text:
    In the Matter of Yeshivath Shearith Hapletah, Respondent, v Assessor of the Town of Fallsburg et al., Appellants. (And Another Related Proceeding.)
    Argued February 13, 1992;
    decided March 26, 1992

      POINTS OF COUNSEL

      Jill Nagy for appellants. I.
    Real property is entitled to exemption if it meets all conditions of RPTL 420-a. (Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover; 29 AD2d 861, 23 NY2d 682; Matter of Genesee Hosp. v Wagner, 47 AD2d 37; B'Nai B’Rith Club v City of New York, 270 NY 12; Matter of Yeshivas Bais Yehudi v Assessor of Town of Ramapo, 109 AD2d 744; Matter of St. Agnes Church v Daby, 148 AD2d 31; Matter of Shrine of Our Lady of Martyrs at Auriesville v Board of Assessors, 40 AD2d 75, 33 NY2d 713; Gospel Volunteers v Village of Speculator, 33 AD2d 407, 29 NY2d 622.) II. Auxiliary facilities are not exempt unless necessary or reasonably incidental to the main exempt activity. (Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover, 29 AD2d 861, 23 NY2d 682; Matter of Holy Spirit Assn. v Tax Commn., 55 NY2d 512; Matter of Shrine of Our Lady of Martyrs at Auriesville v Board of Assessors, 40 AD2d 75, 33 NY2d 713; Crusade for Christ v Town of New Lebanon, 36 AD2d 247; Matter of St. Agnes Church v Daby, 148 AD2d 31; Matter of Genesee Hosp. v Wagner, 47 AD2d 37; Matter of Yeshivas Bais Yehudi v Assessor of Town of Ramapo, 109 AD2d 744; Matter of Syracuse Univ., 124 Misc 788, 214 App Div 375.) III. Vacant land may be exempt if there are short-term plans to put it to exempt use. (Assembly of God v Lynch, 113 AD2d 1016; Matter of Syracuse Univ., 124 Misc 788, 214 App Div 375.) IV. Exemption of property owned by a religious organization, but used for secular purposes, is unconstitutional. (Walz v Tax Commn., 397 US 664.)

      Jay L. Zeiger and Stephen L. Oppenheim for respondent.
    I. Petitioner-respondent’s property is used exclusively for religious purposes and is entitled to whole exemption from real property taxation. (Matter of Rochester Christian Church v State of New York Pub. Serv. Commn., 55 NY2d 196; Mohonk Trust v Board of Assessors, 47 NY2d 476; Matter of Symphony Space v Tishelman, 60 NY2d 33; People ex rel. Watchtower Bible & Tract Socy. v Haring, 8 NY2d 350; Matter of Nassau County Council Boy Scouts of Am. v Board of Assessors, 84 AD2d 862; Matter of St. Luke's Hosp. v Boyland, 12 NY2d 135; People ex rel. Untermyer v McGregor, 295 NY 237; University Auxiliary Servs. v Smith, 78 AD2d 959, 54 NY2d 986; Matter of Mary Immaculate School v Wilson, 73 AD2d 969; Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover, 29 AD2d 861.) II. The education of girls does not destroy petitioner-respondent’s exemption. (Mohonk Trust v Board of Assessors, 47 NY2d 476.) III. Vacant lands which are part of an integral whole are exempt without regard to future plans. IV. Respondents-appellants’ arguments seek a redefinition of "exclusively” as used in Real Property Tax Law § 420-a; their arguments are properly addressed only to the Legislature; the courts are without power to redefine RPTL 420-a. (Kahal Bnei Emunim & Talmud Torah Bnei Simon Israel v Town of Fallsburg, 78 NY2d 194; Hammelburger v Foursome Inn Corp., 54 NY2d 580; Waddey v Waddey, 290 NY 251; New York Mobile Homes Assn. v Steckel, 9 NY2d 533, 369 US 150; Gaynor v Marohn, 268 NY 417; People ex rel. Hatch v Reardon, 184 NY 431, 204 US 152; Matter of Yeshivath Shearith Hapletah v Assessor of Town of Fallsburg, 172 AD2d 950; People ex rel. Outer Ct. v Miller, 161 Misc 603, 256 App Div 814, 280 NY 825; Matter of Knight-Ridder Broadcasting v Greenberg, 70 NY2d 151; Orinoco Realty Co. v Bandler, 233 NY 24.) V. Not having been raised below, the argument contained in point IV of appellants’ brief should not be addressed by this Court. (Salla v County of Monroe, 48 NY2d 514, cert denied sub nom. Abrams v Salla, 446 US 909; Matter of Gonzalez v State Liq. Auth., 30 NY2d 108; Delaney v Brett, 51 NY 78; Lake v Gibson, 2 NY 188; Morris v Hudson, 8 NY 204; Codd v Rathbone, 19 NY 37; Vose v Cockcroft, 44 NY 415.) VI. The exemption of petitioner-respondent’s auxiliary uses, even secular ones, does not violate the First Amendment. (Texas Monthly v Bullock, 489 US 1; Swaggert Ministries v California Bd. of Equalization, 393 US 378; Walz v Tax Commn., 397 US 664.)
   OPINION OF THE COURT

Alexander, J.

The Board of Review and Assessor of the Town of Fallsburg appeal by leave of this Court from an order of the Appellate Division which reversed a determination of Supreme Court, Sullivan County, dismissing the consolidated Real Property Tax Law article 7 petitions of Yeshivath Shearith Hapletah challenging the actions of the assessor in denying full tax exemption to petitioner’s property for the years 1987 and 1988. We agree with the Appellate Division that the subject property is fully exempt from real estate taxes and thus, there should be an affirmance.

The essential facts are undisputed and reveal that Yeshivath Shearith Hapletah is a not-for-profit religious corporation whose primary purpose is the teaching of the principles and doctrines of the Jewish faith. It operates a school in Brooklyn and conducts religious educational programs on a 31-acre parcel of land it owns in the Town of Fallsburg, Sullivan County, referred to as the "Woodbourne facility.” This property is used primarily during the summer months when approximately 450 students from two years of age and up are provided rigorous religious and educational instruction seven days each week, with the youngest, aged 2lA to 4, studying a few hours per day and the older students, up to eight hours per day. The participants in the summer program also either attend classes or teach during the school year at the Brooklyn facility operated by petitioner or an affiliated organization.

The Woodbourne facility is comprised of a main building containing a kitchen and communal dining room for all participants, a ritual bath, recreational facilities, classrooms, synagogues and a variety of housing facilities including a multiunit dormitory building, 64 bungalows and 6 trailers. Ten acres of the 31-acre parcel are largely wooded and are used primarily by the students for hiking. The housing units are occupied by the Rabbis, teaching staff, their wives and children, all of whom receive religious instruction; married students and their families; single students; and families with very young students, whose mothers serve as volunteers for the yeshivah, and whose fathers mostly participate in Sabbath prayer and religious educational programs during the weekend. Some of the participants live away from the property in nearby residences rented or owned by their families. They are transported to the Woodbourne facility by bus each day for classes. One of the trailers is provided to the caretaker who, in exchange for housing for himself and his family, maintains the Woodbourne facility during the summer months and provides year-round security.

The religious instruction programs at Woodbourne are provided to members of the yeshivah only; they are not open to the general public. No fees are paid for use of the facilities; rather, they are made available as housing for teachers and are included as part of the annual tuition for students. Petitioner derives no income from the Woodbourne facility. Charitable contributions are relied upon to help defray operating costs.

It appears that petitioner acquired the Woodbourne property in 1980. It was determined to be fully tax exempt in a declaratory judgment proceeding and was removed from the tax rolls in 1982. However, the property was returned to the tax rolls for 1987 and 1988. Petitioner applied for an exemption pursuant to Real Property Tax Law § 420-a (1) (a) for the tax years 1987 and 1988. The assessor granted the application only in part, however, determining that 64 bungalow units, 6 house trailers and 10 acres of land were taxable. The assessor concluded that because these bungalows, trailers and the 10 acres of wooded land were not used exclusively for religious purposes, they were not entitled to tax exemption and were fully taxable. Petitioner commenced these article 7 proceedings (see, Real Property Tax Law art 7) challenging respondent’s determinations which were consolidated for trial by stipulation.

Supreme Court dismissed the petitions after trial, agreeing with the assessor that because the trailer used by the caretaker, the 10 acres of forested land, the bungalows and the five remaining trailers were not used exclusively for religious purposes, they were taxable. The Appellate Division reversed, granted the petitions and declared petitioner’s property wholly exempt from real property taxation pursuant to RPTL 420-a (1) (a) for tax years 1987 and 1988, concluding that "the undisputed evidence adduced at trial mandates a finding that the entire 31-acre parcel was used exclusively for religious purposes” (172 AD2d 950, 951). This appeal ensued.

Real Property Tax Law § 420-a (1) (a) provides that real property owned by a corporation or association organized or conducted exclusively for religious purposes, if used exclusively for such purposes, shall be exempt from taxation (RPTL 420-a [1] [a]). The term "exclusively”, in this context, has been broadly defined to connote "principal” or "primary” such that purposes and uses merely "auxiliary or incidental to the main and exempt purpose and use will not defeat the exemption” (Matter of Association of Bar v Lewisohn, 34 NY2d 143, 153; see also, Matter of Rochester Christian Church v State of New York Pub. Serv. Commn., 55 NY2d 196, 203; Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover, 29 AD2d 861, appeal dismissed 23 NY2d 682). Although exemption statutes are to be strictly construed against the taxpayer, the interpretation of those statutes "should not be so narrow and literal as to defeat [their] settled purpose, * * * that of encouraging, fostering and protecting religious and educational institutions” (People ex rel. Watchtower Bible & Tract Socy. v Haring, 8 NY2d 350, 358; see also, Matter of Association of Bar v Lewisohn, 34 NY2d 143, 153, supra).

Respondent Town of Fallsburg does not contest this general rule nor is any question raised as to whether petitioner qualifies as an organization created and conducted for religious purposes. Rather, respondent argues that although portions of the property including some of the dormitories, the communal cooking and eating facilities and recreational facilities were entitled to tax-exempt status because they are used exclusively for religious purposes, those portions of the property that are used exclusively for residential purposes, such as the caretaker’s trailer, the residences of the Rabbis and the bungalows and other trailers used by families spending the summer at the facility, should be deemed fully taxable because they may not be considered "necessary or fairly incidental” to the operation of the religious programs.

