World Trade Center Properties LLC. et al v. American Airlines, Inc. et al, No. 1:2008cv03722 - Document 233 (S.D.N.Y. 2012)
Court Description: OPINION AND ORDER DENYING MOTION TO CREDIT INSURANCE RECOVERIES AGAINST POTENTIAL TORT RECOVERIES (CORRECTED OPINION): For the reasons discussed above, Aviation Defendants' motion for summary judgment is denied. The Clerk shall mark the motion (Doc. No. 205) terminated. (Signed by Judge Alvin K. Hellerstein on 12/5/2012) Filed In Associated Cases: 1:21-mc-00101-AKH, 1:08-cv-03722-AKH(pl)
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··lr:,v;:S,D~C~si':·D="'=\=.====C-.. '~ DOCl'~1 E'I'T [nt'IRONICALLY FlU. L'NITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK DOC ": D \I H -;.'-;.1':;:1:-1:&:;;-:,....77'"1" ¢...... ¢..... ¢ ¢ ¢..... ¢ ¢.........-. ¢.--.-. ¢ ¢.........-.-.-.... ¢ ¢ ¢....- x IN RE SEPTEMBER 11 LITIGATION WORLD TRADE CENTER PROPERTIES LLC et aL, Plaintiffs, ·against· AMERICAN AIRLINES, INC. et aL, 21 MC 101 (AKH) OPINION AND ORDER DENYING MOTION TO CREDIT INSURANCE RECOVERIES AGAINST POTENTIAL TORT RECOVERIES (CORRECTED OPINION) 08 Civ. 3722 (AKH) Defendants. ..........-....... ¢...... ¢ ¢.-.... ¢ ¢......-...--..............--...... x ALVIN K. HELLERSTEIN, U.S.D.1.: I. INTRODUCTION On December 31, 1980, the Port Authority of New York and New Jersey (the "Port Authority") entered into a ground lease with 7 World Trade Company, L.P. ("7WTCo.") for the development and construction of7 World Trade Center ("Tower 7"). Upon its completion in 1987, the Port Authority leased Tower 7 to 7WTCo. for a period of99 years. On September 11, 2001, terrorists hijacked American Airlines Flight 11 and crashed it into the llO·story 1 World Trade Center, the northern Twin Tower. As 1 World Trade Center collapsed, it spewed debris, some of which pierced the and, eventually, Tower Ts collapse. I fa~ade of Tower 7, causing fires As a result of Tower Ts destruction, 7WTCo. recovered approximately $831 million from its insurer, Industrial Risk Insurers ("IRI"). I For a detailed account of Tower 7's collapse, see Aegis Ins. Servs .. Inc. v. 7 World Trade Co., 2011 WL 4433158 (S.DS.Y. Sept. 23, 2011), appeal docketed, 1"0.11-4403 (2d Cir. Oct. 24. 2011). -----~ .. -~- -- ... 7WTCo. has sued United Airlines, American Airlines and others (collectively, "Aviation Defendants"), alleging that Tower 7 would not have been destroyed but for Aviation Defendants' negligence. Aviation Defendants now move for summary judgment on the basis of collateral setoff pursuant to N.Y. C.P.L.R. § 4545, alleging that 7WTCo.'s insurancc recovery has fully compensated it for any possible tort recovery against Aviation Defendants2 Collateral setoff requires correspondence between categories of insurance recovery and categories of tort damage. Because correspondence presents issues of material fact requiring trial, I deny the motion. n. BACKGROUND a. 7WTCo.'s Insurance Coverage and Recoverv Pursuant to its lease, 7WTCo. agreed that in the event Tower 7 was damaged or destroyed, 7WTCo. would "rebuild, restore, repair and replace [Tower 7] . , . in accordance with the plans and specifications for the same as they existed prior to such damage or destruction or ",ith the consent in writing of the Port Authority make sure other repairs, replacements, changes or alterations as is mutually agreed to by the Port Authority and [7WTCo.],',l 7 World Trade Center Lease and Amendment to Lease § 14.1. 7WTCo. also agreed to procure certain insurance for Tower 7. See id. at § 13. 7WiCo. agreed to insure Tower 7 against property damage to "not less than ninety percent (90%) of the ... 