where, as here, the policy explicitly provides coverage, such protection should not be denied upon public policy grounds.

The first question which must be addressed is whether the policy of insurance in issue contractually obligated plaintiff to defend and to indemnify Dr. Goldfarb for the claim made by defendant Schwartz. If there is no such contractual obligation, then no question of public policy need be decided. In order to resolve this issue, we must determine first whether adequate notice of claim was given to the insurer and, second, whether such a claim falls within the protective scope of the policy.

We agree with the courts below that Dr. Goldfarb timely notified plaintiff of the existence of defendant Schwartz’ claim against him. The policy required the insured to notify the company as soon as possible “in the event of an accident, unusual occurrence or receiving notice of claim or suit”. Plaintiff contends that the commencement of disciplinary and criminal proceedings against defendant Goldfarb were “unusual occurrences” within the meaning of the policy which triggered the requirement of notice. We cannot agree.

Although Dr. Goldfarb was aware long before Schwartz’ lawsuit was commenced that the propriety of his conduct was in issue, he had no knowledge that any civil claim would be brought against him until he was served with process by defendant Schwartz. When the lawsuit was commenced, he promptly advised his insurer of the pending claim in accordance with the express language of the insurance contract which, as noted earlier, required such notice upon the happening of an unusual occcurrence “or [upon] receiving notice of claim or suit”. Defendant complied with the literal requirements of the policy. That the provisions of the policy could be read to require earlier notice is beside the point. The term “unusual occurrence” is, at best, ambiguous, and any ambiguity in the policy must be resolved against the insurer. (See Public Serv. Mut. Ins. Co. v Levy, 57 AD2d 794.)

We also agree, as did the majority and the dissenters below, that the insurance policy in issue was intended by the parties to provide coverage for liability arising out of the acts complained of by defendant Schwartz. The policy specifically states that the insurer will" “pay on behalf of the Insured named in this certificate all sums, including punitive damages, which the Named Insured shall become obligated to pay by reason of the liability imposed upon him by law for damages because of injury resulting from professional dental services rendered * * * and resulting from any claim or suit based upon * * * [m]alpractice, error, negligence or mistake, assault, slander, libel [or] undue familiarity”. This language clearly indicates an intent on the part of the insurer to pay both compensatory and punitive damages arising out of unlawful or inappropriate physical contact which occurs during the course of dental treatment. Defendant Schwartz claims that such contact occurred. Hence, as a purely contractual matter absent any consideration of public policy, a claim within the stated coverage has been made and the insurer is obligated to defend the suit.

Whether indemnity will ultimately be required, however, cannot be determined at this stage of the proceeding. It is possible, of course, that the trier of fact could find that unlawful contact with defendant Schwartz occurred, but that it did not occur in the course of professional dental services. In this event, defendant Schwartz could recover from defendant Goldfarb, but he, in turn, could not seek contractual indemnity from his insurer because the policy imposes liability upon the insurer only for “injury resulting from professional dental services rendered”. This being so, any determination as to whether the insurer must indemnify Dr. Goldfarb must await a trial of defendant Schwartz’ claim, at which time a special verdict should be obtained on the issue of whether or not the acts complained of occurred in the course of professional dental treatment. (Cf. Utica Mut. Ins. Co. v Cherry, 45 AD2d 350, 355, affd 38 NY2d 735.)

Having determined that plaintiff has contractually obligated itself at least to defend Dr. Goldfarb against the claim in issue, we must now address the question whether the public policy of this State precludes insurance coverage for a claim of sexual abuse in the course of dental treatment. Plaintiff notes that defendant was convicted of the crime of sexual abuse in the third degree and argues that, as a matter of public policy, he may not be indemnified for any civil liability arising out of this criminal act. We disagree. The mere fact that an act may have penal consequences does not necessarily mean that insurance coverage for civil liability arsing from the same act is precluded by public policy. (See Messersmith v American Fid. Co., 232 NY 161, 163-165; cf. Miller v Continental Ins. Co., 40 NY2d 675.) Whether such coverage is permissable depends upon whether the insured, in committing his criminal act, intended to cause injury. One who intentionally injures another may not be indemnified for' any civil liability thus incurred. However, one whose intentional act causes an unintended injury may be so indemnified. (Messersmith v American Fid. Co., 232 NY 161, supra.)

In this case, the complaint against Dr. Goldfarb alleges both intentional acts which caused unintended injury, seeking compensatory damages therefor and intentional causation of injury, seeking compensatory and punitive damages therefor. To the extent that defendant Schwartz’ complaint can be construed as a claim for injuries unintentionally caused by Dr. Goldfarb, he may seek indemnity from his insurer for that claim. Thus, the insurer would be obligated to pay any judgment against Dr. Goldfarb for compensatory damages only, assuming, of course, that the trier of fact determined, in a special verdict, that such unintended injury occurred in the course of dental treatment.