The test of entitlement to tax exemption under the "used exclusively” clause of the statute is whether the particular use is " 'reasonably incidental]’ to the [primary or] major purpose of the [facility]” (see, Matter of St. Luke's Hosp. v Boyland, 12 NY2d 135, 143). Put differently, the determination of " 'whether the property is used exclusively for the statutory purposes depends upon whether its primary use is in furtherance of the permitted purposes’ ” (Matter of Genesee Hosp. v Wagner, 47 AD2d 37, 44, affd 39 NY2d 863, quoting Gospel Volunteers v Village of Speculator, 33 AD2d 407, 411, affd 29 NY2d 622).

Thus, in Matter of St. Luke’s Hosp. (supra), we concluded that although St. Luke’s was not a "free hospital” as contemplated by Tax Law former § 4 (6), then in force, and thus was not entitled to a full exemption for 10 apartment buildings in close proximity to the hospital in which some apartments were occupied by other than hospital personnel, it nevertheless was entitled to the partial exemption for those portions of the apartment buildings occupied by doctors and nurses employed by the hospital because "supplying living accommodations for hospital personnel and their immediate families is a hospital purpose” (id., at 141). So too has it been held that residences and dining facilities provided by exempt institutions are necessarily incidental to the purposes of the institutions as to not interfere with their tax-exempt status (see, People ex rel. Clarkson Mem. Coll. of Technology v Haggett, 300 NY 595; Matter of Board of Foreign Missions v Board of Assessors, 244 NY 42; see also, Matter of Rochester Christian Church v State of New York Pub. Serv. Commn., 55 NY2d 196, supra [school operated by church to educate its children in a religious context intimately related to religious objectives]; People ex rel. Watchtower Bible & Tract Socy. v Haring, 8 NY2d 350, supra [farm operated by religious organization to feed its members exempt from taxes although farming not necessarily a religious activity]; Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover, 29 AD2d 861, appeal dismissed 23 NY2d 682, supra).

As the Appellate Division observed, the uncontradicted record evidence demonstrates that the subject housing facilities are occupied exclusively by staff, teachers, Rabbis, and families, members of which are either students at the yeshivah or parents of students too young to attend the school without parental supervision. If petitioner was unable to provide residential housing accommodations to its faculty, staff, students and their families, its primary purposes of providing rigorous religious and educational instruction at the yeshivah would be seriously undermined. Thus, these housing facilities are "necessary and reasonably incidental” to the primary purpose of the Woodbourne facility, and this is so notwithstanding the existence of limited housing facilities nearby (see, Matter of Shrine of Our Lady of Martyrs at Auriesville v Board of Assessors, 40 AD2d 75, affd without opn 33 NY2d 713).

Respondents argue that the trailer occupied by the caretaker falls outside the "necessary and reasonably incidental” rule, however, because the trailer is merely provided to the caretaker in exchange for his services and thus bears no relation to the purpose of the yeshivah. Respondents rely in support of this assertion upon Matter of St. Agnes Church v Daby (148 AD2d 31), Matter of Yeshivas Bais Yehudi v Assessor of Town of Ramapo (109 AD2d 744) and B’Nai B’Rith Club v City of New York (270 NY 12). Each of these cases is clearly distinguishable, however, and none require a different result here.

In B’Nai B’Rith (supra), the property owner neither qualified as a fraternal organization entitled to tax exemption nor was its property used exclusively for charitable or benevolent purposes. Thus, it did not satisfy any of the provisions of Tax Law former § 4 (6), then in effect.

In contrast to the circumstances here, the caretaker in Yeshivas Bais Yehudi to whom residential accommodations were provided rent free only devoted approximately "two or slightly more days to his employment with petitioner * * * [and] [i]n addition, * * * [was] self-employed as a house painter” (109 AD2d 744, 745, supra). Here, the caretaker lives in the residence year-round and his full-time job is to maintain the premises during the summer months and to keep the property secure during the remaining months of the year. Thus, the use of the residence is clearly incidental to the maintenance of the Woodbourne facility which serves the religious purposes for which petitioner’s corporation was organized, and thus, that residence is also tax exempt (see, Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover, 29 AD2d 861, 861-862, supra).

Reliance on Matter of St. Agnes Church v Daby (148 AD2d 31, supra) is equally unavailing. That case involved the analysis and application, not only of RPTL 420-a, but also of RPTL 462, a statutory provision not at issue here. RPTL 462 provides that "property owned by a religious corporation while actually used by the officiating clergymen thereof for residential purposes shall be exempt from taxation.” Although the 462 exemption may be applied in addition to the 420-a exemption and both exemptions can be applied to the same property (id., at 34; Congregation Kollel Horabonim v Williams, 62 AD2d 866, 867-868, affd 48 NY2d 301; Matter of Faith Church of God Full Gospel Mission v Gingold, 54 Misc 2d 296), generally, RPTL 462 applies to a rectory used exclusively as a residence (Matter of St. Agnes Church v Daby, supra, at 33).

Rather than seeking an exemption for its rectory pursuant to RPTL 462, the petitioner in that case sought to include the rectory in its application for renewal of its RPTL 420-a exemption on its remaining church property. The Appellate Division concluded that the assessor properly granted only a partial exemption for the rectory pursuant to RPTL. 462 because the rectory was not used exclusively for religious purposes. Although a portion of the rectory was used to conduct parish meetings, counseling sessions and educational classes, the primary use of the rectory was residential. Thus, petitioner was only entitled to a RPTL 462 exemption as to that portion of the rectory. The court apparently determined that the residential use of the rectory was not "incidental or auxiliary” to the primary or religious use of the property so as to qualify for a full 420-a exemption. Here, however, as discussed, the residences for the students and their families are necessary and incidental to the primary use of Woodbourne as a religious educational facility.

Finally, the 10-acre wooded parcel of land used for recreational purposes by the students is incidental to the primary religious purpose of the entire 31-acre parcel, and is entitled to exemption as well (see, Matter of Chautauqua Inst. v Town of Chautauqua, 35 AD2d 1, lv denied 27 NY2d 485; Greater N. Y. Corp. of Seventh-Day Adventists v Town of Dover, 29 AD2d 861, supra). Respondent’s constitutional claim, raised for the first time on this appeal, is unpreserved for this Court’s review.

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

Chief Judge Wachtler and Judges Simons, Kaye, Titone, Hancock, Jr., and Bellacosa concur.

Order affirmed, with costs.

       RPTL 420-a (1) (a) states: "Real property owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more of such purposes, and used exclusively for carrying out thereupon one or more of such purposes either by the owning corporation or association or by another such corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.”


source: Caselaw Access Project

author: Simons, J.

license: Public Domain

text:
    In the Matter of the Liquidation of Midland Insurance Company. Kemper Reinsurance Company, Respondent, v James P. Corcoran, as Superintendent of Insurance of the State of New York and Liquidator of Midland Insurance Company, Appellant.
    Argued February 11, 1992;
    decided March 26, 1992

      POINTS OF COUNSEL

      Harold A. Kurland, Robert B. Calihan and Judy A. Toyer for appellant. I.
    The court below erred by permitting Kemper Re to set off its reinsurance obligations with unrelated debts. (Beecher v Vogt Mfg. Co., 227 NY 468; Scott v Armstrong, 146 US 499; Pink v Title Guar. & Trust Co., 274 NY 167; Pink v American Sur. Co., 283 NY 290; Matter of Consolidated Indem. & Ins. Co., 176 Misc 490, affd sub nom. Matter of People [Consolidated Indem. & Ins. Co.], 262 App Div 724, 287 NY 34; New York Tit. & Mtge. Co. v Irving Trust Co., 268 NY 547; Matter of Knickerbocker Agency [Holz], 4 AD2d 71, 4 NY2d 245; O'Connor v Insurance Co., 622 F Supp 611, affd sub nom. Stamp v Insurance Co., 908 F2d 1375; Skandia Am. Reinsurance Corp. v Schenck, 441 F Supp 715.) II. Kemper Re’s set-off attempt is improper because the debts were owed jointly by Midland and others and thus cannot be mutual. (Matter of People [Consolidated Indem. & Ins. Co.], 287 NY 34; Atkinson v Federal Deposit Ins. Corp., 635 F2d 508; Hunter v Booth, 84 App Div 585; Scammon v Kimball, 92 US 362; Sandler v United Indus. Bank, 23 AD2d 567.) III. The insolvency clause bars Kemper Re’s set-off attempt. (Prince Carpentry v Cosmopolitan Mut. Ins. Co., 124 Misc 2d 919; Fidelity & Deposit Co. v Pink, 302 US 224; Bohlinger v Zanger, 306 NY 228; Corcoran v Ardra Ins. Co., 156 AD2d 70, 77 NY2d 225; Matter of Knickerbocker Agency [Holz], 4 NY2d 245.)

      David M. Spector, Thomas S. Kiriakos, Ira J. Belcove and Walter Eliot Bard for respondent. I.
    The court below was correct in holding that section 7427 of the New York Insurance Law provides for offset of the reciprocal debts at issue in this case. (Beecher v Vogt Mfg. Co., 227 NY 468; Matter of

      Midland Ins. Co., 167 AD2d 75; Rochester-Genesee Regional Transp. Dist. v Trans World Airlines, 86 Misc 2d 1011; Siegel v State of New York, 262 App Div 388; New York Tit. & Mtge. Co. v Irving Trust Co., 268 NY 547; Van Schaick v Astor, 154 Misc 543; Scammon v Kimball, 92 US 362; Carr v Hamilton, 129 US 252; Stamp v Insurance Co., 908 F2d 1375.) II. The court below was correct in holding that the provisions of the Playtex facultative contract present no obstacle to the offset of the reciprocal debts at issue in this case. (Fidelity & Deposit Co. v Pink, 302 US 224; Matter of Midland Ins. Co., 167 AD2d 75; Matter of Westchester Tit. & Trust Co., 170 Misc 860; Muttontown Pictures v Levine, 48 AD2d 818.) III. The court below was correct in holding that the liquidator’s change in capacity argument is insupportable and would effectively abrogate section 7427 of the New York Insurance Law. (Matter of Midland Ins. Co., 167 AD2d 75; Savage v Medbury, 19 NY 32; National Bondholders Corp. v Joyce, 276 NY 92; Matter of Westchester Tit. & Trust Co., 170 Misc 860; Schacht v Brown, 711 F2d 1343; Matter of People [Consolidated Indem. & Ins. Co.], 287 NY 34.) IV. The liquidator’s brief offers no justification for a judicial nullification of section 7427. (Matter of Midland Ins. Co., 167 AD2d 75; Stamp v Insurance Co., 908 F2d 1375; Scott v Armstrong, 146 US 499; New York County Natl. Bank v Massey, 192 US 138.)