'full insurable value' [of! the Tower Building and all structures, improvements, fixtures and equipment, furnishings and physical property now or in the future located on or a part of the premises," with "full insurable value being the cost of This motion is made by Aviation Defendants American Airlines, Inc., A\'lR Corp .. United Air Lines. Inc . ¢ United Continental Holdings, Inc., Continental Airlines, Inc., US Airways, Inc., US Airways GrouP. Inc., Colgan Air, Inc . ¢ Delta Air Lines. Inc., Globe Aviation Services Corp., Globe Airport Security Services, Inc., Huntleigh USA Corp., The Boeing Co. and Massachusetts Pon Authority. As their separate motion for summary judgment was granted. however. United Continental Holdings, Inc. and United Airlines, Inc. have been dismissed from the case. In re S~. II Litig. ¢ 21 MC 101,2012 WL 5870143 (SD.N.Y. Nov. 21, 2012). l\L , A different "rebuild, restore. repair and replace" obligation applies during the final five years of the lease. at § 14.1.1. 2 2 replacing the Tower Building and of said structures, improvements, fixtures, equipment, furnishing and physical property." Id. at § 13.1.1. 7WTCo. also agreed to continue making lease payments even if Tower 7 were damaged or destroyed and to procure "[rlent insurance covering loss of rents, lees and other revenues of the Lessee during the period when the Tower Building or a portion thereof is out of operation.,,4 [d. at §§ 13.1.4,4,1.1. After September II, 7WTCo. submitted claims to IRI for damage resulting from the destruction of Tower 7. On January 3, 2005, 7WTCo. and [RI entered into a settlement pursuant to which IRI paid 7WTCo. $819 million and the parties agreed to share the net proceeds of their separate litigations against Aviation Defendants, with 90.2% of the net proceeds allocated to IRI and 9.8% of the proceeds allocated to 7WTCo. On December 2,2011, 7WTCo. and [RI entered into a second settlement agreement whereby they agreed that IRl's Tower 7 subrogation recovery from Aviation Defendants was $121,80 1,880.40 and that 7WTCo. was entitled to 9.8%, or $11,936,584.28. Thus 7WTCo.'s total insurance recovery is $830,936,584.28 5 b. 7WTCo.'s Damages 7WTCo. alleges that the diminution in the fair market value of its leasehold resulting from the destruction of Tower 7 is $959 million, plus prejudgment interest. Its expert, Kerry Yandell, Ph.D., using a discounted cash flow analysis, determined that immediately prior to Tower 7's destruction, the leasehold was worth $737 million, and that its value following Tower 7's destruction was negative $222 million. Yandell determined the post-destruction value .. _ .. _._----- 7WTCo.'s lease payments decrease during such a period. Sec id. al § 5. ~ 7WTCo. contends that the payment it received pursuant to the second settlement agreement does nOT constitute a recovery from IRI because the payment resulted from IRl's recovel)' (as subrogee of 7WTCo.) from Aviation Defendants. However, IRJ made the payment to 7WTCo. to settle 7WTCo.'s claims against fRI, thereby increasing 7WTCo.'s insurance recovery. 4 3 by calculating the net present value of anticipated cash flows of an identical rebuilt building ($262 million) and subtracting the cost of 7WTCo. 's obligation to rebuild pursuant to the lease ($484 million). With a pre-destruction value of$737 million and a post-destruction value of negative $222 million, VandelJ calculated the diminution in the fair market value of the leasehold to be $959 million, plus prejudgment interest. Tn addition, 7WTCo. alleges that it suffered consequential damages and personal property losses as a result of Tower Ts destruction. 7WTCo. seeks to recover $80,849,636.82 for re-tenanting costs, $200,883,571.53 for mortgage interest carrying costs, $371,400,000 for lost tenant improvements, $8,052,309.13 tor insurance recovery costs and fees, $2,846,139.43 for lost personal property and $307,291.90 tor paid insurance premiums. In total, 7WTCo. alleges that the destruction of Tower 7 caused it to sufter a $959 million diminution in the fair market value of its leasehold and over $600 million in consequential damages and personal property losses and that it is entitled to recover these amounts from Aviation Defendants. III. LAW a. Standard of Review "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317,322 (1986). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In ruling on a motion for summary judgment, the court must view all evidence in the light most favorable to the nonmoving party. Overton v. KY. StateDiv. ofMilitary& Naval Affairs, 373 F.3d 83,89 4 (2d Cif. 2004), and must "resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought." S~t,;. Ins. Co. ofllartford v. Old Dominion Freight Line, Inc., 391 F.3d 77, 83 (2d Cif. 2004). 7WTCo. brought this action pursuant to the Air Transportation Safety and System Stabilization Act, 49U.S.C. § 40101 note et seq. CATSSSA"), which creates a federal cause of action for damages arising from the terrorist-related aircraft crashes of September 11. ATSSSA provides the United States District Court for the Southern District of New York with original and exclusive jurisdiction over such actions, with the substantive law to be "derived from the law, including choice oflaw principles, of the State in which the crash occurred unless such law is inconsistent with or preempted by Federal law." As neither party has shown New York law to be inconsistent with or preempted by federal law, New York substantive law governs this action. e. N.Y. C.P.L.R. § 4545 Pursuant to N.Y. C.P.L.K § 4545, a plaintiff who has been compensated for an economic loss by a collateral source, such as insurance, cannot recover compensation for that economic loss again in tort from the tortfeasor 6 As the statute provides: In any action brought to recover damages for personal injury, injury to property or wrongful death, where the plaintiff seeks to recover for ... loss of earnings or other economic loss, evidence shall be admissible for consideration by the court to establish that any such past or future cost or expense was or will, with reasonable certainty, be replaced or indemnified, in whole or in part, from any collateral source such as insurance (except for life insurance) . . .. If the court finds that any such cost or expense was or will, with reasonable certainty, be replaced or indemnified from any collateral source, it shall reduce the amount of the award by such finding, minus an amount equal to the premiums paid by the plaintiff for such benefits for the two-year period immediately preceding the accrual of for further analysis of § 4545 and its judicial interpretation, see In 3822930, at *3 (S.D.N.Y. Sept. 4, 2012). 6 5 !'e ..SeDt. 11 Litig., 21 Me 101,2012 Wl. such action and minus an amount equal to the projected future cost to the plaintiff of maintaining such benefits. NY C.PLR § 4545(c) (l008)? "[RJeduction is authorized only when the collateral source payment represents reimbursement for a particular category of loss that corresponds to a category of loss for which damages were awarded," OdCILv. Chemung Countv Indus. Dev. Agens:y, 87 N. Y.2d 81,84 (N. Y. 1995), and correspondence must be proven by a "reasonable certainty." N.Y. CP.LR. § 4545(c) (2008); Illmbull v. USAir, Ipc., 133 FJd 184, 186 (2d Cir. 1998). IV. ANALYSIS Aviation Defendants move for summary judgmem, contending that 7WTCo.'s insurance recovery more than offsets any potential tort recovery by 7WTCo. against Aviation Defendants. & 7WTCo. contends that its tort damages exceed its insurance recovery and furthermore that its insurance recovery does not offset Aviation Defendams' potential tort liability because there is not sufficient correspondence between the categories of insurance recovery and the categories of tort damage. As I previously held in decisions regarding the destruction of World Trade Center Towers One, Two, Four and Five (together, the "Towers"), "New York courts follow the 'lesser of two' rule: a plaintiff whose property has been injured may recover the lesser of the diminution of the property's market value or its replacement cost." In re Sept 11 Litig., 590 F.Supp.2d 535, 'Effective November 12,2009. § 4545(c) was amended and designated § 4545(.). However.. because it was filed frior to November 12,2009, this action is governed by the earlier version of the statute. For purposes of this motion. Aviation Defendants .ccept7WTCo.'s $737 million valuation of the leasehold immediately prior to the destruction of Tower 7. 