author: Graffeo, J. Chief Judge Lippman (dissenting).

text:
    [985 NE2d 415, 961 NYS2d 820]
    The People of the State of New York, Respondent, v Rafael L. Belliard, Appellant.
    Argued January 2, 2013;
    decided February 12, 2013

      POINTS OF COUNSEL

      Timothy P. Donaher, Public Defender, Rochester (David R. Juergens of counsel), for appellant.
    Rafael Belliard’s guilty plea was involuntary, because the trial court failed to warn him of a direct, adverse consequence—that Penal Law § 70.25 (2-a) would require the new determinate sentences of imprisonment to run consecutively to Mr. Belliard’s undischarged determinate sentence of imprisonment. {People v Catu, 4 NY3d 242; People v Louree, 8 NY3d 541; People v Hill, 9 NY3d 189; People v Boyd, 12 NY3d 390; People v Morbillo, 56 AD3d 694; People v Ford, 86 NY2d 397; People v Harris, 61 NY2d 9; Boykin v Alabama, 395 US 238; People v Van Deusen, 7 NY3d 744; North Carolina v Alford, 400 US 25.)

      Sandra Doorley, District Attorney, Rochester {Kelly Wolford and Leslie E. Swift of counsel), for respondent.
    I. Defendant’s Penal Law § 70.25 (2-a) plea contention is not properly before this Court as it is not only unpreserved but also incorrectly premised upon presumed matters which are dehors the appellate record. (People v Adams, 46 NY2d 1047; People v Baumann & Sons Buses, Inc., 6 NY3d 404; People v Michael, 48 NY2d 1; People v Martin, 50 NY2d 1029; People v Claudio, 64 NY2d 858; People v Warren, 47 NY2d 740; People v Pellegrino, 60 NY2d 636; People v Newbould, 83 AD3d 1570, 17 NY3d 904; People v Lagas, 76 AD3d 384, 16 NY3d 744, 16 NY3d 860; People v Silva, 220 AD2d 230, 87 NY2d 977.) II. The Fourth Department’s affirmance should stand because consecutive sentencing via Penal Law § 70.25 (2-a) was not a direct consequence of defendant’s 2007 plea deal. (Santobello v New York, 404 US 257; People v Selikoff, 35 NY2d 227, 419 US 1122; People v Alexander, 97 NY2d 482; People v Seaberg, 74 NY2d 1; People v Green, 75 NY2d 902, 498 US 860; Brady v United States, 397 US 742; People v Moissett, 76 NY2d 909; People v Garcia, 92 NY2d 869; People v Fiumefreddo, 82 NY2d 536; People v Seeber, 4 NY3d 780.)
   OPINION OF THE COURT

Graffeo, J.

Penal Law § 70.25 (2-a) requires that a prison term imposed upon a second felony offender run consecutively to a previously imposed undischarged sentence. We hold that the consecutive nature of the new sentence is a collateral rather than direct consequence of a conviction in determining the adequacy of a plea allocution.

Following a buy and bust operation in 2006, defendant Rafael Belliard was arrested for possessing cocaine and a loaded firearm. He was subsequently charged with criminal possession of a controlled substance in the first and third degrees and criminal possession of a weapon in the second degree. In July 2007, defendant pleaded guilty to all three counts of the indictment. At the time of his guilty plea, defendant had a prior undischarged state sentence stemming from an earlier state felony drug conviction. And in committing the 2006 crimes, defendant was also facing a federal violation of supervised release in connection with two prior federal felonies.

During the July 2007 plea colloquy, the trial court explained that, as a second felony drug offender, defendant would receive a prison sentence of 12 years, followed by five years of post-release supervision (PRS). Defense counsel asked the court to delay sentencing until the federal court had resolved defendant’s violations of his supervised release, thereby permitting the new state sentence to be served concurrently with the federal sentence. The court agreed. No mention was made by defense counsel or the court as to whether the negotiated 12-year prison term would run concurrently or consecutively with the prior undischarged state sentence arising from his previous state drug conviction. Defendant allocuted to the charges and the court accepted his plea and adjourned his sentencing.

About two months later, defendant was sentenced to a determinate prison term of 12 years plus five years of PRS on the first-degree drug possession conviction, to be served concurrently with determinate terms of five years and five years of PRS on the third-degree drug possession and second-degree weapon possession convictions. The sentencing court further stated that the 12-year sentence would be concurrent to the federal sentence, as permitted by Penal Law § 70.25 (4). As a second felony drug offender, Penal Law § 70.25 (2-a) required that defendant’s 12-year prison term run consecutively to his prior undischarged state sentence. The court, however, was silent on this subject.

Defendant appealed from the judgment of conviction, asserting that his guilty plea was involuntary and should be vacated because the trial court did not advise him of a consequence of his plea, namely, that the 12-year term of imprisonment would run consecutively to his prior undischarged state sentence. The Appellate Division rejected this contention and affirmed (89 AD3d 1443 [4th Dept 2011]). A Judge of this Court granted defendant leave to appeal (18 NY3d 955 [2012]), and we now affirm.

Defendant maintains—and the dissent agrees—that his plea must be vacated because the trial court neglected to inform him that the determinate term of 12 years imposed as a result of his plea bargain was to run consecutively to the undischarged portion of the sentence relating to the earlier state drug conviction. He seeks to analogize his situation to that in People v Catu (4 NY3d 242 [2005]), where we held that a mandatory PRS term is a direct consequence of a conviction and must be addressed by the court during a plea allocution. The People counter that the consecutive nature of defendant’s sentence is a collateral consequence and the trial judge’s failure to raise it does not undermine the validity of the plea.

A trial court is constitutionally required to ensure that a defendant, before entering a guilty plea, has a full understanding of what the plea entails and its consequences. The court is not obligated to engage in any particular litany during the plea colloquy, “but due process requires that the record must be clear that the plea represents a voluntary and intelligent choice among the alternative courses of action open to the defendant” (People v Ford, 86 NY2d 397, 403 [1995] [internal quotation marks and citations omitted]). Nevertheless, because it would be unfeasible for a court to advise a defendant of all the possible ramifications of a guilty plea, our cases have drawn a distinction between the direct and collateral consequences of a plea.

The significance of this distinction is that a trial court has a duty to advise a defendant about direct consequences, which are defined as having “a definite, immediate and largely automatic effect on defendant’s punishment” (id.). A court’s failure to comply with this mandate is not subject to harmless error review and requires reversal (see People v Harnett, 16 NY3d 200, 205 [2011]). In contrast, a court may, but need not, refer to collateral consequences during a plea allocution. A court’s silence regarding collateral consequences “will not warrant vacating a plea because they are peculiar to the individual and generally result from the actions taken by agencies the court does not control” (Ford, 86 NY2d at 403).

In Catu, defendant pleaded guilty to various crimes and his sentence, by virtue of his status as a second felony offender, was required by statute to include a five-year period of PRS (see Penal Law § 70.45). The trial court, however, did not inform defendant of the period of supervision during the plea colloquy. We held that PRS is a direct consequence of a conviction as it constitutes a “component of [a] sentence” (Catu, 4 NY3d at 245) and, consequently, a defendant must be advised of the PRS term associated with the subject crimes. We further noted that, “[w]hereas the term of supervision to be imposed may vary depending on the degree of the crime and the defendant’s criminal record, imposition of supervision is mandatory and thus has a definite, immediate and largely automatic effect on defendant’s punishment” (id. at 244 [internal quotation marks and citation omitted]). As a result, we concluded that defendant was entitled to have his plea vacated.

Next, in People v Gravino (14 NY3d 546 [2010]) and its companion case, People v Ellsworth, we addressed whether mandatory registration under the Sex Offender Registration Act (SORA) and terms of probation are direct or collateral consequences of a plea. In Gravino, the trial judge did not notify defendant that she would have to register as a sex offender under SORA because of her rape conviction. And in Ellsworth, defendant was not told about the conditions of probation, including noncontact with his own children, before entering a guilty plea to a sex crime. On appeal, both defendants relied on Catu, asserting that SORA registration and probation conditions, like PRS, were direct consequences requiring that their pleas be set aside.

We rejected the proposed analogy between SORA and PRS in Gravino, stressing that PRS “is, by statute, a component element of a sentence, which is why a judge must pronounce the period of postrelease supervision at sentencing; it is thus an integral part of the punishment meted out upon a defendant’s conviction of a crime” {id. at 556 [citation omitted]). In contrast, we noted that SORA is not a penal statute nor is the registration requirement a part of the sentence; rather, SORA is a remedial statute designed to prevent future criminal behavior. Although SORA unquestionably imposes significant burdens on a registrant, we determined that it is not a “ ‘direct consequence’ of a conviction within the meaning of Ford as interpreted in Catu” {id. at 557). Similarly, in Ellsworth, we held that the conditions of probation are collateral consequences, reasoning that “courts taking guilty pleas cannot be expected to predict any and every potential condition of probation that might be recommended in the presentence report—an impossible task given the individualized nature of probation supervision” {id. at 558). The end result was that neither of these defendants was awarded relief.

We most recently dealt with the direct versus collateral framework in Harnett, where the trial judge did not apprise defendant that he might be subject to the Sex Offender Management and Treatment Act (SOMTA) as a result of his guilty plea to first-degree sexual abuse. Subsequently, defendant argued that the possibility of being held as a detained sex offender past his release date amounted to a direct consequence that he should have been notified about at his plea proceeding. We disagreed and affirmed the conviction, concluding that SOMTA consequences, while serious, are collateral. In so holding, we observed:

“The direct consequences of a plea—those whose omission from a plea colloquy makes the plea per se invalid—are essentially the core components of a defendant’s sentence: a term of probation or imprisonment, a term of postrelease supervision, a fine. Our cases have identified no others” (Harnett, 16 NY3d at 205).

Finally, although not a plea vacatur case, People ex rel. Gill v Greene (12 NY3d 1 [2009], cert denied sub nom. Gill v Rock, 558 US 837 [2009]) also bears on our analysis of defendant’s claim. In Gill, petitioner pleaded guilty as a second felony offender and was required by Penal Law § 70.25 (2-a)—the same provision at issue here—to have his sentence run consecutively with his prior undischarged sentences. The trial judge did not address this topic at the plea or sentencing stages of the proceedings and, lacking a court directive, the Department of Correctional Services (DOCS) administratively calculated the consecutive sentence. Relying on Matter of Garner v New York State Dept. of Correctional Servs. (10 NY3d 358 [2008]), where we held that only a court, not DOCS, may impose a term of PRS, petitioner brought a habeas corpus petition seeking to annul DOCS’s determination that the sentences ran consecutively. We squarely rejected petitioner’s contention and stated that, when a court is required by statute to impose a consecutive sentence but does not address the matter, it is deemed to have imposed the consecutive sentence.

