author: Read, J. R.S. Smith, J. (dissenting).

text:
    [829 NE2d 276, 796 NYS2d 312]
    In the Matter of Thomas L. Huckaby, Appellant, v New York State Division of Tax Appeals, Tax Appeals Tribunal, et al., Respondents.
    Argued January 5, 2005;
    decided March 29, 2005

      POINTS OF COUNSEL

      McDermott Will & Emery LLP, New York City (Peter L. Faber, Margaret C. Wilson and Richard A. Leavy of counsel), for appellant.
    I. This appeal directly involves a substantial constitutional question. (Matter of Zelinsky v Tax Appeals Trib. of State of N.Y., 1 NY3d 85, 541 US 1009.) II. The convenience of the employer test is unconstitutional as applied to Mr. Huckaby because it taxes income out of all proportion to Mr. Huckaby’s work sourced to, and benefits from, New York; his employer’s benefits from New York are relevant only to New York’s taxation of his employer—not Mr. Huckaby. (Shaffer v Carter, 252 US 37.) III. The convenience of the employer test violates due process by taxing income that clearly was not derived from New York State. (Shaffer v Carter, 252 US 37; Hans Rees’ Sons, Inc. v North Carolina, 283 US 123; Matter of British Land [Md.] v Tax Appeals Trib. of State of N.Y., 85 NY2d 139; Moorman Mfg. Co. v Bair, 437 US 267; Norfolk & W. Ry. Co. v Missouri State Tax Commn., 390 US 317; Trinova Corp. v Michigan Dept, of Treasury, 498 US 358; Wisconsin v J.C. Penney Co., 311 US 435; International Harvester Co. v Wisconsin Dept, of Taxation, 322 US 435; Connecticut Gen. Life Ins. Co. v Johnson, 303 US 77; Matter of Allen [Commissioner of Labor], 100 NY2d 282.) IV The application of the convenience of the employer test to Mr. Huckaby violates the Equal Protection Clause by applying an arbitrary and irrational standard to determine which nonresidents cannot allocate any income outside the state. (Harrah Ind. School Dist. v Martin, 440 US 194; Fitzgerald v Racing Assn, of Cent. Iowa, 539 US 103; Matter of Colleary v Tully, 69 AD2d 922.) V. This Court’s decision in Matter of Zelinsky v Tax Appeals Trib. of State of N.Y. (1 NY3d 85 [2003]) was limited to its facts and did not reach the constitutionality of the convenience of the employer test in the unique context of a telecommuter whose principal job and place of business are outside New York. (Matter of Speno v Gallman, 35 NY2d 256; Norfolk & W. Ry. Co. v Missouri State Tax Commn., 390 US 317; Oklahoma Tax Commn. v Jefferson Lines, Inc., 514 US 175; Moorman Mfg. Co. v Bair, 437 US 267.) VI. The statute does not permit respondent Division of Tax Appeals to tax a nonresident on income that is compensation for services that are in fact performed outside the state. (Matter of McNulty v New York State Tax Commn., 70 NY2d 788; Matter of Linsley v Gallman, 38 AD2d 367, 33 NY2d 863; Matter of D.S. Alamo Assoc, v Commissioner of Fin. of City of N.Y., 71 NY2d 340; Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451; American Locker Co. v City of New York, 308 NY 264; Matter of Speno v Gallman, 35 NY2d 256; Matter of Burke v Bragalini, 10 AD2d 654; Matter of Burke v Murphy, 33 AD2d 581; Matter of Carpenter v Chapman, 276 App Div 634; Matter of Colleary v Tully, 69 AD2d 922.) VII. Because the Division of Tax Appeals has disregarded its own published guidelines to force Mr. Huckaby to court, with no rational basis, Mr. Huckaby is entitled to his reasonable administrative and litigation costs.

      Eliot Spitzer, Attorney General, Albany (Julie S. Mereson, Caitlin J. Halligan, Daniel Smirlock and Andrew D. Bing of counsel), for respondents.
    I. New York’s taxation of all of Thomas Huckaby’s income from his New York employment pursuant to the convenience test is consistent with constitutional norms governing taxation of nonresidents and with Tax Law § 601 (e) and § 631 (b). (Oklahoma Tax Commn. v Chickasaw Nation, 515 US 450; International Harvester Co. v Wisconsin Dept, of Taxation, 322 US 435; Travis v Yale & Towne Mfg. Co., 252 US 60; Brady v State of New York, 80 NY2d 596, 509 US 905; Shaffer v Carter, 252 US 37; Matter of Speno v Gallman, 35 NY2d 256; Matter of Zelinsky v Tax Appeals Trib. of State of N.Y., 1 NY3d 85; Matter of Linsley v Gallman, 38 AD2d 367, 33 NY2d 863; Quill Corp. v North Dakota, 504 US 298.) II. The application of the convenience rule to Thomas Huckaby is consistent with the Due Process Clause. (Matter of Zelinsky v Tax Appeals Trib. of State of N.Y., 1 NY3d 85; Moorman Mfg. Co. v Bair, 437 US 267; Wisconsin v J.C. Penney Co., 311 US 435; Shaffer v Carter, 252 US 37; Matter of Tamagni v Tax Appeals Trib. of State of N.Y., 91 NY2d 530.) III. The application of the convenience rule to Thomas Huckaby does not violate his equal protection rights. (Miriam Osborn Mem. Home Assn, v Chassin, 100 NY2d 544; Trump v Chu, 65 NY2d 20; Lehnhausen v Lake Shore Auto Parts Co., 410 US 356.) IV Thomas Huckaby is not entitled, to administrative and litigation costs pursuant to Tax Law § 3030. (Matter of Speno v Gallman, 35 NY2d 256; Matter of Colleary v Tully, 69 AD2d 922; Matter of Wheeler v State Tax Commn., 72 AD2d 878; Matter of Ritman v State Tax Commn., 92 AD2d 1018, 59 NY2d 603; Matter of Phillips v New York State Dept, of Taxation & Fin., 267 AD2d 927, 94 NY2d 763; Matter of Zelinsky v Tax Appeals Trib. of State of N.Y., 1 NY3d 85; Matter of Carpenter v Chapman, 276 App Div 634.)
   OPINION OF THE COURT

Read, J.

This appeal revisits New York’s “convenience of the employer” test, which provides that when a nonresident is employed by a New York employer, income derived from work in another state is taxable by New York unless performed out of state for the necessity of the employer. Here, the taxpayer, a Tennessee resident who works for a New York employer, contends that the convenience test violates the statute that it implements as well as the Due Process and Equal Protection Clauses of the Fourteenth Amendment to the United States Constitution. We disagree, and uphold the challenged tax as applied to this taxpayer.

I.

Until 1991, petitioner Thomas L. Huckaby, a Tennessee resident, worked as a computer programmer for Multi-User Computer Solutions (MCS), a Tennessee employer engaged in the business of developing and selling computer software. In 1991, MCS underwent a reorganization, and petitioner’s employment was terminated as a result. He was subsequently hired by the National Organization of Industrial Trade Unions (NOITU), an organization based in Jamaica, New York. NOITU had been an MCS client, and Huckaby had worked on NOITU matters while he was employed by MCS.

NOITU is an umbrella organization of industrial trade unions, which provides administrative services for its members. Petitioner’s duties included supporting the software programs that MCS had developed for NOITU; assisting the computer department’s manager in selecting new information technology; and, in general, meeting NOITU’s programming needs.

NOITU and petitioner agreed that he would work primarily from his home in Tennessee, and would travel to the New York office only as needed to “gather guidelines for revision of existing or creation of new computer programs, and to instruct NOI-TU’s New York personnel in their use.” NOITU set up a long-distance data line to connect its Jamaica office to petitioner’s Tennessee home office, where he also maintained a dedicated voice telephone line for business purposes and two computer terminals, which were eventually replaced with a personal computer and a printer. NOITU reimbursed petitioner monthly for office expenses, including telephone bills and supplies.

Petitioner concedes that he performed the bulk of his work for NOITU in Tennessee rather than in New York solely for personal reasons; NOITU did not require him to perform any work in Tennessee and would not have objected if he had worked out of its New York office. In 1994, petitioner split his time between NOITU’s New York office, where he worked 59 days, and his Tennessee home office, where he worked 187 days. In 1995, he worked in NOITU’s New York office for 62 days and in his Tennessee home office for 180 days. Thus, over this two-year period, petitioner spent roughly 25% of his workdáys in New York and 75% of his workdays in Tennessee. He did not work in 1994 or 1995 for any person or any entity other than NOITU as either an employee or an independent contractor.

Petitioner timely filed 1994 and 1995 nonresident income tax returns with New York. He allocated his income between New York and Tennessee based on the number of days he worked in each state relative to the total number of days he worked in each tax year.

Upon subsequently auditing petitioner’s 1994 and 1995 returns, the New York State Department of Taxation and Finance allocated 100% of his income to New York State and New York City and issued notices of deficiency. The Department explained that £‘[a]ny allowance claimed for days worked outside New York State must be based upon the performance of services which, because of the necessity of the employer, obligate the employee to out-of-state duties in the service of his employer. Such duties are those which, by their very nature, cannot be performed at the employer’s place of business.”

Petitioner paid the deficiencies under protest. After a conciliation conferee sustained the assessments, he took an administrative appeal seeking a refund. An administrative law judge sustained the notices of deficiency, and the Tax Appeals Tribunal affirmed. Petitioner then commenced this CPLR article 78 proceeding in the Appellate Division pursuant to Tax Law § 2016. The Appellate Division confirmed the administrative determination and dismissed the petition (6 AD3d 988 [3d Dept 2004]).

