author: Chief Judge Wachtler.

text:
    In the Matter of Colt Industries Shareholder Litigation. Karen Woodrow et al., Plaintiffs, v Colt Industries Inc et al., Appellants. James S. Merritt Company, Respondent.
    Argued November 15, 1990;
    decided January 8, 1991

      POINTS OF COUNSEL

      Barry H. Garfinkel, Marco E. Sehnabl, Seth M. Schwartz
      and Cornelius J. Grealy for appellants.

      Robert L. Beerman, Charles W. German, W. Perry Brandt and David B. Cosgrove for respondent.
   OPINION OF THE COURT

Chief Judge Wachtler.

In this case, we consider whether the respondent, a Missouri corporation with no ties to New York, has a due process constitutional right to opt out of a New York class action in which the relief sought in the complaint was largely equitable in nature. We hold today that when a class action complaint demands predominantly equitable relief that will necessarily benefit the class as a whole if granted, the Trial Judge is not required to give class members the opportunity to opt out of the class. We also hold, however, that under that governing principle as applied to the facts of this case, the Trial Judge erred in approving a settlement agreement insofar as it purported also to extinguish the respondent’s right to pursue a cause of action in damages.

This class action stems from a 1988 corporate merger involving appellant Colt Industries Inc (Colt), a Pennsylvania corporation with offices in New York City, and appellant Morgan Stanley Group Inc. (Morgan Stanley), a New York-based securities firm. Colt and its subsidiaries were in the business of manufacturing and selling firearms and machine and engine parts. At the time the merger was announced in March of 1988, Colt had 32 million shares of common stock outstanding and approximately 16,300 shareholders of record. Of those 32 million shares, 62,000 were owned by the respondent James S. Merritt Company (Merritt), a Missouri corporation with its principal place of business in Kansas City.

In 1986, two years before the merger, Colt underwent a major recapitalization. Each share of Colt common stock held by its public shareholders was exchanged for $85 in cash and one new share. More than 30 million shares were repurchased as a result and Colt incurred $1.5 billion in debt.

In January of 1988, Morgan Stanley advised Colt of its interest in acquiring the company. A special committee consisting of Colt’s outside directors, with the assistance of Colt’s financial advisor, the First Boston Corporation, engaged in negotiations with Morgan Stanley over the terms of a merger agreement. The agreement, which was reached in March of 1988, provided that Colt Holdings Inc., a Morgan Stanley affiliate that came into existence to effectuate the merger, would make a tender offer to purchase all outstanding shares of Colt common stock at $17 per share. This tender offer was to be followed by the merger, in which all remaining shareholders would be entitled to the same $17 consideration for their stock.

The proposed merger ignited 15 separate shareholder suits in State courts in New York and Pennsylvania. Counsel for these plaintiffs stipulated to an order that consolidated these suits in Supreme Court, New York County. Thereafter, class counsel filed a first amended consolidated class action complaint naming Colt and its officers and directors as defendants. In substance, they alleged that the defendants: (1) had breached their common-law fiduciary duties to the class by offering a price per share that was grossly inadequate; (2) had engaged in a course of conduct that lacked any valid business purpose and was designed solely to eliminate the class as Colt shareholders; (3) were not exercising independent business judgment and were in fact engaging in self-dealing to the detriment of the class; and (4) had failed to solicit other, possibly more beneficial, bids from potential buyers.

In their prayer for relief, the plaintiffs demanded a declaration that the action was a class action, preliminary and permanent injunctive relief blocking the merger, rescission in the event the merger did go forward, an order requiring the defendants to disgorge all benefits that they may have received as a result of the transaction, costs and disbursements, including attorneys’ fees, and any damages as may have been sustained.

By an order on consent dated April 12, 1988, the trial court certified the class action for purposes of settlement and defined the class as consisting of Colt’s common shareholders as of March 1, 1987. The court noted that the prerequisites for a class action under CPLR 901 had been satisfied in this case. The court ordered that all members of the class be given notice of the proceeding and enjoined all class members from filing any other lawsuit in any other jurisdiction based on the facts giving rise to the New York-based class action.

The parties to the action on April 29, 1988 prepared a stipulation and agreement of compromise and settlement, based on an earlier Memorandum of Understanding. In substance, the agreement provided: (1) that Colt Holdings Inc. agreed to reduce, from $12 million to $10 million, the amount that it would be entitled to receive as reimbursement if the merger agreement were terminated; (2) Colt Holdings Inc. agreed to waive certain conditions to the offer that permitted Colt Holdings to terminate the offer or refuse to make payment for tendered shares if any change occurred in the operations or condition of Colt or if any material representations made in the merger agreement were not true and correct; (3) defendants agreed not to oppose plaintiffs’ application for attorneys’ fees in the amount of $425,000; and (4) plaintiffs agreed to the dismissal, with prejudice, of the class action, and to the release of all claims that could be asserted by the class regarding the offer and the merger.

By order dated May 10, 1988, the trial court redefined the class to include all Colt common shareholders as of March 1, 1988, scheduled a hearing for June 15, 1988 to determine whether the proposed settlement was fair and reasonable, and approved a Notice of Pendency of Action, Class Action Determination, Proposed Settlement of Class Action and Settlement Hearing that had been prepared by the parties and appended to the stipulation of settlement. The court ordered that this notice be published in the national editions of the New York Times and Wall Street Journal on or before May 17, 1988.

Merritt learned of the pendency of the class action and of the proposed settlement by reading the notice contained in the May 17 edition of the Wall Street Journal. Merritt’s attorneys sent a registered letter to the trial court, dated May 27, requesting exclusion from the class. On June 9, Merritt filed a separate action for damages against Colt and other defendants in the United States District Court for the Western District of Missouri. One day later, on June 10, Colt’s shareholders approved the merger.

On June 15, 1988, the Trial Judge signed an order denying Merritt’s application for exclusion from the class. After conducting the settlement hearing, the court approved the settlement and the request for attorneys’ fees. In the judgment, the trial court dismissed the class complaint with prejudice and enjoined class members and their successors-in-interest from asserting any "class, derivative, or individual claim for violations of federal, state, or other law, or of the common law * * * which has been or might have been asserted in the actions in connection with, arising out of or in any way related to * * * the leveraged buyout of Colt, the Agreement and Plan of Merger * * * the Offer to Purchase all outstanding shares of Colt common stock * * * the merger of Colt Transition Inc. with and into Colt * * * the consideration received or to be received by any Colt shareholder pursuant to the Offer or the Merger and the disclosures made in connection with the Offer or the Merger.” The judgment released all claims against "each individual defendant, Colt, [Colt] Holdings, Morgan Stanley Group, Inc., and The Morgan Stanley Leveraged Equity Fund II, L.P. and their respective agents, servants, attorneys, investment advisors (including, without limitation, The First Boston Corporation), current and former officers, directors and employees, partners, subsidiaries, affiliates, stockholders, heirs, executors, representatives, successors and assigns and each trust or estate in which any individual defendant has any interest.” Merritt appealed the assorted orders and judgments that denied its opt-out request, bound it to the settlement agreement and precluded it from asserting its own damage claims. The Missouri action, while currently pending, is in abeyance pending the outcome of this appeal.

The Appellate Division, First Department, ruled in Merritt’s favor (155 AD2d 154). The court stated that the merger on June 10 mooted out the class’ equitable claims and left remaining only the request for fees and expenses, which the court categorized as a claim for damages. Consequently, the court concluded that Merritt had a due process right to receive notification of the class action and to seek exclusion from the class, citing Phillips Petroleum Co. v Shutts (472 US 797).

We agree with the Appellate Division that the Supreme Court’s analysis in Shutts is relevant in determining whether Merritt had a right to opt out of the class. We believe, however, that the Appellate Division rested its reading of Shutts, and consequently its holding, upon a faulty premise— that the June 10 merger mooted the class’ equitable claims and converted the entire action into one for damages. The only element of the complaint that became moot upon consummation of the merger was the request for an injunction preventing the merger from going forward. The class’ request for rescission, also an equitable remedy (see generally, Dobbs, Remedies § 4.3, at 254-256), certainly remained viable and indeed only became tenable after the merger was completed. Had the trial court not given its approval to the settlement, it is at the very least possible that the class would have pursued its action against the defendants and ultimately obtained rescission of the merger. It is not our role at this juncture to consider the merits of such a claim or to pass upon the likelihood that rescission would have been granted under the facts of this case. We note only that the class requested in its complaint that the court rescind the merger if it went forward and that this prayer for relief survived the shareholder vote approving the merger. This alone, then, undermines the Appellate Division’s conclusion that the merger converted the action into one for damages.

We note further that the request for fees and expenses contained in the consolidated class complaint was improperly characterized by the Appellate Division as a claim for damages. " '[T]he foundation for the historic practice of granting reimbursement for the costs of litigation other than the conventional taxable costs is part of the original authority of the chancellor to do equity in a particular situation’ ” (Mills v Electric Auto-Lite, 396 US 375, 392-393, quoting Sprague v Ticonic Natl. Bank, 307 US 161, 166).

Having determined that the Appellate Division erred as a matter of law in concluding that the relief sought by the class in this case lost its equitable character when the merger was consummated on June 10, we must now consider a question that the Appellate Division did not: whether a member of a class that is seeking predominantly equitable relief has a due process right to opt out of the class.

This question was expressly left open by the United States Supreme Court in Phillips Petroleum Co. v Shutts (supra). The Court held in that case that in a State court class action for money damages, an out-of-State class member with no ties to the forum State could nonetheless be bound by a judgment entered there, provided he was adequately represented (see, Hansberry v Lee, 311 US 32, 42-43, 45) and had notice of the action "plus an opportunity to be heard and participate in the litigation, whether in person or through counsel.” (472 US, at 812.) In addition, "due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an 'opt out’ or 'request for exclusion’ form to the court.” (Id.) But in a footnote to the majority opinion, the Court stated explicitly that its holding was "limited to those class actions which seek to bind known plaintiffs concerning claims wholly or predominately for money judgments.” (Id., at 811, n 3.) The Court "intimate[d] no view concerning other types of class actions, such as those seeking equitable relief.” (Id.)