In reaching this conclusion, we explained that the analogy petitioner proposed between consecutive sentencing and PRS was “flawed” because the problem in Garner “was that a part of the sentence—the PRS term—was never imposed” (Gill, 12 NY3d at 5-6). By comparison, we held that the Gill court did impose the sentence (an indeterminate term of to 5 years); all that was omitted was the characterization of the sentence as concurrent or consecutive. In language that is particularly relevant here, we remarked:

“Nothing in [Penal Law § 70.25 (2-a)] and nothing in the Constitution requires the sentencing court to say the word ‘consecutive,’ either orally or in writing. Nothing in the statute even requires that the sentencing court be made aware that the prior sentences are undischarged. Unlike the petitioners in Garner and Earley [v Murray (451 F3d 71 [2d Cir 2006])], who were told nothing about PRS by the courts that sentenced them, Gill was told in plain terms that he was being sentenced to 2x/2 to 5 years in prison. He was never given any reason to think that part or all of that sentence would be effectively nullified, by running simultaneously with sentences he had already received. Indeed, nothing in the record here shows the court knew that previous undischarged sentences existed” {id. at 6).

In this case, defendant similarly seeks to draw a parallel between PRS and consecutive sentencing, claiming that, like the mandatory PRS term in Catu, a sentence that must run consecutively to a prior undischarged sentence is a direct consequence of a plea. But this contention is undermined by Gravino and Harnett, where we clarified that the PRS term in Catu constituted a direct consequence because it was “a component element of a sentence” (Gravino, 14 NY3d at 556) or, stated otherwise, one of “the core components of a defendant’s sentence” (Harnett, 16 NY3d at 205). Unlike PRS, the consecutive nature of a prison term pursuant to Penal Law § 70.25 (2-a) is not a component of the sentence itself, a point that was critical to our holding in Gill (see also Wilson v McGinnis, 413 F3d 196, 200 [2d Cir 2005] [rejecting the related argument that “mandatory consecutive state sentences . . . ha(ve) the effect of lengthening the actual state sentence and punishment that was imposed pursuant to the guilty plea” (internal quotation marks and emphasis omitted)]). And here, during defendant’s plea colloquy, it is undisputed that he was informed of the core elements of his sentence when the trial judge stated that, as a second felony drug offender, he would receive 12 years’ imprisonment to be followed by five years of PRS. In other words, he was fully advised of the direct consequences of his guilty plea.

Furthermore, as we emphasized in Gill, nothing in the statutory scheme requires a trial court to characterize a term of imprisonment as “consecutive,” particularly since the judge may not even be aware that a defendant has time remaining on a previously-imposed sentence. Indeed, as in Gill, nothing in the record before us demonstrates that the trial judge knew defendant had a prior undischarged sentence. It also cannot be overlooked that defendant had no reasonable basis to believe that the 12-year term would run concurrently with his prior unrelated sentence, “effectively nullif[ying]” the new sentence (Gill, 12 NY3d at 6). Although the trial judge stated that the newly imposed sentence would be concurrent to the federal sentence—the sole issue of concern voiced by his counsel—no reference was made to the prior undischarged state sentence.

In sum, our holdings in Gravino, Harnett and Gill lead us to conclude that the consecutive nature of defendant’s sentence pursuant to Penal Law § 70.25 (2-a) is a collateral consequence of his conviction. For the reasons stated, the failure of the trial court to address the impact of Penal Law § 70.25 (2-a) during the plea colloquy does not require vacatur of the plea.

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

Chief Judge Lippman (dissenting).

The problematic quality of today’s decision is evident from its opening sentences. The Court begins by acknowledging, as it must, that Penal Law § 70.25 (2-a) mandates, in the case of a second felony offender, the imposition of a prison term consecutive to one previously imposed but undischarged, yet then announces that a consecutive sentence imposed pursuant to Penal Law § 70.25 (2-a) is not a direct consequence of a second felony offender’s plea. Nothing that follows in the decision’s lengthy discussion of this Court’s cases explains how it is that the subject legally mandated, automatically attaching, penalty enhancing sentence attribute may be characterized as anything other than a “direct” consequence of an underlying plea. It is, in fact, no less direct than the sentence itself—so direct that the sentencing court need not even mention it for it to take effect, or so this Court has held (People ex rel. Gill v Greene, 12 NY3d 1, 6 [2009] [“We read the words of Penal Law § 70.25 (2-a)—‘the court must impose a sentence to run consecutively with respect to such undischarged sentence’—to mean that any sentence imposed by the court shall run consecutively to the undischarged sentence, whether the sentencing court says so or not”]). If it is the case, as the majority allows, that the court must advise a pleading defendant of his or her sentence because the sentence is a direct penal consequence of the plea, the question naturally arises as to how it is that the court is not also obliged to advise the defendant of the highly material circumstance that the sentence imposed must run consecutively to any undischarged sentence—a penal consequence entailed by and logically no less immediate than the sentence itself. The only answer offered by the Court is that the consecutive running of the sentence is not a “component” of the sentence.

It is true that in Gill the Court said that the consecutive running of a sentence pursuant to Penal Law § 70.25 (2-a) is not a “part of” the sentence, but merely a statutorily supplied sentence “characterization” (12 NY3d at 6). However, while this very fine semantic distinction may have been pertinent in defining the extent of the judicial obligation in pronouncing a sentence—the issue in Gill—it should count for very little in defining the prior obligation of the court to assure, as a condition of a plea’s validity, that the defendant has been informed, not just of the sentence that will be pronounced in exchange for the plea, but of any other similarly direct plea consequence.

In People v Ford (86 NY2d 397, 403 [1995]) this Court described a direct consequence of a plea as one with “a definite, immediate and largely automatic effect on defendant’s punishment.” It is plain that this formulation, which we have employed repeatedly since Ford (see People v Catu, 4 NY3d 242, 244 [2005]; People v Gravino, 14 NY3d 546, 553-554 [2010]; People v Harnett, 16 NY3d 200, 205 [2011]), and to which the majority again purports to adhere, may encompass more than the “component” or “core elements” of the sentence. That the Catu court said that postrelease supervision should be deemed a direct consequence of a plea because it is a significant component of the sentence, is not logically equivalent to the much broader proposition the majority now embraces, that only a sentence component will qualify as a direct plea consequence. Nor does the Court’s observation in Harnett, that our five decisions in the relevant area had not identified any direct plea consequences other than the “core components” of a defendant’s sentence (16 NY3d at 205), amount to a reasoned argument that the “core components” of a sentence are exhaustive of the “definite, immediate and largely automatic effects” upon punishment to which Ford referred. Indeed, the very case from which Ford’s formulation is borrowed, Cuthrell v Director, Patuxent Inst. (475 F2d 1364 [4th Cir 1973], cert denied 414 US 1005 [1973]), observes that the distinction between direct and collateral plea consequences is “sometimes shaded” {id. at 1366), and itself adverts to a plea consequence—i.e., ineligibility for parole— which had been widely viewed as a direct consequence even though it was not the sentence per se but, like the consequence here at issue, an entailed attribute of the sentence.

In any case, it does not seem arguable that the mandatory consecutive running of a sentence pursuant to Penal Law § 70.25 (2-a) corresponds precisely to Ford’s description of a direct plea consequence. The effect of the statute’s consecutive mandate is both punitive and definite. Penal Law § 70.25 (2-a) is patently directed at augmenting the length of time a defendant will spend behind bars; the consecutive “characteristic” of the sentence is nothing if not “an integral part of the punishment meted out upon a defendant’s conviction of a crime” (People v Gravino, 14 NY3d at 556). And, although the effect of the statute’s application will vary from case to case (see Catu, 4 NY3d at 245), it is a virtual certainty that in every case governed by Penal Law § 70.25 (2-a) there will be some penal consequence beyond that pronounced as part of the sentence proper. Nor can there be any question that the provision’s effect on punishment is immediate and automatic. As noted, we have held that the statute will apply by operation of law in the case of every second felony offender with a prior undischarged sentence (Gill, 12 NY3d at 6).

Of course there is legitimate concern with requiring judges to advise defendants of consequences that will depend on their individual circumstances or that emanate from non-judicial agencies—circumstances of which a court may not be aware—and that is the reason for distinguishing between direct and collateral plea consequences; it is not that collateral plea consequences are necessarily less important to a defendant’s decision as to whether to enter a plea. Indeed, it is now clear that a defendant’s understanding of what would under the Ford dichotomy be deemed a collateral plea consequence may yet be highly material to a plea’s constitutional validity (see Padilla v Kentucky, 559 US 356, —, 130 S Ct 1473, 1486 [2010]). The dichotomy’s legitimate utility, then, lies not in gratuitously narrowing the court’s scope of required inquiry, but simply in tailoring a judge’s plea-vetting obligation to what he or she can reasonably be expected to know respecting a plea’s material punitive consequences for the defendant.

Even while acknowledging this practically necessary limitation, it is exceedingly difficult to understand why it should operate to relieve a judge from informing a second felony offender tendering a plea that his or her sentence must run consecutively to any undischarged term previously imposed—in other words, that the period of incarceration resulting from the plea may actually be significantly longer than the stated term in the sentence. In the ordinary course of preplea proceedings, a judge will learn of a defendant’s predicate status, and this case is not in that respect exceptional, as the majority suggests. Moreover, inasmuch as a defendant’s predicate status is extant, documented information that is easily made available to the court— and is routinely furnished by the prosecution prior to sentencing—it is plain that there exists no considerable impediment to its production in connection with a plea.

It is the core object of every defendant entering a plea to minimize the punitive consequence of his or her conviction. Where, as here, a plea entails incarceration beyond that expressly agreed to as part of the bargained for sentence, it cannot be ascertainably knowing, intelligent and voluntary unless that entailment is first disclosed by the court. This conclusion I do not believe is soundly or prudently avoided by the analysis the Court advances today.

Judges Read, Smith and Pigott concur with Judge Graffeo; Chief Judge Lippman dissents in an opinion; Judge Rivera taking no part.

Order affirmed.

      . Penal Law § 70.25 (4) provides:
      “When a person, who is subject to any undischarged term of imprisonment imposed at a previous time by a court of another jurisdiction, is sentenced to an additional term or terms of imprisonment by a court of this state, the sentence or sentences imposed by the court of this state . . . shall run either concurrently or consecutively with respect to such undischarged term in such manner as the court directs at the time of sentence.”

      . Penal Law § 70.25 (2-a) states in relevant part:
      “When an indeterminate or determinate sentence of imprisonment is imposed pursuant to . . . subdivision three ... of section 70.71 . . . and such person is subject to an undischarged indeterminate or determinate sentence of imprisonment imposed prior to the date on which the present crime was committed, the court must impose a sentence to run consecutively with respect to such undischarged sentence.”