II.

Tax Law § 601 (e) (1) imposes a tax on “income which is derived from sources in this state of every nonresident” (emphasis added). Section 631 (a) (1) of the Tax Law defines the “New York source income of a nonresident individual” as including “[t]he net amount of items of income, gain, loss and deduction entering into his federal adjusted gross income, as defined in the laws of the United States for the taxable year, derived from or connected with New York sources” (emphasis added). Tax Law § 631 (b) (1) (B), in turn, provides that “[i]terns of income, gain, loss and deduction derived from or connected with New York sources shall be those items attributable to: . . . (B) a business, trade, profession or occupation carried on in this state” (emphasis added).

The “carried on” language first appeared in the Tax Law in 1919, the year New York adopted an income tax (see L 1919, ch 627). The 1919 law imposed a tax on “the entire net income . . . from all property owned and from every business, trade, profession or occupation carried on in this state by natural persons not residents of the state” (former Tax Law § 351). The 1919 law also provided that “[i]n the case of taxpayers other than residents, gross income includes only the gross income from sources within the state” (former Tax Law § 359 [3]). Other sections provided for deductions (former Tax Law § 360), exemptions (former Tax Law § 362) and credits (former Tax Law § 363) for nonresidents. The United States Supreme Court in Travis v Yale & Towne Mfg. Co. (252 US 60 [1920]) vindicated New York’s nonresident income tax from charges that it violated the Commerce, Due Process and Equal Protection Clauses.

Petitioner contends that sections 601 and 631 of the Tax Law preclude New York from taxing income attributable to work that he carried out for his New York employer in his Tennessee home office. Nothing in the Tax Law’s legislative history, however, indicates whether the Legislature intended business “carried on in this state” and “sources in this state” to refer to the location of the employee or of the employer. Petitioner’s assumption that these phrases signify the employee’s place of performance traces to a 1919 opinion of the Attorney General construing the phrase “sources [of income] within the State” (1919 Report Atty Gen 301). Attorney General Charles D. Newton opined that “[i]t seems to me that the work done, rather than the person paying for it, should be regarded as the ‘source’ of the income” (id..). He went on to conclude that “[w]here services are rendered partially within and partially without the State, the income therefrom should be divided pro rata into income from sources within and without the State” (id.).

In 1960, the Tax Law was recodified and reconfigured so as to allow taxpayers to use federal figures for their state returns (Message of Governor, 1960 McKinney’s Session Laws of NY, at 2026). Section 601 and what later became section 631 were added and mirror, to a large extent, the language found in the predecessor statutes. Importantly, however, new language was folded into the latter as subdivision (c). This subdivision, referring to New York source income of nonresidents, states that

“[i]f a business, trade, profession or occupation is carried on partly within and partly without this state, as determined under regulations of the tax commission, the items of income, gain, loss and deduction derived from or connected with New York sources shall be determined by apportionment and allocation under such regulations.” (Tax Law § 631 [c].)

The Legislature thus recognized the complexities of administering an income tax for a nonresident who works both within and without the state, and left it up to the State Tax Commission, whose functions and duties in this regard were subsequently transferred to the Commissioner of Taxation and Finance (see L 1986, ch 282), to develop a rule for apportionment and allocation.

This rule, the convenience of the employer test, provides that

“[i]f a nonresident employee . . . performs services for his employer both within and without New York State, his income derived from New York State sources includes that proportion of his total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number of working days employed both within and without New York State. . . . However, any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer” (20 NYCRR 132.18 [a]).

When the convenience test first came into use is obscure; however, it was embodied in regulation by 1960, the tax year at issue va. Matter of Speno v Gallman (35 NY2d 256 [1974]).

In Speno, we addressed the language “sources within the state” (former Tax Law § 632) in relation to the taxation of the income of the nonresident president of a company with offices in New York and abroad. We endorsed a “refinement” of the Attorney General’s 1919 “place of performance” opinion. (Speno at 259.) That is, we accepted the Department’s interpretation of the Tax Law in the convenience test, and held that “sources within the state” does not simply mean “place of performance.” Rather, it calls for a more complicated analysis that takes into consideration why work is performed out of state. Our recent decision in Matter of Zelinsky v Tax Appeals Trib. of State of N.Y. (1 NY3d 85 [2003], cert denied 541 US 1009 [2004]), which rejected challenges to the convenience test on federal due process and Commerce Clause grounds, was premised on our conclusion in Speno that the convenience test is a valid interpretation of the Tax Law.

Petitioner contends that while the convenience test as applied in Speno and Zelinsky may have comported with the Tax Law, his circumstances are different because he was not seeking to avoid or evade taxes. But our decisions in Speno and Zelinsky did not rest on any notion that these taxpayers were motivated to work at home to sidestep New York income tax liability. Further, although petitioner may not be in a position to commute physically into New York State each day to work, he is the one who chose to accept employment from a New York employer (with the advantages of a New York salary and fringe benefits) while maintaining his residence in Tennessee, some 900 miles and a two-hour plane trip distant from his New York employer’s office.

In short, the statute facially evidences the Legislature’s intent to tax nonresidents on all New York source income, and to task the Commissioner to develop a workable rule for apportioning and allocating the taxable income of nonresidents who work both within and without the state. The Commissioner has carried out his statutory responsibility by adopting the convenience of the employer test.

III.

Petitioner’s due process challenge to the convenience test relies principally on Supreme Court cases involving taxes on interstate businesses (see e.g. Wisconsin v J.C. Penney Co., 311 US 435, 441 [1940] [upholding from due process challenge tax on the “ ‘privilege of declaring and receiving dividends, out of income derived from property located and business transacted in’ Wisconsin”]; Moorman Mfg. Co. v Bair, 437 US 267 [1978] [upholding from due process challenge Iowa’s “single-factor” formula for allocating interstate business income for tax purposes]; Hans Rees’ Sons v North Carolina ex rel. Maxwell, 283 US 123 [1931] [invalidating under Commerce Clause tax on 84% of corporation’s income where only 17% was sourced in North Carolina]). In Matter of British Land (Md.) v Tax Appeals Trib. of State of N.Y. (85 NY2d 139 [1995]), we summarized this multistate business case law as follows:

“[A] formula-based tax on income may be struck down if the income attributed to the State is in fact out of all appropriate proportions to the business transacted [by the taxpayer] in that State or if application of the apportionment formula has led to a grossly distorted result. The taxpayer bears the burden of showing by clear and cogent evidence that [application of the formula] results in extraterritorial values being taxed” (id. at 146 [citations and internal quotation marks omitted]).

While instructive, these cases are not directly relevant to this appeal. Income derived from a business’s interstate activities differs from income a nonresident earns from a New York employer—nonresidents do not implicate themselves or their employers in interstate commerce merely by working from home (see Zelinsky, 1 NY3d at 92-93), while interstate businesses are, by definition, engaged in interstate commerce. In order for these interstate business precedents to bear on petitioner’s due process challenge to the convenience rule, we must tease out their Commerce Clause implications.

The dormant Commerce Clause “prohibits state taxation, or regulation, that discriminates against or unduly burdens interstate commerce and thereby imped[es] free private trade in the national marketplace” (General Motors Corp. v Tracy, 519 US 278, 287 [1997] [citations and internal quotation marks omitted]). A four-pronged test has developed over the course of the Supreme Court’s Commerce Clause jurisprudence. A state tax on interstate commerce violates the dormant Commerce Clause unless it “is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State” (Complete Auto Tr., Inc. v Brady, 430 US 274, 279 [1977] [upholding under Commerce Clause “a state tax for the privilege of carrying on within a state, certain activities related to a corporation’s operation of an interstate business” (id. at 274 [internal quotation marks omitted])]).

The Commerce Clause’s requirement of fair apportionment has been said to be a “principle of fair share . . . which is threatened whenever one State’s act of overreaching combines with the possibility that another State will claim its fair share of the value taxed” (Oklahoma Tax Commn. v Jefferson Lines, Inc., 514 US 175, 184 [1995] [holding superseded by statute]). “[T]he central purpose behind the apportionment requirement is to ensure that each State taxes only its fair share of an interstate transaction” (Goldberg v Sweet, 488 US 252, 260-261 [1989]).

Shaffer v Carter (252 US 37 [1920]) is the Supreme Court’s last decisive statement on a state’s ability to tax the income of a nonresident as opposed to a business engaged in interstate commerce. There, the Court held that “just as a state may impose general income taxes upon its own citizens and residents whose persons are subject to its control, it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to nonresidents from their property or business within the state, or their occupations carried on therein” (id. at 52).

Petitioner contends that the convenience rule violates due process because he is taxed out of all proportion to the benefits that he receives from New York. Accordingly, he asks us to en-graft a proportionality requirement upon existing due process precedent. The Supreme Court, however, has established distinct Commerce Clause and due process restraints in its state taxation rules. Specifically, the Court has stated that the dormant Commerce Clause is “a means for limiting state burdens on interstate commerce” (Quill Corp. v North Dakota, 504 US 298, 313 [1992]). It is in this context that the apportionment standard was developed. If a state overreaches by taxing an activity that another state is also justified in taxing, the burden placed on interstate commerce is too great to withstand constitutional scrutiny.