"The class suit was an invention of equity to enable it to proceed to a decree in suits where the number of those interested in the subject of the litigation is so great that their joinder as parties in conformity to the usual rules of procedure is impracticable.” (Hansberry v Lee, 311 US 32, 41, supra; see also, Stern v Carter, 82 AD2d 321, 325-327 [Titone, J.].) The Supreme Court’s distinction in Shutts between class actions seeking equitable and monetary relief is consistent with the pattern in State class action statutes and in rule 23 of the Federal Rules of Civil Procedure to accord varying degrees of procedural protection to class members depending upon the relief sought by the class. For example, the 1938 Federal Rules of Civil Procedure gave recognition to three types of class actions, which were known as "true,” "hybrid” and "spurious,” imposing different requirements and giving different binding effect to the judgments in each of these three categories (see, e.g., Kennedy, Class Actions: The Right to Opt Out, 25 Ariz L Rev 3, 14-15). The "true” class action was defined as involving "joint, common or secondary rights,” where, but for the class action device, the joinder of all interested parties would have been required. The "true” class action was mandatory in the sense that class members were bound by the judgment and were not given an opportunity to opt out of the class (id., quoting 3B Moore’s Federal Practice ][ 23.08, at 23-2505 app [2d ed 1982]; see also, Advisory Comm Note to 1966 Revision of Fed Rules Civ Pro, rule 23, at 39 FRD 98).

The "hybrid” class action did not involve joint or common rights; rather, it involved " 'several’ rights related to 'specific property’ ” (see, Advisory Comm Note, op. cit., at 98). This class action was partially mandatory in that "the member’s interests would be bound to the extent of the disposition of property or a fund within the jurisdiction of the court, but otherwise the member’s interest would not. be bound” (see, Kennedy, op. cit., at 14-15). By contrast, the "spurious” class action, involved " 'several’ rights affected by a common question and related to common relief’ (Advisory Comm Note, op. cit., at 98). Prior to the 1966 amendment of the Federal Rules, members of this class were not given the opportunity to opt out of the class per se; rather, they would not be bound by the judgment unless they actually "opted in,” thereby affirmatively consenting to be bound (id.).

The 1966 amendments to rule 23 changed the 1938 scheme dramatically, but again gave class members varying degrees of procedural protection depending upon the posture of the parties and the exact nature of the relief sought by the class. The amended rule defined three types of class action, known generally as the (b) (1), (b) (2) and (b) (3) class actions based upon their placement within the rule. In the (b) (1) class action, which authorizes class certification to prevent "inconsistent or varying adjudications” or individual judgments that would threaten the interests of others not party to the litigation, class members are not granted a right to opt out of the class and there is no requirement that each class member be given notice of the pendency of the action. Similarly, there is no right to notice or opt out in a Federal class action brought under rule 23 (b) (2), which applies to actions for equitable or declaratory relief. Only in class actions brought under rule 23 (b) (3) are notice and opt out mandated. In these class actions, the certifying court has determined "that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.”

New York’s class action statute (CPLR 901-909) has much in common with Federal rule 23 (see generally, Friar v Vanguard Holding Corp., 78 AD2d 83, 90-96; see also, Brandon v Chefetz, 106 AD2d 162, 168-171). The prerequisites to the filing of a New York class action are virtually identical to those contained in rule 23 (compare, CPLR 901 and Fed Rules Civ Pro, rule 23 [a]). First, the class must be "so numerous that joinder of all members, whether otherwise required or permitted, is impracticable.” Second, common questions of law or fact must predominate over individual claims. Third, the claims of the representative parties must be typical of those of the class as a whole. Fourth, the representatives must fairly and adequately represent the class. Finally, the class action must be superior to other methods of settling the controversy (see, Weinberg v Hertz Corp., 116 AD2d 1, affd 69 NY2d 979; Friar v Vanguard Holding Corp., supra, at 96-100).

More importantly for our purposes here, however, the New York statute also looks to the relief sought by the class in determining what process is due the class members. Section 904 (a) deals with class actions brought predominantly for injunctive or declaratory relief and provides that in such an action "notice of the pendency of the action need not be given to the class” unless the court believes notice to be necessary and determines that the cost of notice will not prevent the action from going forward. Subdivision (b) applies to all other class actions and provides that "reasonable notice” must be given according to the instructions of the court.

Unlike rule 23, the New York statute does not specifically mandate opt out for cases of a certain type. The statute clearly contemplates, however, that a Judge may choose to exercise discretion to permit a class member to opt out of a class (see, CPLR 903 ["(w)hen appropriate the court may limit the class to those members who do not request exclusion from the class within a specified time after notice”]; CPLR 904 [c] [III] [in considering the type of notice to be given to class members, the court should consider "the stake of each represented member of the class, and the likelihood that significant numbers of represented members would desire to exclude themselves from the class or to appear individually”]).

The question left open by the Supreme Court’s holding in Shutts, then, is whether the jurisdictional and due process concerns addressed by that decision effectively eliminate the mandatory class action as a matter of constitutional law, despite the fact that both State and Federal governments have for years recognized the need for mandatory classes where certain types of relief are sought. We conclude that the Trial Judge committed no error in refusing to give Merritt the opportunity to exclude itself from the class when it was first certified because there is no due process right to opt out of a class that seeks predominantly equitable relief.

In arriving at this decision, we look to the reasons for treating equitable relief differently from damage relief in this context. When a class seeks to compel certain behavior on the part of an entity, whether it be a governmental agency or a private corporation, certain considerations come into play that distinguish the situation from a private damage suit. First, because the class seeks to enjoin actual conduct that it considers to be detrimental to the class, there is an interest in consolidating the action in a single forum in order to avoid the possibility of conflicting judgments from different jurisdictions which would subject the defendants to varying and possibly inconsistent obligations (see, e.g., Weber, Preclusion and Procedural Due Process in Rule 23 (b) (2) Class Actions, 21 U Mich J of L Reform 347, 366-367). So long as the Judge certifying a class seeking predominantly equitable relief makes a finding that the prerequisites to bringing a class action — numerosity, predominance, typicality, adequacy of representation and superiority — are satisfied (see, Friar v Vanguard Holding Corp., supra), we believe that the due process rights of the class members, whatever their ties to the forum State, are protected. With claims of this kind, a judgment benefits the class as a whole, and any interest in promoting individual control of litigation is outweighed by the importance of obtaining a single, binding determination.

Further, where a class action suit seeks to bind defendants to a certain course of conduct, the resolution of that action, especially if the case is settled before trial, will involve the careful fashioning of a remedy that accommodates both the class’ and the defendants’ interests. That was certainly the case here, where the parties worked out a settlement that accorded the class relief that was primarily equitable in nature but at the same time recognized the interests of the defendants in having the merger proceed. To permit limitless collateral challenges under these circumstances would greatly diminish the possibility that complicated class actions for equitable relief would ever settle before trial, because it would be likely that compromises carefully arrived at would be unraveled by subsequent litigation in other jurisdictions. The specter of later, equally binding litigation in different jurisdictions around the country would doubtless inject a note of uncertainty into class actions for equitable relief and would upset expectations on both sides that a final judgment ordering specific conduct could ever be truly final (see, Note, Developments in the Law — Class Actions, 89 Harv L Rev 1318, 1400-1401).

Our review of the complaint convinces us that at the time this class action was certified, the class was primarily seeking injunctive relief. As noted above, the court was under no statutory duty to grant Merritt the opportunity to opt out of the class. Because of the distinct concerns that come into play when a class seeks primarily equitable relief, we conclude that there was similarly no due process constitutional right to opt out of the class at the time the class was certified.

It does not follow from the foregoing, however, that the court’s approval of the final settlement was proper. ”[0]ne of the strengths of CPLR article 9 is its flexibility. A decision granting class action status is not immutable and if later events indicate that the decision should be reversed, altered or amended, requisite relief is authorized.” (Friar v Vanguard Holding Corp., supra, at 100.) Specifically, CPLR 902 authorizes the court to alter or amend the order granting certification, CPLR 906 permits the court to sever issues for class determination or to divide the class into subclasses, and CPLR 902 permits the court to make, alter, or amend any order dealing with procedural matters (see, Friar v Vanguard Holding Corp., supra, at 100).

This case would be much easier if the judgment purported simply to preclude the relitigation of the class members’ equitable claims. In a case of that kind, the foregoing analysis would compel the conclusion that Merritt was not entitled to opt out of this action and that Merritt is precluded from bringing any individual action for injunctive relief in any other forum, despite the fact that it does not possess minimum contacts with New York State. That, however, is not this case, and Merritt’s lack of contacts with New York troubles us enormously when we consider the fact that the settlement purports to extinguish its rights to pursue a damage remedy as well.

We are well aware of the fact that we can neither dictate nor predict the res judicata effect that the New York judgment will be given by the Federal court in Missouri (see, Restatement [Second] of Judgments § 86 [2], comment e). What we can do, however, is to review the trial court’s determination that this settlement was fair, reasonable, and adequate and decide whether its decision to approve the settlement was .error in light of the circumstances present in this case.

We hold that the trial court did err as a matter of law by seeking to bind an absent plaintiff with no ties to New York State to a settlement that purported to extinguish its rights to bring an action in damages in another jurisdiction. We reach this conclusion based on our consideration of the terms of the settlement reflected in the judgment, on our reading of Shutts, and on our belief that the Supreme Court in that decision intended to afford substantial protections to out-of-State plaintiffs in State class action suits.

The settlement in this case gave class members relief that was essentially equitable in nature, but exacted as a price for that relief a concession that the class members could not pursue damage claims based on the merger. This aspect of the settlement poses special difficulties because while contained in an agreement granting largely equitable relief, it nonetheless impinges upon a distinct right — the right to pursue a claim in damages. Thus, to the extent that the terms in this settlement had an impact upon the entirely separate and distinct right of the class members to pursue damage claims, thé Supreme Court’s analysis in Shutts and the due process concerns discussed in the body of that opinion become relevant.