      . The dissent disregards these passages from Gravino and Harnett.


source: Caselaw Access Project

author: Read, J.

license: Public Domain

text:
    [984 NE2d 914, 960 NYS2d 716]
    The People of the State of New York, Appellant, v Damien Warren, Respondent.
    Argued January 7, 2013;
    decided February 12, 2013

      POINTS OF COUNSEL

      Frank A. Sedita, III, District Attorney, Buffalo (Donna A. Milling of counsel), for appellant.
    Defendant was not deprived of a fair trial based on the manner in which the court conducted a simultaneous bench trial of codefendant and jury trial of defendant. Defendant’s severance claim is both unpreserved and meritless. (People v Ricardo B., 73 NY2d 228; People v Fleming, 76 AD3d 582, 15 NY3d 893; People v Wallace, 153 AD2d 59, 75 NY2d 925; People v Irizarry, 83 NY2d 557; People v Owens, 22 NY2d 93; People v Bornholdt, 33 NY2d 75; People v Mahboubian, 74 NY2d 174; People v Cruz, 66 NY2d 61, 481 US 186, 70 NY2d 733; People v Johnson, 124 AD2d 1063, 69 NY2d 713, 69 NY2d 951; People v De Los Angeles, 270 AD2d 196, 95 NY2d 889.)

      Michael L. D’Amico, Buffalo, for respondent.
    The Appellate Division properly found respondent was deprived of a fair trial. (People v Cona, 49 NY2d 26; People v Turriago, 90 NY2d 77; People v Johnson, 47 NY2d 124; People v Amato, 173 AD2d 714, 78 NY2d 919; People v Wallace, 153 AD2d 59; People v Imburgia, 134 Misc 2d 1057; People ex rel. Rohrlich v Follette, 20 NY2d 297; People v Firestone, 118 Misc 2d 314; People v Ricardo B., 73 NY2d 228; People v Irizarry, 83 NY2d 557.)
   OPINION OF THE COURT

Read, J.

Defendant Damien Warren and three codefendants, Eric Young, Marvin Howard and Nathaniel Williams, were jointly indicted on a theory of accomplice liability for second-degree murder (Penal Law § 125.25 [1]) and second-degree weapon possession (Penal Law § 265.03 [former (2)]) in connection with a drug-related shooting death in the City of Buffalo on March 23, 2006. The week before jury selection, Young, who had just waived his right to a jury trial, was offered a plea to a class A misdemeanor in exchange for his testimony. Howard also waived his right to a jury, which prompted Warren’s attorney to ask County Court to try Warren and Howard separately, or, alternatively, direct that Howard testify outside the jury’s presence if he took the stand. The judge denied these requests, and a joint bench and jury trial ensued.

Among the People’s witnesses, both Young and a jailhouse informant, who unbeknownst to Warren was related to the victim, implicated Warren as the shooter; Young testified that Warren pursued the wounded victim as he stumbled to a nearby park and fell to the ground, where the armed Warren walked up to him. Young additionally told the jury that Williams ran in the opposite direction of the park after the first shots were fired; he further stated that he never saw Williams with a gun, and that Howard was simply not present when the gunfire erupted.

Another witness, a 16-year-old runaway who lived with the victim, claimed that Warren, Williams and Howard each possessed a gun and fired at the victim as he stood in front of the house where he sold crack, talking to Young; and that it was Howard who ran down the victim in the park and “kick[ed] something” on the ground, while Williams ran the other way. This witness related that Young had earlier pulled up in a car, which he parked across the street from the victim’s house, in front of the house from which Warren dealt drugs; and that Young had shouted out to the victim, at the time near an open, second-floor window, enticing him out of doors. She also claimed that Young drove Warren away from the crime scene after the shooting; and that Warren, as he was entering the passenger side of the car, threatened to kill her if she said anything about what she had seen. This witness was awaiting sentence on an armed robbery charge at the time of trial; many details of her testimony were inconsistent with her previous statements to the police or grand jury.

After the People rested, Warren’s and Williams’s attorneys each indicated that they did not intend to offer proof. Howard’s counsel, however, advised the judge that his client planned to take the stand. Warren’s attorney then again asked County Court for Howard to testify outside the jury’s presence because the People’s proof had closed with respect to Warren, and the jury would not be deciding Howard’s guilt or innocence. In opposition, the People argued that the trials were not separate, Howard might corroborate the People’s witnesses, he was subject to cross-examination, and the jury had a right to hear from him. The judge denied Warren’s attorney’s request, expressing her belief that Howard’s defense would not be “separate and distinct as to any of the defendants.”

Howard, a drug dealer whose supplier was Warren, claimed that he was sitting on the steps of the front porch of a friend’s house down the street from the crime scene when he heard gunfire and saw Warren chase someone into the park while Williams fled in the opposite direction. He further testified that another friend then drove him to the park, where they saw the victim lying on the grass, not moving. At that point, Howard implored this friend to “take [him] home” as “it[ ] [was] about to [get] hot,” and they drove off. A few blocks away, Warren flagged down the friend’s car and hitched a ride to Howard’s house. Once there, according to Howard, Warren acknowledged shooting the victim; washed his hands with disinfectant; and buried a gun in the backyard and set his sweatshirt on fire. The jury also heard recordings of telephone calls made by Howard from jail, directing his brother to unearth a hidden gun and deliver it to a reverend. The brother testified that, after retrieving the gun, he instead handed it over for safekeeping to a friend, who sold it.

The jury convicted Warren and acquitted Williams of both crimes charged, while the judge acquitted Howard. County Court sentenced Warren to concurrent terms of imprisonment of 25 years to life for murder, and 15 years followed by five years of postrelease supervision on the weapon possession conviction. Warren appealed on the ground that the judge’s refusal to direct Howard to testify outside the jury’s presence deprived him of his right to a fair trial. The Appellate Division unanimously agreed and reversed the judgment of conviction and sentence (87 AD3d 36 [4th Dept 2011]). A Judge of this Court granted the People leave to appeal (18 NY3d 862 [2011]), and we now affirm.

Once Howard waived a jury trial, there arose a situation akin to trial by dual juries, which we have called, “at root, a modified form of severance” (see People v Irizarry, 83 NY2d 557, 560 [1994]). And trials with dual juries, which are to be used “sparingly” (People v Ricardo B., 73 NY2d 228, 235 [1989]), are “evaluated under standards for reviewing severance motions generally, which require a showing of prejudice to entitle a defendant to relief’ (Irizarry, 83 NY2d at 560, citing Ricardo B., 73 NY2d at 233 and People v Mahboubian, 74 NY2d 174, 183 [1989] [internal quotation marks omitted]). Thus, Warren must show that he was prejudiced by the judge’s decision to allow the jury to hear Howard’s defense.

Here, the People could not have forced Howard to testify against Warren. Further, it would have been easy enough for the judge to excuse the jury for Howard’s defense. After all, the jury was not the factfinder in Howard’s trial. In those cases involving multiple juries where we have found no prejudice, the trial judge took pains to shield each jury from presentation of evidence admissible only before the other (see Ricardo B., 73 NY2d at 232; Irizarry, 83 NY2d at 559). That the second fact-finder here was the court and not a jury does not alter the analysis.

Indeed, if Howard had not waived a jury trial, Warren could have made a strong case for severance on the ground that his defense was irreconcilable with Howard’s (see Mahboubian, 74 NY2d at 184 [“severance is compelled where the core of each defense is in irreconcilable conflict with the other and where there is a significant danger, as both defenses are portrayed to the trial court, that the conflict alone would lead the jury to infer defendant’s guilt”]; see also People v Cardwell, 78 NY2d 996, 998 [1991] [severance required because, during the conduct of the trial, codefendant’s attorney “took an aggressive adversarial stance against” the defendants, “in effect becoming a second prosecutor,” which resulted in “damaging evidence (being) elicited not by the People, but by a codefendant”]). In that event, whether the trials were conducted separately or simultaneously with separate juries, Warren’s jury would not have been permitted to hear the witnesses who testified on Howard’s behalf (Ricardo B., 73 NY2d at 232; Irizarry, 83 NY2d at 559). No less is required for the modified severance that occurred here.

Finally, we cannot say that the judge’s failure to prevent the jury from hearing Howard’s defense was harmless. The People’s case against Warren was certainly strong, but not overwhelming. Perhaps as a result, the prosecutor essentially adopted Howard’s narrative of the shooting, even though it was at odds with some of the testimony of the 16-year-old girl, the People’s main witness. As the Appellate Division observed, “the prosecutor repeatedly referenced [Howard’s testimony] during his summation to the jury, emphasizing that, although he was not the People’s witness, he had corroborated the People’s proof’ against Warren (87 AD3d at 39). Howard’s vivid account may well have sealed Warren’s fate with the jurors.

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

Chief Judge Lippman and Judges Graffeo, Smith and Pigott concur; Judge Rivera taking no part.

Order affirmed.

       The medical examiner testified that the victim suffered six gunshot wounds, five to his extremities and buttocks, which were probably survivable. The lethal bullet entered the left side of the victim’s chest.


author: Pigott, J.

text:
    [984 NE2d 925, 960 NYS2d 727]
    In the Matter of Jacqueline Perez, Respondent, v John B. Rhea, as Chairman of the New York City Housing Authority, Appellant.
    Argued January 10, 2013;
    decided February 14, 2013

      POINTS OF COUNSEL

      Kelly D. MacNeal, General Counsel, New York City Housing Authority, New York City (Seth E. Kramer and Nancy M. Harnett of counsel), for appellant.
    The Appellate Division majority erred in substituting its preferred result for a rational agency determination. (Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222; Peconic Bay Broadcasting Corp. v Board of Appeals, Town of Southampton, 99 AD2d 773;
      Matter of Featherstone v Franco, 95 NY2d 550; Matter of Wooten v Finkle, 285 AD2d 407; Matter of Ahsaf v Nyquist, 37 NY2d 182; Matter of Kelly v Safir, 96 NY2d 32; Matter of Newton v Municipal Hous. Auth. for City of Yonkers, 38 NY2d 220; Matter of Parker v New York City Hous. Auth., 73 AD3d 632; Matter of Bland v New York City Hous. Auth., 72 AD3d 528; Matter of Smith v New York City Hous. Auth., 40 AD3d 235, 9 NY3d 816.)

      Marc Sackin, Royal Oak, Michigan, for respondent.
    This Court should affirm the well-reasoned decision of the Appellate Division, which is in conformity with well-settled precedent. (Matter of Holiday v Franco, 268 AD2d 138; Matter of Wise v Morales, 85 AD3d 571, 18 NY3d 808; Matter of Brown v Popolizio, 166 AD2d 44; Matter of Dickerson v Popolizio, 168 AD2d 336; Matter of Milton v Christian, 99 AD2d 984; Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222; Matter of Davis v New York City Dept. of Hous. Preserv. & Dev., 58 AD3d 418; Matter of Gray v Donovan, 58 AD3d 488; Matter of Williams v Donovan, 60 AD3d 594; Matter of Vazquez v New York City Hous. Auth. [Robert Fulton Houses], 57 AD3d 360.)