Due process, on the other hand, is .“a proxy for notice” (id.) and looks to the connection that must be present between the taxpayer and the taxing state before the state has authority to impose its power to tax (see Northwestern States Portland Cement Co. v Minnesota, 358 US 450 [1959]; Quill, 504 US 298 [1992], supra). All that is required to satisfy due process is some “minimal connection” between the taxpayer and the state, and that the income the state seeks to tax be “rationally related to values connected with” the state (see Moorman Mfg. Co., 437 US at 273 [internal quotation marks omitted]).

As the Commissioner argues, the convenience test is, in effect, a surrogate for interstate commerce. Where work is performed out of state of necessity for the employer, the employer creates a nexus with the foreign state and essentially establishes itself as a business entity in the foreign state. This nexus is often enough to expose the employer to corporate and sales and use taxes in the foreign state (see e.g. Amerada Hess Corp. v Director, Div. of Taxation, N.J. Dept, of Treasury, 490 US 66, 73 [1989] [finding substantial nexus between state and income from oil company’s oil production which occurred entirely without the state because oil company had some operations in state and was a “unitary business”]). The convenience test stands for the proposition that New York will not tax a nonresident’s income derived from a New York employer’s participation in interstate commerce because in such a case, the nonresident’s income would not be derived from a New York source.

In Zelinsky, we found the minimal connection called for by due process on account of the taxpayer’s “physical presence in New York and because he . . . purposefully avail[ed him] self of the benefits of an economic market in” New York {Zelinsky, 1 NY3d at 97 [internal quotation marks omitted]). Here, petitioner objects that, read and applied literally, the convenience of the employer test would allow New York to tax 100% of the income of a nonresident who worked out of his employer’s place of business in New York just one day a year. He argues that due process demands proportionality in order to prevent this presumed overreaching. Whether due process would countenance this particular result—taxation of 100% of the income of a nonresident who spends a trivial amount of time working in New York—is simply not before us. We conclude that the minimal connection required by due process plainly exists in this case where petitioner accepted employment from a New York employer and worked in his employer’s New York office approximately 25% of the time annually. Moreover, the amount of time that petitioner spent working in New York—25%—is significant enough to satisfy any rough proportionality requirement called for by due process.

As to whether New York’s taxation of 100% of the nonresident’s income was “rationally related” to values connected with the state, in Zelinsky we noted the “host of tangible and intangible protections, benefits and values” New York provided to the taxpayer and his employer, and that these benefits were provided every day, regardless of whether the taxpayer chose to absent himself from New York {id. at 95). “New York may require contributions from [the taxpayer] because he thus realized] current pecuniary benefits under the protection of the government, and the tax imposed need not bear an exact relation to the services actually provided to the individual taxpayer” (id. [emphasis added, citations and internal quotation marks omitted], quoting Matter of Tamagni v Tax Appeals Trib. of State of N.Y., 91 NY2d 530, 544 [1998]). Certainly, the same may be said of petitioner.

Under the convenience of the employer test, New York taxes a nonresident employee’s income from a New York employer except to the extent the income is connected with the employer’s participation in interstate commerce. By taxing only income sourced to New York, the convenience test is rationally related to values connected with New York because New York has the right to tax 100% of a nonresident employee’s income derived from New York sources. Where a nonresident employee must perform work out of state for the employer’s necessity, a nexus is created between the employer and the foreign state. New York does not tax the nonresident employee’s income derived from these activities, which are properly sourced to the foreign state. Thus, the convenience test constitutes an across-the-board standard designed to comply with both due process and the Commerce Clause.

IV

Nordlinger v Hahn (505 US 1 [1992]) established the equal protection standard for tax cases:

“the Equal Protection Clause is satisfied so long as there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decision-maker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational” (id. at 11 [citations omitted]).

Further, “[a]bsolute equality is impracticable in taxation, and is not required by the equal protection clause .... [Inequalities that result not from hostile discrimination, but occasionally and incidentally in the application of a system that is not arbitrary in its classification, are not sufficient to defeat the law” (Maxwell v Bugbee, 250 US 525, 543 [1919]).

Petitioner argues that the convenience test impermissibly discriminates between those employees who work out of state for personal convenience and those who work out of state as a necessity. New York distinguishes between these two classes of nonresidents because by doing so, it properly taxes nonresidents only on income sourced to New York, and, concomitantly, avoids taxing income derived from interstate commerce. This classification, which is designed to comply with both the Commerce Clause and the Due Process Clause, is therefore rational in every respect.

Petitioner criticizes the convenience test as unfair and unsound as a matter of tax policy and a discouragement to telecommuting. Maybe so. We do not view it as our role, however, to upset the Legislature’s and the Commissioner’s considered judgments so long as the convenience test has been constitutionally applied in this case. For all the reasons given, we conclude that the convenience test as applied to petitioner complies with the requirements of due process and equal protection.

Finally, we agree with the Appellate Division that petitioner is not a prevailing party entitled to recover litigation and administrative costs pursuant to Tax Law § 3030. Accordingly, the judgment of the Appellate Division should be affirmed, with costs.

R.S. Smith, J. (dissenting).

The issue here is to what extent the salary paid by a New York employer to a resident of another state who works most of his time outside, and beyond commuting distance from, New York is subject to New York State income tax. The majority holds that 100% of the employee’s income is taxable in New York, so long as (1) any significant part of the employee’s work is performed in New York and (2) the employer does not require the employee to work outside New York. I dissent, because I believe that the application of this rule to this case is contrary to the Tax Law, and that the Tax Law as interpreted by the majority violates the Due Process Clause of the United States Constitution.

I

Tax Law § 601 (e) (1) imposes a tax on “the taxable income which is derived from sources in this state” of nonresident individuals. Tax Law § 631 uses the words “New York source income,” “income . . . from New York sources” and “income . . . derived from . . . New York sources” to identify the same concept. These interchangeable terms are defined by Tax Law § 631 (b) (1), which lists four categories of “New York source income”; only one of the four is relevant to this case. Tax Law § 631 (b) (1) (B) includes as “New York source income” that income which is “attributable to ... a business, trade, profession or occupation carried on in this state.” The statutory issue in this case is how much of Thomas Huckaby’s income is in that category.

Huckaby argues that, since only 25% of his “business, trade, profession or occupation” is “carried on in this state,” only 25% of his income is subject to tax under the Tax Law. The Commissioner seeks to tax 100% of it, relying on the “convenience” regulation (20 NYCRR 132.18 [a]), which provides that income will be allocated to New York in proportion to the days worked there, but that “any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.” I think the convenience rule as applied to Huckaby is inconsistent with the Tax Law, because the rule does not here, as it does in other cases, serve the legitimate purpose of avoiding manipulation or fraud; and because there is no other good reason for attributing the part of Huckaby’s income that is earned in Tennessee to “a business, trade, profession or occupation carried on in this state.” Thus, I would hold that Huckaby is correct in asserting that only 25% of his income is taxable in New York.

We have previously upheld the application of the Commissioner’s convenience rule to permit New York to tax income paid for work done outside New York (Matter of Speno v Gallman, 35 NY2d 256 [1974]; Matter of Zelinsky v Tax Appeals Trib. of State of N.Y., 1 NY3d 85 [2003]). Speno and Zelinsky rest, however, on the proposition that an employee’s discretionary decision to do work at home rather than in the office should not have significant tax consequences; if the rule were otherwise, the door would be open to abuse. This rationale does not support the application of the Commissioner’s rule to Huckaby.

The taxpayer in Speno, Frank Speno, Jr., was employed as president of the Frank Speno Railroad Ballast Cleaning Co., Inc., which had its principal office in Ithaca, New York. He lived in Summit, New Jersey. In his 1960 and 1961 tax returns, he claimed to have worked 106 days at his home in 1960, and 174 days in 1961. We observed that “the work performed at home in New Jersey consisted essentially of making phone calls. No business calls were received on the unlisted [New] Jersey number, and Mr. Speno entertained no business contacts in New Jersey” (35 NY2d at 258). In upholding the application of the “convenience” test to reject Speno’s allocation of income to his days worked in New Jersey, we explained:

“The policy justification for the ‘convenience of the employer’ test lies in the fact that since a New York State resident would not be entitled to special tax benefits for work done at home, neither should a nonresident who performs services or maintains an office in New York State.” (Id. at 259.)

In Zelinsky, the taxpayer was a professor at Cardozo Law School who did all his teaching in New York City, and commuted there from his Connecticut home three days a week. On the other two days, “he stayed at home, where he prepared examinations, wrote student recommendations, and conducted scholarly research and writing” (1 NY3d at 89). He also “worked exclusively at home” when school was not in session, and when he was on sabbatical leave (id.). In rejecting his attempt to allocate much of his law school salary to work done outside New York, we noted that a contrary ruling would allow the taxpayer to manipulate the system. We said:

“The convenience test was originally adopted to prevent abuses arising from commuters who spent an hour working at home every Saturday and Sunday and then claimed that two sevenths of their work days were non-New York days and that two sevenths of their income was thus non-New York income, and either free of tax (if the state of their residence had no income tax) or subject to a lower rate than New York’s. In the present case, the taxpayer’s efforts to reduce the amount of tax owed to New York on his New York source income earned during the work week raise similar concerns.” (Id. at 92.)

Although there was no suggestion in either Speno or Zelinsky that the taxpayer was not telling the truth, of course not all taxpayers are so scrupulous. We noted in Zelinsky that “in the absence of the convenience test, opportunities for fraud are great and administrative difficulties in verifying whether an employee has actually performed a full day’s work while at home are readily apparent” (id. n 4). We also remarked that “the test ‘serves to protect the integrity of the apportionment scheme by including income as taxable’ when the income results from services derived from New York sources performed out-of-state ‘to effect a subterfuge’ (Matter of Colleary v Tully, 69 AD2d 922, 923 [3d Dept 1979])” (Zelinsky, 1 NY3d at 92 n 5).