In Shutts, the Court acknowledged that a class member’s cause of action was a constitutionally protected property interest (472 US, at 807). Although the Court held that an absent class member need not possess minimum contacts with the forum State to be bound by a judgment in damages obtained by the class, the Court also required that certain procedural prerequisites be satisfied before the class member could be bound, including an opportunity to be excluded from the class. In this case, the court denied Merritt the opportunity to exclude itself from a settlement that extinguished rights the Supreme Court has recognized are deserving of constitutional protection. That the settlement arose out of a class action seeking equitable relief does not change the fact that property rights entitled to due process protection were implicated by the settlement’s terms. Thus, we believe that the Supreme Court’s holding in Shutts controls our analysis of the damage aspects of this case and that the due process concerns that motivated the Court in that case also have a place in the disposition of this one.

Despite the fact that Merritt had notice of the action and could have chosen to appear to contest the settlement, we do not believe that this was sufficient to protect Merritt’s property interest in its cause of action in damages against Colt and other parties involved in the merger. The interest in obtaining a single binding judgment and in satisfying the expectations of the parties that such a judgment precludes additional litigation is not sufficiently compelling for us to ignore the jurisdictional and procedural impediments to binding out-of-State class members to class settlements such as this one without giving them the opportunity to exclude themselves from the class. CPLR article 9 is remarkably flexible and provides for a wide range of procedural and administrative approaches in the handling of class action disputes. The Trial Judge, for example, could have created subclasses instead of seeking to bind all class members to a settlement of this kind (see, CPLR 906). To adhere to a rigid view of the efficacy of the class action device without considering the jurisdictional and due process implications of that position was error.

Our recognition that the class complaint here sought predominantly equitable relief in no way alters our conclusion that it was erroneous for the trial court to approve a settlement that purported to extinguish Merritt’s damage claims. By precluding out-of-State class members from litigating damage claims without giving them a chance to opt out of the class, the settlement negated the long-standing practice of distinguishing between class actions for monetary and equitable relief and granting varying degrees of procedural protection depending upon the relief sought. If the class complaint had sought only monetary relief or both substantial monetary relief and equitable relief, Shutts would have required that Merritt be given an opportunity to opt out of the class once it was certified. The mere fact that the relief initially demanded was largely equitable should not permit the court to circumvent the Supreme Court’s holding in Shutts and bind Merritt to a settlement that eliminates constitutionally protected property interests without due process. The degree of due process accorded plaintiffs and the binding effect consequently accorded settlements should not be made to depend wholly upon the way in which class counsel styles an action through the mechanism of the class complaint. Litigants should not be able to subvert substantial constitutional rights by sleight of hand and artful pleading.

In conclusion, the Trial Judge was not required to give Merritt an opportunity to opt out of the class at the time that the class was certified, because at that juncture, the relief sought was predominately equitable. Given the class complaint as filed, the court properly considered the value of consolidating the action in a single forum and reaching one binding determination. However, once the parties presented the court with a settlement that accorded equitable relief and in turn required the class members to give up all claims in damages, the nature of the adjudication changed dramatically. We conclude that the trial court erred when it approved a settlement of this kind without affording Merritt the due process protections outlined in Shutts.

We have considered the parties’ remaining arguments and find them to be without merit. Accordingly, the order of the Appellate Division should be modified, with costs to respondent, by (1) vacating so much thereof as grants Merritt’s request to be excluded from the class and directs that Merritt is not bound by the class action insofar as it seeks equitable relief, (2) denying Merritt’s request to be excluded from the class, and (3) adjudging that Merritt is riot bound by the class action settlement insofar as Merritt seeks to assert an action for damages. As so modified, the Appellate Division order should be affirmed.

Judges Simons, Kaye, Alexander, Titone, Hancock, Jr., and Bellacosa concur.

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


source: Caselaw Access Project

author: Alexander, J. Titone, J.

license: Public Domain

text:
    Art Masters Associates, Ltd., et al., Respondents, v United Parcel Service, Appellant.
    Argued September 11, 1990;
    decided December 20, 1990

      POINTS OF COUNSEL

      George G. Gallantz, Francis D. Landrey, Scott A. Eggers, James Crawford, Steve D. Shadowen and Nicolette Parisi for appellant.

      Alfred C. Polidore for respondents.

      Kenneth E. Siegel, of the Virginia Bar, admitted pro hac vice, for American Trucking Associations, Inc. and another, amici curiae.

   OPINION OF THE COURT

Alexander, J.

In I.C.C. Metals v Municipal Warehouse Co. (50 NY2d 657), we held that in an action for conversion, where a warehouse fails to adequately explain its failure to return bailed goods, it is not entitled to the benefit of its contractual limitation of liability. Thus, conversion is presumed and the bailor is entitled to recover the full value of the undelivered goods without proving a conversion by the bailee.

In this case, the Appellate Division concluded that this presumption of conversion also applies to common motor carriers who fail to deliver bailed goods upon demand. That court affirmed Supreme Court’s grant of summary judgment to plaintiff on its common-law negligence cause of action, but denied defendant’s motion for summary judgment on plaintiff’s cause of action for conversion and severed that cause. The case is before us by leave of the Appellate Division, upon the certified question: "Was the order of this court dated December 29,1989 properly made?” For reasons that follow we reverse the order below and answer the certified question in the negative.

I

In the spring of 1985, after having acquired a number of original Erte paintings from a gallery in England, Art Masters Associates, Ltd. and Kram Trading consigned six of the paintings to Benjamin’s Art Gallery in Buffalo, New York, to be sold. When by July, the paintings had not been sold, Art Masters and Benjamin agreed that the paintings would be returned to Art Masters.

Benjamin thereafter delivered the paintings to defendant United Parcel Service (UPS) for delivery to Art Masters in Brooklyn, New York, and filled out a "pick-up” slip, which provided, in part, that "[u]nless a greater value is declared in writing on this receipt, the shipper hereby declares and agrees that the released value of each package * * * covered by this receipt is $100 which is a reasonable value under the circumstances surrounding the transportation.” Benjamin declared the value of the package to be $999.99 and paid $2.25 for the shipment based on a fee schedule of 25 cents for each $100 increment of value over the initial $100 in accordance with the provisions of the UPS tariff filed with and approved by the Interstate Commerce Commission (ICC) and the New York State Department of Transportation.

Although the paintings were scheduled to arrive on July 19, 1985, Art Masters never received them. On that day, the Art Masters’ employee left the premises for some 15 minutes and when she returned, she saw a UPS delivery truck in the next block. She asked the driver whether any delivery had been made to Art Masters and was told that a package had been left at the side door of the building. The package was not there and was never located. In response to a request that a trace be made, UPS produced a copy of a delivery sheet containing an illegible signature. The signature apparently did not belong to any Art Masters’ employee.

Art Masters declined UPS’ tender of $999.99, the declared value of the package, and commenced this suit seeking $27,000 as the full value of the six paintings. The company alleged two causes of action; the first sounding in negligence-based common-law liability of common carriers and the second in conversion. Among the affirmative defenses interposed by UPS was the limitation of liability based on the declared value of the package.

Motions for summary judgment by both parties ensued. Supreme Court granted summary judgment to Art Masters on that branch of its motion predicated on UPS’ common-law liability, inasmuch as UPS failed to demonstrate that the nondelivery did not result from its negligence. Damages were limited, however, to the $999.99 declared value. The court granted summary judgment to UPS on the conversion cause of action, however, concluding that because UPS was a common carrier operating under the jurisdiction of the ICC, Federal law was applicable. Thus Art Masters’ failure to demonstrate that the loss was due to UPS’ willful or intentional conduct was fatal to its conversion cause of action.

In denying summary judgment to UPS on the conversion claim, the Appellate Division, concluding that Supreme Court erred in applying Federal law, held that State law applied and that under I.C.C. Metals v Municipal Warehouse Co. (50 NY2d 657, supra), "Art Masters established a prima facie case of conversion * * * based upon its undisputed allegations that Benjamin delivered the Erie paintings to UPS and that Art Masters never received them.” (153 AD2d 41, 48-49.)

UPS argues that the presumption of conversion applied to warehouses in I.C.C. Metals should not be extended to regulated motor carriers because to do so would conflict with the intent of the New York State Legislature that State law, as embodied in section 181 of the Transportation Law, be consistent with the Federal law as embodied in the Carmack Amendment to the Interstate Commerce Act (49 USC §§ 10730, 11707). UPS argues that because such a presumption of conversion is not applied under Federal law, it should not be applied as a matter of State law. Because no distinction between the applicable Federal and State statutes and their underlying purposes would support our not following the Federal scheme and for the reasons stated below, we agree with UPS.

II

A

Although common carriers are precluded from exempting themselves from all liability for loss or damage or injury to goods entrusted to them, both the Carmack Amendment (49 USC § 10730) and the New York Transportation Law (§ 181) permit regulated motor carriers to limit their liability for loss, damage or injury to such property to the agreed-upon declared or released value of the property.

It has long been the Federal law governing interstate shipments of goods that stipulations between a shipper and a carrier limiting the carrier’s liability for the loss, damage or injury to goods entrusted to the carrier are enforceable as supported by sound principles of fair dealing and freedom of contracting (Adams Express Co. v Croninger, 226 US 491, 511) and cannot be avoided "by suing in trover and laying the failure to deliver as a conversion” (American Ry. Express Co. v Levee, 263 US 19, 21). The Supreme Court held in American Ry. Express Co. v Levee, that a local rule "applied as to the burden of proof narrowed the protection that the [carrier] had secured, and therefore contravened the law.” (Id.) As the Ninth Circuit Court of Appeals observed in Glickfeld v Howard Van Lines (213 F2d 723, 727) "the cases are uniform in holding that the conversion doctrine is pertinent only when there has been a true conversion, i.e., where the carrier has appropriated the property for its own use or gain.” Federal courts routinely require that in the presentation of claims for damages for the nondelivery of goods, in order to avoid application of agreed-upon limitation of liability, a claimant must establish a true conversion — a defendant’s willful or intentional misconduct occasioning the nondelivery; where no such proof is forthcoming, the agreed-upon limitation of liability is enforced (see, Lerakoli, Inc. v Pan Am. World Airways, 783 F2d 33, 37-38, cert denied 479 US 827; Nippon Fire & Mar. Ins. Co. v Holmes Transp., 616 F Supp 610, 611-612; see also, Vogelsang v Delta Air Lines, 302 F2d 709, 712, cert denied 371 US 826).