      Weil, Gotshal & Manges LLP, New York City (Ronit J. Berkovich and David J. Schwartz of counsel), for Housing Court Answers, Inc., amicus curiae.
    I. The Court of Appeals must preserve the Pell standard and appellate courts’ consistent interpretation. (Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222; Matter of Stolz v Board of Regents of Univ. of State of N. Y., 4 AD2d 361.) II. New York appellate courts applying the Pell standard have consistently held that administrative penalties affecting tenancy were disproportionate to the offense in cases with graver offenses and weaker mitigation evidence than that which was demonstrated by Jacqueline Perez. (Matter of Wise v Morales, 85 AD3d 571; Matter of Paul v New York City Hous. Auth., 89 AD3d 520; Matter of Davis v New York City Dept. of Hous. Preserv. & Dev., 58 AD3d 418; Matter of Gray v Donovan, 58 AD3d 488; Matter of Holiday v Franco, 268 AD2d 138; Matter of Rodriguez v New York City Hous. Auth., 84 AD3d 630; Matter of Spencer v New York City Hous. Auth., 81 AD3d 537; Matter of Bellamy v Hernandez, 72 AD3d 814; Matter of Vazquez v New York City Hous. Auth. [Robert Fulton Houses], 57 AD3d 360; Matter of Spand v Franco, 242 AD2d 210.) III. Every case the New York City Housing Authority cites to support its proposition that the penalty imposed on Jacqueline Perez was proportionate to her circumstances is highly distinguishable from the case at bar. (Matter of Newton v Municipal Hous. Auth. for City of Yonkers, 38 NY2d 220; Matter of Parker v New York City Hous. Auth., 73 AD3d 632; Matter of Bland v New York City Hous. Auth., 72 AD3d 528; Matter of Smith v New York City Hous. Auth., 40 AD3d 235; Matter of Waterside Redevelopment Co. v Department of Hous. Preserv. & Dev. of City of N.Y., 270 AD2d 87; Matter of Cuevas v Beacon Hous. Auth., 220 AD2d 179; Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222.)
   OPINION OF THE COURT

Pigott, J.

The question presented by this case is whether the New York City Housing Authority’s termination of petitioner’s tenancy was, in light of the circumstances, so disproportionate to her misconduct as to shock the judicial conscience, thereby constituting an abuse of discretion as a matter of law (see generally Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222, 233 [1974]; Matter of Featherstone v Franco, 95 NY2d 550, 554 [2000]). We hold that it was not.

Petitioner is a tenant in a New York City Housing Authority (NYCHA) public housing apartment in Manhattan. In the late 1990s, she became employed, for the first time, as a bookkeeper. She failed to disclose her new earnings to her landlord, each year stating in an affidavit of income that she did not work. This omission allowed petitioner to pay a substantially lower rent than she would have had she revealed the income.

When NYCHA officials discovered the misrepresentation, the matter was referred to its Office of the Inspector General. In December 2006 petitioner was charged criminally with grand larceny in the third degree and offering a false instrument for filing in the first degree, for failing to report her income, “thereby causing NYCHA to be defrauded of $27,144.00.” In July 2008, petitioner pleaded guilty to a reduced charge of petit larceny and received a conditional discharge, upon her agreement to pay restitution to NYCHA in monthly installments totaling $20,000.

Thereafter, NYCHA sought to terminate petitioner’s tenancy, on the grounds of non-desirability, misrepresentation, non-verifiable income, and breach of rules and regulations. In hearings in the spring of 2009, petitioner admitted that at the time she failed to report her employment, she had been aware that her rent was based on income. She also testified that her three children, two of whom have learning disabilities, live with her, and that she needed a larger home for her family, but could not afford to rent one.

The Hearing Officer ruled that, despite “[t]he plight of the family,” termination of petitioner’s tenancy was “[t]he only appropriate disposition.” Petitioner, the Hearing Officer reasoned, had given no explanation for her misrepresentations that might tend to “show that she did not intend to defraud NYCHA.” The Hearing Officer concluded that “[a]n individual who through misrepresentation obtains from the tax-paying public a greater subsidy than that to which she is entitled is not eligible for tenancy.” NYCHA approved the Hearing Officer’s decision and ordered that petitioner’s tenancy be terminated.

Petitioner then commenced this CPLR article 78 proceeding, challenging that determination. She contended that the penalty of termination was so harsh as to constitute an abuse of discretion as a matter of law. For the first time, petitioner claimed that eviction might leave her homeless. She included documentary evidence concerning her sons’ learning disabilities and the negative impact on their schooling should the family be forced to move to a homeless shelter.

Supreme Court confirmed NYCHA’s determination, denied the article 78 petition, and dismissed the proceeding, holding that “[termination is appropriate when the tenant conceals a large amount of income over an extended period causing a substantial rent underpayment, even if a child is part of the household” (2010 NY Slip Op 30763[U], *7 [2010]).

The Appellate Division reversed Supreme Court’s judgment, granted the article 78 petition to the extent of vacating the penalty of termination, and remanded the matter to NYCHA for the imposition of a lesser penalty (87 AD3d 476 [1st Dept 2011]). It concluded that termination of tenancy was so disproportionate to the offense, in the light of all the circumstances, as to shock the judicial conscience. The court stated that “forfeiture of public housing accommodations is a drastic penalty because, for many of its residents, it constitutes a tenancy of last resort” (87 AD3d at 479, quoting Matter of Holiday v Franco, 268 AD2d 138, 142 [1st Dept 2000]).

One Justice dissented, reasoning that “[i]n accordance with her plea agreement, petitioner was required to repay only $20,000 of the more than $27,000 in rent that she avoided paying, which amounts to no penalty at all. If defrauding a governmental agency incurs no adverse consequence, others will be encouraged to engage in similar fraudulent conduct—hardly an outcome that promotes the ends of justice” (87 AD3d at 481 [Tom, J.P., dissenting]).

We granted NYCHA’s motion for leave to appeal, and now reverse.

The principal reason that the Appellate Division overturned NYCHA’s determination and Supreme Court’s judgment is that the Appellate Division considered public housing accommodation to be “a tenancy of last resort” (87 AD3d at 479); the quotation is from a dictum in Matter of Holiday (268 AD2d at 142). The Appellate Division’s decision begins with the premise that termination “would likely leave petitioner . . . homeless” (87 AD3d at 476).

Absent from the Appellate Division’s analysis, however, is any estimate of how probable it is that petitioner’s eviction would result in homelessness. Unlike some residents of public housing, petitioner, of course, has an income. Notably, while petitioner testified that she could not afford a larger apartment, she did not claim at her hearings that she would become homeless if evicted. That assertion originates in her petition in this article 78 proceeding, which states, conclusorily, that “[i]f petitioner is evicted from her apartment, she and her family will be rendered homeless.” Implicit in petitioner’s statement is the claim that the income that she earns from her employment is insufficient to allow her to afford appropriate accommodation. But the petition has no affidavit from petitioner to this effect, nor any support for her claim. Nor is it alleged that petitioner would lose her job, or be forced to resign, if she were obliged to move. Indeed, on appeal to this Court, petitioner asserts, more narrowly, that “if she loses her employment, she certainly would not be able to afford an apartment for her family” (emphasis added).

The Appellate Division erred by importing its prior dictum that public housing is “a tenancy of last resort” into its analysis, thus giving rise to an implicit assumption that any termination of tenancy is a “drastic penalty” (87 AD3d at 479, quoting Holiday, 268 AD2d at 142) that, by default, is excessive. In short, we share the dissenting Justice’s concern that “universal application” of the Appellate Division majority’s principles “would result in no tenant of public housing ever being evicted, whatever the grounds” (87 AD3d at 480-481 [Tom, J.P, dissenting]). Instead, reviewing courts must consider each petition on its own merit. The Appellate Division failed to do that here.

The remaining question, then, is whether the penalty of termination of petitioner’s tenancy was an abuse of discretion as to the measure or mode of penalty (CPLR 7803 [3]). “It is well settled that a court may not substitute its judgment for that of the board or body it reviews unless the decision under review is arbitrary and unreasonable and constitutes an abuse of discretion” (Matter of Pell, 34 NY2d at 232 [emphasis omitted]). Petitioner, whose rent was income-based, knowingly and intentionally concealed her income from NYCHA for seven years, defrauding the agency of $27,144. We hold that termination of petitioner’s tenancy was not “so disproportionate to the offense, in the light of all the circumstances, as to be shocking to one’s sense of fairness” (id. at 233). Moreover, termination in this case is “compelled by a supervening public interest” (id. at 241).

A vital public interest underlies the need to enforce income rules pertaining to public housing. Despite petitioner’s alleged difficulties if her tenancy is terminated, public housing is of limited availability and there are waiting lists of other families in need of homes, whose situations may be equally sympathetic. If income reporting violations were to be ignored by the NYCHA, there would be—as noted by the dissenting Justice—no meaningful deterrent to residents of income-based public housing who misstate their earnings. If residents believe that the misrepresentation of income carries little to no chance of eviction, the possibility of restitution after criminal conviction may not serve adequately to discourage this illegal practice. The deterrent value of eviction, however, is clearly significant and supports the purposes of the limited supply of publicly-supported housing. It follows, then, that NYCHA’s decision to terminate petitioner’s tenancy is not so disproportionate to her misconduct as to shock the judicial conscience.

The remaining contentions in the petition are either unpreserved or without merit.

Accordingly, the order of the Appellate Division should be reversed, without costs, and the judgment of Supreme Court reinstated.

Chief Judge Lippman and Judges Graffeo, Read and Smith concur; Judge Rivera taking no part.

Order reversed, without costs, and judgment of Supreme Court, New York County, reinstated.

       Petitioner focuses exclusively on the consequences if she were “to move to a homeless shelter that is a significant distance away.”


author: Smith, J.

text:
    [985 NE2d 876, 962 NYS2d 566]
    United States Fidelity & Guaranty Company et al., Respondents, v American Re-Insurance Company et al., Appellants, et al., Defendants.
    Argued January 2, 2013;
    decided February 7, 2013

      POINTS OF COUNSEL

      Wachtell, Lipton, Rosen & Katz, New York City (Herbert M. Wachtell, Ben M. Germana and Michael J. McDuffie of counsel), for American Re-Insurance Company, appellant.
    I. The Appellate Division erred in upholding summary judgment for United States Fidelity & Guaranty Company based upon an overbroad and erroneous legal interpretation of the follow the fortunes doctrine. (Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Matter of Union Indem. Ins. Co. of N.Y., 89 NY2d 94; Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143; Unigard Sec. Ins. Co. v North Riv. Ins. Co., 79 NY2d 576; North Riv. Ins. Co. v CIGNA Reins. Co., 52 F3d 1194; Insurance Co. v Associated Manufacturers’ Corp., 70 App Div 69, 174 NY 541; Christiania Gen. Ins. Corp. of N.Y. v Great Am. Ins. Co., 979 F2d 268; Hartford Acc. & Indem. v Columbia Cas. Co., 98 F Supp 2d 251.) II. Reversal of summary judgment is independently required in that there is a triable issue of fact as to whether the parties’ conceded retroactive agreement to change the treaty retention level reached back to the years at issue. (Columbus Trust Co. v Campolo, 110 AD2d 616, 66 NY2d 701; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583.)