In short, in Speno and Zelinsky, we justified the application of the “convenience” test on the ground that not to apply the rule would facilitate tax avoidance or evasion. That is not true here. Huckaby does not work in Tennessee to avoid New York taxes; he works there because that is where he lives. There is no undue difficulty in verifying his claim that three quarters of his working days are spent in Tennessee. While it might be said that he chooses to work in Tennessee for his own “convenience” in the sense that he could, if he wished, uproot his family and move to or near New York, a choice based on that sort of “convenience” is not subject to the sort of manipulation about which we expressed concern in Speno and Zelinsky.

Thus, the Commissioner cannot prevail here unless he offers some justification other than the prevention of abuse for treating 100% of Huckaby’s income as “New York source income.” He has not succeeded in finding such a justification.

The Commissioner argues that Huckaby’s income comes from “a business, trade, profession or occupation carried on in this state” and is therefore “New York source income” on the ground that the business of Huckaby’s employer is “carried on” in New York. The majority artfully avoids either embracing or rejecting this argument; it raises, but does not answer, the question of whether “the Legislature intended business ‘carried on in this state’ ... to refer to the location of the employee or of the employer” (majority op at 432). I think the Commissioner’s argument is completely untenable.

The natural and obvious reading of the words in Tax Law § 631 (b) (1) (B), “a business, trade, profession or occupation carried on in this state,” is “a business, trade, profession or occupation” that is “carried on” by the taxpayer. As the majority notes (majority op at 432-433), these words were so read in an Attorney General’s opinion contemporaneous with the enactment of the statute in 1919 (1919 Report Atty Gen 301 [“(T)he work done, rather than the person paying for it, should be regarded as the ‘source’ of the income”]). We endorsed this reading in Matter of Oxnard v Murphy (15 NY2d 593 [1964], affg on op below 19 AD2d 138, 140 [3d Dept 1963]; see also Matter of Linsley v Gallman, 38 AD2d 367, 370 [3d Dept 1972], affd 33 NY2d 863 [1973]; Matter of Hayes v State Tax Commn., 61 AD2d 62, 63 [3d Dept 1978]).

Yet the Commissioner, without citing authority, and ignoring our decision in Oxnard, asserts that “in determining whether a nonresident employee who works both inside and outside New York is earning income from New York sources, the business ‘carried on’ in New York refers to the business of the employer” (emphasis added). The Commissioner does not dispute that, as to nonemployees—i.e., independent contractors—the location of the taxpayer’s work is dispositive. The Commissioner’s theory not only contradicts the apparent meaning of the statute and our prior interpretation of it; it is riddled with logical flaws.

First, what language in the statute even hints at a distinction between employee taxpayers and others of the kind the Commissioner advocates? Secondly, what indication is there in the background or legislative history of the statute that the Legislature had any such intention? Thirdly, if the relevant location is that of the employer and not the employee, why does the Commissioner’s own regulation make the place of performance of the employee’s duties the governing factor, as a general rule to which the “convenience” test is an exception? And finally, if he really believes his reading of the statute is sound, why does the Commissioner not carry it to its logical conclusion, by trying to tax the salaries of all out-of-state employees of New York-based firms?

The Commissioner attempts to answer only the last of these questions, and his answer to that one is completely unpersuasive. He suggests that taxing employees who work out of state for reasons other than convenience might violate the Commerce Clause, but he does not support this suggestion with either reasoning or authority. (The majority, in dealing with the constitutional issue in this case, adopts a version of the Commissioner’s “Commerce Clause” theory, which I discuss below.)

In short, the view that “carried on in this state” means “carried on by the taxpayer’s employer” is without merit. Thus, the only two possible rationales for treating all of Huckaby’s income as “New York source income” within the meaning of the statute—the “avoidance of abuse” rationale and the “location of the employer” rationale—clearly fail. The majority upholds the Commissioner’s position here without approving either of these two rationales for it, and without suggesting a third one. The majority makes no attempt to offer any justification, in the words of the statute or in the policy underlying it, for holding that 100% of Huckaby’s income is taxable in New York.

The majority’s sole ground for holding that Huckaby’s income is “New York source income” is that the Commissioner says it is. The majority says that the Legislature “recognized the complexities” of taxing those who work both within and outside the state (majority op at 433), and “task[ed] the Commissioner to develop a workable rule” (majority op at 435). No doubt. But the Commissioner’s rule is still supposed to make sense (New York State Assn. of Counties v Axelrod, 78 NY2d 158, 166 [1991] [a state regulation should be upheld only if it has a rational basis and is not unreasonable, arbitrary, capricious or contrary to the statute under which it was promulgated]; Matter of Jones v Berman, 37 NY2d 42, 53 [1975] [“(administrative agencies can only promulgate rules to further the implementation of the law as it exists; they have no authority to create a rule out of harmony with the statute”]). As applied to Huckaby, the Commissioner’s convenience rule does not make sense.

I would hold that only 25% of Huckaby’s income is “New York source income” within the meaning of the Tax Law.

II

Since the majority holds that the Tax Law permits New York to tax the 75% of Huckaby’s income that he earned by work done in Tennessee, the Court must decide whether the Tax Law, as so interpreted, is valid under the Due Process Clause. I would hold that it is not, and I therefore dissent on constitutional as well as on statutory grounds.

The basic due process limitation on a state’s taxing power is that jurisdiction to tax is limited by the state’s borders. To take a simple example, it would be an obvious violation of the Due Process Clause if New York sought to levy a real property tax on the Tennessee home in which Huckaby Uves. Or, to move a step closer to this case, if Huckaby owned four parcels of real property—one in New York and three in Tennessee—due process would permit New York to collect real property tax only on the New York property, not on the other three. Huckaby’s argument is, essentially, that an income tax on his salary is subject to a similar limitation, and that New York is free to tax only the one quarter of his salary that he earns in New York. I believe this argument is correct.

As we noted in Zelinsky, under the Due Process Clause “[a] state . . . may not tax value earned outside its borders” (1 NY3d at 96, citing Allied-Signal, Inc. v Director, Div. of Taxation, 504 US 768, 777 [1992]). This general principle has been implemented by a two-part test, which we summarized in Zelinsky as follows:

“The Due Process Clause places two restrictions on a state’s power to tax income generated by interstate activities. First, it ‘requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax’ (Quill Corp. v North Dakota, 504 US 298, 306 [1992] [citation omitted]). Second, the ‘income attributed to the State for tax purposes must be rationally related to values connected with the taxing State’ (Moorman [Mfg. Co. v Bair], 437 US [267,] at 273 [1978] [citation and internal quotation marks omitted]).” (1 NY3d at 96.)

The first part of the two-part test is met here. Huckaby works one quarter of his time in New York, and therefore has a “minimum connection” to the state. Huckaby does not challenge New York’s power to tax him. Rather, relying on the second part of the test, he challenges the State’s power to tax more than the one quarter of his income earned in New York. He argues that a tax on 100% of his income is not “rationally related to” the 25% of his time spent working in the state.

United States Supreme Court precedent, and our own, establish that a tax is not “rationally related to values connected with the taxing State” unless it bears some reasonable proportion to those values. Thus in Hans Rees’ Sons v North Carolina ex rel. Maxwell (283 US 123 [1931]), the Supreme Court held that North Carolina’s income tax was invalid under the Due Process Clause as applied to a particular taxpayer because the state taxed as much as 85% of the taxpayer’s income, of which only some 17% was attributable to that state. The Supreme Court said:

“It is sufficient to say that, in any aspect of the evidence, and upon the assumption made by the state court with respect to the facts shown, the statutory method, as applied to the appellant’s business for the years in question operated unreasonably and arbitrarily, in attributing to North Carolina a percentage of income out of all appropriate proportion to the business transacted by the appellant in that state. In this view, the taxes as laid were beyond the state’s authority. Shaffer v. Carter, 252 U.S. 37, 52, 53, 57.” (283 US at 135 [emphasis added].)

The existence of a proportionality requirement under the Due Process Clause was reaffirmed in Moorman Mfg. Co. v Bair (437 US 267 [1978]). The Court upheld the tax in that case, noting that “the States have wide latitude in the selection of apportionment formulas,” but, quoting from Hans Rees’ Sons, said that a tax is invalid under the Due Process Clause where “the income attributed to the State is in fact ‘out of all appropriate proportion to the business transacted ... in that State’ . . . .” (437 US at 274 [emphasis added]; see also Zelinsky, 1 NY3d at 97 [incorporating by reference into Due Process Clause analysis aspects of our analysis under the Commerce Clause].) Thus I see no basis for the majority’s suggestion that the Due Process Clause does not require proportionality (see majority op at 437 [Huckaby “asks us to engraft a proportionality requirement upon existing due process precedent”], at 438 [“any rough proportionality requirement called for by due process”]).

It also seems to me beyond question that the tax in this case— applied to 100% of Huckaby’s income—is out of all proportion to the time he spent working in New York—25%. Again, I see no basis for the majority’s view that, while it might be disproportionate to tax 100% of Huckaby’s income if he spent only a “trivial” percentage of his time in New York, “the amount of time that petitioner spent working in New York— 25%—is significant enough to satisfy any rough proportionality requirement . . . .” (Majority op at 438.) I do not think it can plausibly be argued that, while 1% would not be close enough to 100% to be “proportional,” 25% is close enough. Even if this proposition were not indefensible on its face, it is surely inconsistent with the Supreme Court’s holding in Hans Rees’ Sons that 17% was not close enough to 85%.