6 541 (S.D.:.r. Y. 2008). The potential tort liability of Aviation Defendants is therefore limited to the diminution in the fair market value of7WTCo.'s Tower 7 leaschold 9 7WTCo. contends that the diminution in the fair market value of the leasehold is $959 million because the cost of the contractually-obligated rebuilding of Tower 7 must be considered in calculating leasehold's post-destruction value. This argument is incorrect as a matter of law because 7WTCo. cannot pass the costs of its contractual obligations onto Aviation Defendants. "When a party commits a tort that results in damage to property, the wronged party may recover damages for injuries which flow directly from that tort and are its natural and probable consequences. The tortfeasor is not responsible for damages which are remote from the wrong or indirectly related to it. Stated differently, the tortfeasor is responsible only for injuries that are the direct. natural and proximate result of the tortfcasor's actions, and that the parties would have foreseen, contemplated or expected" ld. at 543 (citations omitted); In re Sept. 11 Litig., 2009 WL 1181057, at *3 (S.D."'.Y. April 30, 2009) ("Plaintiffs. having lost their argument for replacement value, cannot now argue for the equivalent of replacement value, a negative fair market value that would impose contract obligations of specific performance on [defendants] and their insurers,"). The diminution in the fair market value of the leasehold cannot exceed $737 million. 10 In addition to the diminution in the fair market value of its leasehold, 7WTCo. alleges that it suffered, and seeks to recover for, consequential damages and personal property losses of more than 5600 million as a result of Tower Ts destruction. 7WTCo. seeks to recover For purposes of this motion. I assume that the diminution in the fair market value of {he leasehold res~lti,ng from the destruction of Tower 7 is less than irs replacement cost. If it were proven that the replacement cost IS 10 fact the lesser amount. the lesser of two rule would limit Aviation Defendants' potential tor1liabilily to that amount. 10 For purpos~s of this motion, 1 assume that the post-destruction fair market afthe Jeasehold was zero. If it v.. ~r~ proven that the post-destructwn value exceeded zero, the diminution in the faIr market value would be S737 mllhon minus the post-destruction value. 'I 7 $80,849,646,82 in costs incurred tenanting the replacement 7 World Trade Center building, including brokers' commissions, advertising costs, rent concessions and legal fees, However, the cost of tenanting a replacement building is a replacement cos! and therefore, as discussed above, its recovery in tort is barred by I\ew York's lesser of two rule, See In rc Sept. 11 Litig" 590 F. Supp. 2d at 541. 7WTCo. also seeks to recover $200,883,571.53 in mortgage carrying costs incurred after Tower Ts destruction. However. 7WTCo. would have incurred these costs whether or not Tower 7 had been destroyed and therefore the costs cannot be recovered in tort. 7WTCo. also seeks to recover $371 ,400,000 in tenant improvements lost due Tower 7'5 destruction that the lease requires 7WTCo. to replace, II to See 7 World Trade Center Lease and Amendment to Lease § 14.1. However, the cost of replacing the destroyed tenant improvements is a replacement cost and therefore, as discussed above, its recovery in ton is barred by I\ew York's lesser of two rule. See In re Sept. 11 Litig" 590 F. Supp. 2d at 541. Furthermore, as discussed above, 7WTCo. cannot pass the costs of its contractual obligations onto Aviation Defendants. rd. at 543. 7WTCo. also seeks to recover $8,052,309.13 in costs and fees incurred in pursuing its insurance claims against IRI. Just as I held with respect to the Towers, Aviation Defendants are not liable in ton for litigation expenses incurred by 7WTCo. in litigation with IRL In re Sept. II Litig., 21 MC 101 (S.D.N.Y. Sept. 30, 2009). Furthermore, Aviation 12 Defendants arc nOlliable in ton for attorneys' fees incurred in preparing and submitting -- ...