      Reid L. Ashinoff, Martin J. Foley, Phillip E. Stano, Richard P. Hefferan, Craig A. Berrington, Ronald S. Gass, L. Eric Loewe and Debra J. Anderson for American Council of Life Insurance and others, amici curiae.

    Denial of the right of setoff will disrupt New York’s insurance and reinsurance markets and adversely affect the public interest in maintaining stable, affordable and available insurance services in this State. (Matter of Midland Ins. Co., 167 AD2d 75; Helvering v Le Gierse, 312 US 531; United States v Consumer Life Ins. Co., 430 US 725; Stamp v Insurance Co., 908 F2d 1375; Scammon v Kimball, 92 US 362; Van Schaick v Astor, 154 Misc 543; New York Tit. & Mtge. Co. v Irving Trust Co., 241 App Div 246; Scott v Armstrong, 146 US 499; Fidelity & Deposit Co. v Pink, 302 US 224; Matter of Anonymous, 40 NY2d 96.)
   OPINION OF THE COURT

Simons, J.

This action was instituted by Kemper Reinsurance Company (Kemper Re) against the State Superintendent of Insuranee, as liquidator of the insolvent, Midland Insurance Company. Kemper Re seeks a declaration that Insurance Law § 7427 authorizes it to offset moneys it concededly owes Midland under a reinsurance contract against amounts Midland owes it for premiums under a separate and distinct contract. Defendant Superintendent’s principal contention is that the obligations under the reinsurance contract and Midland’s unrelated debts to Kemper Re are not "mutual,” and thus the latter may not be used to offset the former. We disagree and therefore affirm the order of the Appellate Division.

I

In 1979, Midland and its affiliates entered into a reinsurance treaty whereby Kemper Re agreed to reinsure certain lines of business ceded through the treaty in return for premiums. In 1984, in an unrelated transaction, Midland issued an excess products liability insurance policy to Esmark, Inc./International Playtex, Inc. and negotiated a facultative contract with Kemper Re reinsuring 75% of the risk. The Playtex contract contained an insolvency clause obligating Kemper Re to pay reinsurance proceeds due under the contract notwithstanding Midland’s subsequent insolvency.

In April of 1986, Midland was placed into liquidation. At that time Kemper Re owed Midland approximately three quarters of a million dollars in reinsurance proceeds for underwriting losses under the Playtex contract, while Midland owed Kemper Re unpaid premiums allegedly exceeding that amount under the treaty. When Kemper Re attempted to set off the amount Midland owed it under the treaty against the amount Kemper Re owed Midland under the Playtex contract defendant objected. Kemper Re brought this action claiming it was entitled to the offset, and defendant, as liquidator, counterclaimed for the amount Kemper owed Midland under the Playtex contract.

Both parties moved for summary judgment. Supreme Court denied Kemper Re’s motion and granted defendant’s cross motion. The Appellate Division unanimously modified the order by granting Kemper Re’s motion for summary judgment, holding it had the right to set off premiums due from Midland against the reinsurance proceeds owed, and denied defendant’s cross motion.

Defendant contends that the debts may not be offset because they arise out of different transactions, offset is barred by the language of the insolvency clause in the Playtex contract, and because they are not owed to and from the same person.

II

A reinsurance contract is one by which a reinsurer agrees to indemnify a primary insurer for losses it pays to its policyholders. Such contracts are of two general types. Treaty reinsurance is obtained in advance of actual coverage and may cover any risk the primary insurer covers. The contract is formed when the primary insurer "cedes” part of the premiums for its policies and the losses on those policies to the reinsurer. A facultative reinsurance contract is one obtained to cover a particular risk. The reinsurer does not assume liability for losses paid in either case; its only obligation is to indemnify the primary insurer. Typically, reinsurance permits a small insurer to minimize its exposure to catastrophic loss by the distribution of its risks to another insurer or group of insurers. It also permits a primary insurer to reduce the amount of the legally required reserves held for the protection of policyholders, and to increase the company’s ability to underwrite other polices or make other investments (see generally, Semple and Hall, The Reinsurer’s Liability in the Event of the Insolvency of a Ceding Property and Casualty Insurer, 21 Torts & Ins LJ 407 [1986]; Schwab, Anderson, Reed and Mendelsohn, Onset of an Offset Revolution: The Application of Set-Offs In Insurance Insolvencies, 8 J of Ins Reg 464 [1990], also reported in 95 Dick L Rev 449; Keeton and Widiss, Insurance Law § 1.3 [b] [2] [1988]).

Although reinsurance contracts are indemnity contracts, they commonly contain insolvency clauses which, even in the absence of a primary insurer’s payment to policyholders, permit a liquidator to collect from the reinsurer the amount of reinsurance proceeds that would have become due if the ceding company had not become insolvent. The New York statutes encourage such clauses by providing that unless the reinsurance contract contains an insolvency clause the primary insurer may not consider the reinsurance as an asset or claim a deduction for the amount ceded (see, Insurance Law § 1308 [a] [2]). The loss of those rights is substantial because if the primary insurer must maintain reserves in the full amount of reinsurance ceded, one of the primary reasons for obtaining reinsurance is defeated.

Our statutes also permit insurers and reinsurers to net their respective preliquidation debts. Thus, the Insurance Law provides that "[i]n all cases of mutual debts or mutual credits between the insurer and another person in connection with any action or proceeding [in rehabilitation or liquidation], such credits and debts shall be set off and the balance only shall be allowed or paid” (Insurance Law § 7427 [a]). It is plaintiffs right of offset under the statute that is in dispute in this appeal.

A

Defendant first contends that "mutual” debts or credits must arise out of the same contractual transaction and that because the debts and credits in this case did not the statute does not authorize them to be offset against one another. To hold otherwise, he asserts, would result in an unlawful preference of the reinsurer over the policyholders and, ultimately, those answerable for the policyholders’ losses.

Under our decisions, debts and credits are mutual when they are "due to and from the same person in the same capacity” (Beecher v Vogt Mfg. Co., 227 NY 468, 473; Matter of People [Consolidated Indem. & Ins. Co.], 287 NY 34, 38). The language of the statute does not state, however, whether they must arise from the same transaction. What little legislative history there is suggests that they need not. Before the statute was enacted in 1932, Superintendent Van Schaick, in an explanatory memorandum to the Legislature, stated that section 420 (the predecessor to section 7427) was patterned after the conventional provisions commonly found in insolvency laws and the provisions of the Bankruptcy Act (see, Mem of Superintendent Van Schaick dated Mar. 15, 1932, Bill Jacket, L 1932, ch 191, at 9). Under the bankruptcy laws offsets arising out of different transactions have consistently been permitted; they are distinguished from recoupment which involves claims arising from the same transaction (see, 4 Collier, Bankruptcy If 553.03 [15th ed], and authorities cited therein; Schwab, Anderson, Reed and Mendelsohn, Onset of an Offset Revolution: The Application of Set-Offs In Insurance Insolvencies, 8 J of Ins Reg 464, 470-473, also reported in 95 Dick L Rev 449; see generally, 5 Carmody-Wait 2d, NY Prac § 31.2).

It is significant that New York decisions of the time, much like the bankruptcy courts, recognized the distinction between offset and recoupment and held generally that debts arising from different transactions could be set off (see, e.g., Matter of National Cash Register Co. v Joseph, 299 NY 200, 203; Otto v Lincoln Sav. Bank, 268 App Div 400, affd 294 NY 798; Merry Realty Co. v Shamokin & Hollis Real Estate Co., 186 App Div 538, revd on other grounds 230 NY 316). Thus, it appears that the Legislature, in extending the remedy of offset to liquidation proceedings, did not intend it to be limited to mutual debts arising from the same transaction.

Notwithstanding this background, defendant maintains that the "same transaction” rule is compelled in liquidation cases by earlier New York cases (citing Matter of People [Consolidated Indem. & Ins. Co.], 287 NY 34, supra; Pink v American Sur. Co., 283 NY 290; Pink v Title Guar. & Trust Co., 274 NY 167; New York Tit. & Mtge. Co. v Irving Trust Co. 241 App Div 246, affd 268 NY 547). We do not read those decisions to support his position.

In New York Tit. & Mtge. Co. v Irving Trust Co. (supra), we approved an offset involving debts from separate and distinct transactions. There, the Superintendent of Insurance, as receiver of a domestic insurer in rehabilitation, had sued a bank for moneys due and owing on certain demand deposit accounts maintained and issued by the bank. The bank sought to defend by setting off amounts owed by the insurer to the bank based on the insurer’s guarantee of the payment of principal and interest on unrelated bank mortgages. We held that the offset — which clearly arose out of a separate transaction — was allowable under section 420 of the Insurance Law (now § 7427) (see, New York Tit. & Mtge. Co. v Irving Trust Co., 268 NY 547, supra). Defendant would distinguish New York Tit. & Mtge. Co. because the party asserting the offset was not a reinsurer and because that case involved a rehabilitation proceeding and not liquidation. The decision involves the concept of mutuality, however, which is the touchstone of offset under section 7427 of the Insurance Law. Moreover, the statute applies to both rehabilitation and liquidation and requirements remain the same in either case (see, Insurance Law § 7427; New York Tit. & Mtge. Co. v Irving Trust Co., 241 App Div 246, 248, supra).

Defendant also relies on Pink v Title Guar. & Trust Co. (supra). In Pink, the Superintendent of Insurance brought an action to disaffirm the fraudulent transfer of mortgages by defendant. We struck defendant’s pleaded offset because we found fraud in the procurement of the offsetting debt, not because the debts arose out of different transactions. We distinguished New York Tit. & Mtge. Co. v Irving Trust Co. because it involved debts which arose "on contract,” as opposed to those arising out of a trust relationship (see, Pink v Title Guar. & Trust Co., 274 NY 167, 172-173, supra) and in doing so, we reaffirmed our previous position that debts arising in contract, but not necessarily out of the same transaction, may be set off against one another (see, Pink v Title Guar. & Trust Co., supra, at 172).