As I read the majority opinion, it does not rely primarily on the unsupportable argument that the Due Process Clause’s requirement of proportionality is either nonexistent or so weak that 25% can be called roughly equivalent to 100%. The main basis for the majority’s holding that a tax on 100% of Huckaby’s income is “rationally related to values connected with” New York is the majority’s theory that the entity that pays Huckaby’s salary, his employer, is a “value” on which jurisdiction to tax may be based, and this “value” is located 100% in New York. This theory, unsupported by any precedent, is a radical departure from long-accepted limits on the powers of states to tax nonresidents.

Since state income taxes on nonresidents were first upheld in Shaffer v Carter (252 US 37 [1920]), such taxes have been levied on income derived either from work done within the state, or from property located in, or sent into, the state. I am aware of no case in which it has been held, or even argued, that an instate source of payment for services done outside the state is a constitutionally valid basis for taxing the recipient of the payment. Nor am I aware of any state statute—other than New York’s Tax Law as interpreted by the majority in today’s decision—that attempts to levy nonresident income tax on this basis. This obviously does not reflect any reticence by states in seeking to collect taxes; they are not reticent. A statement issued by the Multi-State Tax Commission contains the unsurprising assertion: “It is the policy of the state signatories hereto to impose their net income tax, subject to State and Federal legislative limitations, to the fullest extent constitutionally permissible” (Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272 [July 29, 1994], 1 Hellerstein and Hellerstein, State Taxation, at App D-l [3d ed]).

Until today’s decision, it has been universally assumed that an in-state entity that pays a taxpayer’s salary is not, in itself, in-state “value” for due process purposes. The majority’s departure from this assumption has potentially troubling consequences. If the location of a taxpayer’s employer is taxable “value,” there is no reason in principle why New York may not tax all out-of-state employees of New York firms—for example, a New York company’s California sales manager, or a secretary who works in a New York law firm’s Boston office. And other states can return the compliment, applying their own income taxes to New York residents who work for firms headquartered in California or Massachusetts. The result could be “an inequitable and perhaps ruinously overlapping scramble” for tax dollars (see American Ins. Assn. v Lewis, 50 NY2d 617, 624 [1980]).

The majority, perhaps aware of this danger, seemingly feels a need to limit the implications of its holding that an employee is subject to income tax in the state where his employer is located. Thus the majority, if I am correctly interpreting its opinion, comes up with a novel Commerce Clause theory as a companion to its novel due process theory. The Commerce Clause, the majority seems to be saying, will prevent states from taxing instate companies’ out-of-state employees—except those employees who, like Huckaby, work outside the state for their own “convenience.” In other words, the majority advances a rule of constitutional law that is identical to the Commissioner’s convenience regulation. As the majority puts it, “the convenience test is, in effect, a surrogate for interstate commerce” (majority op at 437).

The majority cites no authority at all, and offers no persuasive reason, in support of this new interpretation of the Commerce Clause. It may be true that, “[wjhere work is performed out of state of necessity for the employer, the employer creates a nexus with the foreign state,” which may be “enough to expose the employer to corporate and sales and use taxes in the foreign state” (majority op at 437). But why should this have any impact on the power of the employer’s home state to levy income tax on nonresident employees? What is the source of, or the reason for, a rule that says, in effect: “If Tennessee can tax a New York company, New York loses the right to tax that company’s Tennessee employees”? It is simply not true that, as the majority suggests, “in such a case, the nonresident’s income would not be derived from a New York source” (majority op at 438). On the contrary, the majority’s assumption that the New York company is involved in interstate commerce would if anything support the argument that the company’s Tennessee employees are getting income from a New York source. The word “interstate” seems to imply a source in one state and a recipient in another.

It is evident, I suggest, that the majority’s constitutionalizing of the Commissioner’s convenience rule is based on a different kind of “convenience”: it conveniently allows New York State to tax telecommuters like Huckaby. I see no other basis for rules of constitutional law to the effect that (1) due process permits a state to tax income earned out of state by nonresident employees of local employers, but (2) the Commerce Clause forbids such taxation except where the employee works out of state for his own convenience. I believe the majority errs in adopting these rules.

Ill

Accordingly, I would reverse the order of the Appellate Division and hold that the Commissioner may not tax that portion of Huckaby’s salary earned outside the State of New York.

Chief Judge Kaye and Judges Rosenblatt and Graffeo concur with Judge Read; Judge R.S. Smith dissents and votes to reverse in a separate opinion in which Judges G.B. Smith and Ciparick concur.

Judgment affirmed, with costs.

      . The Court, however, held that an exemption that discriminated against nonresidents violated the Privileges and Immunities Clause (252 US at 80).

      . The convenience test was formerly found at 20 NYCRR 131.16 (see Speno). The policy, if not the regulation, appears to have been in place since at least 1951, the tax year considered in Matter of Burke v Bragalini (10 AD2d 654 [3d Dept I960]).

      . The taxpayer in Speno was arguably also unable to commute physically to his employer’s New York workplace daily; he lived in Summit, New Jersey and his company’s New York offices were located upstate in Ithaca and Syracuse. The taxpayer in Zelinsky lived in Connecticut and commuted to work in Manhattan.

      . We note that petitioner does not claim that application of the convenience rule in his case violates the Commerce Clause.

      . The “threat” of misapportionment is measured by two factors—internal and external consistency. “Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear” (Oklahoma Tax Commn., 514 US at 185). External consistency looks to “the economic justification for the State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond that portion of value that is fairly attributable to economic activity within the taxing State” (id,.). The external consistency test asks “whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the instate component of the activity being taxed” (Goldberg, 488 US at 262).

      . The dissent fails to acknowledge the two factors that drive our analysis and our conclusion that due process is not offended when New York taxes all of petitioner’s income from his New York employer. First, nonresident individuals are simply not the same as interstate businesses, and these differences must be taken into account when considering whether a tax meets with due process. Second, the purposes and scope of the Due Process and Commerce Clauses are not coextensive and, as the Supreme Court has held, a tax can burden interstate commerce without violating due process (see Quill).


source: Caselaw Access Project

author: Ciparick, J. R.S. Smith, J. (concurring).

license: Public Domain

text:
    [828 NE2d 959, 796 NYS2d 2]
    General Motors Acceptance Corporation et al., Respondents, v Nationwide Insurance Company, Appellant.
    Argued February 10, 2005;
    decided March 31, 2005

      POINTS OF COUNSEL

      Nixon Peabody LLP, New York City (David H. Tennant and Aidan M. McCormack of counsel), for appellant.
    I. Fireman’s Fund Insurance Company was obligated to pay the defense costs for its insured (General Motors Acceptance Corporation) after Nationwide Insurance Company tendered its policy limits. (Fama v Metropolitan Prop. & Cas. Ins. Co., 169 Misc 2d 872; Argonaut Ins. Co., Inc. v U.S. Fire Ins. Co., 728 F Supp 298.) II. Even if Fireman’s Fund Insurance Company was not contractually obligated to pay for the defense costs despite its declared duty to do so after assuming control of the defense, Fireman’s Fund was obligated to pay its fair share of those defense costs under equitable principles recognized in New York. (Schulman Inv. Co. v Olin Corp., 514 F Supp 572; Sanabria v American Home Assur. Co., 113 AD2d 193, 68 NY2d 866; Cassara v Nationwide Mut. Ins. Co., 144 AD2d 974; Pallotta v Aetna Ins. Co., 66 Misc 2d 929; Russo v Rochford, 123 Misc 2d 55; Hertz Corp. v Government Empls. Ins. Co., 250 AD2d 181; Guaranty Natl. Ins. Co. v American Motorists Ins. Co., 758 F Supp 1394; Belmer v Nationwide Mut. Ins. Co., 157 Misc 2d 845; Lumbermens Mut. Cas. Co. v Allstate Ins. Co., 51 NY2d 651.) III. The lower court improperly awarded prejudgment interest to Fireman’s Fund Insurance Company.