Under no circumstances, however, can the insurer be compelled to indemnify Dr. Goldfarb for punitive damages. Such damages are, as the name implies, a punishment for intentional wrongdoing. As we have only recently noted, to allow insurance coverage for such damages “is totally to defeat the purpose of punitive damages” (Hartford Acc. & Ind. Co. v Village of Hempstead, 48 NY2d 218, 228). Nor should such indemnity be allowed because the insurer specifically agreed to provide such coverage and charged a premium for such coverage. An agreement between two private parties, no matter how explicit, cannot change the public policy of this State. Therefore, should the trier of fact at the trial of the Schwartz claim determine that defendant Goldfarb intentionally caused the injuries of which Jacqueline Schwartz complains, and award punitiv damages therefor, Dr. Goldfarb may not look to his insurer to indemnify him for such damages.

Furthermore, if a finding that defendant Goldfarb intended to injure defendant Schwartz is made in a special verdict, he would be precluded from seeking indemnity from his insurer for either compensatory or punitive damages flowing from this intentional causation of injury. This is so because to allow such indemnity would be to violate the “fundamental principle that no one shall be permitted to take advantage of his own wrong”. (Messersmith v American Fid. Co., 232 NY 161,165, supra.) We emphasize, however, that if punitive damages are awarded on any ground other than intentional causation of injury — for example, gross negligence, recklessness or wantonness — indemnity for compensatory damages would be allowable even though indemnity for the punitive or exemplary component of the damage award would be barred as violative of public policy. (See Liability Insurance As Covering Accident, Damage, or Injury Due to Wanton or Wilful Misconduct or Gross Negligence, Ann., 20 ALR3d 320, 331-333.) Where no finding of an intent to injure has been made, nothing in the public policy of this State precludes indemnity for compensatory damages flowing from a defendant’s volitional act. Since the insurance contract in issue expressly provides coverage for such volitional acts in the course of dental treatment, the insurer must be held to the bargain which it struck with the insured, absent an express reservation or exclusion to the contrary. (Cf. Carlson v Travelers Ins. Co., 35 AD2d 351, 355.)

We note also that although the insurer need not indemnify Dr. Goldfarb for any liability for punitive damages, it must, nonetheless, defend him in the pending lawsuit because a claim within the stated coverage has been made. Moreover, inasmuch as the insurer’s interest in defending the lawsuit is in conflict with the defendant’s interest— the insurer being liable only upon some of the grounds for recovery asserted and not upon others — defendant Goldfarb is entitled to defense by an attorney of his own choosing, whose reasonable fee is to be paid by the insurer. (Hartford Ace. & Ind. Co. v Village of Hempstead, 48 NY2d 218, 228-229, supra; Prashker v United States Guar. Co., 1 NY2d 584, 593; see, also, Parker v Agricultural Ins. Co., NYLJ, June 23, 1981, p 6, col 1.)

In sum, we hold that plaintiff is obligated to defend Dr. Goldfarb in the lawsuit commenced by defendant Schwartz and to provide independent counsel for the defense, to be chosen by Dr. Goldfarb. At this stage of the litigation, however, it is impossible to determine whether any indemnity for any compensatory damages which ultimately may be assessed against Dr. Goldfarb will be required, for such a determination can only be made after the trier of fact in the Schwartz action has rendered its special verdict.

Accordingly, the order of the Appellate Division should be modified, with costs, by deleting therefrom so much of the order as declares that plaintiff must indemnify defendant Goldfarb for any liability arising out of the lawsuit against him by defendant Schwartz and by substituting therefor a provision dismissing as premature so much of plaintiff’s complaint as seeks a declaration with respect to indemnity. The order should be further modified to include a declaration that plaintiff is required to defend defendant Goldfarb in respect of the claim of defendant Schwartz and must pay a reasonable fee for separate counsel of defendant Goldfarb’s choosing to defend him. As so modified, the order of the Appellate Division should be affirmed.

Chief Judge Cooke and Judges Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur.

Order modified, with costs to plaintiff, in accordance with the opinion herein and, as so modified, affirmed.

       That is not to say that a conflict of interest requiring retention of separate counsel will arise in every case where multiple claims are made. Independent counsel is only necessary in cases where the defense attorney’s duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds which would render the insurer liable. When such a conflict is apparent, the insured must be free to choose his own counsel whose reasonable fee is to be paid by the insurer. On the other hand, where multiple claims present no conflict — for example, where the insurance contract provides liability coverage only for personal injuries and the claim against the insured seeks recovery for property damage as well as for personal injuries — no threat of divided loyalty is present and there is no need for the retention of separate counsel. This is so because in such a situation the question of insurance coverage is not intertwined with the question of the insured’s liability.