B

This Court, likewise, has held that where there is an agreed-upon limitation of liability in a contract of carriage, the carrier may not be cast in damages, upon a theory of conversion, for the full value of the property it failed to deliver unless there is proof of actual conversion (see, Wamsley v Atlas S. S. Co., 168 NY 533). In Wamsley, we observed that "There are cases in which evidence of demand and refusal is sufficient to sustain a recovery in conversion, but this rule applies against common carriers only in exceptional cases. The general rule is that a common carrier is not liable in conversion for mere non-feasance, although he may be liable for negligence. So on the contrary he may be held in trover when he is guilty of misfeasance, although the wrong may have been unintentional.” (Id., at 536.) In Wamsley, we relied upon our prior holding in Magnin v Dinsmore (70 NY 417) that while proof of nondelivery, along with other evidence, may establish negligence, "[a] mere non-delivery will not constitute a conversion” (id., at 417; see also, Magnin v Dinsmore, 62 NY 35) and the plaintiff could not avoid the limitations of the contract of carriage by proof of nondelivery alone. Thus, it has long been the settled rule in this State that a carrier is entitled to the benefit of a contractual limitation upon its liability for nondelivery unless the shipper establishes that the nondelivery resulted from the carrier’s affirmative wrongdoing (D’Utassy v Barrett, 219 NY 420, 424; see also, Reichman v Compagnie Generate Transatlantique, 290 NY 344, 352, cert denied 320 US 771).

Art Masters argues, as does the dissent, that this rule has been changed by our holding in I.C.C. Metals (50 NY2d 657, supra) a case involving the failure of a warehouse to deliver, on demand, valuable goods stored with it for approximately two years. There, the warehouse was unable to offer more than speculation as to the reason the goods were missing. We held "that proof of delivery of the stored property to the warehouse and its failure to return that property upon proper demand suffices to establish a prima facie case of conversion” (id., at 660) and divests the warehouse of the benefit of the liability-limiting provisions of the storage agreement. The burden was placed upon the warehouse to come forward with evidence sufficient to prove that its failure to return the property did not result from its conversion of that property to its own use and thus overcome the presumption of conversion. We held that only if the warehouse proffered sufficient proof to satisfy the trier of fact of the truth of its explanations would the bailor be required to prove the warehouse at fault in order to recover.

Our decision in I.C.C. Metals however, gave no indication that we intended to apply the presumption of conversion to common motor carriers. Quite the contrary; our consideration was directed to the question of "whether a warehouse which provides no adequate explanation for its failure to return stored property upon proper demand is entitled to the benefit of a contractual limitation upon its liability.” (Id., at 660 [emphasis supplied].) Considering the issue now, we conclude that the presumption of conversion articulated in I.C.C. Metals should not be extended to common motor carriers. Common carriers of property by motor vehicle are highly regulated in New York under the provisions of article 8 of the Transportation Law (see, Transportation Law § 170 et seq.) as are common motor carriers engaged in interstate commerce (see, 49 USC § 10521 et seq.). The New York State Legislature has consistently expressed an intent that intrastate motor carriers in this State be regulated under statutory schemes consistent with the Federal regulatory scheme relating to motor carriers engaged in interstate commerce. In 1906, Congress enacted the Carmack Amendment permitting carriers to limit their liability to the declared or released value of goods so long as that declared value determined the shipping rates charged and an opportunity to declare a higher value was afforded (see, Act of June 29, 1906, ch 3591, 34 US Stat 584, 585). Shortly thereafter, in 1907, our Legislature enacted section 38 of the Public Service Commissions Law to essentially mirror the provisions of the Carmack Amendment (see, L 1907, ch 429).

Congress’ Motor Carrier Act of 1935 (49 US Stat 543) incorporated the Carmack Amendment. New York’s Legislature followed suit in 1938, enacting article 3-B of the Public Service Law (L 1938, ch 543, § 2) also incorporating the New York version of the Carmack Amendment now located at section 181 of the Transportation Law. This 1938 legislation followed the recommendation of the Joint Legislative Committee on Motor Carriers and Transportation that: "intrastate motor carriers should be placed within the jurisdiction of a State regulatory body empowered to regulate intrastate operations along lines similar to the Federal Motor Carrier Act, so as to secure complete coordination between Federal and State authorities in the regulation of motor transportation. State regulations and Federal regulation should go hand in hand. There should be cooperation between this State and the Federal Government so far as it is practicable” (Report of Joint Legis Comm on Motor Carriers and Transportation, 1936 NY Legis Doc No. 93, at 15 [emphasis supplied]).

Given the close similarity between the Federal and State statutes under consideration and the common purpose served by the two statutes, it is consistent with sound principles of statutory construction, that the statutes be construed harmoniously (see, All Seasons Resorts v Abrams, 68 NY2d 81, 87; Matter of Fink v Lefkowitz, 47 NY2d 567, 572, n). Moreover, construing the provisions of Transportation Law § 181 consistent with the construction of the Carmack Amendment by the Federal courts comports with the prior decisions of this Court limiting the liability of a common carrier to the declared or released value in respect to claims of conversion based solely on nondelivery of shipped goods (see, D’Utassy v Barrett, 219 NY 420, supra; Wamsley v Atlas S. S. Co., 168 NY 533, supra). Contrary to the assertions of the dissent, extension of the I.C.C. Metals rule to common carriers is not merely a matter of procedure; it would effectively change the substantive law of conversion as applied to motor carriers by allowing recovery without any affirmative proof of the carrier’s wrongdoing, and thus "narrow[ing] the protection * * * the [carrier] had secured” (see, American Ry. Express Co. v Levee, 263 US 19, 21, supra). Indeed, it will actually shape the outcome of a case because it grants the full relief sought — the actual value of a shipped parcel notwithstanding the parcel’s declared value— upon a mere allegation of nondelivery solely because of the carrier’s inability to explain the parcel’s whereabouts. Such a rule hardly comports with sound principles of fair dealing and freedom of contract and indeed would be "unjust and contrary to the policy of the law” (D’Utassy v Barrett, 219 NY 420, 425, supra).

Accordingly, the order of the Appellate Division should be reversed, with costs, and defendant’s motion for summary judgment dismissing plaintiffs’ second cause of action granted. The certified question should be answered in the negative

Titone, J.

(dissenting). In refusing to apply the holding in I.C.C. Metals v Municipal Warehouse Co. (50 NY2d 657) to the present case involving a common carrier, the majority has, without explanation, revived a line of cases that was expressly discarded as "essentially irreconcilable” in I.C.C. Metals (id., at 667) and, further, has ignored the sound policy considerations rooted in "practical necessity” on which the I.C.C. Metals decision was based. In the process, the majority has created a dual standard of proof for conversion actions against bailees — one for actions in which the bailee is a warehouse operator and another for cases in which the bailee is a common carrier. Since, as discussed below, the majority’s stated reasons for differentiating among bailees in this manner are unpersuasive, I offer my own dissenting views.

At the outset, I would stress that the issue here is not, as the majority opinion suggests, whether "a carrier is entitled to the benefit of a contractual limitation upon its liability for nondelivery” unless the carrier’s affirmative wrongdoing is established (majority opn, at 207, citing D’Utassy v Barrett, 219 NY 420, 424). As is true under the applicable decisional law at both the State and Federal levels, a carrier may generally limit its liability for lost packages to the packages’ declared value (see, 49 USC § 10730 [Carmack Amendment]; Transportation Law § 181), but such limitations do not apply when the carrier has been guilty of conversion (e.g., Bank of Oswego v Doyle, 91 NY 32; Glickfeld v Howard Van Lines, 213 F2d 723). This exception to the general rule, which is acknowledged by both parties, is based on the sound premise that no party should be able to insulate itself by contract from liability for its own intentional torts (see, e.g., Reichman v Compagnie Generale Transatlantique, 290 NY 344, 352, cert denied 320 US 721).

Accordingly, as even defendant concedes, a carrier may be held liable for the full value of undelivered goods, despite a lower "declared” value, if its responsibility for a conversion has been established under the prevailing rules of evidence. The problem in this case — a common one in cases involving failure to return bailed goods — is how the occurrence (or nonoccurrence) of a conversion is to be established. It is on this point that the Court’s prior decision in I.C.C. Metals is instructive and, in my view, controlling.

In I.C.C. Metals v Municipal Warehouse Co. (50 NY2d 657, supra), this Court held that in a conversion action based on a bailee-warehouse’s failure to redeliver goods to the bailor, the bailor may prevail by simply showing that the goods were delivered to the bailee and were thereafter not returned unless the bailee sustains the burden of coming forward with an explanation of what happened to the goods. This rule, which was derived from principles traditionally applied in negligence actions against bailees (e.g., Stewart v Stone, 127 NY 500; Claflin v Meyer, 75 NY 260; see, PJI 4:93, at 1090; Richardson, Evidence § 109 [Prince 10th ed]), does not shift the burden of proof to the bailee. Rather, as the I.C.C. Metals Court observed (supra, at 666), it merely places the initial onus of explaining the circumstances surrounding the loss on the party in the best position to know. Once that initial burden of explanation is sustained, the bailor must persuade the trier of fact, by a preponderance of the evidence, that the bailee was at fault (id.).