      Lawrence, Worden & Rainis, P.C., Melville (Roger B. Lawrence of counsel), for respondents.
    I. The offer to settle the Mammano suit for the single limit of $100,000 that was rejected by plaintiff was not tender of the limits of the Nationwide Insurance Company policy and did not serve to relieve Nationwide of its obligation to defend its insureds under the policy. (Fama v Metropolitan Prop. & Cas. Ins. Co., 169 Misc 2d 872, 242 AD2d 663; State Farm Mut. Auto. Ins. Co. v Tucker, 188 AD2d 458.) II. Defendant-appellant Nationwide Insurance Company’s insurance policy is the only primary policy available to the underlying claim, and as such contained the sole obligation to pay all defense costs of the insured, General Motors Acceptance Corporation. (Hartford Acc. & Indent. Co. v Continental Natl. Am. Ins. Cos., 861 F2d 1184; Texas Empls. Ins. Assn. v Underwriting Members of Lloyds, 836 F Supp 398; Continental Cas. Co. v Synalloy Corp., 667 F Supp 1523; Insurance Co. of N. Am. v Medical Protective Co., 768 F2d 315; Guaranty Natl. Ins. Co. v American Motorists Ins. Co., 758 F Supp 1394; Hartford Acc. & Indem. Co. v Michigan Mut. Ins. Co., 93 AD2d 337, 61 NY2d 569; Firemen’s Ins. Co. of Washington, D.C. v Federal Ins. Co., 233 AD2d 193; Fidelity Gen. Ins. Co. v Aetna Ins. Co., 27 AD2d 932; International Paper Co. v Continental Cas. Co., 35 NY2d 322; Everlast Sporting Goods Mfg. Co. v Aetna Ins. Co., 23 AD2d 641.) III. Forcing excess insurers to share in the costs of defense with primary insurers, while benefiting Nationwide Insurance Company in this specific case, would otherwise work against the concepts of fairness and the predictable and efficient administration of justice. (Thomas v Washington Gas Light Co., 448 US 261; Dankoff v Bowling Proprietors Assn, of Am., 69 Misc 2d 658; Broome County Coop. Fire Ins. Co. v Aetna Life & Cas. Co., 75 Misc 2d 587.) IV Prejudgment interest was mandated where the basis for the judgment was the contractual breach of defendant-appellant Nationwide Insurance Company as well as the quasi contractual obligation to plaintiff-respondent insurer. (Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw & Folley, 71 NY2d 21; Pilewski v Solymosy, 266 AD2d 83; Isaacs v Incentive Sys., 52 AD2d 550; Utica Mut. Ins. Co. v Sweet Constr. Corp., 169 AD2d 382; Employers’ Liab. Assur. Corp. v Empire City Iron Works, 19 Misc 2d 963; Neimark v Martin, 7 AD2d 934; Fagnani v American Home Assur. Co., 101 AD2d 803; Saratoga Spa & Bath v Beeche Sys. Corp., 230 AD2d 326, 90 NY2d 979; Aetna Cas. & Sur. Co. v Home Ins. Co., 882 F Supp 1328, 1355; Baratta v S.D. Cohn & Co., 656 F Supp 1.)
   OPINION OF THE COURT

Ciparick, J.

We are called upon to determine whether an allocation of defense costs between a primary and excess insurer is warranted. We conclude that where, as here, two coincidental primary policies exist—one excess to the other by reason of competing “other insurance” provisions—and where the excess carrier has voluntarily assumed and marshaled the insured’s defense, an allocation of defense costs based on primary policy limits is appropriate. Here the primary policy limits are identical, warranting a 50-50 split.

In 1994, John C. Sabin, not a party to this action, leased an SUV from plaintiff General Motors Acceptance Corporation (GMAC). The lease agreement required Sabin to obtain an automobile insurance policy and include GMAC as an additional insured under the policy. Sabin procured a suitable primary insurance policy through defendant Nationwide Insurance Company. This policy limited liability to $100,000 per person and $300,000 per occurrence. Nationwide’s policy made explicit that it would “defend at [its] expense, with attorneys of [its] choice, any suit against the insured.”

In order to cover its potential liability in the event the lessee failed to fulfill its obligation to obtain insurance, and to obtain excess coverage in the event of catastrophic injury, GMAC purchased two distinct policies from plaintiff Fireman’s Fund Insurance Company. Fireman’s issued both a primary “Business Auto Policy,” with liability limits comparable to Nationwide’s policy, and an “Excess Liability Policy,” or an “umbrella” policy, with a substantially greater limit of $9,000,000 per occurrence. The primary Business Auto Policy stated that Fireman’s had “the right and duty to defend any suit asking for [ ] damages.” As to other insurance, the policy stated that the primary policy’s insurance coverage was “excess over any other collectible insurance, whether primary, excess, or contingent.” There was no similar limitation on Fireman’s duty to defend. Fireman’s true excess or umbrella policy, by contrast, specifically limited the duty to defend to instances where no primary policy or other insurance applied, stating that it would “assume charge of the settlement or defense of any claim or Suit against the Insured seeking damages to which this policy applies and to which no Primary Insurance or Other Insurance applies.”

On April 5, 1995, Sabin drove his leased vehicle through an intersection, colliding with a dump truck and another passenger vehicle. Two individuals were seriously injured and a third died in the accident. The injured parties, and decedent’s estate, commenced three separate lawsuits against, among others, GMAC as owner of the offending vehicle. Jeanette Mammano, as guardian of Elizabeth Mammano, whose injuries left her in a permanent vegetative state, commenced the action that exposed GMAC to the greatest potential liability. Nationwide’s primary policy and both Fireman’s policies were in effect on the date of the accident. Prior to commencement of this action, Nationwide—reasonably expecting any award to exceed policy limits— tendered its entire policy to Mammano’s attorney in exchange for a general release. Counsel refused the tender and the case proceeded.

Nationwide originally undertook GMAC’s defense of the Mammano action. In a letter dated October 24, 1997, however, Nationwide wrote that it was tendering the defense to Fireman’s. “As our available liability limit is only $100,000 it represents only 1% of the total indemnification potential considering [Fireman’s] limits of nine million.” Nationwide further wrote that “[i]t only makes sense therefore that [Fireman’s] designate counsel that should continue with the defense of this matter, under your direction.” In a letter dated November 25, 1997, Fireman’s voluntarily agreed that it would “assume the defense of . . . GMAC, but it [would] do so while reserving its rights to pursue collection of all defense costs from Nationwide expended in Fireman’s Fund’s defense of these actions.” Thereafter Fireman’s retained counsel vigorously defended the action in an effort to reduce the enormous exposure of GMAC and Fireman’s.

In January 1999, the parties settled the Mammano action. The settlement agreement provided for a one-time payment of $4.5 million, of which Fireman’s paid $3.3 million and provided an annuity of $10,000 a month for life with guaranteed payments for 10 years. The settlement nearly exhausted the $9.1 million limit provided under both Fireman’s policies. Nationwide contributed its entire $100,000 policy to the settlement. Prior to settling, Fireman’s amassed over $200,000 in legal fees defending the action.

Following settlement, Fireman’s sought to recover all its legal expenses from Nationwide. When Nationwide refused to contribute, Fireman’s and GMAC commenced the underlying action to recover the defense costs. Supreme Court granted plaintiffs Fireman’s and GMAC summary judgment and awarded them full reimbursement of defense costs, and the Appellate Division affirmed. We granted defendant Nationwide leave to appeal and now reverse.

A primary insurer “has the primary duty to defend on behalf of [its] insureds” (General Acc. Fire & Life Assur. Corp. v Piazza, 4 NY2d 659, 669 [1958]; see also Ostrager and Newman, Handbook on Insurance Coverage Disputes § 6.03 [a] [12th ed]). Moreover, a primary insurer has a duty to defend “without any entitlement to contribution from an excess insurer” (Firemen’s Ins. Co. of Washington, D.C. v Federal Ins. Co., 233 AD2d 193 [1st Dept 1996]). An excess carrier may, in its discretion, “protect its interest ... by participating in the defense” (General Acc. Fire & Life, 4 NY2d at 669). Unlike a primary insurer, however, there is no obligation to do so.

We have liberally construed an insurer’s general duty to defend in order to ensure the adequate and timely investigation of a claim and defense of an insured, regardless of the insured’s ultimate likelihood of success on the merits. Consequently, an insurer’s duty to defend is broader than its duty to indemnify (see Fitzpatrick v American Honda Motor Co., 78 NY2d 61, 65-66 [1991]).

Here, Fireman’s issued two distinct policies—a primary policy deemed excess by the competing “other insurance” provisions and a true excess, or “umbrella,” policy where the duty to defend and the duty to indemnify came into effect only after the limits of the underlying primary coverage were exhausted. Furthermore, Fireman’s accepted the defense of the action and conducted it in a most thorough manner suitable to protect its own interests and that of its insured. The circumstances of this case thus allowed both Nationwide and Fireman’s to defend the action on behalf of GMAC. Moreover, insofar as both Nationwide and Fireman’s shared this obligation, and each participated in the defense, they are both liable for the defense costs, here in equal shares as the policy limits of the coincidental primary auto liability policies are identical.

Both primary insurance policies contain specific language reaffirming their duties, as primary insurers, to defend the insured. While Fireman’s primary policy coverage is deemed “excess” by virtue of other collectible insurance, the limiting language is directed to its obligation to contribute to a settlement or judgment, not to its duty to defend. Moreover, when Nationwide tendered the defense, Fireman’s accepted and proceeded to defend the action in a manner that it deemed most appropriate—albeit reserving its rights to collect defense costs from Nationwide. In essence, Fireman’s, in accepting the defense here, embraced the specific language of its primary policy requiring it to “defend any suit asking for [ ] damages.” In assuming the defense, Fireman’s triggered its own duty to defend the action, a duty that overlapped with Nationwide’s same obligation.

Fireman’s reservation of rights put Nationwide on notice that Fireman’s acceptance did not relieve Nationwide of its policy obligations. At a minimum, Nationwide knew that it would be liable for a share of the defense costs. Consequently, insofar as the primary insurers’ respective policy limits were identical, an allocation in this case requires that the total defense costs be shared equally.

We are mindful of the fact that these policies were both coincidental primary policies. Primary insurance premiums are based, at least in part, on the insurer’s consideration that it may be liable to defend an action. In this sense, “primary” policy premiums are higher, relatively speaking, than “excess” premiums, because the primary insurer contemplates defending a potential lawsuit when it contracts with the insured. A primary insurer’s duty to defend is not diminished, however, nor is it entitled to defend an action less vigorously, simply because its policy limits are more easily exceeded in any given case. Relieving primary insurers of this duty to defend would provide a windfall to the carrier insofar as the costs of defense—litigation insurance—are contemplated by, and reflected in, the premiums charged for primary coverage. This is in contrast to a true excess, or “umbrella,” policy, where the duty to defend is not as readily triggered.