      Quinn Emanuel Urquhart & Sullivan, LLP, New York City (Kathleen M. Sullivan, Jane M. Byrne, J. Toji Calabro, Brad Evan Rosen and Cleland B. Welton II of counsel), and Boies, Schiller & Flexner, LLP, Albany (George F. Carpinello and Benjamin D. Battles of counsel), for Excess Casualty Reinsurance Association and others, appellants.
    I. Follow the fortunes does not preclude all judicial review of an insurer’s allocation of losses to its reinsurer. (Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; North Riv.

      Ins. Co. v CIGNA Reins. Co., 52 F3d 1194; Continental Cas. Co. v Stronghold Ins. Co., Ltd., 77 F3d 16; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Affiliated F.M. Ins. Co. v Employers Reins. Co., 369 F Supp 2d 217; Hartford Acc. & Indem. v Columbia Cas. Co., 98 F Supp 2d 251; Employers Reins. Corp. v Newcap Ins. Co., Ltd., 209 F Supp 2d 1184; American Employers’ Ins. Co. v Swiss Reins. Am. Corp., 413 F3d 129; Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143; Dalton v Educational Testing Serv., 87 NY2d 384.) II. Summary judgment for United States Fidelity & Guaranty Company was improper because the reinsurers raised material disputes of fact as to whether United States Fidelity & Guaranty Company’s post-settlement allocation was made in good faith. (Negri v Stop & Shop, 65 NY2d 625; F. Garofalo Elec. Co. v New York Univ., 300 AD2d 186; Sillman v Twentieth Century-Fox Film Corp., 3 NY2d 395; Christiania Gen. Ins. Corp. of N.Y. v Great Am. Ins. Co., 979 F2d 268; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Hartford Acc. & Indem. v Columbia Cas. Co., 98 F Supp 2d 251; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445; Bellefonte Reins. Co. v Aetna Cas. & Sur. Co., 903 F2d 910; Matter of Midland Ins. Co., 87 AD3d 487.) III. Summary judgment for United States Fidelity & Guaranty Company was improper because there are material disputes of fact as to the amount of the retention in the applicable reinsurance treaty years. (Gulf Ins. Co. v Transatlantic Reins. Co., 69 AD3d 71; Federal Ins. Co. v Americas Ins. Co., 258 AD2d 39; Webster’s Red Seal Publs. v Gilberton World-Wide Publs., 67 AD2d 339; Koester v Rochester Candy Works, 194 NY 92; Navedo v 250 Willis Ave. Supermarket, 290 AD2d 246; Giandana v Providence Rest Nursing Home, 32 AD3d 126, 8 NY3d 859; Matter of Anthus v Rail Joint Co., 193 App Div 571; Reed v McCord, 160 NY 330; Nemeroff v Coby Group, 54 AD3d 649.)

      Simpson Thacker & Bartlett LLP, New York City (Mary Kay Vyskocil, Chet A. Kronenberg, Ryan A. Kane and Jonathan M. Weiss of counsel), for respondents.
    I. The court should reject appellants’ attempt to distort the follow the fortunes doctrine beyond recognition and denude it of any force and effect. (Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; International Surplus Lines Ins. Co. v Certain Underwriters & Underwriting Syndicates at Lloyd’s of London, 868 F Supp 917; Commercial Union Ins. Co. v Seven Provinces Ins. Co., Ltd., 9 F Supp 2d 49, 217 F3d 33; Travelers Cas. & Sur. Co.

      v Gerling Global Reins. Corp. of Am., 419 F3d 181; North Riv. Ins. Co. v Ace Am. Reins. Co., 361 F3d 134; National Union Fire Ins. Co. of Pittsburgh, PA v American Re-Ins. Co., 441 F Supp 2d 646; Granite State Ins. Co. v ACE Am. Reins. Co., 46 AD3d 436; Mentor Ins. Co. [U.K.] Ltd. v Brannkasse, 996 F2d 506; Champion Intl. Corp. v Continental Cas. Co., 400 F Supp 978, 546 F2d 502.) II. The decisions by United States Fidelity & Guaranty Company that appellants denominate “post-settlement allocation decisions” were all integral to the settlement itself and under follow the fortunes principles may not be second-guessed. (International Surplus Lines Ins. Co. v Certain Underwriters & Underwriting Syndicates at Lloyd’s of London, 868 F Supp 917; North Riv. Ins. Co. v Ace Am. Reins. Co., 361 F3d 134; Unigard Sec. Ins. Co. v North Riv. Ins. Co., 79 NY2d 576; Granite State Ins. Co. v ACE Am. Reins. Co., 46 AD3d 436.) III. All parties to the settlement have sworn that the settlement did not encompass any amounts on account of bad faith and appellant reinsurers have no evidence to contradict this indisputable fact. (National Union Fire Ins. Co. of Pittsburgh, PA v American Re-Ins. Co., 441 F Supp 2d 646; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; North Riv. Ins. Co. v CIGNA Reins. Co., 52 F3d 1194; Aetna Cas. & Sur. Co. v Home Ins. Co., 882 F Supp 1328; Unigard Sec. Ins. Co. v North Riv. Ins. Co., 79 NY2d 576; Peerless Ins. Co. v Inland Mut. Ins. Co., 251 F2d 696; Grullon v City of New York, 297 AD2d 261; American Ins. Co. v North Am. Co. for Prop. & Cas. Inc., 697 F2d 79; Commercial Union Ins. Co. v Seven Provinces Ins. Co., Ltd., 9 F Supp 2d 49; Liberty Mut. Ins. Co. v Rotches Pork Packers, Inc., 969 F2d 1384.) IV Appellant reinsurers’ complaints about United States Fidelity & Guaranty Company’s allocation of the losses to the 1959 treaty year is an improper attempt to dissect the settlement itself and is without merit. (Travelers Cas. & Sur. Co. v Gerling Global Reins. Corp. of Am., 419 F3d 181; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; National Union Fire Ins. Co. of Pittsburgh, PA v American Re-Ins. Co., 441 F Supp 2d 646; Commercial Union Ins. Co. v Seven Provinces Ins. Co., Ltd., 9 F Supp 2d 49; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; North Riv. Ins. Co. v Ace Am. Reins. Co., 361 F3d 134; Aetna Cas. & Sur. Co. v Home Ins. Co., 882 F Supp 1328; Simplexdiam, Inc. v Brockbank, 283 AD2d 34; In re Prudential Lines Inc., 158 F3d 65; Unigard Sec. Ins. Co. v North Riv. Ins. Co., 79 NY2d 576.) V Appellants cannot avoid their indemnification obligations simply because United States Fidelity & Guaranty Company, like appellant reinsurers, sought to determine its potential net exposure prior to entering into the settlement. (Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143; Insurance Co. v Associated Manufacturers’ Corp., 70 App Div 69; Travelers Cas. & Sur. Co. v Gerling Global Reins. Corp. of Am., 419 F3d 181.) VI. Appellants’ argument that the parties orally agreed to increase the retention amount in the treaty—made for the first time six years into this litigation—is baseless and contrary to appellants’ own pleading. (W.W.W. Assoc. v Giancontieri, 77 NY2d 157; Stevens & Thompson Paper Co., Inc. v Niagara Mohawk Power Corp., 49 AD3d 1011; Stroll v Epstein, 818 F Supp 640; Chimart Assoc. v Paul, 66 NY2d 570; Matter of Union Indem. Ins. Co. of N.Y., 162 AD2d 398; George Backer Mgt. Corp. v Acme Quilting Co., 46 NY2d 211; Resort Sports Network Inc. v PH Ventures III, LLC, 67 AD3d 132.)

      Freeborn & Peters LLP, Chicago, Illinois (Thomas R. Fawkes of counsel), for Reinsurance Association of America, amicus curiae.
    I. Follow the fortunes is a key reinsurance doctrine with carefully defined scope of application. (Matter of Union Indem. Ins. Co. of N.Y., 89 NY2d 94; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583; Unigard Sec. Ins. Co. v North Riv. Ins. Co., 79 NY2d 576; Aetna Cas. & Sur. Co. v Home Ins. Co., 882 F Supp 1328; Compagnie de Reassurance d’lle de France v New England Reins. Corp., 944 F Supp 986; Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Granite State Ins. Co. v ACE Am. Reins. Co., 46 AD3d 436; Hartford Acc. & Indem. v Columbia Cas. Co., 98 F Supp 2d 251; Mentor Ins. Co. [U.K.] Ltd. v Brannkasse, 996 F2d 506.) II. The Appellate Division misinterpreted and misapplied the follow the fortunes doctrine. (Affiliated F.M. Ins. Co. v Employers Reins. Co., 369 F Supp 2d 217; Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583.) III. The decision below is inconsistent with the purpose of follow the fortunes, creates incentives for misconduct, and presents new risks and uncertainties in the reinsurance industry.

      Goldberg Segalla LLP, New York City (James J. Wrynn of counsel), amicus curiae.
    I. The follow the fortunes doctrine provides risk transfer certainty. (North Riv. Ins. Co. v CIGNA Reins. Co., 52 F3d 1194; Sumitomo Mar. & Fire Ins. Co.—U.S. Branch v Cologne Reins. Co. of Am., 75 NY2d 295; Aetna Cas. &

      Sur. Co. v Home Ins. Co., 882 F Supp 1328; Mentor Ins. Co. [U.K.] v Brannkasse, 996 F2d 506; National Union Fire Ins. Co. of Pittsburgh, Pa. v American Re-Insurance Co., 351 F Supp 2d 201; International Surplus Lines Ins. Co. v Certain Underwriters & Underwriting Syndicates at Lloyd’s of London, 868 F Supp 917; North Riv. Ins. Co. v Ace Am. Reins. Co., 361 F3d 134; National Union Fire Ins. Co. of Pittsburgh, PA v American Re-Ins. Co., 441 F Supp 2d 646; Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143; Travelers Cas. & Sur. Co. v Gerling Global Reins. Corp. of Am., 419 F3d 181.) II. Commercial certainty and insurer solvency depend upon liberal risk transfer from insurer to reinsurer.

