A Manhattan Supreme Court has thrown out — for the second time in as many years — a regulation to limit business expenses, including entertainment for client development, that title insurers can pass on to consumers.

The measure, promulgated by the state Department of Financial Services was struck down by the judge on due process and First Amendment grounds.

The decision came in a lawsuit brought last year against DFS by the New York State Land Title Association, a trade group for the state’s title insurers. The group is represented by attorneys from Gibson, Dunn & Crutcher, including partner Mylan Denerstein.

While the regulation had been largely upheld by the Appellate Division, First Department in a decision handed down in January, the appellate court remanded part of the lawsuit back to Manhattan State Supreme Court Justice Eileen Rakower for further litigation.

Rakower, on her second time evaluating the regulation, again rejected it.

In a decision handed down last July, Rakower invalidated the regulation and said the changes would be better made by the state Legislature, instead of through executive action.

This time, Rakower evaluated four remaining arguments brought by the Land Title Association challenging the measure that weren’t addressed extensively by the appellate court.

Among them were claims that the agency’s regulation violated the due process rights of title insurers, and restricted their freedom of speech under the First Amendment.

The regulation set limits on the title insurance industry by listing which expenses were allowed to be passed on to consumers. Those included advertising in local media, public marketing events, continuing legal education courses, charitable contributions, and political donations. Those items weren’t exhaustive, according to the regulation.

That list came with a caveat. Immediately preceding those examples, the regulation required that any expense be “reasonable and customary, and not lavish or excessive.”

Rakower cited that section of the regulation in her decision to invalidate it based on violations of due process. She wrote that DFS hadn’t defined what it meant by “reasonable and customary,” which she said was impermissibly vague and left companies guessing at how much they could spend, and how much would land them in trouble with the agency.

“[The regulation] violates the Due Process Clause of the Constitution,” Rakower wrote. “The section is not sufficiently informative on its face to ensure that business can conform their conduct to the dictates of the law.”

DFS had argued that companies were always free to consult the agency if they had a question about whether an expense would be allowed under the regulation. Rakower wrote that, according to case law, regulations have to be written in a way for reasonable people to draw the line on their own.

Rakower also wrote that the regulation violated the First Amendment rights of title insurers by unlawfully restricting the amount they’re able to spend on political donations, charitable contributions, and advertising.

The state had argued that the regulation was intended to regulate unlawful market conduct, rather than protected speech. That’s a legitimate state interest, Rakower wrote, but the regulation was not tailored narrowly enough to balance against the First Amendment.

“The statute imprecisely prohibits constitutionally protected speech without narrowly tailoring the regulation to fit the state’s needs, which invites arbitrary enforcement and chills corporations from engaging in these forms of constitutionally protected speech under the First Amendment,” Rakower wrote.

Based on those two claims, Rakower struck down the regulation in its entirety.

“Judge Rakower’s decision affirms that title insurance companies have the simple right to market their services like all other professionals in the state,” said Bob Treuber, executive director of the Land Title Association. “New York’s title industry’s more than 2,000 small businesses have been working to protect property rights for decades and will continue to fight for New York homeowners.”

They’ve sought to have the regulation thrown out since it took effect last year. It was first promulgated by DFS after an investigation by the financial regulatory agency found some title insurance agents were billing consumers for hefty expenses labeled as marketing, such as tickets to sporting events for prospective clients.

One insurer was found to have spent millions of dollars each year on tickets to basketball games at Madison Square Garden, for example. Another allegedly paid for their clients to visit strip clubs on Long Island.

The regulation was created to prevent those practices, which drove up costs for consumers, according to DFS.

Representatives for the title insurance industry have stressed that those agents were the exception among their ranks, not the rule. They’re far from representative of the state’s huge title insurance industry, they’ve said, which is composed of thousands of agents.

Rakower rejected two other claims brought against the regulation by the Land Title Association. It had argued that the regulation violated the state insurance law by imposing a 5% rate reduction, and that DFS hadn’t gone through the proper steps in crafting the rules.

The decision follows two years of failed attempts by state lawmakers in Albany to roll back parts of the regulation. The most recent bill was defeated, in part, because of advocacy efforts by former DFS Superintendent Maria Vullo, who led the agency when the regulation was promulgated.

DFS could seek to appeal Rakower’s most recent decision, which they also did last year when she came to a similar conclusion on the regulation.

DFS Superintendent Linda Lacewell, who took over at the agency earlier this year, said in a statement that Rakower’s decision runs contrary to what the Appellate Division held on the regulation in January.

“The Department of Financial Services believes the decision fails to follow the Appellate Division’s ruling to uphold DFS’s regulatory authority to promulgate Insurance Regulation 208 for the protection of consumers from excessive title insurance rates and to enforce New York’s anti-inducement statute,” Lacewell said. “DFS will continue to fight for consumers to preserve this valid and important regulation.”

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