Both Fireman’s and Nationwide issued primary policies commensurate with their respective expectations and bargained-for rights and obligations. Therefore, requiring both Fireman’s and Nationwide, as coincidental primary insurers having the same policy limits, to contribute equally to defense costs is consistent with the requirement that insurance contracts be interpreted “according to the reasonable expectation and purpose of the ordinary businessman when making an ordinary business contract” (Atlantic Cement Co., Inc. v Fidelity & Cas. Co. of N.Y., 91 AD2d 412, 418 [1st Dept 1983], affd 63 NY2d 798 [1984]). It is also consistent with our general reluctance to relieve a primary insurer of its duty to defend (see generally Fitzpatrick, 78 NY2d 61 [1991]). In this instance, it is apparent that both Fireman’s and Nationwide, by virtue of their status as primary insurers, and additionally through their course of conduct, could reasonably have expected to share the expense of the defense.

Thus, we reject Nationwide’s position, followed in only a minority of jurisdictions, that an equitable allocation between a primary and excess insurer must be realized and hold only that, under the circumstances of this case, both insurers should be required to share defense costs. Here, the policy limits of the coincidental policies lead to a 50-50 split (cf. Federal Ins. Co. v Atlantic Natl. Ins. Co., 25 NY2d 71 [1969]).

Accordingly, the order of the Appellate Division should be reversed, with costs, and the case remitted to Supreme Court for further proceedings in accordance with this opinion.

R.S. Smith, J. (concurring).

I agree with the result reached by the majority, and I agree in part with its reasoning. I think the majority is correct in rejecting a general doctrine of “equitable allocation” between primary and excess insurers. I also agree that, since Fireman’s chose to take over the defense in this case, it is liable under its policy for a fair portion of defense costs. Indeed, I think the facts here would support allocating to Fireman’s more than 50% of the burden, but allocations like this are not an exact science, and the majority’s 50-50 division is not unreasonable.

I differ with the majority, however, in its reliance on the existence of two “coincidental” defense policies. As the majority notes, the terms of Nationwide’s policy and Fireman’s “Business Auto Policy” render the latter “excess” with respect to the former. The relevant language in the Fireman’s Business Auto Policy—“The insurance provided by this policy is excess over any other collectible insurance, whether primary, excess, or contingent”—is on its face equally applicable to defense costs and damages. The majority seems to suggest that, as to defense costs, the Nationwide policy and the Fireman’s Business Auto Policy were both primary, but I see no valid reason for reaching that conclusion.

I believe the Fireman’s “true excess” policy, the “Excess Liability Policy,” provides a sounder basis for compelling Fireman’s to share defense costs. That policy provided nine million dollars in coverage—many times the amount provided by the other two policies. This large exposure obviously furnished the motivation for Fireman’s to assume, as it did, control of the defense of the case.

The Excess Liability Policy also gave Fireman’s the right to defend the case—at its own expense. The policy provided that Fireman’s “will have the right and opportunity, although not the obligation, to associate with the Primary Insurer in. the defense and control of any claim or Suit.” The policy also provided that “[w]ith respect to any claim or Suit of which We [Fireman’s] assume charge of the settlement or defense, We will pay . . . All expenses We incur.”

Fireman’s did assume charge of the defense of the Mammano case, and thus it became obligated to pay the expenses it incurred. That did not release Nationwide from its own obligation under the primary policy. Nationwide’s policy excused it from defending claims only “[a]fter the limits of this coverage have been paid,” and I agree with the majority that that never occurred.

Thus, the terms of the Fireman’s Excess Liability Policy and the terms of the Nationwide policy both rendered the insurers liable for defense costs on the facts of this case. It is only these policy clauses that, in my view, make an allocation between the two insurers appropriate.

Chief Judge Kaye and Judges G.B. Smith, Graffeo and Read concur with Judge Ciparick; Judge R.S. Smith concurs in result in a separate opinion in which Judge Rosenblatt concurs.

Order reversed, etc.

       Supreme Court approved a total award to Fireman’s and GMAC of $289,052.18, representing reasonable attorneys’ fees and costs, with statutory interest from January 1999.


author: R.S. Smith, J.

text:
    [829 NE2d 292, 796 NYS2d 328]
    Melissa Dickinson Kamens et al., Appellants, v Utica Mutual Insurance Company et al., Respondents. Melissa Dickinson Kamens et al., Appellants, v Utica Mutual Insurance Company et al., Respondents.
    (Appeal No. 1.)
    (Appeal No. 2.)
    Argued February 17, 2005;
    decided March 31, 2005

      POINTS OF COUNSEL

      Underberg & Kessler, LLP, Rochester (Paul V. Nunes and Ronald G. Hull of counsel), for appellants.
    I. The purported change of beneficiary was ineffectual and void. (Altman v Altman, 246 AD2d 565; McCarthy v Aetna Life Ins. Co., 92 NY2d 436; John Hancock Mut. Life Ins. Co. v McManus, 247 AD2d 513.) II. Susan Dickinson renounced her status as primary beneficiary of the annuity. (John Hancock Mut. Life Ins. Co. v McManus, 247 AD2d 513; Silber v Silber, 99 NY2d 395; Curley v Giltrop, 68 NY2d 651; Matter of Hayman-Chaffey v Landy, 267 AD2d 142; Teachers Ins. & Annuity Assn. of Am. v Rogers, 41 AD2d 1020; Mohawk Airlines v Peach, 61 AD2d 346, 44 NY2d 645; Flaherty v McCall, 262 AD2d 890; Simonds v Simonds, 45 NY2d 233.) III. The theory of conveyance also fails because of the restrictions in the structured settlement agreement and public policy. (Allstate Ins. Co. v American Bankers Ins. Co. of Fla., 882 F2d 856; Singer Asset Fin. Co. v Bachus, 294 AD2d 818; Reed v Tompkins Terrace, 209 AD2d 595; Liberty Life Assur. Co. of Boston v Stone St. Capital, Inc., 93 F Supp 2d 630; CGU Life Ins. Co. v Metropolitan Mtge. & Sec. Co., Inc., 131 F Supp 2d 670.) IV The death of Susan Dickinson is not an “indispensable condition” to the vesting of plaintiffs’ rights. (Doyle v Sullivan, 176 AD2d 55; Matter of Dominquez, 143 Misc 2d 1010; Matter of Ginsberg, 142 Misc 2d 192; Massachusetts Mut. Life Ins. Co. v Thorpe, 260 AD2d 706; Flaherty v McCall, 262 AD2d 890; Simonds v Simonds, 45 NY2d 233; Rogers v Rogers, 63 NY2d 582; McCourt v McCourt, 122 AD2d 539.) V Plaintiffs have standing. (Strianese v Metropolitan Life Ins. Co., 221 App Div 81; John Hancock Mut. Life Ins. Co. v McManus, 247 AD2d 513; Matter of International Assn, of Bridge, Structural & Iron Workers, Local Union No. 6, AFL-CIO v State of New York, 280 AD2d 713; Sardanis v Sumitomo Corp., 282 AD2d 322.)

      Goldberg Segalla LLP, Buffalo (Susan E. Van Gelder and Al

      bert J. D'Aquino of counsel), for Utica Mutual Insurance Company, respondent.
    I. Charles Dickinson became the sole owner of the subject annuity payments with unrestricted power to designate beneficiaries following Susan Dickinson’s divestiture. (Curley v Giltrop, 68 NY2d 651; Mohawk Airlines v Peach, 61 AD2d 346; Silber v Silber, 99 NY2d 395.) II. Appellants do not have a vested interest in the structured settlement agreement because the indispensable condition precedent has not occurred. (Drew v Prudential Ins. Co. of Am., 224 AD2d 1036; Doyle v Sullivan, 176 AD2d 55; Silber v Silber, 99 NY2d 395.) III. There was no renunciation under EPTL 2-1.11. (Matter of Chofeng Lin Lee, 155 Misc 2d 689; Matter of Ginsberg, 142 Misc 2d 192.) IV There is no legal or factual support for the imposition of a constructive trust. (Simonds v Simonds, 45 NY2d 233.) V Appellants currently do not have standing to maintain this action. (Society of Plastics Indus, v County of Suffolk, 77 NY2d 761; Truty v Federal Bakers Supply Corp., 217 AD2d 951; Matter of International Assn. of Bridge, Structural & Ornamental Ironworkers, Local Union No. 6, AFL-CIO v State of New York, 280 AD2d 713; Salesky v Hat Corp. of Am., 20 AD2d 114; Silber v Silber, 99 NY2d 395; Doyle v Sullivan, 176 AD2d 55; Cole v Metropolitan Life Ins. Co., 273 AD2d 832; Roosevelt Islanders for Responsible Southtown Dev. v Roosevelt Is. Operating Corp., 291 AD2d 40; Drake v Drake, 89 AD2d 207; Binghamton Masonic Temple v City of Binghamton, 213 AD2d 742.)