      Reed Smith LLP, New York City (John N. Ellison and Jill N. Averett of counsel), and Amy Bach, San Francisco, California, for United Policyholders, amicus curiae.
    I. The purpose of insurance is to insure. (Matter of Union Indem. Ins. Co. of N.Y., 89 NY2d 94.) II. To protect policyholders, primary insurance companies must have prompt access to reinsurance. (National Union Fire Ins. Co. of Pittsburgh, PA v American Re-Ins. Co., 441 F Supp 2d 646; Travelers Cas. & Sur. Co. v Gerling Global Reins. Corp. of Am., 419 F3d 181; International Surplus Lines Ins. Co. v Certain Underwriters & Underwriting Syndicates at Lloyd’s of London, 868 F Supp 917.) III. Reinsurance companies are not—and should not—be claims handlers. IV Reinsurers’ interpretation of follow the fortunes would discourage settlements and create endless litigation. (North Riv. Ins. Co. v Ace Am. Reins. Co., 361 F3d 134; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143.) V Allegations of bad faith do not on their own allow an inference that the basis of a settlement is bad faith. (Travelers Cas. & Sur. Co. v Gerling Global Reins. Corp. of Am., 419 F3d 181; Unigard Sec. Ins. Co., Inc. v North Riv. Ins. Co., 4 F3d 1049; North Riv. Ins. Co. v CIGNA Reins. Co., 52 F3d 1194; Commercial Union Ins. Co. v Seven Provinces Ins. Co., Ltd., 9 F Supp 2d 49; Aetna Cas. & Sur. Co. v Home Ins. Co., 882 F Supp 1328; Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113; Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143.)
   OPINION OF THE COURT

Smith, J.

An insurance company, United States Fidelity & Guaranty Company (USF&G), having settled asbestos claims for nearly a billion dollars, seeks to recover a share of its settlement payment from its reinsurers. The courts below granted summary judgment for USF&G. We modify the Appellate Division’s order to deny summary judgment on two issues, and otherwise affirm.

We conclude, as did the dissenting Justice in the Appellate Division, that there is an issue of fact as to whether USF&G, in allocating the settlement amount, reasonably attributed nothing to the so called “bad faith” claims made against it. We also find a factual issue as to whether certain claims were given unreasonable values for settlement purposes. However, we hold that the courts below correctly rejected the reinsurers’ other defenses.

I

From 1948 or earlier until mid-1960, USF&G was one of the liability insurers of Western Asbestos Company, a distributor of asbestos products. The business of Western Asbestos was taken over in the 1960s by Western MacArthur Company, a subsidiary of Mac Arthur Corporation. (The difference between the subsidiary and the parent is unimportant here, and we will refer to both as “MacArthur.”) It was eventually decided that MacArthur was liable for personal injury claims arising out of exposure to the products that Western Asbestos had sold (Kaminski v Western MacArthur Co., 175 Cal App 3d 445, 220 Cal Rptr 825 [1985]). By 1991, such claims had apparently exhausted MacArthur’s own insurance coverage, and MacArthur demanded a defense from Western Asbestos’s insurers, including USF&G. USF&G refused the demand, and in 1993 MacArthur brought suit in a California state court against USF&G and others to establish the existence of coverage.

USF&G relied principally on two grounds in defense of the coverage litigation. First, in the decades that passed between the issuance of the USF&G policies and the claims made under them, the policies themselves had been lost; USF&G took the position that MacArthur, lacking copies of the policies, could not prove that they had ever been issued. Secondly, USF&G argued that it had, at most, insured only Western Asbestos, not MacArthur, and had no obligation to defend the latter company.

USF&G’s first line of defense did not fare well. Although the policies themselves had disappeared, other documents, including the form of policy used by USF&G at the time, and documents showing that Western Asbestos was among its insureds, sufficed to prove both the existence of the policies and their terms. In 2001, more than seven years after the litigation began, USF&G acknowledged that it had had an insurance relationship with Western Asbestos during the years in question.

But USF&G initially prevailed on its second argument. A California Court of Appeal held in 1997 that MacArthur, though it was liable on claims made against Western Asbestos, did not succeed by operation of law to Western Asbestos’s liability insurance (General Acc. Ins. Co. of Am. v Superior Ct. of Cal., Alameda County, 55 Cal App 4th 1444, 64 Cal Rptr 2d 781 [1997]). This victory proved hollow, however, because MacArthur obtained an assignment of Western Asbestos’s rights, and in 2002 the trial court in the coverage litigation held that USF&G lacked standing to challenge the assignment.

While the coverage litigation wore on, MacArthur’s underlying liability to the asbestos claimants grew. After Western Asbestos’s insurers refused to defend MacArthur, MacArthur agreed not to oppose the entry of default judgments against it in favor of the asbestos claimants; in exchange the asbestos claimants, hoping for a favorable outcome of the coverage litigation, agreed to refrain from executing against MacArthur on the judgments. According to figures used in settlement negotiations, there were by 2002 more than a thousand such default judgments, totaling $1.4 billion without interest. MacArthur faced additional risks from pending and possible future claims.

USF&G had not insured the full amount of MacArthur’s liability. The policies it issued to Western Asbestos contained “per person” and “per accident” limits in varying amounts; the highest per person limit was $200,000. But the policies contained no aggregate limit; USF&G could be liable under the policies for any number of separate claims. In addition, MacArthur alleged in the coverage litigation that USF&G had, by refusing to defend the asbestos claimants’ lawsuits, breached its implied covenant of good faith and fair dealing. These “bad faith” claims, if successful, could have led to a judgment against USF&G for whatever liability of MacArthur was found to be attributable to USF&G’s failure to defend—without regard for policy limits.

The coverage suit went to trial in 2002, and was settled in June of that year, while the trial was in progress. The settlement required USF&G to pay a total of $975 million to resolve the asbestos claims, plus $12.3 million in fees to counsel for the asbestos claimants. As part of the settlement, MacArthur was to file for bankruptcy, and a trust was to be created, as authorized by the Bankruptcy Code, to assume MacArthur’s asbestos-related liabilities (see 11 USC § 524 [g] [1], [2] [B] [i] [I]).

Having settled the coverage case, USF&G turned to its re-insurers, defendants in this case, with whom it had entered into a “treaty” of reinsurance applicable to the years 1956 through 1962. The reinsurance was of the type known as “excess of loss”: the reinsurers agreed to pay to USF&G the amount over $100,000 of any loss occurring during the period covered by the treaty. Since USF&G’s loss in the asbestos litigation could not, under its policies, exceed $200,000 per claimant, the reinsurers’ liability was in effect capped at $100,000 per loss. But the reinsurance treaty, like the underlying policies, had no aggregate limit—the reinsurers could be liable for any number of losses, up to $100,000 each.

USF&G calculated the reinsurers’ obligation to it at approximately $391 million, a calculation determined by USF&G’s allocation of the settlement payment, which was based on assumptions we will describe below. The reinsurers refused to pay, and this action followed. Some reinsurers have settled with USF&G, but approximately $262 million (not including interest) remains in dispute.

Supreme Court granted summary judgment to USF&G (2010 NY Slip Op 32441[U] [2010]). The Appellate Division affirmed, with one Justice dissenting on the ground that “[t]here is a genuine triable issue of fact as to whether a portion of the . . . settlement . . . was for bad faith claims” (United States Fid. & Guar. Co. v American Re-Ins. Co., 93 AD3d 14, 27 [1st Dept 2012, Abdus-Salaam, J., dissenting]). The Appellate Division granted the reinsurers leave to appeal, and we now modify the Appellate Division’s order.

II

The reinsurers’ main arguments are challenges to USF&G’s allocation of the settlement payment—i.e., the amounts that USF&G attributed to each of the claims made against it, and to each of the policies under which the claims were made, when it billed the reinsurers. The reinsurers say that USF&G’s allocation minimizes the burden on itself and maximizes the cost to the reinsurers, and that the reinsurers are not bound by it. To analyze the issues the reinsurers raise, we must first identify some rules of law that govern the allocation of settlement payments for reinsurance purposes.

The reinsurance treaty at issue here contained, as contracts of reinsurance commonly do, what is often referred to as a “follow the fortunes” or “follow the settlements” clause (see generally Staring, Law of Reinsurance ch 18 at 407-468 [2012] [hereafter Staring]). We will use the latter term. The follow the settlements clause says:

“All claims in which this reinsurance is involved, when allowed by the Company [USF&G], shall be binding upon the Reinsurers, which shall be bound to pay or allow, as the case may be, their proportion of such loss. It is understood, however, that when so requested, the Company will afford the Reinsurers an opportunity to be associated with the Company, at the expense of the Reinsurers, in the defense of any claim or suit or proceeding involving this reinsurance, and the Company and the Reinsurers shall cooperate in every respect in the defense or control of such claim or suit or proceeding, provided that the Company shall have the right to defend, settle, or compromise any such claim, suit or proceeding, and such action on the part of the Company shall be binding upon the Reinsurers.”

It is well established, and the parties here do not dispute, that a clause like this ordinarily bars challenge by a reinsurer to the decision of a party in USF&G’s position—called in reinsurance jargon the “cedent,” because it has ceded part of its risk to its reinsurers—to settle a case for a particular amount (see Staring § 18.6 at 434-447). That rule usually creates little risk of unfairness because, in deciding whether and for how much to settle, the interests of cedent and reinsurer will normally be aligned; both will want the cheapest settlement possible. There are exceptions to this generalization, but they do not concern us here, because the reinsurers do not challenge USF&G’s decision to settle MacArthur’s lawsuit, nor do they assert that USF&G overpaid in the settlement. Rather, they challenge the way the settlement was allocated.

As the reinsurers point out, the application of a follow the settlements clause to allocation decisions raises problems, because in that context the interests of cedent and reinsurer will often conflict. This case can serve as an illustration. Under the reinsurance treaty, the first $100,000 of every loss must be borne by USF&G, and the second $100,000 by the reinsurers. If the settlement were allocated entirely to losses amounting to $100,000 or less, the whole cost would be borne by USF&G and the reinsurers would pay nothing; but if it were allocated entirely to losses of $200,000 each, the reinsurers would bear half the cost. Because conflicts of this kind will occur often, the reinsurers argue, cedents’ allocation decisions should not bind reinsurers under a follow the settlements clause.

