A municipality may rescind its decision to defend and indemnify an employee being sued for acts or omission that occurred performing official duties if the individual fails to cooperate

A municipality may rescind its decision to defend and indemnify an employee being sued for acts or omission that occurred performing official duties if the individual fails to cooperate

A municipality may rescind its decision to defend and
indemnify an employee being sued for acts or omission that occurred performing
official duties if the individual fails to cooperate
Lancaster v Incorporated Village of Freeport, 2013 NY Slip Op 07652, Court of
AppealsThe Court of Appeals ruled that a municipality, here the Village of Freeport, may withdraw
from its defense and indemnification obligations otherwise required under
provisions of the Freeport Village Code §130-6 adopted pursuant to Public
Officers Law §18* in the event current and
former municipal officials and officers being sued in a civil action decline to
accept a reasonable settlement offer. Further the court said that “First
Amendment concerns with respect to the settlement's nondisclosure clause do not
warrant a different conclusion.”However, §130-6 of the Code provided that the Village's duty
to defend and indemnify "shall be conditioned upon: . . . the full
cooperation of the employee in the defense of such action or proceeding
against the Village based upon the same act or omission"
According to the decision, the Freeport Board of Trustees
authorized the Village to defend and indemnify the employees named in the civil
action and retained separate counsel to represent the Village and employees in
the litigation.Subsequently the Village's counsel began settlement
negotiations with the plaintiffs and an agreement whereby the plaintiffs would
dismiss the actions against the Village in return for $3,500,000 paid over six
years. In addition, the settlement agreement included a “nondisparagement
clause” and required the employees to "agree not to ever interfere, nor
challenge or criticize the terms of either Stipulation [of Settlement] in any
manner." The employees counsel indicated that, in his opinion, “the
nondisparagement clause constituted a "concerted effort by the Village and
the plaintiffs to silence any comment by [the employees] in this matter of
public concern, particularly as to those who hold public office, is misguided
at best and could be construed as a threat to [the employees] First Amendment
rights.” The employees suggest revisions “to avoid even the impression of an
effort to impinge on anyone's right to express themselves or to coerce any
public official from fulfilling his/her responsibilities.”The Village's counsel replied indicating that: the proposed
settlement did not violate employees' free speech rights; the settlement was
advantageous for employees §18; and refusal would be patently unreasonable and
a breach of their duty to cooperate under the Public Officers Law** and Village Code.The employees refused to settle. The Board subsequently met
in executive session and resolved to withdraw providing for the employees
defense and indemnification. However, the employees continued to litigate the
actions at their own expense and subsequently initiated a “hybrid Article 78
proceeding and declaratory judgment action seeking a judgment (1) vacating the
withdrawal; (2) directing [the Village] to provide a defense; and (3) declaring
invalid the Village's disclaimer of any further obligation to defend [the
employees].”Supreme Court denied the petitions and dismissed the
proceedings, rejecting the employees arguments that “the Village had infringed
their First Amendment rights, improperly withdrawn the defense and indemnification
for lack of cooperation, or violated the Open Meetings Law.” The Appellate
Division sustained the Supreme Court ruling and the Court of Appeals affirmed.The Court of Appeals rejected the employees argument that
(1) the Village violated their free speech rights by withdrawing the defense
and indemnification; (2) their refusal to settle did not constitute a failure
to cooperate justifying revocation of the defense and indemnification under
Public Officers Law §18; and (3) the Board violated the Open Meetings Law by
withdrawing the defense and indemnification in executive session. The Court of Appeals said that the employees had advance two
argument: [1] the requirement of a nondisparagement clause was an impermissible
prior restraint on free speech, and [2] penalizing the employees for refusing
to refrain from criticizing the settlement was unconstitutional retaliation.
The court found neither argument persuasive. The court noted that the evidence does not show the Village
to have actively sought to restrict the employees' speech. If, on the other
hand, were there. for example, that as part of the settlement, the Village
induced the plaintiffs to include the nondisparagement clause in the settlement
with employees, said the court, this might be a different case. The Court of Appeals explained that the plaintiffs
inclusion of the nondisparagement clause in the settlement offer was not a
prior restraint on speech as plaintiff was a private party and entitled to
offer settlement on whatever terms it saw fit. Had employees accepted the
settlement and breached its terms, only the plaintiff, not the Village, could
have sued to enforce it. As the employees claim that the Village's
"threat" to withdraw the defense and indemnification a prior
restraint on speech, the Court of Appeals noted that "[T]he First
Amendment prohibits government officials from encouraging the suppression of
speech in a manner which can reasonably be interpreted as intimating that some
form of punishment or adverse regulatory action will follow the failure to
accede to the official's request." Here, however, the reason the Village
threatened to withdraw funding was to end the litigation and save public funds,
rather than to suppress speech. The court also observed that the withdrawal of it obligation
to provide for the employees defense and indemnification was not a prior
restraint on speech but rather a response to employees' failure to cooperate.
It was not a restraint on what petitioners could say in the future as the
employees were free to continue litigating and criticize the settlement as they
pleased. The Court of Appeals affirmed the lower courts decisions,
Judge Pigott dissenting.* Presumably the same ruling
would control with respect to officers and employees of the State as the
employer seeking “defense and indemnification” pursuant to §17 of the Public
Officers Law in any civil action or proceeding in any state or federal court
arising out of any alleged act or omission which occurred or is alleged in the
complaint to have occurred while the officer or the employee was acting within
the scope of his or her public employment or duties.** §17.5 of the Public
Officers Law provides, in pertinent part, “The duty to defend or indemnify and
save harmless prescribed by this section shall be conditioned upon: … (ii) the
full cooperation of the employee in the defense of such action or proceeding
and in defense of any action or proceeding against the public entity based upon
the same act or omission, and in the prosecution of any appeal.The decision is posted on the Internet at:
http://www.nycourts.gov/reporter/3dseries/2013/2013_07652.htm
.