~-~--- 7VlTCo. did not include the value of these improvements in its post-destruction value of the leasehold, 12 7WTCo. argues that these expenses are recoverable pursuant to a New York exception to the American Rule on attorneys' fees which provides that "[iJf, through the wrongful act of his present adversary. a person is involved in earlier litigation wilh a third person in bringing or defending an action to protect his interests, he is entitled to recover the reasonable value ofattameys' fees and other expenses thereby suffered or incurred," Shindler v. Lamb, 211 KY.s.2d 762, 765 (N.Y. Sup. Ct 1959). The,e expenses do not quali!'y for this narrow exception. however, because, among other reasons, they are not sufficiently ·~the natural and necessary consequences of [A vmtlOn Defendants'] a~ts." Coopers & Lybrand v. Levitl, 52 A.D.2d 493,496 eN.Y, App. Div. 1976). 11 8 insurance claims, but such fces serve to reduce 7WTCo.' s net insurance recovery. Id. I cannot at this time determine what portion of the $8,052,309.13 sought constitutes litigation expenses incurred by 7WTCo. in litigation with lRl versus attorneys' fees incurred by 7WTCo. in preparing and submitting insurance claims. For purposes of this motion, I assume that the entire sum constitutes attorneys' fees incurred by 7WTCo. in preparing and submitting insurance claims and therefore reduces 7WTCo.'s net recovery from IRI as this assumption is most favorable to 7WTCo's opposition to Aviation Defendants' motion. 7WTCo. also seeks to recover $2,846,139.43 for items of personal property, including two Frank Stella paintings, lost in Tower Ts destruction. These losses, standing separate from the value of the leasehold and unrelated to the replacement of the leasehold. are properly recoverable in tort. Finally, 7WTCo. seeks to recover $303,791.73 paid in property insurance premiums and $3.500.17 paid in fine art insurance premiums prior to September II. Just as I held with respect to the Towers, these are not damages recoverable in tort, although they serve to reduce 7WTCo.'s net insurance recovery. [J In re Sept. II Litig., 21 Me 101 (S.D.N.Y. Sept. 30. 2009). b. Collateral Off,et Aviation Defendants move for summary judgment, contending thaI 7WTCo.'s insurance recovery more than offsets any potential tort recovery by 7WTCo. against Aviation n 7WTCo. contends that it is entitled to recover these insurance premiums even if Aviation Defendants' tort Jiabiliry is otherwise completely offset because N.Y. C.P.L.R" §4545(c) (2008) "expressly provides that [he Court 'shall reduce the amount of lhe award ... minus an amount equal to the premiums paid by the plaintiff' to obtain collateral source benefits.\> However, this argument ignores relevant statutory language: "Iflhe court finds [hat any such cost or expense was or \vilL \\ith reasonable certainty, be replaced or indemnified from any collateral source, it shall reduce the amount of the award by su£h n:nding. minus an amount equal to the premiums paid by the plaintiff for such benefits for the two-year period immediately preceding the accrual of such action and minus an amount equal to the projected future cost to the plaintiff of maintaining such benefits." N.Y. C.P.L.R. § '1545(c) (2008) (emphasis added). 9 Defendants. 7WTCo. contends that its insurance recovery does not offset Aviation Defendants' potential tort liability because there is not sufficient correspondence between the categories of insurance recovery and the categories of tort damage. '4 "[R]eduction is authorized only when the collateral source payment represents reimbursement for a particular category of loss that corresponds to a category of loss for which damages were awarded," Oden, 87 N.Y.2d at 84. and correspondence must bc proven be a "reasonable certainty." N.Y. C.P.L.R. § 454S(c) (2008); Turnbull, 133 F.3d at 186; sce also Kihl v. Pfeffer, 848 N.Y.S.2d 200. 