Faced with the question of whether this ancient rule of evidence for negligence actions was also applicable to conversion actions, the I.C.C. Metals Court examined the prior decisions on the subject (id., at 666-667). It compared the cases on which the majority now relies (Reichman v Compagnie Generale Transatlantique, 290 NY 344, supra; Wamsley v Atlas S. S. Co., 168 NY 533; see also, Central School Dist. No. 3 v Insurance Co., 43 NY2d 878) with the cases not cited by the majority here, which held that a bailor establishes a prima facie case of conversion by simply proving delivery to the bailee and the bailee’s failure to return them upon demand (Proctor & Gamble Distrib. Co. v Lawrence Am. Field Warehousing Corp., 16 NY2d 344; Bank of Oswego v Doyle, 91 NY 32, 41, supra; Claflin v Meyer, 75 NY 260, 263, supra; see also, 1 Harper and James, Torts § 2.27). Finding the cases "essentially irreconcilable,” the I.C.C. Metals Court decided to "re-examine the matter” entirely in light of the underlying policy considerations rather than attempting to engage in a pointless dissection of the case law (50 NY2d, at 667, supra). The majority now concludes that the I.C.C. Metals decision is not controlling in, and should not be extended to, conversion cases involving common carriers, which are subject to Federal regulation. In my view, however, neither conclusion is sustainable.

Initially, the majority concludes that in imposing the burden of explanation on the warehouse operator in the case before it, the I.C.C. Metals Court did not intend to "change” the law as it relates to other classes of bailees, most notably common carriers. That conclusion, however, rests on a very weak reed: i.e., the I.C.C. Metals Court’s specific use of the terms "warehouse” and "stored property” in its opening description of the issue before it (see, majority opn, at 207-208, 208, n 6, quoting 50 NY2d, at 660, supra). That no meaningful inference can be drawn from this stylistic happenstance is underscored by the fact that the I.C.C. Metals Court set forth its ultimate holding in significantly broader terms applicable to all bailees (50 NY2d, at 667, supra ["(w)e now conclude that there exists no sound reason to apply a different rule to (negligence and conversion actions) where, as here, the bailee comes forward with insufficient proof of its explanation for the loss of the bailed goods”] [emphasis supplied]). As the foregoing comparison reveals, there is little to be gained from a line-by-line textual analysis that focuses on the number of times — or the contexts in which — the I.C.C. Metals Court used terms that were descriptive of the specific parties before it rather than the applicable generic legal terms of "bailor” and "bailee”.

More meaningful than a linguistic analysis is one that looks to the case law and underlying principles with which the I.C.C. Metals Court was concerned. In this regard, the I.C.C. Metals Court’s undifferentiated references to cases involving warehouses and cases involving common carriers suggest that the limitation now identified by this majority was simply not contemplated by that Court (see, 50 NY2d, at 666-667, supra, citing Proctor & Gamble Distrib. Co. v Lawrence Am. Field Warehousing Corp., supra [warehouse]; Reichman v Compagnie Generale Transatlantique, supra [carrier]; Wamsley v Atlas S. S. Co., supra [carrier]; Bank of Oswego v Doyle, supra [carrier]; Claflin v Meyer, supra [warehouse]). Further, the policy considerations that the I.C.C. Metals Court deemed critical (see, at 215, infra) are equally applicable to most bailees, including carriers, regardless of the precise service they provide. Thus, in the absence of some highly persuasive circumstance justifying the superimposition of a new limitation, the I.C.C. Metals rule should be fully applicable in this situation.

The "persuasive circumstance” on which this majority relies is the existence of a Federal regulatory scheme which affects common carriers and provides a potential ground for differentiating carriers from warehouse operators. However, in my view, the existence of a Federal regulatory scheme is an insufficient ground to depart from the sound I.C.C. Metals evidentiary rule.

It is true, as the majority stresses, that our application of the I.C.C. Metals burden of going forward to common carriers would render the rules governing intrastate conversion actions in New York somewhat different from those that govern in interstate disputes required to be settled under Federal law. It is also true that the State laws governing common carriers were intended to be applied in a manner consistent with the Federal regulatory scheme (see, Report of Joint Legis Comm on Motor Carriers and Transportation, 1936 NY Legis Doc No. 93, at 15 [hereinafter Joint Legis Rep]). Our State Legislature’s preference for uniformity, however, is not necessarily contravened by applying a local rule of evidence such as the I.C.C. Metals rule that differs from the Federal equivalent. First, as the majority observes, the Legislature intended only that the Motor Carrier Act, now codified at section 181 of the Transportation Law, be applied "along lines similar to,” rather than identical to, the Federal Motor Carrier Act to facilitate "cooperation between this State and the Federal Government so far as it is practicable” (Joint Legis Rep, at 15 [emphasis supplied]). New York’s present rule for contractual limitations of liability is already quite "similar” to the Federal rule, since both schemes permit carriers to limit their liability by agreement to the declared value of the goods and both schemes would withhold the benefits of such agreements from carriers who have been guilty of conversion (see, Bank of Oswego v Doyle, 91 NY 32, supra; Glickfeld v Howard Van Lines, 213 F2d 723, supra). As the Court noted in I.C.C. Metals (supra, at 667), a rule placing the burden of explanation on the bailee does not increase the bailee’s duty of care, nor does it lead to the imposition of strict liability. Thus, application of the I.C.C. Metals rule would not lead to a divergence in the substantive Federal and State principles of tort law that are supposed to guide carriers’ behavior.

Second, even as cited by the majority, the legislative aim in enacting a local version of the Federal Motor Carrier Act was to secure "coordination between Federal and State authorities in the regulation of motor transportation” (Joint Legis Rep, at 15 [emphasis supplied]). Manifestly, a divergence in the rules of evidence affecting the manner in which the courts resolve litigated disputes between carriers and their customers does not in any way impair this goal of coordination and cooperation among regulatory officials at each level of government. Thus, contrary to the majority’s suggestion, there is no clear legislative mandate requiring abrogation of the I.C.C. Metals rule in common carrier cases.

Nor are there any sound policy reasons supporting such a result. Contrary to the majority’s assertion, it is simply not accurate to state that a rule relieving carriers of any duty to explain "comports with the prior decisions of this Court” (majority opn, at 209, citing D’Utassy v Barrett, supra; Wamsley v Atlas S. S. Co., supra; see also, majority opn, at 206-207). At least one prior decision of this Court (Bank of Oswego v Doyle, 91 NY 32, supra) stated that a prima facie case of conversion against a carrier is established upon a showing that the goods were delivered to the carrier and not returned on the customer’s demand. Moreover, of the two cases on which the majority now relies, only one is on point (Wamsley v Atlas S. S. Co., 168 NY 533, supra). The other, D’Utassy v Barrett (219 NY 420, supra), merely held that a conversion action did not lie when it was known that the goods were stolen by the bailee’s employee, acting outside the scope of his employment, and the bailee himself was not culpable. The decision, which was based on a record in which the fate of the missing goods was stipulated, plainly has no bearing on the question presented here, i.e., how should the initial burden of demonstrating what happened to the goods be allocated. Finally, and most importantly, the majority’s assertion about the import of the prior cases completely overlooks I.C.C. Metals’ discussion of those cases, as well as its conclusion that the precedent was so hopelessly inconsistent as to be useless for purposes of analysis (50 NY2d, at 666-667, supra). Nothing in the present majority’s analysis suggests a reason why that rejected line of cases should suddenly be revived. Indeed, the majority’s attempt to suggest that Bank of Oswego v Doyle (supra) was superseded by Wamsley v Atlas S. S. Co. (supra; see, majority opn, at 206, n 5) is particularly ironic in light of I.C.C. Metals’ explicit rejection of the latter case as useful precedent.

Additionally, although the majority places great weight on it (majority opn, at 209), the theoretical value of applying the State scheme regulating contractual limitations of liability so that it is perfectly "harmonious” with the Federal system is unimpressive when compared to the strong public policies favoring application of the I.C.C. Metals rule to common carriers. A bailor generally loses all control over its property after delivering it into the hands of a carrier, and thus it is the carrier that "is in the best, if not the only, position” to discover and explain the circumstances surrounding the property’s disappearance or destruction (I.C.C. Metals v Municipal Warehouse Co., supra, at 665 [emphasis supplied]). A rule requiring the bailor to prove in the first instance that the property was lost through an act of conversion, rather than negligence or accident, would impose a "well nigh impossible burden” and would "encourage both dishonesty and carelessness” by enabling an unscrupulous carrier to obtain the benefits of a liability limitation clause through "the simple expedient of professing ignorance as to the fate of the goods.” (Id., at 665, 667.) In light of these self-evidently important concerns, which the majority here has inexplicably ignored, it seems clear beyond peradventure that our State’s public policy interest in imposing a minimal burden of explanation on the carrier, as previously recognized in I.C.C. Metals, more than outweighs our intangible interest in precise Federal-State uniformity and compels application of the I.C.C. Metals rule to this action arising under State law.

In sum, neither relevant considerations of public policy nor the existence of a different view among the Federal courts on the burden of proof problem supports the proposition that common carriers, unlike warehouse operators, should be exempt from having to explain the circumstances surrounding a loss or destruction of property entrusted to their care when challenged in an action alleging conversion. It is a legal commonplace that "if a fact lies peculiarly within the knowledge of a party, that party has the burden of proof with respect to it” (Richardson, Evidence §99, at 78 [Prince 10th ed]). A fortiori, the same should be true of the lesser burden of simply explaining what happened to a package that the carrier was given by its customer. Indeed, common carriers have long been burdened with the duty of coming forward with an explanation when they are charged with negligence (Richardson, op. cit., § 109; see, e.g., Claflin v Meyer, 75 NY 260, supra). I see no reason why they should be relieved of that duty when the charge is the more serious one of conversion. Since the contrary rule endorsed by the majority, in effect, rewards those carriers that are least effective in managing their packages and keeping track of the goods entrusted to their care, it represents bad policy. Accordingly, I must, respectfully, dissent.

Chief Judge Wachtler and Judges Hancock, Jr., and Bellacosa concur with Judge Alexander; Judge Titone dissents and votes to affirm in a separate opinion in which Judge Simons concurs; Judge Kaye taking no part.

Order reversed, etc.

      . Both Art Masters Associates and Kram Trading are plaintiffs and will be referred to collectively as Art Masters.

      . Neither party contests the Appellate Division’s affirmance of that part of Supreme Court’s order, thus the only issue before us is the effect of the I.C.C. Metals presumption of liability in the conversion cause of action.