There is logic to this argument, but almost all courts to consider the question have held, and we join them in holding, that a follow the settlements clause does require deference to a cedent’s decisions on allocation (see Travelers Cas. & Sur. Co. v Insurance Co. of N. Am., 609 F3d 143, 157-159 [3d Cir 2010] [hereafter Travelers v IN A] [applying New York law]; Travelers Cas. & Sur. Co. v Gerling Global Reins. Corp. of Am., 419 F3d 181, 186-190 [2d Cir 2005] [hereafter Gerling]; North Riv. Ins. Co. v ACE Am. Reins. Co., 2002 WL 506682, *2-3, 2002 US Dist LEXIS 5536, *4-9 [SD NY 2002], affd in relevant part 361 F3d 134, 139-141 [2d Cir 2004]; Hartford Acc. & Indem. v Columbia Cas. Co., 98 F Supp 2d 251, 258 [D Conn 2000]; Commercial Union Ins. Co. v Seven Provinces Ins. Co., Ltd., 9 F Supp 2d 49, 67-68 [D Mass 1998], affd 217 F3d 33 [1st Cir 2000]; but see Employers Reins. Corp. v Newcap Ins. Co., Ltd., 209 F Supp 2d 1184, 1190-1191 [D Kan 2002]; see generally Staring § 18:10 at 455-465). As other courts have observed, there seems to be no good alternative to giving a measure of deference to a cedent’s allocation decisions. To review each decision de novo would invite long litigation over complex issues that courts may not be well equipped to resolve, creating cost and uncertainty and making the reinsurance market less efficient (see Commercial Union, 9 F Supp 2d at 67-68; North Riv., 2002 WL 506682, *3, 2002 US Dist LEXIS 5536, *7-8; North Riv., 361 F3d at 140-141). Deference to a cedent’s decisions makes for a more orderly and predictable resolution of claims.

The language of the follow the settlements clause in this case supports the conclusion that precedent and policy suggest. The words “[a]ll claims . . . when allowed by the Company, shall be binding upon the Reinsurers” imply discretion in the cedent to decide which claims should be considered “allowed,” and to what extent. And the clause gives the reinsurers a measure of protection against abuse by allowing the reinsurers to take a role in defending claims and requiring that the cedent and the reinsurers “cooperate in every respect in the defense or control” of claims, while preserving the cedent’s right “to . . . settle, or compromise any such claim” by action that “shall be binding upon the Reinsurers.” If reinsurers think that they are not adequately protected by this language, their remedy is to negotiate better terms.

But to say that a cedent’s allocation decisions are entitled to deference is not to say that they are immune from scrutiny. Recognizing that the cedent’s and the reinsurer’s interests will often conflict, courts generally hold that a reinsurer is bound only by a cedent’s “good faith” decisions. While that expression might seem to suggest that the cedent’s subjective intentions are critical, most decisions also consider reasonableness or some other objective element (see Commercial Union, 9 F Supp 2d at 68 [deferring to “good faith and reasonable” allocation]; Hartford Acc., 98 F Supp 2d at 258-260 [rejecting deference if “gross negligence or recklessness” could be shown]; North Riv., 361 F3d at 141 [cedents “must make good-faith allocations”]; Gerling, 419 F3d at 191-193 [a cedent may choose among “reasonable allocation possibilities”]; Travelers v INA, 609 F3d at 158-159 [allocation must be “legitimate” or “credible”]). This approach is consistent with our own in Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London (96 NY2d 583, 596-597 [2001]), where we held that a follow the settlements clause “does not alter the terms or override the language of reinsurance policies,” and rejected a cedent’s attempt to “allocate” to certain reinsurance treaties losses that the treaties simply did not cover.

In our view, objective reasonableness should ordinarily determine the validity of an allocation. Reasonableness does not imply disregard of a cedent’s own interests. Cedents are not the fiduciaries of reinsurers, and are not required to put the interests of reinsurers ahead of their own. As the Third Circuit put it in Travelers v INA:

“[T]o establish a breach of the duty of good faith, it is not sufficient simply to demonstrate that a particular allocation decision increased the insurer’s access to reinsurance, at least not where the insurer is able to point to some legitimate (i.e., non-reinsurance-related) reason for the challenged decision” (609 F3d at 158-159).

We mean by “reasonable” essentially what we take the Third Circuit to mean by “legitimate”: The reinsured’s allocation must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at in arm’s length negotiations if the reinsurance did not exist.

The Third Circuit said that a cedent’s allocation could be rejected if the cedent’s allocation was not “credible”—a word seemingly used to mean the same thing as “legitimate” or “reasonable”—or if the cedent “was motivated primarily by reinsurance considerations” (id. at 159). We conclude, however, that the cedent’s motive should generally be unimportant. When several reasonable allocations are possible, the law, as several courts have recognized, permits a cedent to choose the one most favorable to itself (see id.; Gerling, 419 F3d at 193 [an “allocation that increases reinsurance recovery . . . would rarely demonstrate bad faith in and of itself’]). We think it unrealistic to expect that the cedent will not be guided by its own interests in making the choice.

But the choice must be a reasonable one, and we also conclude that reasonableness cannot be established merely by showing that the cedent’s allocation for reinsurance purposes is the same as the allocation that the cedent and the insurance claimants actually adopted in settling the underlying insurance claims. The fact that they did adopt it does not prove that they would have, or reasonably could have, adopted it if reinsurance did not exist. In this case, the record shows that the allocation USF&G used in billing the reinsurers was one that it discussed and agreed on in negotiations with MacArthur and the asbestos claimants. We reject USF&G’s argument that this in itself establishes the validity of the allocation.

Again, we follow what we take to be the view of the Third Circuit in Travelers v IN A. Like the Third Circuit, “[w]e are reluctant to adopt a rule whereby an insurer could insulate its allocation from challenge by its reinsurer simply by getting its, essentially indifferent, insured to agree to it” (609 F3d at 159 n 25). Indeed, we will put the point more strongly than the Third Circuit did: in many cases claimants and insureds (i.e., those in the position of the asbestos claimants and MacArthur here), far from being indifferent, will enthusiastically support insurers’ efforts to fund a settlement at reinsurers’ expense. They will do this for the simple reason that insurers, like everyone else, are apt to be more generous with other people’s money than their own.

In sum, under a follow the settlements clause like the one we have here, a cedent’s allocation of a settlement for reinsurance purposes will be binding on a reinsurer if, but only if, it is a reasonable allocation, and consistency with the allocation used in settling the underlying claim does not by itself establish reasonableness. We now consider whether USF&G’s allocation decisions in this case were reasonable as a matter of law, thus entitling USF&G to the summary judgment that it was granted by the courts below.

Ill

The significant, disputed assumptions underlying USF&G’s settlement allocation were: (1) that all of the settlement amount was attributable to claims within the limits of USF&G’s policies, and none of it to the claims that USF&G acted in bad faith when it refused to defend MacArthur in asbestos litigation; (2) that claims by claimants suffering from lung cancer had a value of $200,000 each, while certain other claims had values of $50,000 or less; and (3) that USF&G’s entire payment should be attributed to the policy in force in 1959—the last full year in which USF&G was Western Asbestos’s liability insurer. We consider whether these assumptions might reasonably have been the basis for an arm’s length settlement among the asbestos claimants, MacArthur and USF&G if reinsurance were not in the picture. We conclude that the reasonableness of the first two, but not the third, of these assumptions presents issues of fact.

The Bad Faith Claims

The decision to allocate all the settlement to claims within the policy limits, and nothing to the claims for bad faith, worked to USF&G’s advantage because the bad faith claims were not covered by reinsurance. The reinsurance treaty covered “loss in connection with each policy” of USF&G in effect at the relevant time; these words, read with a common-sense appreciation of the risks that reinsurers could reasonably be expected to take, must be interpreted to mean losses for which USF&G was liable under its policies—not losses for which it became liable by failing in bad faith to observe the policies’ terms (see Staring § 18:7 [1] at 447; National Union Fire Ins. Co. of Pittsburgh, Pa. v Clearwater Ins. Co., 2007 WL 2106098, *2, 2007 US Dist LEXIS 52770, *4-6 [SD NY 2007]; American Ins. Co. v North Am. Co. for Prop. & Cas. Ins., 697 F2d 79, 81 [2d Cir 1982]).

There is evidence in the record from which a factfinder could conclude that an allocation giving no value to the bad faith claims was unreasonable. The more important features of that evidence may be summarized as follows:

First, it could be found that USF&G faced a significant risk of an adverse verdict on the bad faith claims. It had taken a very aggressive position in refusing to admit, for almost a decade, that it had ever written liability insurance that covered the asbestos claimants’ claims—a position that it abandoned at a late stage of the coverage litigation, in the face of strong proof that coverage existed. It could be found that USF&G knew, well before it admitted, that it did indeed provide such coverage, and that its litigation position was an irresponsible attempt to exploit the fact that, with the passage of time, the policies it issued had disappeared. It could also be found that USF&G’s refusal to defend MacArthur resulted in the many large default judgments with which MacArthur was faced.

Admittedly, USF&G had a plausible defense to the bad faith claims. Its refusal to acknowledge the existence of the policies was not its only reason for refusing to defend MacArthur. It also refused on the alternative ground that, even if it insured Western Asbestos, it did not insure MacArthur—and that defense was accepted by the California courts, though it was later nullified by an assignment. It was not until 2002 that the California trial court held the assignment unchallengeable by USF&G—a holding that was even then still subject to appeal. It could hardly be argued that this second ground for refusing to defend MacArthur was not advanced in good faith.

USF&G’s argument is, in substance, that since one of its two grounds for refusing to defend was asserted in good faith, the possible bad faith of the other was inconsequential. Perhaps this argument would persuade us, if we were the court adjudicating the bad faith claims, but we are not. The California trial court before whom those claims were pending was evidently not persuaded: it denied USF&G’s motion for summary adjudication on the bad faith claims, and also denied, at the outset of the coverage trial, a motion in limine to exclude some evidence thought to be relevant to those claims.

Thus, when the coverage case went to trial, USF&G was faced with the possibility of a jury verdict—possibly a very large one— against it on the bad faith claims, with the uncertain comfort of having a logically persuasive argument that it could assert on appeal. It is a fact of life, well known to insurance companies, that logically persuasive arguments do not always win cases for defendants that juries or courts may think have acted outrageously. It was therefore arguably not reasonable, at the time the coverage litigation was settled, to say that the bad faith claims had no value.

Secondly, it could be found that USF&G, in allocating the settlement, assigned inflated values to claims other than the bad faith claims—i.e., to claims that were covered in part by reinsurance. As we explained above, under its policies with Western Asbestos, USF&G could be liable for no more than $200,000 to each claimant; and under the reinsurance treaties, the amount exceeding $100,000 of each loss (i.e., half of each $200,000 loss) was the reinsurers’ responsibility.

In allocating its settlement payment, USF&G classified the claims according to the disease from which the claimant suffered. It seems to be undisputed (and in any event, it is clear from the record) that the claims for the most serious disease, mesothelioma, were reasonably valued above the $200,000 cap. But USF&G also valued each claim by a claimant suffering from lung cancer at $200,000—thus allocating the maximum payment to each such claim. According to affidavits submitted in this case, this allocation was agreed to, in the settlement negotiations, by MacArthur and the asbestos claimants; but we do not, for the reasons we explained above (at 421-422), assign dis-positive weight to their agreement. At an earlier stage of the coverage litigation, an expert retained by the asbestos claimants estimated MacArthur’s liability for each lung cancer claim at $91,174. It is unusual for claims to be settled for more than twice what the claimant’s expert has asserted they are worth. A factfinder could conclude that the lung cancer claims were priced at an unreasonably high level, and included value that should have been attributed to the bad faith claims.