The other cases cited are similarly distinguishable. In Matter of People (Consolidated Indent. & Ins. Co.) (287 NY 34, supra), the moneys owed to the insolvent reinsurer’s estate by defendant insurer were the result of salvage — i.e., proceeds received and held in trust by the insurer for the purpose of reimbursing the insurer and reinsurer proportionately for their losses. Defendant sought to set off this debt against one owed to it by the insolvent reinsurer under several reinsurance agreements. We held that there was no mutuality and disallowed the offset under the statute because the two claims were held in different capacities: salvage recoveries were held by defendant as a trustee, whereas the insolvent’s obligation to defendant was a debt created by a contractual obligation. Pink v American Sur. Co. (283 NY 290, supra) is similarly distinguishable. Thus, the legal authority in New York appears to support the position of plaintiff, not defendant.

Furthermore, we do not agree with defendant that public policy considerations justify adopting a "same transaction” rule. Although permitting offsets may conflict with the statutory purpose of providing for the pro rata distribution of the insolvent’s estate to creditors, the Legislature has resolved the competing concerns and recognized offsets as a species of lawful preference. Indeed, if an offset is otherwise valid, there would seem to be no reason why its allowance should be considered a preference: it is "only the balance, if any, after the set-off is deducted which can justly be held to form part of the assets of the insolvent” (Scott v Armstrong, 146 US 499, 510).

Nor does it appear that a multiple transaction rule will encourage insurance company insolvency. An important reason offset has been recognized as desirable is that it provides a form of security to insurers. As explained by the United States Court of Appeals in Stamp v Insurance Co. (908 F2d 1375, 1380):

"Offsetting debts in a reinsurance pool not only spreads risk but also acts as mutual security for performance. Such security is especially important for smaller insurers; if the large firms could not count on the netting of balances to satisfy obligations, they would be more likely to exclude smaller or tottering firms — making new entry harder and precipitating failures of firms in difficulty.”

We conclude, therefore, that the contractual obligations between Kemper Re and Midland constitute "mutual debts” for purposes of offset under section 7427 of the Insurance Law despite the fact that they arise out of two separate and distinct transactions.

B

Next, defendant contends the insolvency clause in the Playtex contract barred setoff by its terms.

To support his argument that no debtor/creditor relationship existed, defendant contends first that the insolvency clause — included in the Playtex contract pursuant to Insurance Law § 1308 (a) (2) (A) and requiring Kemper Re to pay Midland or the liquidator "without diminution because of such insolvency” — creates an obligation that is absolute and precludes the reinsurer from exercising its right of offset. He interprets "without diminution” as meaning that moneys due to the insolvent insurer must be paid to the liquidator without any subtraction, regardless of the reinsurer’s right to set off the treaty premiums against the Playtex losses prior to insolvency. Defendant has misconstrued the purpose of the insolvency clause.

Insurance Law § 1308 (a) (2) (A) was enacted in response to the Supreme Court’s decision in Fidelity & Deposit Co. v Pink (302 US 224). That case held, based on the language of the reinsurance contract and consistent with the indemnity nature of reinsurance contracts in general, that a reinsurer need only reimburse the liquidator of the insolvent ceding company for losses actually paid by the ceding company or the liquidator to the insureds on the underlying policies (see, Fidelity & Deposit Co. v Pink, supra). Section 1308 was intended to overcome that decision by altering the indemnity nature of a reinsurance contract when the ceding company becomes insolvent (see, Mem of Superintendent Pink dated Feb. 26, 1940, Bill Jacket, L 1940, ch 87). Pursuant to the statute, if the contract contains a statutory insolvency clause, the reinsurer is obligated to pay the liquidator his or her allocated share of any losses due under the reinsurance contract even though the insolvent ceding company has not first made payment to the insureds on the underlying policies. Nothing in the language of section 1308 (a) (2) (A) or its history, however, support the conclusion that the statute was enacted to destroy a reinsurer’s right of offset under Insurance Law § 7427. Indeed, were we to adopt defendant’s construction of the insolvency clause the reinsurer’s right of offset granted by section 7427, would be nullified in every liquidation proceeding where a ceding company elected to include the clause in its reinsurance contract pursuant to section 1308 (a) (2) (A).

C

Nor is mutuality of capacity or identity lacking.

Before an offset will be allowed, the claims must be mutual, i.e., owed between the same persons and in the same right. If the debts between the parties arise when those parties were acting in different capacities, the debts will not be considered mutual. "Capacity” means legal capacity (e.g., principal, agent, trustee, beneficiary). Contracting principals, who are debtors and creditors of each other by virtue of entry into a contract or contracts, have the same legal capacity and may set off debts against each other.

By seizing on the contractual reference in the insolvency clause — that payment is to be made without diminution "directly to the Company or its liquidator” — defendant contends that a special category of obligation was created which is owed not to the insolvent insurer but directly to the liquidator. In effect, he contends there has been a novation of the contract because of insolvency and that after the liquidation order the reinsurer holds the reinsurance proceeds in trust for the liquidator, thus destroying any debtor/creditor relationship previously existing between Kemper Re and Midland. However, the language of the contract directing payment to the liquidator merely tracks the language of Insurance Law § 7405 (a) which allows the Superintendent of Insurance to take possession of the insolvent insurer’s assets and deal with them in his own or the insured’s name. It was not intended to create a special category of obligation owed directly to the liquidator. Moreover, liquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation (see, Bohlinger v Zanger, 306 NY 228, 234; see also, 2A Couch, Insurance 2d §§ 22:48, 22:50 [rev ed]). Defendant concedes that before Midland was adjudged insolvent Kemper Re had the right to set off the treaty premiums against the amount owed under the Playtex contract. Those rights were not altered merely because a liquidation order was entered. To hold that they were would be to render portions of the statute meaningless by prohibiting offset of all preliquidation debts between an insolvent insurer and reinsurer arising out of a reinsurance contract, despite the fact that section 7427 of the Insurance Law applies to liquidation proceedings.

Finally, defendants contend that the debts were not between the same parties because Midland’s affiliates had the right to cede risks to Kemper Re under the treaty. Notwithstanding the affiliates’ right to cede business to Kemper Re under the treaty, Midland was the only company that did so. Midland alone, therefore, contracted the debt for unpaid premiums, and notwithstanding his conclusory assertions, defendant has failed to make a record establishing that the affiliates were jointly liable for those premiums. Thus the requisite mutuality of identity exists between Kemper Re and defendant, as liquidator of Midland.

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

Chief Judge Wachtler and Judges Kaye, Alexander, Ti-tone, Hancock, Jr., and Bellacosa concur.

Order affirmed, with costs.

      . Superintendent Van Schaick acknowledged that the statute left unanswered the question of whether premiums could be set off. He believed such offsets should be allowed, given the Legislature’s tendency to extend the principle of offset, but stated that the matter would probably have to be decided by the courts (see, Mem of Superintendent Van Schaick dated Mar. 15, 1932, Bill Jacket, L 1932, ch 191, at 9). Some jurisdictions expressly prohibit setting off premiums (see, e.g., Conn Gen Stat Annot § 38a-932; Haw Rev Stat §431:15-319 [b] [4]; Idaho Code § 41-3330 [2] [d]; Ind Code § 27-9-3-28 [b] [4]; Iowa Code Annot § 507C.30 [2] [d]; Ky Rev Stat Annot § 304.33-330 [2] [d]; Minn Stat Annot § 60B.34 [2] [d]; Mont Code Annot § 33-2-1359 [2] [d]; NH Rev Stat Annot § 402-C:34 [II] [d]; NM Stat Annot § 59A-41-45 [B] [4]; Pa Stat Annot, tit 40, § 221.32; SC Code Annot § 38-27-490 [b] [4]; Utah Code Annot § 31A-27-323 [2] [d]; Wis Stat Annot § 645.56 [2] [d]). Defendant does not contend in this case, however, that such a prohibition exists under section 7427 of the Insurance Law.

      . The general rule, recognized by courts and commentators alike, holds that mutual debts and credits between parties may be set off even though they arise from different transactions. And this is so, even in cases involving insolvent insurance companies (Scammon v Kimball, 92 US 362, 367; Stamp v Insurance Co., 908 F2d 1375; Barnett Bank v State ex rel. Department of Ins., 507 So 2d 142 [Fla App]; Prudential Reinsurance Co. v Superior Ct., 6 Cal App 4th 275 [2d Dist], review granted — Cal 3d —, 789 P2d 342 [1990]; see generally, Schwab, Anderson, Reed and Mendelsohn, Onset of an Offset Revolution: The Application of Set-Offs in Insurance Insolvencies, 8 J of Ins Reg 464, 468-469 [1990]; Semple and Hall, The Reinsurer’s Liability in the Event of the Insolvency of a Ceding Property and Casualty Insurer, 21 Tort & Ins U 407; Semple and Hall, Offsets in Liquidations: A Matter of Balance, 87 Best’s Rev 56 [1986]; 4 Collier, Bankruptcy ff 553.03 [15th ed]; but see, Jemigan, The Case for Restricting Offsets, 91 Best’s Rev 55 [1990]). Indeed, as early as 1875 the Supreme Court held in Scammon (supra) that "mutual debts” could arise out of "independent” transactions when it permitted bank deposits of the insolvent insurer to be offset against insurance proceeds owed to a bank for a fire loss.

      . The clause provided in pertinent part:
      "In the event of the insolvency of [Midland], reinsurance under this Agreement shall be payable by [Kemper] on the basis of the liability of ¡Midland] under the Reinsurance Agreement, without diminution because of such insolvency, directly to [Midland] or its liquidator, receiver or statutory successor, except as otherwise specified in the statutes of any state having jurisdiction of the insolvency proceedings.” (Emphasis added.)

      . Defendant cites Bluewater Ins. v Balzano (823 P2d 1365 [Colo Sup Ct]), in support of his position that the "without diminution” language in the insolvency clause nullifies a reinsurer’s right to an offset. That case dealt with a common-law right of offset. Indeed, the Colorado Supreme Court distinguished the case from this one because the New York Insurance Law specifically allows offsets in insurance liquidation proceedings.