207 (N.Y. App. Div. 2007) (equating "reasonable certainty" standard to the "clear and convincing evidence" standard). "The problem of matching up a collateral source to an item of loss is simply a matter of proof and factual analysis. The burden of establishing the requisite correspondence rests ... on the party seeking the CPLR 4545(c) offset. Where that burden is not sustained because the connection between the item of loss and the collateral source payment is tenuous or because the necessary correspondence between their essential elements is lacking, the purposes of the statute would not be served by applying the mandatory offset." Oden, 87 N.Y.2d at 89. Aviation Defendants argue that all of7WTCo.'s insurance recovery was for replacement costs and business interrnption and thus corresponds to Aviation Defendants' potential tort liability. In fisher v. Qualico Contracting C5!!.lL, 98 N.Y.2d 534 (2002}, "in a case originating with the negligent destruction by tirc of plaintifis' home:' the New York Court of Appeals had to determine "whether a collateral source paj lllcnt received by plaillliITs from their insurer "orresponds to damages paynhle by defendants so as to require setoff under CI'RL 4S4S(c)." Yisher. % N.Y. :!d. at 535. The Court of Appeals held that ''replacement cost and :4 7WrCo. also contends that there must be a damages award by a jury in its favor against A vialion Defendants before I can consider collateral offset. I previousl) rejected this argument as a matter of hnv. Se~ ,~~,' June S, 2012 Tr. at 7. I propose to discuss with counsel at a forthcoming conference how best to resolve the issues of facL 10 diminution in market value are simply two sides of the same coin. Each is a proper way to measure lost property value, the lower of the two figures affording full compensation to the owner," and that "Ii]n this case, the collateral source payment~·the ... replacement cost i nsurance proceeds~thus corresponds to [the1property loss. and was properly offset against the damages award." ld. at 540. However, unlike the plaintiffs in Fisher, 7WTCo.'s insurance recovery was not only compensation for lost property value, but also compensation for 7WTCo.'s contractual obligation to rebuild Tower 7 following its destruction. Because Aviation Dcfendants arc not liable in tort for 7WTCo.'s contractual obligation to rebuild, 7WTCo.'s insurance recovery does not perfectly correspond to Aviation Defendants' potential tort liability. Yet, 7WTCo.'s replacement cost insurance recovery cannot be completely separated from Aviation Defendants' potential tort liability because replacemem of the destroyed Tower 7 with a new building worked to increase the fair market value of7WTCo's leasehold, or, in other words, to compensate 7WTCo. for the diminution in the fair market value of its leasehold resulting from Tower Ts destruction. Aviation Defendants' potential tort liability should therefore be offset by the increase in the fair market value of the leasehold that is attributable to 7WTCo.'s replacement cost insurance recovery. Were such offset not made, 7WTCo. would be afforded double recovery with respect to some portion of the diminution in the fair market value of its leasehold. These are only some of the issues that must be addressed to determine the correspondence between categories of insurance recovery and categories of tort damage. Because they present issues of material fact requiring trial, I deny Aviation Defendants' motion II for summary judgment. See In re Sept. II Litig., 2012 \\lL 3822930 (Denying Aviation Defendants' coHateral offset summary judgment motion with respect to the Towers). v. CO~CLUSrON For the reasons discussed above, Aviation Defendants' motion for summary judgment is denied. The Clerk shall mark the motion (Doc. No. 205) terminated. SO ORDERED. Dated: t12- /t. ~~~ s-: December 2012 New York, New York ALVIN K. HELLERSTEIN United States District Judge 12
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