Thirdly, while the people who negotiated the settlement of the coverage litigation all agreed that the settlement gave no value to the bad faith claims, a demand made shortly before the settlement did include such value. A proposal by MacArthur’s counsel on April 19, 2002 suggested a payment of $1,953 billion by USF&G, of which $167 million was ascribed to “Bad faith tort measures of liability.” The settlement agreement signed seven weeks later was for $975 million (plus attorneys’ fees)— almost exactly half the MacArthur demand. A factfinder might infer that this was a simple 50% settlement, and that therefore $83.5 million of it—a relatively small part of the total, but considerably more than zero—was attributable to the bad faith claims.

Fourthly, the parties to the settlement persuaded a bankruptcy court to approve a plan of reorganization based on the settlement, partly on the ground that the bad faith claims had significant value. To obtain court approval, the proponents of the plan had to show, among other things, that the contribution of the debtors, Western Asbestos and MacArthur, to the settlement was “fair and equitable ... in light of the benefits provided, or to be provided” on the debtors’ behalf (11 USC § 524 [g] [4] [B] [ii]). The debtors claimed, and the Bankruptcy Court agreed, that the debtors’ bad faith claims against USF&G, which they surrendered in the settlement, were part of the “benefits provided.” The Bankruptcy Court found that the claims had “great settlement value”; it did not value them, but remarked that they were significant even if they “represent only ten percent of the settlement amount.”

When the confirmation of the plan was appealed to the United States District Court, the debtors submitted a brief, joined by USF&G in relevant part, saying that the debtors’ contributions included their “valuable rights of action for bad faith . . . against their insurers.” The reinsurers do not argue, and we do not imply, that USF&G is estopped or otherwise barred from taking an inconsistent position now. But the position it did take, successfully, in the bankruptcy proceedings would be admissible against it on the issue of whether its allocation of nothing to the bad faith claims for reinsurance purposes was reasonable.

In short, we find it impossible to conclude, as a matter of law, that parties bargaining at arm’s length, in a situation where reinsurance was absent, could reasonably have given no value to the bad faith claims. This issue must be decided at trial.

The Relative Valuation of Lung Cancer and Other Claims

There is, as we have explained, evidence from which a fact-finder could conclude that the $200,000 value assigned by USF&G to the claims against MacArthur by claimants with lung cancer was unreasonably high (at 424). As our discussion above shows, a possible inference is that some of this value should properly have been attributed to the bad faith claims; but another possible inference is that claims falling below the reinsurers’ $100,000 retention amount were undervalued. USF&G’s allocation assigned values of $50,000, $20,000 and $20,000 to the claims of sufferers from asbestosis, pleural thickening and “other cancer,” respectively. If some of the value attributed to the lung cancer claims were reassigned to these less serious claims, the result would be to decrease the reinsurers’ liability. For example, if (to use values chosen arbitrarily) the lung cancer claims were reduced to $100,000 each, while the values given the claims for the three other diseases were doubled, the result would be no reinsurance coverage for any claims in these four categories.

Whether the values assigned to lung cancer, asbestosis, pleural thickening and other cancer claims could reasonably have been agreed on in arm’s length bargaining in the absence of reinsurance presents an issue of fact.

The Allocation to the 1959 Policy

The allocation of all of the losses encompassed in the settlement to a single insurance policy, the 1959 policy, was also to the advantage of USF&G and the disadvantage of the re-insurers. If the claims had been prorated over the many policy years in which claimants were exposed to asbestos, few if any losses would have exceeded the $100,000 retention in the reinsurance treaty, and thus the reinsurers would have largely or wholly escaped liability. We see no evidence, however, from which a factfinder could infer that this aspect of USF&G’s allocation was unreasonable.

Courts have long struggled with the insurance coverage problems presented by injuries that, like those suffered by people exposed to asbestos, occur gradually, over a period of years in which several liability insurance policies are successively in force. Rules to deal with such problems have been developed, and which policy or policies will apply often depends on which rules are invoked. Here, USF&G did its allocation on the assumption that California courts would follow the rules sometimes referred to as “continuous trigger,” “all sums” and “no stacking.”

The continuous trigger rule is that, when an injury is suffered continuously for a period in which several policies are applicable, coverage under all of the policies is triggered (see Montrose Chem. Corp. of Cal. v Admiral Ins. Co., 10 Cal 4th 645, 913 P2d 878 [1995]). The all sums rule is that all of the damages from such an injury may be attributed to any policy that was in effect during the period in which the injury was suffered (see Armstrong World Indus., Inc. v Aetna Cas. & Sur. Co., 45 Cal App 4th 1, 49-50, 52 Cal Rptr 2d 690, 705-707 [1996]). And no stacking means, in substance, that the claimant must pick one policy; he or she is not entitled to recover under every policy that could be triggered, thus adding or “stacking” the policy limits to produce a larger recovery (see FMC Corp. v Plaisted & Cos., 61 Cal App 4th 1132, 1189-1191, 72 Cal Rptr 2d 467, 502-504 [1998]). Applied to this case, these rules mean that the asbestos claimants could have chosen any one of the policies that USF&G issued to Western Asbestos, and attributed all their injuries to that policy. It is not disputed that, given that choice, they would have picked the 1959 policy, for there is no policy with higher policy limits, and all claimants who were exposed to asbestos in 1959 or earlier could claim to have suffered some injury in that year.

The reinsurers complain of USF&G’s adoption of all three of these rules for allocation purposes. As to all sums and no stacking we find their objections plainly lacking in merit. At least the Armstrong World Indus, case clearly held that the all sums approach was accepted in California, and the reinsurers cite no authority contrary to that decision. And we do not understand how the reinsurers can complain of the no stacking rule, which significantly limited both USF&G’s and the reinsurers’ total obligation. Indeed, in light of the California Supreme Court’s recent approval of stacking (see State of California v Continental Ins. Co., 55 Cal 4th 186, 281 P3d 1000 [2012] [overruling the FMC case]), it seems that the reinsurers were lucky that the settlement occurred while the no stacking rule was still viable in California.

The application of the continuous trigger rule requires more discussion. The California Supreme Court held in Montrose that that rule applied to policies obligating the insurer to pay damages “caused by an occurrence,” where “occurrence” was defined as “an accident, including continuous or repeated exposure to conditions” (10 Cal 4th at 656, 913 P2d at 881). The reasoning of the Montrose court is tied to the precise wording of the policies (see 10 Cal 4th at 669-689, 913 P2d at 890-904). The policies USF&G issued to Western Asbestos, which were on a form older than the one at issue in Montrose, insured against liability for injuries caused by “accident,” but “accident” was not defined, and the policies made no reference to “continuous or repeated exposure.” It could be argued—and USF&G did argue, during the negotiations for settlement of the coverage litigation—that these older, “accident-based” policies did not permit application of the continuous trigger rule. Indeed, a California case decided after USF&G settled the coverage litigation, Lockheed Corp. v Continental Ins. Co. (134 Cal App 4th 187, 208, 35 Cal Rptr 3d 799, 814 [2005]), rejected the continuous trigger rule; that case involved another older form of policy, which the court described as “accident-based.”

It was not unreasonable to believe in 2002, however, that USF&G’s attempt to distinguish “occurrence-based” from “accident-based” policies would not succeed. Before the Lockheed decision, the distinction was by no means so well established as the reinsurers now claim (see Aerojet-General Corp. v Transport Indem. Co., 17 Cal 4th 38, 56 n 9, 948 P2d 909, 919 n 9 [1997] [“As pertinent here, the difference in words (between ‘accident’ and ‘occurrence’ policies) does not reflect any difference in substance”]). The Third Circuit had said, in 1991, that the insurance industry’s transition from accident-based to occurrence-based coverage in the 1960s was merely a recognition of what was already “prevailing case law” (New Castle County v Hartford Acc. & Indem. Co., 933 F2d 1162, 1196 [3d Cir 1991]). The New Castle court remarked that a narrow definition of “accident” which would not include gradual damage had been “roundly rejected by the judiciary” (id.). We see no basis for concluding that it would have been unreasonable for parties bargaining at arm’s length in the absence of reinsurance to expect, in 2002, that the California courts would reject a similar argument.

The reinsurers also argue that the “Other Insurance” clause of the policies USF&G issued to Western Asbestos forbade the allocation of all losses to one policy year. That clause says:

“If the Insured has other insurance against a loss covered by this policy the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability stated in the declarations bears to the total applicable limit of liability of all valid and collectible insurance against such loss.”

The reinsurers’ argument is that each of USF&G’s policies in force during any of the years at issue here was “other insurance” with respect to the other policies, and so must bear a pro rata share of each loss. The argument is without merit. It was and is at least reasonable to read the clause as applicable to policies issued by other insurers, not to policies of the same insurer covering other time periods (see Dart Indus., Inc. v Commercial Union Ins. Co., 28 Cal 4th 1059, 1078-1080, 52 P3d 79, 92-93 [2002]). The reinsurers cite no authority in support of their reading.

As to the allocation of all losses to the 1959 policy year, summary judgment in USF&G’s favor was properly granted.

IV

In addition to challenging USF&G’s allocation, the re-insurers argue in the alternative that they have no liability to USF&G because the applicable reinsurance treaty was retroactively amended to increase the retention per loss to $3,000,000, far more than any loss for which USF&G could have been liable. We find the evidence of this alleged amendment insufficient to raise an issue of fact.

There is no evidence of any written endorsement or amendment to alter the retention on the treaty in issue here, though such endorsements exist for later treaties, covering the years 1962 and afterwards. The suggestion that an agreement of such importance between such sophisticated parties would be orally amended, without any writing being issued for the purpose of confirming the amendment, is a highly unlikely one. The re-insurers rely on evidence showing at most that certain representatives of the parties thought that they would agree, or mistakenly thought that they had agreed, to increase the retention for years preceding 1962. The proof offered by USF&G that no such increase was ever finally agreed to stands without any refutation of substance.

The reinsurers’ other arguments are without merit.

Accordingly, the order of the Appellate Division should be modified, without costs, to grant USF&G’s motion for summary judgment in part and to deny it in part in accordance with this opinion, and as so modified affirmed, and the certified question should not be answered on the ground that it is unnecessary.

Chief Judge Lippman and Judges Graffeo, Read and Pigott concur.

Order modified, without costs, in accordance with the opinion herein and, as so modified, affirmed, and certified question not answered upon the ground that it is unnecessary.