      . Defendant cites Corcoran v Ardra Ins. Co. (77 NY2d 225) for the proposition that he has different rights than did the insolvent insurer, but that decision dealt with remedies available to the parties after a liquidation order had been entered. Nothing in it suggests that the liquidator’s appointment affects a creditor’s substantive right of offset.


author: Kaye, J.

text:
    In the Matter of Beer Garden, Inc., Respondent-Appellant, v New York State Liquor Authority, Appellant-Respondent. In the Matter of Bayside Bowling and Recreation Center, Inc., Doing Business as Avanti, Respondent-Appellant, v New York State Liquor Authority, Appellant-Respondent.
    Argued February 20, 1992;
    decided March 26, 1992

      POINTS OF COUNSEL

      Adrian C. Hunte, Stephen D. Kolinsky and Thomas J. Bepko, Jr., for appellant-respondent in the first above-entitled proceeding. I.
    The decision that Commissioner Tillman, one of the five members of the State Liquor Authority, participate in the determinations of August 1st and August 8th, 1990, was entirely reasonable, proper and lawful, and her recusal was unwarranted. (Matter of 1616 Second Ave. Rest. v New York State Liq. Auth., 75 NY2d 158; Matter of Pelaez v Waterfront Commn., 88 AD2d 443; Anderson v Dolce, 653 F Supp 1556; Matter of Washington County Cease v Persico, 99 AD2d 321, 64 NY2d 923; Richardson v Perales, 402 US 389; Trade Commn. v Cement Inst., 333 US 683; Labor Bd. v Donnelly Co., 330 US 219; Withrow v Larkin, 421 US 35; Bolden v Alston, 810 F2d 353.) II. The action of the State Liquor Authority, pursuant to a stipulation of recall, in recalling respondent’s liquor license based upon the evidence adduced at a nonrenewal interview was a reasonable, rational and proper act of discretion and it was not arbitrary, capricious, unreasonable or unlawful. (Matter of Farina v State Liq. Auth., 20 NY2d 484; Matter of Agoglia v Mulrooney, 259 NY 462; Matter of Fink v Cole, 1 NY2d 48; Matter of Wager v State Liq. Auth., 4 NY2d 465; Matter of 125 Bar Corp. v State Liq. Auth., 24 NY2d 174; People ex rel. Lodes v Department of Health, 189 NY 187; Matter of Katz’s Delicatessen v O’Connell, 302 NY 286; Metropolitan Bd. of Excise v Barrie, 34 NY 657; Matter of Restaurants & Patisseries Longchamps v O’Connell, 271 App Div 684, 296 NY 888.) III. The promulgation of rule 36.1 (q) of the Rules of the State Liquor Authority (9 NYCRR 53.1 [q]) represents a valid exercise of the Authority’s rule-making power and it is not ultra vires. The rule is harmonious and consistent with the design and purpose of the Alcoholic Beverage Control Law, and it gives effect to legislative policy. (Matter of Levine v Whalen, 39 NY2d 510; Matter of Shankman v Axelrod, 73 NY2d 203; Matter of Consolidated Edison Co. v Public Serv. Commn., 47 NY2d 94; Murray v State Liq. Auth., 133 AD2d 569, 135 AD2d 378, 139 AD2d 461, 72 NY2d 810, 951; Matter of L. Newstand, Inc. v State Liq. Auth., 151 AD2d 483; Rotunno v City of Rochester, 120 AD2d 160, 70 NY2d 601, 71 NY2d 995; O’Connor v Hendrick, 184 NY 421; People v Malmud, 4 AD2d 86; Matter of Lehama Rest. v O’Connell, 280 App Div 796; Matter of Wilmont Liqs. v Rohan, 2 Misc 2d 768.) IV. The record discloses substantial evidence to sustain the determination of appellant State Liquor Authority that respondent violated the Alcoholic Beverage Control Law and the Rules of the State Liquor Authority, as charged and found. (Matter of Humphrey v State Ins. Fund, 298 NY 327; Matter of Miller v Kling, 291 NY 65; Matter of Avon Bar & Grill v O’Connell, 301 NY 150; Matter of Kopec v Buffalo Brake Beam-Acme Steel & Malleable Iron Works, 304 NY 65; Matter of Stork Rest. v Boland, 282 NY 256; Matter of Burke v Bromberger, 300 NY 248; Matter of Gerbino v State Liq. Auth., 12 NY2d 904; Labor Bd. v Nevada Copper Corp., 316 US 105; Labor Bd. v Greyhound Lines, 303 US 261; Matter of Holland v Edwards, 307 NY 38.) V. The measure of penalty imposed by appellant Authority was a reasonable exercise of its discretion. (Matter of Gambino v State Liq. Auth., 4 AD2d 37, 4 NY2d 997; Matter of Stolz v Board of Regents, 4 AD2d 361; Matter of Pell v Board of Educ., 34 NY2d 222; Matter of Butterly & Green v Lomenzo, 43 AD2d 707, 36 NY2d 250; Matter of Mitthauer v Patterson, 8 NY2d 37; Matter of McGinnis’ Broadway Rest. v Rohan, 6 AD2d 115, 6 NY2d 770; Matter of Fischer v Kelly, 20 AD2d 906; Matter of Ahsaf v Nyquist, 37 NY2d 182; Schaubman v Blum, 49 NY2d 375.)

      Warren B. Pesetsky and Randye F. Bemfeld for respondent-appellant in the first above-entitled proceeding. I.
    The court below properly found that Commissioner Tillman was required to recuse herself. (Matter of Washington County Cease v Persico, 120 Misc 2d 207, 99 AD2d 321, 64 NY2d 923; La Voie v State of New York, 91 AD2d 749; 29 W. 25th St. Parking

      Corp. v Penn Post Parking, 105 AD2d 610.) II. The court below erred in failing to hold 9 NYCRR 53.1 (q) invalid. (Matter of L. Newstand, Inc. v State Liq. Auth., 151 AD2d 483, 75 NY2d 710; Murray v State Liq. Auth., 133 AD2d 569; Rotunno v City of Rochester, 120 AD2d 160, 70 NY2d 601, 71 NY2d 995; Matter of Porretta v Costantino, 133 Misc 2d 436; Dumain v Carey, 131 Misc 2d 221.) III. The recall of respondent’s license was arbitrary, capricious, fraudulent, unreasonable, unsupported by substantial evidence and contrary to law. IV. The State Liquor Authority’s determination revoking respondent’s liquor license was arbitrary, capricious, unreasonable, unsupported by substantial evidence and contrary to law and the penalty imposed was excessive. (Matter of Circus Disco v New York State Liq. Auth., 51 NY2d 24; Matter of 17 Cameron St. Rest. Corp. v New York State Liq. Auth., 48 NY2d 509; Matter of Pell v Board of Educ., 34 NY2d 222; Matter of Stolz v Board of Regents, 4 AD2d 361.) V. The SLA exceeded its discretion in failing to maintain procedures with respect to warning interviews. (Cappadora v Celebrezze, 356 F2d 1.)

      Adrian C. Hunte and Thomas J. Bepko, Jr., for appellant-respondent in the second above-entitled proceeding. I.
    The decision that Commissioner Tillman, one of five members of the Authority, participate in the determination of July 25, 1990 was entirely reasonable, proper and lawful, and her recusal was unwarranted. (Matter of 1616 Second Ave. Rest. v New York State Liq. Auth., 75 NY2d 158; Anderson v Dolce, 653 F Supp 1556; Matter of Pelaez v Waterfront Commn., 88 AD2d 443; Matter of Washington County Cease v Persico, 99 AD2d 321, 64 NY2d 923; Richardson v Perales, 402 US 389; Trade Commn. v Cement Inst., 333 US 683; Labor Bd. v Donnelly Co., 330 US 219; Withrow v Larkin, 421 US 35; Bolden v Alston, 810 F2d 353; Matter of Grant v Senkowski, 146 AD2d 948.) II. SLA rule 36.1 (q) (9 NYCRR 53.1 [q]), as applied to respondent, was constitutionally proper and lawful. (Quintard Assocs. v New York State Liq. Auth., 57 AD2d 462.) III. The record herein discloses substantial evidence to sustain the Authority’s determination that petitioner violated rule 36.1 (q) (9 NYCRR 53.1 [q]) of the Rules of the State Liquor Authority, as charged and found. (Matter of Humphrey v State Ins. Fund, 298 NY 327; Matter of Miller v Kling, 291 NY 65; Matter of Avon Bar & Grill v O'Connell, 301 NY 150; Matter of Kopec v Buffalo Brake Beam-Acme Steel & Malleable Iron Works, 304 NY 65; Matter of Stork Rest. v Boland, 282 NY 256; Labor Bd. v Nevada Copper Corp., 316 US 105; Labor Bd. v Greyhound Lines, 303 US 261; Matter of Holland v Edwards, 307 NY 38; Matter of Gordon v New York Life Ins. Co., 300 NY 652; Matter of Egan v New York State Joint Legislative Comm., 2 AD2d 418.)

      Herbert Rubin, David B. Hamm and Miriam Skolnik for respondent-appellant in the second above-entitled proceeding. I.
    Commissioner Tillman’s continued participation in the adjudication of the merits of the charges against petitioner, despite the fact that she had served as Counsel to the SLA at the time the charges were preferred and prosecuted and signed the accusatory instrument, deprived petitioner of a fair hearing. The court below correctly annulled the SLA’s determination. (Withrow v Larkin, 421 US 35; Matter of Warder v Board of Regents, 53 NY2d 186, 454 US 1125; Matter of 1616 Second Ave. Rest. v New York State Liq. Auth., 75 NY2d 158; Matter of Washington County Cease v Persico, 120 Misc 2d 207, 99 AD2d 321, 64 NY2d 923; Matter of City of Rochester, 208 NY 188; Matter of Lowcher v New York City Teachers’ Retirement Sys., 54 NY2d 373; Trans World Airlines v Civil Aeronautics Bd., 254 F2d 90; In re Murchison, 349 US 133; Matter of Wayering v County of St. Lawrence, 140 AD2d 838; Huber Pontiac v Allphin, 431 F Supp 1168, vacated on jurisdictional grounds sub nom. Huber Pontiac v Whitler, 585 F2d 817.) II. Unable to present sufficient proof to sustain the charges brought against petitioner, the SLA resorts to such a broad reading of its rule 36.1 (q) (9 NYCRR 53.1 [q]) as to render the rule, as applied, illegal and unconstitutional. (Mancini v Mc-Laughlin, 54 NY2d 860; Matter of Circus Disco v New York State Liq. Auth., 51 NY2d 24; Matter of P.G.P. Entertainment Corp. v State Liq. Auth., 52 NY2d 886.)
   OPINION OF THE COURT

Kaye, J.