      . Transportation Law § 181 provides, in part: "Every common carrier of property by motor vehicle shall, upon demand, issue either a receipt or a bill of lading for all property delivered to it for transportation. No contract, stipulation or clause in any receipt or bill of lading shall exempt any common carrier of property by motor vehicle from any liability for loss, damage or injury caused by it to property * * * provided, however, that when expressly authorized or required by order of the commissioner a carrier may establish and maintain rates dependent upon the value declared in writing by the shipper or agreed upon in writing as the released value of the property, in which case such declaration or agreement shall have no other effect than to limit liability and recovery to an amount not exceeding the value so declared * * *. Every common carrier of property by motor vehicle shall be liable for all loss, damage or injury to property caused by delay in transit due to negligence while the same is being carried by it, but in any action to recover for damages sustained by delay in transit the burden of proof shall be upon the defendant to show that such delay was not due to negligence. Nothing in this section shall deprive any holder of such receipt or bill of lading of any remedy or right of action which such holder has under existing law” (emphasis supplied).

      . 49 USC § 10730 provides, in part: "The Interstate Commerce Commission * * * may require or authorize a carrier * * * providing transportation or service * * * to establish rates for transportation of property under which the liability of the carrier for that property is limited to a value established by written declaration of the shipper, or by a written agreement, when that value would be reasonable under the circumstances surrounding the transportation.”

      . The dissent’s reliance upon Bank of Oswego v Doyle (91 NY 32) — a case decided nearly 20 years before Wamsley — to support its contention that a contrary rule regarding carriers prevailed prior to I.C.C. Metals, is misplaced. Although the Oswego Court discusses carriers’ liability, it is clear that the defendant’s liability was predicated upon its capacity as a warehouseman (see, Bank of Oswego v Doyle, 91 NY, at 42).

      . Although the dissent correctly indicates that the I.C.C. Metals Court spoke in terms of "all bailees” (dissenting opn, at 212), the question presented for decision pertained to warehouses only. It is axiomatic that "[principles are not established by what was said, but by what was decided * * * unless it relates directly to the question presented for decision” (People ex rel. Metropolitan St. Ry. Co. v State Bd. of Tax Commrs., 174 NY 417, 447).

      . Section 174 of the Transportation Law (L 1970, ch 267, § 3) embodied the recodification of section 63-v of the Public Service Law. In 1983, section 174 of the Transportation Law was recodified and is now section 181 (see, L 1983, ch 635, § 6).

      . The majority cites American Ry. Express Co. v Levee (263 US 19, 21) for the proposition that "a local rule 'applied as to the burden of proof narrow[s] the protection that the [carrier] had secured, and therefore contravene[s] the law.’ ” (Majority opn, at 206.) However, as is evident from the Supreme Court’s subsequent references to that case, the quoted language in American Ry. means nothing more than that State courts must apply the Federal evidentiary rules governing the burden of proof when adjudicating rights arising under Federal law (e.g., South Buffalo Ry. Co. v Ahern, 344 US 367, 372; Robins Dry Dock Co. v Dahl, 266 US 449, 457; Davis v Wechsler, 263 US 22, 25). The case has no bearing on the entirely separate question of when Federal rules governing the burden of proof should be incorporated in actions such as this based on local law.

      . The majority refers to the problem presented here as one of "statutory construction” (majority opn, at 209). However, the principle that contractual liability limitations are inapplicable in conversion cases is, in fact, a judicially created exception to the general statutory rule authorizing such limitations. A fortiori, the question of what rules of evidence and proof should be applied is, at least in this State, a matter for common-law analysis rather than statutory construction. Accordingly, the "rules” of statutory construction relied on by the majority are, at best, of limited utility here.


author: Titone, J.

text:
    Evelyn Rodriguez et al., Appellants, v Manhattan Medical Group, P. C., et al., Respondents.
    Argued November 13, 1990;
    decided December 27, 1990

      POINTS OF COUNSEL

      William Kirchhofer for appellants.

      Thomas Samuel Nogaro and Michael Saunders for respondents.
   OPINION OF THE COURT

Titone, J.

Although a medical malpractice action must ordinarily be brought within 2Vi years after the act, omission or failure complained of, the time for commencing an action based on the discovery of a "foreign object” does not begin to run until the date the object was, or should have been, discovered (CPLR 214-a). This appeal requires us to consider whether a "fixation device” originally implanted in a patient’s body for a specific treatment purpose is transformed into a "foreign object” within the meaning of this rule when a physician retained to remove it negligently fails to do so. We now hold that the "fixation device” does not become a "foreign object” in these circumstances and that, accordingly, plaintiffs’ complaint was properly dismissed as time barred.

According to the complaint’s allegations, plaintiff had an intrauterine device (I.U.D.) inserted into her uterus in 1980 as a birth control measure. Approximately two years later, when she and her husband decided to begin having a family, plaintiff made an appointment with defendant Manhattan Medical Group to have the I.U.D. removed. On November 5, 1982, plaintiff was examined by defendant Dr. Klein, an employee of the Group. Having failed to locate the I.U.D. during the examination, Klein ordered X rays to be taken of plaintiff’s lower abdomen. When the X rays did not disclose the presence of an I.U.D., Klein met with plaintiff on December 17, 1982 and informed her that she could attempt to conceive without the need for any further medical procedures.

Plaintiff’s efforts to become pregnant over the next 3Vi years were unsuccessful. By the spring of 1986, she was experiencing heavy vaginal bleeding, leading her to consult with a new physician, Dr. Radney. A sonogram ordered by Dr. Radney revealed the presence of an I.U.D. embedded in the uterus wall. Plaintiff ultimately had to be admitted to the hospital so that the I.U.D. could be surgically removed.

On February 19, 1987, more than four years after her last consultation with Klein, plaintiff and her husband commenced the present action against Klein and the Manhattan Medical Group, alleging that Klein had acted negligently in failing to discover the presence of the I.U.D. Defendants subsequently interposed CPLR 214-a’s 21/i-year Statute of Limitations as an affirmative defense. In response, both plaintiffs invoked the special statutory rule for "foreign objects” and argued that the limitations period on their medical malpractice claim had not begun to run until the I.U.D.’s continued presence in plaintiff’s uterus was discovered.

On cross motions to test the validity of this defense, Supreme Court rejected plaintiffs’ efforts to bring their case within the special statutory provisions for actions "based upon the discovery of a foreign object.” Holding that the I.U.D. was a "fixation device” and was therefore not a foreign object as that term is used in the statute, Supreme Court dismissed the complaint in an order that was affirmed by a closely divided Appellate Division panel. Plaintiffs then appealed to this Court, as a matter of right (see, CPLR 5601 [a]), arguing that while the I.U.D. may have originally been a deliberately implanted "fixation device,” it became a "foreign object” when defendants left it in place after having been retained for the specific purpose of removing it. We now reject plaintiffs’ argument and affirm the lower courts’ dismissal of their complaint.

Traditionally, the limitations period for bringing a medical malpractice action has been held to run from the date that the last act of alleged malpractice was performed rather than from the date that the resulting injury was discovered (see, e.g., Conklin v Draper, 254 NY 620, affg 229 App Div 227). Recognizing the harshness of this rule in cases where the harm could not have been discovered before the Statute of Limitations had expired (see, e.g., Schwartz v Heyden Newport Chem. Corp., 12 NY2d 212, 219 [Desmond, Ch. J., dissenting], cert denied 374 US 808), this Court in Flanagan v Mount Eden Gen. Hosp. (24 NY2d 427) recognized a narrow exception to this rule in cases where a "foreign object,” such as surgical clamps, had accidentally been left inside the patient’s body. In such cases, the Court held, the Statute of Limitations should begin to run not from the date of the negligent act, but rather from the date on which the malpractice was, or should reasonably have been, discovered.

In support of this holding, the Court noted that the primary purpose of the Statute of Limitations, i.e., to weed out "belated, false or frivolous claims”, was not undermined by the recognition of this exception, since suits based solely on the presence of negligently implanted "foreign objects” do not "raise questions as to credibility” and do not "rest on professional diagnostic judgment or discretion.” (24 NY2d, at 431, supra.) Further, because the unremoved object in Flanagan "retain[ed] its identity” despite the passage of time, the physician’s ability to defend, which is often implicated in cases involving "stale” claims, was not "unduly impaired.” Finally, the fact that there could be no possible break in the causal chain connecting the alleged negligence to the injury supported the adoption of a "foreign object” exception to the general accrual rule (id., at 430-431).

Following the Court’s ground-breaking decision in Flanagan, several lower courts attempted to extend its analysis to cases not involving tangible paraphernalia accidentally left inside the patient’s body (see, e.g., Merced v New York City Health & Hosps. Corp., 56 AD2d 553, revd 44 NY2d 398 [negligently performed tubal ligation discovered following emergency surgery for ectopic pregnancy]; Matter of Smalls v New York City Health & Hosps. Corp., 55 AD2d 537, revd 44 NY2d 398 [lesion caused by negligently performed cervical myelogram]; Dobbins v Clifford, 39 AD2d 1 [damage to pancreas during course of operation to remove spleen]; Murphy v St. Charles Hosp., 35 AD2d 64 [malfunction in surgically implanted prosthetic device]; but see, Schiffman v Hospital for Joint Diseases, 36 AD2d 31 [declining to apply Flanagan rule to erroneous diagnosis of malignancy]). In several of these decisions, the courts relied on the factors mentioned in the Flanagan opinion, notably the supposed absence of professional judgment or discretion, the lack of a possible break in the causal chain and the small danger of a false claim, and concluded that the use of a discovery accrual date was warranted even though no specific "foreign object” was involved.

Further judicial extension of the doctrine was curtailed, however, when, in 1975, the Legislature enacted CPLR 214-a and incorporated in the new statute a narrow version of the "foreign object” exception to the traditional accrual rule (L 1975, ch 109, § 6). Under the new statute, an action for medical malpractice "must be commenced within two years and six months of the act, omission or failure complained of * * * provided, however, that where the action is based upon the discovery of a foreign object in the body of the patient, the action may be commenced within one year of the date of such discovery or of the date of discovery of facts which would reasonably lead to such discovery, whichever is earlier” (emphasis supplied). The statute specifically excludes "chemical compound[s], fixation device[s] [and] prosthetic aid[s] or device[s]” from the definition of the term "foreign object.” This exclusion was inserted specifically to overcome efforts by the intermediate appellate courts to expand Flanagan by applying it "to instances where fixation devices were inserted in a patient’s body for the purpose of treatment” (Bill Jacket, Governor’s Program Bill Mem, at 4 [hereinafter Governor’s Mem]).