      Shapiro, Rosenbaum, Liebschutz & Nelson, LLP, Rochester (Warren B. Rosenbaum of counsel), for Violetta Q. Dickinson, respondent.
    I. The postdivorce change of beneficiary was consistent and complied with both the settlement agreement and stipulation. (Niagara County Sewer Dist. No. 1 v Town of Niagara, 214 AD2d 978; Teitelbaum Holdings v Gold, 48 NY2d 51; Meinwald v Meinwald, 56 AD2d 565; Hallock v State of New York, 64 NY2d 224.) II. Susan Dickinson gave up her rights as primary death beneficiary of Charles Dickinson in consideration for transfers to her under the divorce settlement. (United States v Davis, 370 US 65; Matter of Maul, 176 Misc 170, 262 App Div 941, 287 NY 694.) III. The Appellate Division correctly held that the divestiture of Susan Dickinson’s interests had the effect of making Charles Dickinson’s estate the primary death beneficiary. (Silber v Silber, 99 NY2d 395; Curley v Giltrop, 68 NY2d 651; Matter of Hayman-Chaffey v Landy, 267 AD2d 142; Teachers Ins. & Annuity Assn, of Am. v Rogers, 41 AD2d 1020; Mohawk Airlines v Peach, 61 AD2d 346; Flaherty v McCall, 262 AD2d 890.) IV Even if Susan Dickinson’s exchange of her right as primary death beneficiary can be construed as a “renunciation,” it does not accelerate the interests of appellants under EPTL 2.1-11 (d) and (f) or otherwise. (Matter of Chofeng Lin Lee, 155 Misc 2d 689; Flaherty v McCall, 262 AD2d 890; Curley v Giltrop, 68 NY2d 651; Matter of Ginsberg, 142 Misc 2d 192.) V. Susan Dickinson would not be required to hold the funds in a constructive trust for the benefit of appellants. (Simonds v Simonds, 45 NY2d 233; Rogers v Rogers, 63 NY2d 582; Matter of Salvano v Merrill Lynch, Pierce, Fenner & Smith, 85 NY2d 173; Doyle v Sullivan, 176 AD2d 55; Life & Cas. Ins. Co. v Martin, 603 F Supp 281, affd sub nom. Webb v Voirol, 773 F2d 208.) VI. Appellants lack standing to challenge Violetta Dickinson’s right to receive agreement proceeds prior to the death of Susan Dickinson. (Decolator; Cohen & DiPrisco v Lysaght, Lysaght & Kramer, 304 AD2d 86; Leavitt-Berner Tanning Corp. v American Home Assur. Co., 129 AD2d 199; Fourth Ocean Putnam Corp. v Interstate Wrecking Co., 66 NY2d 38; Cole v Metropolitan Life Ins. Co., 273 AD2d 832; Binghamton Masonic Temple v City of Binghamton, 213 AD2d 742.)
   OPINION OF THE COURT

R.S. Smith, J.

The question here is the effect of an agreement by a wife, as part of a divorce settlement, to “remove herself as primary contingent beneficiary” on an annuity payable to her husband. Plaintiffs, the secondary contingent beneficiaries on the annuity, claim that the wife’s removal promoted them to primary status. Defendants claim the agreement allowed the husband to select his own primary contingent beneficiary. We hold that defendants’ interpretation is correct.

Facts and Procedural History

Charles Dickinson was seriously injured in an accident in 1982, and as a result had a claim against parties who were insured by Utica Mutual Insurance Company. The claim was resolved by a settlement agreement dated September 1, 1983 among Utica Mutual, Charles Dickinson and his wife Susan Dickinson.

The agreement provided for a structured settlement, by which Charles was to receive a $447,200 payment immediately; payments of $3,000 per month for the rest of his life; and deferred payments increasing from $50,000 to $300,000, on the 5th, 10th, 15th and 20th anniversaries of the agreement. The agreement also provided for payments (not involved in the present dispute) to plaintiffs here, the couple’s daughters Melissa, Amy and Sarah, when they reached their 18th, 19th, 20th and 21st birthdays.

The present dispute arises from the provisions of the settlement agreement dealing with the contingency that Charles would die within 30 years (by September 1, 2013). In that event, the agreement provided, the $3,000 monthly payments, until September 1, 2013, “shall be made in the following order: to Susan B. Dickinson if she is then living; if not, to Melissa, Amy and Sarah Dickinson, in equal shares, or their survivor(s); otherwise to the estate of Charles G. Dickinson.” Identical language was used to describe the recipients of the payments to be made on the 5th, 10th, 15th and 20th anniversaries of the agreement, in the event Charles was no longer living when those payments became due.

Susan later began an action for divorce against Charles, which was settled by a stipulation placed on the record in open court on September 30, 1985. The settlement of the divorce action provided, among other things, for Susan’s removal as a contingent beneficiary on the agreement with Utica Mutual. The key language of the stipulation is as follows:

“[Susan] will execute any and all forms or instruments necessary to remove herself as primary contingent beneficiary on annuity owned by Utica Mutual Life Insurance Company implementing a structured settlement that the parties received as a result of injuries suffered by [Charles].”

Charles remarried, and attempted to substitute his second wife, Violetta Dickinson, for Susan as the primary beneficiary under the Utica Mutual agreement. Although Susan did not sign any forms consenting to the change, Utica Mutual honored the request.

Charles died on August 29, 1999. Utica Mutual then began making the $3,000 monthly payments to Violetta. Plaintiffs sued Utica Mutual and Violetta, claiming that they and not Violetta were entitled to receive the monthly payments and the $300,000 payment due September 1, 2003. Supreme Court later directed that the payments be made into an interest-bearing account pending resolution of the case.

Supreme Court decided the case in plaintiffs’ favor. The Appellate Division, with two Justices dissenting, reversed, holding that Violetta was entitled to the payments in issue. Plaintiffs appeal to this Court as of right, pursuant to CPLR 5601 (a).

Susan died on January 22, 2005, while this appeal was pending. The parties agree that plaintiffs are entitled to all payments due under the Utica Mutual agreement after Susan’s death. The monthly payments that became due between Charles’s death in 1999 and Susan’s death in 2005, and the $300,000 payment due September 1, 2003, remain in issue. We affirm the Appellate Division’s holding that those payments should be made to Violetta.

Discussion

The case turns on the interpretation of the 1985 divorce settlement: What did the parties mean when they agreed that Susan would “execute any and all forms or instruments necessary to remove herself as primary contingent beneficiary”?

Plaintiffs argue that Susan was agreeing to a “renunciation” of her interest in the Utica Mutual agreement, and point out that under Estates, Powers and Trusts Law § 2-1.11 (d) the effect of a renunciation is “as though the renouncing person had died at the time of filing” the renunciation. While it is undisputed that Susan did not file a formal renunciation, plaintiffs’ argument is that she in substance agreed to do so. If Susan renounced her interest prior to Charles’s death, she must be deemed to have predeceased Charles, and by the terms of the Utica Mutual agreement the payments after Charles’s death should go to plaintiffs.

Defendants argue that the purpose of Susan’s agreement “to remove herself as primary contingent beneficiary” was to convey her rights under the Utica Mutual agreement to Charles. Again, it is undisputed that no formal “conveyance” was executed, but defendants argue that a conveyance is what Susan in substance agreed to. If Susan’s rights were conveyed to Charles, Charles was entitled to name Violetta, or anyone else he liked, to receive the payments that Susan would have been entitled to under the Utica Mutual agreement.

Thus, the abstract nouns “renunciation” and “conveyance” are simply ways of describing the parties’ contentions about what Charles and Susan intended in their divorce settlement in 1985. The real issue is whether they meant that Susan step aside in favor of her daughters, or in favor of Charles. The record shows that defendants are correct: The parties intended Charles, not plaintiffs, to benefit from Susan’s agreement to “remove herself.”

A primary purpose in any divorce settlement is to divide assets between the husband and the wife, and where, as here, the wife agrees not to claim a particular asset, the natural reading of the agreement is that the asset becomes the husband’s. It is true, of course, that parties may and often do agree to give assets to their children, but where that occurs one would normally expect the children to be mentioned. Susan’s agreement to “remove herself’ makes no mention of plaintiffs, suggesting that there was no intention to benefit them.

Other language in the divorce settlement supports this inference. The sentence immediately following the one in dispute in this case expressly gives a benefit to “the children.” That sentence provides:

“In addition, [Susan] will execute any and all forms or instruments necessary to change her as primary beneficiary under the husband’s life insurance policy and [Charles] will agree that he will appoint the children irrevocable beneficiaries of such policy.”

Thus, when the parties sought to confer rights on plaintiffs, they left no doubt of their intention.

Finally, a colloquy that occurred in open court during the divorce settlement confirms that the clause in dispute was meant to benefit Charles. Charles’s attorney, in response to a question asked by Charles himself, recited on the record that the parties had “tried to make an accommodation” so that not only Susan, but also plaintiffs, “would not be alternate beneficiaries under the Utica Mutual contract.” The plan had been for Charles to buy out plaintiffs’ contingent interests, for the modest sum of $5,000 each. According to counsel’s recital this plan failed, not because Susan and Charles did not agree to it, but because the Supreme Court Justice “indicated that he has no jurisdiction over the girls.” If, as this colloquy implies, Susan and Charles were ready to agree to extinguish plaintiffs’ contingent interests in the Utica Mutual contract completely, it is most unlikely that the extinction of Susan’s interest was intended to benefit plaintiffs rather than Charles.

In short, the Appellate Division correctly concluded that the effect of the disputed provision in the 1985 divorce settlement was to give Charles the right to name anyone he chose as the primary contingent beneficiary of the Utica Mutual agreement.

Charles named Violetta, and Violetta is therefore entitled to the payments that became due under the Utica Mutual agreement between Charles’s death and Susan’s death.

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

Chief Judge Kaye and Judges G.B. Smith, Ciparick, Rosenblatt, Graffeo and Read concur.

Orders affirmed, with costs.