These appeals raise two administrative law questions: the validity of a regulation of the State Liquor Authority (the SLA), and the propriety of an SLA Commissioner’s participation in final agency decisions against petitioner licensees. As to both questions we agree with the licensees: the regulation is invalid as applied because it conflicts with the authorizing legislation, and the Commissioner (who was SLA Counsel when the charges against the licensees were filed and heard) should have recused herself from the final agency determinations.

I.

Beer Garden, Inc.

In 1986, the SLA issued petitioner Beer Garden, Inc., a New York City nightclub, a license for the on-premises sale of alcoholic beverages. Three SLA notices are the focus of Beer Garden’s appeal. First, in December 1988, a proceeding to cancel or revoke Beer Garden’s license was initiated by a Notice of Pleading and Hearing charging that the "occurrence of noise, disturbance, misconduct or disorder in the licensed premises, in areas in front of or adjacent to the licensed premises, or in the parking lot of the licensed premises has resulted in the licensed premises becoming a focal point for police attention; all cause for revocation, cancellation or suspension of the license in accordance with rule 36.1 (q) of the Rules of the State Liquor Authority.”

Second, in March 1989, the SLA served Beer Garden with notice of a proceeding to suspend its license, charging that the licensee had two months earlier sold alcoholic beverages to a minor in violation of Alcoholic Beverage Control Law § 65 (1). The notice specified a 30-day suspension as the maximum possible penalty. Third, a Notice of Interview was served on Beer Garden in October 1989, informing the licensee that based on the same "focal point” allegation made in the first notice, an interview would be scheduled in connection with renewal of its license for 1989-1992.

All three notices were issued over the stamped signature of "Sharon L. Tillman, Counsel to the Authority.” The first two notices advised Beer Garden that failure to appear and plead would be deemed "no contest” of the charges; all three notices stated that Beer Garden could be represented by counsel and, at any hearing or interview, could introduce evidence in its own behalf.

Under SLA regulations, the Administrative Law Judge is authorized to make findings as to whether the evidence sustained the charges, and may also recommend a penalty (see, 9 NYCRR 54.4 [g]). Between November 1989 and April 1990, the ALJ conducted hearings on the revocation and suspension proceedings, during which he rejected Beer Garden’s challenge to the agency’s authority to promulgate rule 36.1 (q); he concluded that under the rule it was unnecessary for the SLA to establish that the licensee was aware of the alleged misconduct. In March 1990, the ALJ found the charges sustained factually and, without recommendation as to penalty, he referred the matter to the Commissioners for final determination (see, 9 NYCRR 54.4 [g]; 54.6).

The renewal interview was held shortly thereafter, on April 19, 1990, and the SLA’s motion to incorporate the prior proceedings granted. The ALJ deferred to the Commissioners as to whether evidence of incidents occurring prior to the expiration of the current license (the same incidents supporting the "focal point” charge in the revocation proceeding) could support a determination not to renew Beer Garden’s license.

On June 30, 1990, Tillman left her position as Counsel to become an SLA Commissioner.

On August 1, 1990, the Commissioners voted to combine the first and second proceedings, adopt the ALJ’s findings, and sustain the charges, imposing a penalty of revocation and $1,000 bond forfeiture. The Commissioners also sustained the ALJ’s findings in the nonrenewal proceeding and directed entry of a nonrenewal order. Three of the five Commissioners, including Commissioner Tillman, concurred in the dispositions; two voted to adjourn the matter for a week.

The matter was reconsidered one week later at the request of Beer Garden’s attorney, who had been unable to attend the earlier session, and at that time he asked that Commissioner Tillman recuse herself based on her role as SLA Counsel during the hearing process. She refused. Upon reconsideration, the three Commissioners adhered to their original determination, and the two who had voted to defer the matter voted to suspend, rather than revoke, Beer Garden’s license. Beer Garden then commenced the present CPLR article 78 proceeding.

Bayside Bowling and Recreation, Inc.

In September 1989, the SLA notified Bayside Bowling and Recreation, Inc. of the commencement of a license revocation proceeding based on a charge that the premises — a Queens discotheque — had become the "focal point” of police activity. The language of the charge was identical to that contained in the notice to Beer Garden. Tillman’s signature, as Counsel to the SLA, was stamped at the foot of the notice, which — as in the case of Beer Garden — advised of the consequences of a failure to plead, the right to be represented by counsel, and the right to present evidence at a hearing.

After hearings during January and February 1990, the ALJ sustained the charge as to the period from April 6, 1988 through July 20, 1989 based upon approximately 18 incidents "recalled or recorded by police.” In response to Bayside’s contention that the charge could not be sustained without proof of the licensee’s fault — or awareness of the alleged conduct — the ALJ held that rule 36.1 (q) does not require any showing of "suffering or permitting,” and "the absence of such a requirement indicates that the regulation is no-fault in nature.”

A majority of the five SLA Commissioners — including Commissioner Tillman — voted to impose a 10-day license suspension and $1,000 fine. The two remaining members voted to sustain the charge, impose the fine, but defer suspension. Again, in response to a request from the licensee, Tillman refused to recuse herself. Bayside then commenced this article 78 proceeding to annul the SLA’s determination.

Both article 78 proceedings were transferred to the Appellate Division, which held in each case that Commissioner Tillman’s refusal to recuse herself mandated that the petitions be granted. The court concluded that inasmuch "as the very notice of charges brought against petitioner had been signed by Tillman, there was too great a possibility that she may have been predisposed to uphold those charges to permit her, over petitioner’s objection, to subsequently assume an adjudicative role as to the same charges.” (Matter of Bayside Bowling & Recreation Center v New York State Liq. Auth., 171 AD2d 576, 576-577.) In that the AU’s factual findings were unaffected by the SLA’s subsequent determinations, the Appellate Division remanded both cases to the agency for reconsideration without the participation of Commissioner Tillman. In neither case did the court reach the validity of rule 36.1 (q).

II.

We first consider petitioners’ argument, raised on their cross appeals, that rule 36.1 (q) was invalid as applied. That argument — if successful — would result in dismissal of all charges but one.

Under rule 36.1 (q), a license may be revoked, canceled or suspended when "any noise, disturbance, misconduct, disorder, act or activity occurs in the licensed premises, or in the area in front of or adjacent to the licensed premises, or in any parking lot provided by the licensee for use by licensee’s patrons, which * * * results in the licensed premises becoming a focal point for police attention” (9 NYCRR 53.1 [q]).

Petitioners challenge the SLA’s authority to promulgate this rule, arguing that the only statutory authority which might support the agency’s authority is Alcoholic Beverage Control Law § 106 (6): no person "licensed to sell alcoholic beverages shall * * * suffer or permit [the licensed] premises to become disorderly.” Petitioners maintain that, as rule 36.1 (q) represents the SLA’s effort to implement the policy embodied in section 106 (6), the rule must incorporate the "suffer or permit,” or awareness, element of the statute. The SLA counters that, under rule 36.1 (q), there need be no demonstration of a licensee’s awareness, and cites as its authority for a no-fault rule Alcoholic Beverage Control Law §§ 2, 17, 114 and 118.

"Before a court can determine whether an agency acted reasonably in taking a particular action it must find that the agency had authority to act in the first instance.” (Mancini v McLaughlin, 54 NY2d 860, 862.)

Under the Alcoholic Beverage Control Law, the Legislature has granted the SLA specific and particular, rather than general, rule-making authority: "the power to make rules with respect to particular subjects is specifically granted to the SLA throughout the body of the Alcoholic Beverage Control Law.” (Matter of Rotunno v City of Rochester, 120 AD2d 160, 163, affd 71 NY2d 995; see, by contrast, Banking Law § 14 [1]; Executive Law § 295 [5]; Labor Law § 21 [11]; Social Services Law § 20 [3] [f]; Vehicle and Traffic Law § 215.) We agree with petitioners that the SLA cannot take refuge in general rule-making authority as a means of circumventing the specific legislative requirement in Alcoholic Beverage Control Law § 106 (6) of the licensee’s awareness of the disorderly conduct.

It is clear that section 106’s prohibition on disorderly conduct is the basis for the agency’s rule. On its face, rule 36.1 (q) speaks of "noise, disturbance, misconduct, disorder” as the culpable conduct that may lead to the licensed premises becoming the "focal point” for police attention (9 NYCRR 53.1 [q]; compare, Penal Law § 240.20 ["disorderly conduct” defined, including the making of "unreasonable noise”]). In fact, this Court has stated that the "noise generated by a licensed establishment may furnish a basis for suspending an issued license * * * because subdivision 6 of section 106 of the Alcoholic Beverage Control Law mandates that no licensee 'suffer or permit [his] premises to become disorderly’ ” (Matter of Circus Disco v New York State Liq. Auth., 51 NY2d 24, 35, citing Quintard Assocs. v New York State Liq. Auth., 57 AD2d 462, mot to dismiss appeal granted 42 NY2d 973, Iv denied 42 NY2d 805; and 9 NYCRR 53.1 [q]). Indeed, the agency itself appears to have applied the rule consistently with section 106 in past cases, alleging some culpable mental state on the part of the licensee (see, e.g., Matter of Kelly v Duffy, 144 AD2d 792; Matter of Desiderio’s Parklane Pizzeria v Duffy, 143 AD2d 508; Matter of Jimmy Daze Inn v New York State Liq. Auth., 116 AD2d 579; Matter of 8 Christopher St. Corp. v McLaughlin, 88 AD2d 515).

By contrast, the sections relied on by the SLA do not support a no-fault rule for disorderly conduct. Alcoholic Beverage Control Law § 2 is no more than a general statement of purpose and policy; the remaining three sections cited by the SLA relate to "for cause” revocation of licenses. The first grants the SLA the authority to "revoke, cancel or suspend for cause any license or permit” (Alcoholic Beverage Control Law § 17 [3]); the second requires the SLA to prepare and furnish to each licensee a statement of the causes for which a license may be revoked (Alcoholic Beverage Control Law § 114 [5]); and the last section again states that licenses may be revoked, canceled or suspended for cause, listing two infractions that mandate revocation (Alcoholic Beverage Control Law § 118).