Any remaining uncertainty about the reach of the Flanagan discovery rule was eliminated when this Court stated in Beary v City of Rye (44 NY2d 398, 415) that the enactment of CPLR 214-a "left * * * no room but to conclude that [the Legislature] intended that Flanagan not be broadened beyond its existing confines.” Our continuing commitment to that premise has been reiterated on many occasions, and in several different contexts (see, e.g., Goldsmith v Howmedica, Inc., 67 NY2d 120; Martin v Edwards Labs., 60 NY2d 417; Thornton v Roosevelt Hosp., 47 NY2d 780; see also, Matter of Steinhardt v Johns-Manville Corp., 54 NY2d 1008, appeal dismissed and cert denied 456 US 967; Reis v Pfizer, Inc., 48 NY2d 664).

In light of this history, it seems clear that plaintiffs cannot prevail in their present effort to broaden the definitions of the terms used in CPLR 214-a so as to extend the "foreign object” doctrine’s applicability. The I.U.D. that prevented plaintiff from conceiving and ultimately became embedded in her uterus was originally placed in her body deliberately as a contraceptive device with a specific medical purpose. Accordingly, at least at the outset, it was a "fixation device” and not a "foreign object” within the meaning of CPLR 214-a (see, McLaughlin, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, C214-a:3, at 603 ["a foreign object is one that the doctor does not intend to leave inside the body”]; see also, Mitchell v Abitol, 130 AD2d 633).

Moreover, contrary to plaintiffs’ contentions, the I.U.D. did not become a "foreign object” when defendants failed to remove it after having been retained to do so. This notion of a transformation in a "fixation device’s” character resulting from a physician’s postinsertion negligence is evidently derived from a legal theory pertaining to undetected and unremoved I.U.D.s that has recently been advanced by some lower courts and commentators. Under this theory, an I.U.D. that remains in the body after it should have been removed as part of a course of treatment sought by a patient becomes, " 'or t[akes] on the character of, a "foreign object” because it then ha[s] no function to perform [and] no longer belong[s] in the body’ ” (Sternberg v Gardstein, 120 AD2d 93, 96; see, Ooft v City of New York, 80 AD2d 888; Darragh v County of Nassau, 91 Misc 2d 53, affd 63 AD2d 1010; Mayotte v Bauer, 130 Misc 2d 946; Taddeucci v Weitzner, 130 Misc 2d 853; McLaughlin, Practice Commentaries, op. cit., at 604; Carlisle, Civil Practice Survey, 39 Syracuse L Rev 75, 124-125; but cf., Szakalski v Aubry, 148 AD2d 972; Dunaway v Ball, 116 Misc 2d 409).

The theory on which plaintiffs rely, however, is flawed by its failure to appreciate the context in which the term "foreign object” was initially used to establish an exception to the general rule of accrual upon impact. In Flanagan v Mount, Eden Gen. Hosp. (supra), the patient was suing the practitioners who had actually left the surgical clamps in her body and the focus of her claim was that very act. Here, in contrast, there is no claim against the physician who actually inserted the I.U.D.; instead, plaintiffs are seeking recovery from a different treating physician on the theory that his treatment of the patient in connection with the previously inserted I.U.D. was negligent. In other words, plaintiffs are not suing because a "foreign object” was negligently inserted, but rather because there was a subsequent medical omission, allegedly negligent, which caused her injuries. The "foreign object” exception first recognized in Flanagan was specifically tailored to cover only the former category of claims. It should not now be extended to apply in these very different circumstances (see, Beary v City of Rye, 44 NY2d 398, 415, supra). Indeed, the gist of plaintiffs’ claim , i.e., a negligent failure to detect the continued presence of a previously inserted device, is most logically classified as one involving misdiagnosis — a category for which the benefits of the "foreign object” discovery rule have routinely been denied (e.g., Matter of Soto v Greenpoint Hosp., 76 AD2d 928; see, Siegel, NY Prac § 42, at 44; see also, Dunaway v Ball, supra, at 410 ["foreign object” exception not applicable where defendant doctor was not involved in its implantation]).

The inapplicability of the "foreign object” exception to these circumstances is reinforced by an examination of the special analytical factors that were deemed significant in Flanagan. The claim in this case, unlike the claim in Flanagan, clearly rests on defendants’ alleged negligence in exercising "professional diagnostic judgment or discretion.” (Flanagan v Mount Eden Gen. Hosp., 24 NY2d, at 431, supra.) Further, a claim based on injuries arising from a failure to diagnose such as that asserted by plaintiffs involves a far more problematic chain of causation than one based on injuries arising from the negligent implantation of a surgical instrument or other "foreign object” (see, id., at 430). Additionally, in contrast to the Flanagan suit, actions such as plaintiffs’ do "raise questions as to credibility”, since they require the fact finder to assess conflicting evidence as to whether the defendant physician’s diagnostic methods and conclusions were consistent with contemporary professional standards of care (see, id., at 431). Thus, at least three of the elements considered important in Flanagan are lacking here. Finally, as was noted in Beary v City of Rye (44 NY2d, at 414, supra), the codification of the judicially created "foreign object” rule in CPLR 214-a precludes our adoption of a more flexible discovery rule for these cases even if "considerations similar to those which motivated the court in Flanagan [c]ould be applied with like effect to the * * * different circumstances [presented here].”

In the final analysis, this case is no different from any other medical malpractice action in which it is claimed that a physician negligently failed to detect a condition within the patient’s body requiring treatment or surgical removal. Application of CPLR 214-a’s "foreign object” exception to this case would thus represent a giant step toward precisely what the statute’s drafters feared: "bringing virtually all medical malpractice cases under the discovery rule” (Bill Jacket, Governor’s Mem, op. cit., at 4). Since such a result is plainly inconsistent with the Legislature’s intentions, we are duty-bound to reject it.

Inasmuch as plaintiffs’ claim does not fall within the statutory exception for actions "based upon the discovery of a foreign object,” the limitations period began to run on or about December 17, 1982, the date that Klein allegedly told plaintiff that the I.U.D. was no longer, in her body. The present action, brought more than four years after that date, is thus untimely under the 2V£-year Statute of Limitations governing medical malpractice actions. Hence, the complaint was properly dismissed.

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

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

Order affirmed, with costs.


author: Simons, J.

text:
    James P. Corcoran, as Superintendent of Insurance of the State of New York and as Liquidator of Nassau Insurance Company, Respondent, v Ardra Insurance Company, Ltd., et al., Appellants.
    Argued November 15, 1990;
    decided December 20, 1990

      POINTS OF COUNSEL

      James Veach and Eugene A. Leiman for appellants.

      William F. Costigan and Patricia A. Griffin for respondent.
   OPINION OF THE COURT

Simons, J.

The issue presented is whether plaintiff, the State Superintendent of Insurance acting as liquidator of an insolvent insurance company, can be compelled to arbitrate the insolvent’s claims against a foreign reinsurer. It arises because defendant Ardra Insurance Company, Ltd., a Bermuda reinsurance corporation, and its principals seek to compel plaintiff to arbitrate Ardra’s liability to the insolvent, Nassau Insurance Company, for reinsurance proceeds allegedly due pursuant to three international reinsurance agreements containing arbitration clauses. Defendants claim that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention) supersedes article 74 of the New York Insurance Law, which authorizes the Superintendent to sue on behalf of insolvent insurance companies, and requires the Superintendent to arbitrate with Ardra on Nassau’s behalf. We conclude that the Convention, as a United States treaty, preempts conflicting Federal and State law, but that it excepts the Superintendent from arbitration in this case and allows him to proceed against Ardra in the main action. Accordingly, we affirm the order of the Appellate Division.

I

Nassau Insurance Company was a New York corporation licensed by the Superintendent to conduct insurance business in New York. It was owned by defendants Jeanne S. DiLoreto and Richard A. DiLoreto, its president. In 1976, the DiLoretos established defendant Ardra Insurance Company, Ltd., a foreign reinsurance corporation under their exclusive ownership, which had its principal and only place of business in Hamilton, Bermuda. Jeanne DiLoreto served as president of Ardra. Between 1978 and 1982, Nassau and Ardra entered into three international reinsurance agreements. The agreements covered policies written by Nassau concerning commercial automobile liability, general liability, lawyers professional package liability, excess liability and personal injury protection benefits written under New York automobile statutory no-fault coverage. Pursuant to the contracts, Ardra assumed a substantial portion of the risk insured in each policy written by Nassau and in consideration Nassau paid Ardra $10,682,924.84 in reinsurance premiums. Each agreement contained a broad arbitration clause requiring extrajudicial resolution of any dispute between Nassau and Ardra.

Nassau subsequently became insolvent and, after efforts to rehabilitate the company failed, the Superintendent commenced a liquidation proceeding pursuant to article 74 of the Insurance Law. In June 1984, Supreme Court appointed plaintiff liquidator and authorized him to take various actions to wind up Nassau’s affairs, including taking possession of property, collecting outstanding debts, paying claims arising under policies issued by Nassau, collecting reinsurance on those claims, and commencing necessary proceedings. Nassau’s corporate charter was forfeited and the company was dissolved.

Plaintiff entered into his duties and began to settle claims on Nassau policies. Ardra paid plaintiff reinsurance proceeds due on some of these claims but stopped doing so in February 1985. At that time, Richard DiLoreto sent a letter to the Superintendent stating that Ardra was repudiating the reinsurance agreements with Nassau because the Superintendent refused to allow Ardra’s representatives to participate directly in court proceedings involving third-party claims against Nassau’s insureds. In response, the Superintendent commenced this action seeking reinsurance balances allegedly owed by Ardra to Nassau and damages from the DiLoretos resulting from their purported use of "shell” corporations such as Ardra to obstruct recovery on Nassau’s obligations to its creditors and insureds. Defendants moved to dismiss the complaint and compel arbitration under the terms of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (June 10, 1958, 21 UST 2517, TIAS No. 6997), a United States treaty, and provisions of the Federal Arbitration Act implementing it (9 USC § 201 et seq.).