It is of course a fundamental principle of administrative law that agencies are possessed of only those powers expressly delegated by the Legislature, together with those powers required by necessary implication (see, Suffolk County Bldrs. Assn. v County of Suffolk, 46 NY2d 613). Even when broad rule-making authority has been granted, an agency cannot "promulgate rules in contravention of the will of the Legislature.” (Finger Lakes Racing Assn. v New York State Racing & Wagering Bd., 45 NY2d 471, 480; see also, Matter of L. Newstand, Inc. v State Liq. Auth., 151 AD2d 483, 484, lv denied 75 NY2d 710.) Whatever power the SLA may have to delineate "for cause” grounds for revocation not specified in the statute (see, e.g., Matter of Glenram Wine & Liq. Corp. v O’Connell, 295 NY 336, 342; Matter of Lehama Rest. v O’Connell, 280 App Div 796), that general authority cannot override the specific legislative mandate of an awareness element in section 106 governing disorderly conduct.

Since the SLA’s application of rule 36.1 (q) in the present cases is in direct conflict with the plain language of section 106 (6) of the Alcoholic Beverage Control Law, the charges alleging that the licensed premises have become the focal point of police attention must be dismissed.

In the case of Bayside, this ends the matter, as the only charge proffered against the licensee was that the premises had become the focal point of police attention. Indeed, Bay-side’s experience reflects how far the SLA’s application of its regulation has strayed from Alcoholic Beverage Control Law § 106 (6). Of the 18 or so incidents upon which the ALJ relied in sustaining the charge, approximately 12 were station house reports or complaints, with no officers dispatched to the licensed premises. There is thus no evidence that the licensee was made aware of any of these reports.

In the case of Beer Garden, two additional matters remain for consideration.

First, after the ALJ concluded that rule 36.1 (q) was "no fault” in nature and sustained the charges on that basis, he added that this licensee obviously was aware of what was going on. The ALJ’s added remark cannot eradicate the error of law that infected his findings. In light of his ruling that strict liability was the governing legal standard, it is moreover impossible to determine what degree of "awareness” he had in mind by the later statement. For this reason, the ALJ’s findings on the "focal point” charge, which were dispositive of the revocation and nonrenewal proceedings, must be dismissed.

Second, Beer Garden was also charged with sale to a minor in violation of Alcoholic Beverage Control Law § 65 (1) — a matter not determined by rule 36.1 (q). Given the consolidation of charges before the SLA, this surviving charge must now be remitted to the agency, requiring us to consider whether Commissioner Tillman may participate in the further proceedings. We conclude that she may not.

Commissioner Tillman was the attorney for the SLA during the entire period the matter against Beer Garden was pending before the ALJ, and the charges bore her signature. The challenge here is not to the dual investigatory/adjudicatory role of the agency. Rather it concerns an individual’s participation, as advocate for the agency’s position, in the very matter over which she is later required to pass impartial judgment (compare, Withrow v Larkin, 421 US 35).

Judiciary Law § 14 provides that no Judge shall "sit as such in, or take any part in the decision of, an action, claim, matter, motion or proceeding to which he [or she] is a party, or in which he [or she] has been attorney or counsel.” While we recognize that this provision pertains only to courts of record, the common-law rule of disqualification embodied by the statute has been applied to administrative tribunals exercising quasi-judicial functions (see, e.g., Matter of City of Rochester, 208 NY 188, 192, rearg denied 209 NY 529; Matter of Washington County Cease v Persico, 120 Misc 2d 207, 228-229, affd 99 AD2d 321, affd on other grounds 64 NY2d 923).

The SLA urges that Tillman did not actively participate in the hearing before the AU and had no actual knowledge of the facts of the present case. Mere "appearance of impropriety,” the SLA maintains, will not suffice to mandate recusal where no actual bias is shown, citing this Court’s recent decision in Matter of 1616 Second Ave. Rest. v New York State Liq. Auth. (75 NY2d 158).

In the present circumstances, we disagree. In 1616 Second Avenue, the Court was concerned with whether public statements made by the Chairman of the SLA relating to charges then pending in an SLA proceeding against a licensee disqualified the Chairman from participating in the administrative review of that proceeding (75 NY2d, at 160, supra). Those circumstances necessarily required the Court to examine the statements and determine whether the comments gave the impression that the Chairman had prejudged the facts. The present case involves a different concern for propriety: whether one who has appeared, even if it be in form only, as counsel in the prosecution of legal charges can later adjudicate that very dispute.

" 'Next in importance to the duty of rendering a righteous judgment, is that of doing it in such a manner as will beget no suspicion of the fairness and integrity of the judge.’ So vital is deemed the observance of this principle that it has been held that a judge disqualified under a statute cannot act even with the consent of the parties interested, because the law was not designed merely for the protection of the parties to the suit, but for the general interests of justice.” (Matter of City of Rochester, supra, at 192, quoting People ex rel. Roe & Roe v Suffolk Common Pleas, 18 Wend 550, 552; see also, Matter of Pelaez v Waterfront Commn., 88 AD2d 443, 447-448.)

Courts of this State, while finding no actual fault in the conduct of the hearing, have held "as a matter of propriety” that administrative officers should recuse themselves in situations where prior involvement creates an appearance of partiality (see, e.g., Matter of O’Reilly v Pisani, 79 AD2d 973, 974; Matter of Aiello v Tempera, 65 AD2d 791; Matter of Waters v McGinnis, 29 AD2d 969). Fundamental fairness requires "at least that one who participates in a case on behalf of any party, whether actively or merely formally by being on pleadings or briefs, take no part in the decision of that case by any tribunal on which [that person] may thereafter sit.” (Trans World Airlines v Civil Aeronautics Bd., 254 F2d 90, 91 [DC Cir]; see also, Matter of Bigelow v Board of Trustees, 63 NY2d 470, 474.)

Tillman’s role as Beer Garden’s "prosecutor” in this case was inherently incompatible with her subsequent participation as its Judge (see, Sharkey v Thurston, 268 NY 123, 126). That circumstance and fundamental fairness require that she recuse herself from any reconsideration of the surviving charge.

Accordingly, in Beer Garden, the order of the Appellate Division should be modified, with costs to petitioner, by remitting the matter to Supreme Court with directions to remand to the State Liquor Authority for further proceedings in accordance with this opinion. As to Bayside, the order of the Appellate Division should be modified, with costs to petitioner, by granting the petition and dismissing the charges.

Judges Simons, Alexander, Titone, Hancock, Jr., and Bellacosa concur; Chief Judge Wachtler taking no part.

In Matter of Beer Garden v New York State Liq. Auth.: Order modified, with costs to petitioner, by remitting the matter to Supreme Court, New York County, with directions to remand to the State Liquor Authority for further proceedings in accordance with the opinion herein and, as so modified, affirmed.

In Matter of Bayside Bowling & Recreation Center v New York State Liq. Auth.: Order modified, with costs to petitioner, in accordance with the opinion herein and, as so modified, affirmed.

       The rule also provides that a license may be revoked when such noise or disturbance "adversely affects or tends to affect the protection, health, welfare, safety or repose of the inhabitants of the area in which the licensed premises are located * * * or is offensive to public decency.” Petitioners were not charged with violating these provisions of the rule and thus their validity is not in issue on this appeal.


text:
    The People of the State of New York, Respondent, v Patrick Williams, Also Known as Patrick Blake, Appellant.
    Argued January 14, 1992;
    decided March 31, 1992

      POINTS OF COUNSEL

      Steven R. Bernhard for appellant.
    Unduly harsh is the appropriate ameliorating standard in the case at bar; assuming, arguendo, that mitigating circumstances need be found, suppression issues can be such mitigating factors; assuming, arguendo, that suppression issues cannot be considered mitigating, nisi prius properly exercised its discretion in finding mitigation. (Matter of Schmidt v Roberts, 74 NY2d 513; Dillard v LaVallee, 429 F Supp 35, 559 F2d 873, 434 US 999; People v Goetz, 141 AD2d 446, 73 NY2d 751; People v Felix, 58 NY2d 156; People v Battles, 117 AD2d 509, 68 NY2d 665; People v Day, 73 NY2d 208.)

      Robert T. Johnson, District Attorney (Peter D, Coddington of counsel), for respondent.
    The court below correctly recognized that the imposed probationary sentence was invalid as a matter of law; there are no circumstances here which mitigate the two-time possession of different loaded, operable handguns by appellant who was then on probation. (People v Pedraza, 107 AD2d 572, 66 NY2d 626; People v Suitte, 90 AD2d 80; People v Doleo, 110 AD2d 524; People v Fernandez, 67 NY2d 686; People v Garcia, 126 Misc 2d 579; Matter of Schmidt v Roberts, 74 NY2d 513; People v Estenson, 101 AD2d 687; United States v McCrory, 930 F2d 63; People v Felix, 58 NY2d 156; Morgenthau v Citisource, Inc., 68 NY2d 211.)
   OPINION OF THE COURT

Kaye, J.

This appeal centers on the technical legality of the sentence imposed on defendant — concurrent terms of probation for gun possession — and particularly on mitigation provisions of the Penal Law (see, § 70.02 [2] [c] [i]; [5] [b]). While agreeing with the Appellate Division that mitigation was improper here, we reach that conclusion on different grounds.

Defendant, who was serving a three-year sentence of probation imposed by a New Jersey court for marihuana possession, was arrested in New York City and charged with third degree unlawful possession of a weapon (Penal Law § 265.02) and resisting arrest (Penal Law § 205.30). At the time of the arrest, defendant was in possession of a fully loaded automatic pistol that had been defaced — the serial number removed— and showed evidence of recent discharge. While on bail, defendant was arrested a second time and again charged with unlawful possession of a fully loaded .38 caliber revolver. This gun had been reported stolen and also showed evidence of recent discharge. Defendant’s companion, a predicate felon, was charged with possession of a loaded .38 special Colt revolver.

A plea bargain was arranged covering both indictments and as a result defendant withdrew his suppression motions. Although the presumptive minimum sentence for possession of a loaded firearm is one year in prison, the court in accepting defendant’s plea suggested disposing of both indictments with a "split” sentence of six months in prison and 4 Vi years’ probation, because a one-year prison term might be "unduly harsh.”

At sentencing some time later, the People opposed the suggested sentence, citing defendant’s arrest while on probation for the New Jersey conviction. In an apparent response to the People’s contention, the court indicated it would mitigate the sentence based on the manner in which the crime was committed.

After a four-month adjournment of the sentencing, the court again stated its intention to mitigate the mandatory sentence based on the manner in which the crime was committed. In placing its reasons on the record, the court mentioned the circumstances surrounding the two police stops, noted the "strong likelihood that the weapons would not have been admissible at the trial,” and concluded that in all probability the People "would not have been able to sustain their burden of proof of probable cause.” The court then explicitly found mitigating circumstances "bearing directly on the manner in which the crimes were committed,” and imposed two concurrent five-year sentences of probation.

That was not a permissible sentence under the statute.

A person found guilty of criminal possession of a loaded handgun outside the home or place of business must be sentenced either to an indeterminate sentence of at least one to three years in prison, or to a definite prison term of no less than one year (Penal Law § 70.02 [2] [c]; see, Governor’s Mem, June 13, 1980, 1980 McKinney’s Session Laws of NY, at 1857). Two provisions allow the court discretion to reduce the mandatory sentence.

The first applies where the sentence would be unduly harsh given the nature and circumstances of the crime and the history and character of the defendant (Penal Law § 70.02 [2] [c] [i]). Mitigation under this section is permitted only if the defendant has not been convicted of a class A misdemeanor as "defined in this chapter” within the five years immediately preceding the commission of the gun possession offense.

Second, even if a defendant has committed such a disqualifying misdemeanor, a court may nevertheless impose a less severe sentence if it finds at least one of three enumerated factors: "(i) mitigating circumstances that bear directly upon the manner in which the crime was committed; or (ii) where the defendant was not the sole participant in the crime, the defendant’s participation was relatively minor although not so minor as to constitute a defense to the prosecution; or (iii) possible deficiencies in proof of the defendant’s commission of an armed felony.” (Penal Law § 70.02 [5] [b].)

The minutes indicate that after the prosecutor mentioned defendant’s prior New Jersey conviction, the trial court — apparently concluding that Penal Law § 70.02 (2) (c) (i) could not be the basis for mitigation — turned immediately to section 70.02 (5) (b) and grounded its decision to mitigate on the manner in which the crime was committed.

We therefore first consider whether the circumstances presented furnished a valid basis for mitigation under Penal Law § 70.02 (5) (b) (i).

The Appellate Division concluded that the Trial Judge applied section 70.02 (5) (b) (iii) — "possible deficiencies in proof’ — and held that possible police misconduct could not be a basis for mitigation under that provision. However, it is evident from examination of the record that the Trial Judge relied on mitigating circumstances bearing upon the manner in which the crime was committed (Penal Law § 70.02 [5] [b] [i]), not possible deficiencies in proof (Penal Law § 70.02 [5] [b] [iii]). The court repeatedly referred to the manner in which the crime was committed; by contrast, no findings are evident as to what the "possible deficiencies in proof’ might be.

Nevertheless, the trial court’s application of the mitigation provisions based on the manner in which the crime was committed must also be rejected.

"Enacted at an extraordinary session of the Legislature as a 'key’ part of a program intended to combat violent crime, section 70.02 of the Penal Law was intended to establish greater responsibility for an armed violent felony through stiffer sentencing provisions and restrictions upon plea bargaining. * * * The Legislature did not choose to abolish plea bargaining as it could have * * *. Rather it opted to limit the broad discretion previously exercised in the determination of the crime to be pleaded to and the sentence to be imposed.” (People v Felix, 58 NY2d 156, 161-162, appeal dismissed 464 US 802.) The dearth of appellate precedent under Penal Law § 70.02 (5) (b) suggests that, during the past 12 years since enactment of the statute, there has been little difficulty applying it.

Given the legislative intent to limit "the discretion available to [prosecutors and courts] where the legislature feels strongly that no mitigating circumstance should permit erosion of the specified mandatory-minimum sentence” (Mem in Support of 1980 NY Assembly Bill A 11309, at 3, in Bill Jacket for L 1980, ch 233), the mitigation provisions should be narrowly construed.

That the statute was not complied with in the present case is amply demonstrated by the record of the sentencing proceedings. Little attention was paid to making clear the particular basis for mitigation; only Penal Law § 70.02 was mentioned as the statutory authorization for the sentence. A better procedure, one facilitating appellate review in the rare case it becomes necessary, would be for trial courts to set forth in the record the statutory ground being relied on and the circumstances of the case supporting that reliance.

Because that procedure was not followed in the present case, and because the existing record demonstrates that the trial court improperly applied the statute over the People’s objection, the sentence must be vacated with leave to defendant to withdraw his pleas. The mitigating circumstances, under Penal Law § 70.02 (5) (b) (i), must relate to defendant’s conduct in committing the crime, not the conduct of the police in effecting the arrest. Whether the officers involved had probable cause to stop defendant, or his cooperation in the arrest, is irrelevant to the manner in which he committed the crime of criminal possession of a weapon.

That conclusion does not end the matter, however, since the Appellate Division remanded with instructions to the trial court to determine whether defendant’s New Jersey conviction would have been a class A misdemeanor if committed in New York for purposes of defendant’s qualification for the "unduly harsh” exception to the mandatory sentence. This was error as the statute provides that only class A misdemeanors "defined in this chapter” — meaning the New York Penal Law— act as a per se bar to such consideration.

The "unduly harsh” exception of Penal Law § 70.02 (2) (c) (i) authorizes the court to "impose any other sentence authorized by law upon a person who has not been previously convicted in the five years immediately preceding the commission of the offense for a class A misdemeanor defined in this chapter, if the court having regard to the nature and circumstances of the crime and to the history and character of the defendant, is of the opinion that such sentence would be unduly harsh.”

The People argue that the words "in this chapter” must be read more broadly, to include offenses defined in the Penal Law of any jurisdiction. That argument must be rejected.

For sentencing purposes, classification of misdemeanors depends on whether the offense is defined in the New York Penal Law ("in this chapter”) or by a statute other than the New York Penal Law ("outside this chapter”) (see, Penal Law § 55.10 [2]). We conclude that the Legislature had this dichotomy in mind when it specified the words "in this chapter” in Penal Law § 70.02 (2) (c) (i).

The authorization in Penal Law § 70.06 to consider foreign convictions further supports our reading of section 70.02. "Predicate felony conviction” is defined to include conviction "in this state of a felony, or in any other jurisdiction of an offense for which a sentence to a term of imprisonment in excess of one year or a sentence of death was authorized and is authorized in this state” (Penal Law § 70.06 [1] [b] [i]; see also, Penal Law § 70.10 ["Sentence of imprisonment for persistent felony offender”]). Penal Law § 70.02 has no comparable authorization or procedural safeguard afforded defendants charged with having committed felonies in other jurisdictions (see, CPL 400.21, 220.35; see also, People v Gonzalez, 61 NY2d 586, 589). As defendant points out, the Legislature was explicit when it intended that crimes committed in other jurisdictions affect New York sentences.

That legislative intent, additionally, is evident from a repealed Criminal Procedure Law provision, which did contemplate consideration of "equivalent” foreign misdemeanor convictions by a New York sentencing court. CPL former 400.14, enacted in 1984 as part of a legislative attempt to change the sentencing structure for certain class A misdemeanors so as to avoid mandatory jury trials, provided the procedural mechanism for determining whether a defendant was a "second crime offender.”

Under that statute, a "predicate crime conviction” had to have been "in this state * * * a misdemeanor defined in the penal law or a felony or in any other jurisdiction * * * an offense for which a sentence to a term of imprisonment in excess of fifteen days or a sentence of death was authorized in that jurisdiction, provided that such offense, if committed in this state, would have been at the time of its actual commission, a misdemeanor defined in the penal law or a felony” (CPL former 400.14 [1] [b] [i]). Other qualifying criteria and procedures were also put in place (see, CPL former 400.14 [1], [4]-[9]; see also, Governor’s Mem of Approval, L 1984, ch 673, 1984 McKinney’s Session Laws of NY, at 3632 [noting that CPL 400.14 "also contains various procedural safeguards to assure that such defendants’ rights are protected.”]).

Thus it is clear that the Legislature could and did implement procedures similar to that used for foreign felony convictions when it intended that analogous misdemeanor convictions affect sentencing. The absence of such a legislative mandate in the unambiguous language of Penal Law § 70.02 (2) (c) (i) is clear indication that only prior New York Penal Law misdemeanor convictions would automatically disqualify a defendant from consideration of whether the mandatory sentence would be "unduly harsh.” Of course, such misdemeanor convictions — even though not per se disqualifying for mitigation purposes — could still be considered by trial courts in assessing defendants’ "history and character” (see, Penal Law § 70.02 [2] [c] [i]).

In sum, we construe and apply the statute "as it is written by the Legislature, not as some judges may believe it should have been written.” (People v Olah, 300 NY 96, 102.) In Olah, involving the second felony offender statute, we concluded that a crime is to be limited by the statute that defines it, regardless of extraneous allegations in the indictment, leaving the Legislature free to broaden the relevant definition should it so desire (id.). We reach a similar conclusion here.

Accordingly, the order of the Appellate Division should be modified by remitting the matter to Supreme Court for resentencing in accordance with this opinion, and, as so modified, affirmed. As the Appellate Division noted, prior to resentencing defendant should be given the opportunity to withdraw his guilty pleas.

Chief Judge Wachtler and Judges Simons, Alexander, Titone, Hancock, Jr., and Bellacosa concur.

Order modified and case remitted to Supreme Court, Bronx County, for further proceedings in accordance with the opinion herein and, as so modified, affirmed.

      . We thus need not and do not consider whether police misconduct may provide a basis for mitigation as a possible deficiency in proof under Penal Law § 70.02 (5) (b) (iii).

      . Penal Law § 70.02 (2) (c) (i) is relevant only to the consideration of a defendant’s foreign misdemeanor convictions. Of course, any foreign felony convictions could be considered under the relevant predicate felony offender statute (see, Penal Law §§ 70.04, 70.06, 70.08, 70.10).