Supreme Court denied the motion, holding that the McCarran-Ferguson Act (15 USC § 1011 et seq.) which specifically permits States to regulate insurance companies, insulates plaintiff from the requirements of the Convention and the Federal Arbitration Act. The Appellate Division affirmed, holding that arbitration was not required because various exceptions in the Convention exempted the Superintendent from its provisions.

II

The threshold question is preemption. The Supremacy Clause provides that “all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land” (US Const, art VI, cl 2). Any Federal or State law that "prevents the Federal Government from 'speaking with one voice’ in international trade” must bow to superior authority (Japan Line v County of Los Angeles, 441 US 434, 453-454; see also, Mitsubishi Motors v Soler Chrysler-Plymouth, 473 US 614, 631; Zschernig v Miller, 389 US 429, 441). If the Convention requires arbitration, it preempts provisions of the McCarran-Ferguson Act, the Federal Arbitration Act and the State Insurance Law empowering the Superintendent to litigate on behalf of an insolvent insurance company (see, Cooper v Ateliers de la Motobecane, 57 NY2d 408, 411-412 [proceeding to obtain attachment order prior to arbitration of dispute arising out of international agreement violates Convention]). The focus, therefore, must be on the Convention, not the Federal statutes, and whether the Superintendent is exempt from its provisions.

III

In 1958, 45 nations convened in New York under the auspices of the United Nations to resolve difficulties in existing international agreements and private law impairing international arbitration. Resolution was important not only to secure the several advantages available in domestic arbitration — speed, informality, economy, expertise of decisionmakers (see generally, Sablosky v Gordon Co., 73 NY2d 133, 138) — but more importantly to enact uniform standards for the enforcement of such contracts thus minimizing uncertainties in dealing with unfamiliar laws in several foreign jurisdictions (see, Scherk v Alberto-Culver Co., 417 US 506, 520, n 15; Cooper v Ateliers de la Motobecane, 57 NY2d, at 410, supra; Quigley, Accession by the United States to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 70 Yale LJ 1049, 1051). To this end, the Convention subsequently adopted provides that the courts of acceding nations must recognize arbitration clauses contained in international commercial agreements and the resulting arbitral awards (United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards, art II, If 1; art III, 21 UST, at 2519).

Although the United States attended and participated in the 1958 conference, it did not sign the treaty. The United States Senate gave its advice and consent to ratification 10 years later, in October 1968, and accession was delayed until enactment of amendments to the Federal Arbitration Act implementing the Convention in 1970 (9 USC § 201 et seq.; see, McMahon, Implementation of the UN Convention on Foreign Arbitral Awards in the US, 26 Arb J 65, 67). In acceding to the Convention, the Senate restricted the treaty’s application to commercial matters (see, 9 USC § 202; Mitsubishi Motors v Soler Chrysler-Plymouth, 473 US 614, 639, n 21, supra).

Plaintiff’s first contention is that this limitation bars arbitration of the present dispute because he is acting as a fiduciary, implementing a statutory regulatory scheme at the direction of the Court, and that his activities do not constitute "commercial” matters (see, Matter of Knickerbocker Agency [Holz], 4 NY2d 245, 251). The commercial nature of the relationship is determined at the inception of the agreement, however, not at the time of enforcement and there can be little doubt that the original agreement between Nassau and Ardra arose "out of a legal relationship * * * considered as commercial” under domestic law (9 USC § 202; see, Island Territory of Curacao v Solitron Devices, 356 F Supp 1, 13, affd 489 F2d 1313).

Nevertheless, it is apparent that the drafters did not intend to compel arbitration in all cases involving international commercial disputes because the Convention excepts certain contracts from its terms. As Secretary of State Katzenbach noted in recommending accession to President Johnson and the Senate, these exceptions "provide substantial safeguards to American citizens against any misuse of the arbitration process” (Senate Doc E, 90th Cong, 2d Sess, at 4 [1968]).

The exceptions relevant to this case are found in article II of the Convention. They require recognition of an arbitral agreement only when it "concern[s] a subject matter capable of settlement by arbitration” and provide that the court of an acceding nation may refuse to refer disputing parties to arbitration if the international agreement "is null and void, inoperative or incapable of being performed” (United Nations Convention, art II, ffff 1, 3, 21 UST, at 2519). These exceptions are implemented by examining the domestic law of an acceding nation (see, Mitsubishi Motors v Soler Chrysler-Plymouth, 473 US, at 639, n 21, supra; see also, Quigley, op. cit., at 1064; Contini, International Commercial Arbitration: The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 8 Am J Comp L 283, 296; Smit, A-National Arbitration, 63 Tul L Rev 629, 631). In the United States statutes provide that insurance is generally a matter of State concern and that the laws of the individual States govern (McCarran-Ferguson Act, 15 USC §§ 1011, 1012 [b]; see also, Bankruptcy Code, 11 USC § 109 [b] [2] [which exempts insurance companies from its provisions]). Thus, in this case, the law to be applied in interpreting the exceptions is article 74 of the New York Insurance Law.

As a result of Nassau’s insolvency, and plaintiff’s substitution to liquidate its assets, the contractual parties and their relationship have changed. Nassau no longer exists. Plaintiff steps into its shoes, in the sense that he succeeds to its property, but he is a fiduciary, appointed by the court, subject to its exclusive jurisdiction and possessing only the powers authorized by the Legislature (see, Insurance Law art 74). He holds office as liquidator solely to protect the interests of policyholders, stockholders and the public and has no authority to pursue the commercial interests which motivated the original parties to conclude the reinsurance agreements (Insurance Law § 7417; see, Matter of Knickerbocker Agency [Holz], 4 NY2d 245, 250, supra).

Although the Legislature has granted the Superintendent plenary powers to manage the affairs of the insolvent and to marshal and disburse its assets, the statutory scheme does not authorize his participation in arbitration proceedings. Over 30 years ago this Court held, when examining an earlier version of the Insurance Law, that absent express authority to do so the Superintendent could not engage in arbitration when acting as a liquidator (see, Matter of Knickerbocker Agency [Holz], supra, at 251-253). Despite that ruling and periodic amendments to the Insurance Law, the Legislature has not granted the Superintendent the authority to arbitrate disputes. Under the statute’s provisions, the subject matter of the claims against Ardra must be litigated in Supreme Court. The arbitration clause is "incapable of being performed” (United Nations Convention, art II, 1[ 3), therefore, and the claims are not "capable of settlement by arbitration” (art II, [| 1) under the applicable domestic law.

This interpretation is also supported by article V of the Convention which specifies when arbitral awards may be denied recognition. It provides that an award need not be enforced if "[t]he subject matter of the difference is not capable of settlement by arbitration under the law of that country [where recognition and enforcement are sought]” (art V, fl 2 [a]). The practical result of the parallel provisions contained in articles II and V is to relieve the parties from having to proceed through a futile arbitration in which the resulting award would be unenforceable in New York because of the Supreme Court’s exclusive jurisdiction in liquidation matters (see, Matter of Knickerbocker Agency [Holz], 4 NY2d 245, supra).

These exceptions are properly construed to effect New York’s strong public policy concerns by maintaining Supreme Court’s exclusive jurisdiction over liquidation proceedings. Arbitrators are private individuals, selected by the contracting parties to resolve matters important only to them. They have no public responsibility and they should not be in a position to decide matters affecting insureds and third-party claimants after the contracting party has failed to do so. Resolution of such disputes is a matter solely for the Superintendent, subject to judicial oversight, acting in the public interest.

IV

We recognize strong policy concerns of international comity which enjoin us to enforce arbitration agreements when the Convention requires it (see, Mitsubishi Motors v Soler Chrysler-Plymouth, 473 US 614, 629, supra; Scherk v Alberto-Culver Co., 417 US, at 516-517, supra). Moreover, it is the policy in New York to encourage resolution of disputes through arbitration, particularly conflicts arising in the context of international commercial transactions (see, Cooper v Ateliers de la Motobecane, 57 NY2d, at 411, supra).

The underlying concerns of the Convention are not implicated here, however. The DiLoretos were the principals of Ardra and Nassau and both companies were wholly owned by them. Nassau and the DiLoretos were New York residents and were amenable to process in New York, both personally and by designation of a New York agent to receive process, and the contracts specifically referred to New York law in various clauses. Under the circumstances, the parties had reason to anticipate at the time the contracts were executed that New York law applied to them and to know from established precedent that arbitration was not an authorized remedy under article 74 of the Insurance Law in the event of Nassau’s insolvency (Matter of Knickerbocker Agency [Holz] supra). Thus, the case does not present an international merchant subjected to unfamiliar judicial proceedings and the vagaries of foreign law requiring us to exercise a "sensitivity to the need of the international commercial system for predictability in the resolution of disputes” (Mitsubishi Motors v Soler Chrysler-Plymouth, 473 US, at 629, supra; see, Cooper v Ateliers de la Motobecane, 57 NY2d, at 410-411, supra).

We conclude, therefore, that although the reinsurance agreements fell within the broad terms of the Convention, plaintiff is excepted from arbitration because the arbitration clause and the dispute alleged to be subject to it are not capable of performance and settlement under the law of New York.

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.

      . Defendants removed the action to Federal court but the United States District Court for the Southern District of New York remanded the action to Supreme Court, holding that abstention principles required that the New York courts be provided an opportunity to rule on whether the UN Convention preempts the New York Insurance Law and requires the Superintendent to arbitrate with Ardra (Corcoran v Ardra Ins. Co., 657 F Supp 1223, appeal dismissed and petition denied 842 F2d 31).

        . The relevant provision of the McCarran-Ferguson Act provides: "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance * * * unless such Act specifically relates to the business of insurance” (15 USC § 1012 [b]).