Opinion
02 Civ. 9696 (HB)
November 13, 2003
OPINION ORDER #89322
Plaintiff moves for summary judgment. For the following reasons, plaintiffs motion is granted in part and denied in part.
I. BACKGROUND
A. Facts
Defendant David Bouley is a prominent chef in New York. He wholly owns defendant Bouley Consulting, Inc., and owns 50% of Bouley International Holding, LLC, which in turn wholly owns Bouley Bakery Operating, LLC, and Danube Operating, LLC. Bouley Bakery Operating, LLC is a company organized for the operation of Bouley Bakery, a restaurant at 120 West Broadway in downtown Manhattan. Danube Operating, LLC is similarly organized for the operation of Danube, a restaurant at 162 Duane Street/16 Hudson Street, also in downtown Manhattan. All of these entities, including Mr. Bouley, are named insureds under a policy issued by plaintiff Admiral Indemnity to Bouley International Holdings, commercial property policy number 21-3-1434-31-02. The policy provided that Admiral Indemnity would "pay for the actual loss of Business Income you sustain due to the necessary `suspension' of your `operations' during the `period of restoration.'" Under the policy, the "period of restoration" ends on the date when the property "should be repaired, rebuilt, or replaced with reasonable speed and similar quality." If, as here, the insured intends to continue the business after a loss, the insured's duties include that it "must resume all or part of your `operations' as quickly as possible." The policy also provided for payment for "the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Causes of Loss." The policy also provided that the insured's fraud voids the coverage or too if any insured intentionally conceals or misrepresents a material fact concerning, inter alia, a claim under the policy.
Bouley Consulting is a company that does off-premises catering and consulting.
He owns 1% of Bouley International Holding individually and 49% through Bouley International Inc., which he wholly owns.
The policy further stated, "The suspension must be cause by direct physical loss of or damage to property, including personal property in the open (or in a vehicle) with 100 feet, at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations."
As a result of the events of September 11, 2001, these two restaurants were infiltrated by dust and debris (and possibly noxious and toxic chemicals) and their food provisions were contaminated. They were forced to close for a certain period due to the shut-down of lower Manhattan. For several weeks thereafter, David Bouley participated in a project called Green Tarp Project, which served meals to rescue workers at "Ground Zero." Bouley used the facilities and employees at Bouley Bakery to prepare food for the Green Tarp Project, but was not paid for these services. Danube reopened on September 28, 2001. Admiral Indemnity advanced Bouley International Holdings $350,000, in three checks paid between September and November 2001. In early October, Mr. Bouley was reminded by the insurance broker of the obligation to reopen the restaurant as soon as possible and that this was "extremely important." At the end of the month, the insurance broker sent to Mr. Bouley another letter, which stated:
The insurance company once again today stated that they did not understand why the Bouley Bakery is not opened for business. . . . [T]hey do not understand why the bakery's dining rooms are not reopened. They are also starting to put two arid two together concerning the use of the bakery dining rooms and kitchen to produce food for the Red Cross effort. . . . We have to be prepared to justify not opening the bakery. I would be glad to discuss this with you, but I don't want to do this in writing.
Starting in early October 2001, Bouley Consulting entered into a contract with the American Red Cross to feed workers. Under this contract, which was in effect until January 2002, Bouley Consulting earned $5,810,494, of which 75% was allocated to Bouley International Holdings and 25% to Bouley Consulting. As a consequence of its contract with the Red Cross, Bouley Consulting was able to retain a number of food service employees from Bouley Bakery and Danube, and these employees were paid as independent contractors. The telephone reservations system for the two restaurants was restored on January 7, 2002. Bouley Bakery reopened on February 9, 2002.
Defendants contend that none of the contractors who worked on the Red Cross contract were included in the business and expense claim submitted by BB and Danube, although it is not entirely clear that the exhibit cited supports this.
In February 2002, Bouley International Holding, through its claims adjuster, notified Admiral Indemnity of a claim for business income and extra expenses, and on May 15, 2002 submitted a claim in which it sought $1,502,102 for Bouley Bakery and $786,752 for Danube, for a total of $2,288,858. Defendants averred that the "period of restoration" ended when the telephone reservation system was restored — namely, January 7, 2002, and that they were also entitled to 60 days of extended coverage from that date. After it conducted its own investigation, Admiral Indemnity denied coverage by letter dated October 15, 2002, on the basis that the defendants' loss of business income, which it calculated to be $831,525, was dwarfed by the amount it received from the Red Cross. Admiral Indemnity deemed October 1, 2001 as the end of the "period of restoration" Bouley International Holding challenged the disclaimer and sought to bring the claim to an appraisal. In November 2002, Admiral Indemnity filed an action in New York State Supreme Court seeking a declaration that it was not liable on this insurance policy. This matter was subsequently removed to this Court on December 6, 2002. Admiral Indemnity has moved for summary judgment.
The policy provided for "extended business income" for the actual loss of business income for an additional period, not to exceed 30 days, from when the property is actually repaired, rebuilt or replaced and operations are resumed.
II. DISCUSSION
Admiral Indemnity contends that it is entitled to summary judgment because 1) defendants are only entitled to lost business income for the three weeks after September 11, when its operations were "necessarily suspended," because after that point defendants sustained no "actual loss" — indeed they earned substantially more by shifting operations to a different insured entity — and 2) defendants misrepresentations — e.g., their failure to report the income from the contract with the American Red Cross — vitiates their rights to coverage. With respect to the contract with the Red Cross, defendants argue that this contract was with Bouley Consulting, which is an entity separate from Bouley International Holding (and Bouley Operating and Danube Operating). Although there is a genuine factual dispute about whether the contract was with David Bouley individually or with Bouley Consulting, this factual dispute ultimately is not material because even if the contract was with Bouley Consulting, it is beyond peradventure that the monies earned should have been counted against what the defendants claim as losses from the restaurants. The only material factual dispute here is whether Bouley International Holding submitted a fraudulent claim by not mentioning the Red Cross contract and by failing to disclose to Admiral Indemnity relevant documents in defendants' possession, as required of an insured making a claim under a policy and thus voiding the policy altogether. As discussed below, I do not think it appropriate to resolve this issue on summary judgment.
In their opposition, defendants place considerable weight on the fact that Admiral Indemnity has, until very recently, referred to an incorrect business-loss form. Specifically, defendants contend — and Admiral Indemnity concedes — that the appropriate form was one revised in June 1995 and denominated CP 1030 0695 rather than a version dated October 2000 and denominated CP 1030 1000. The relevant difference between the two versions is that old form does not define the phrase "suspension of operations," whereas the new form defines it as a "slowdown or cessation" of business.
It is clear that there remains a genuine dispute about whether the Red Cross contract was with Bouley Consulting or with David Bouley individually. Admiral Indemnity points to several documents that indicate the contract was with David Bouley, not Bouley Consulting. First is a "Memorandum of Understanding" signed by David Bouley individually and not on behalf of Bouley Consulting and the Red Cross — allegedly the only document signed by both parties with respect to this work — on or around October 1, 2001, at the start of the work for the Red Cross. Second are the checks issued by the Red Cross, which were made payable to David Bouley, not Bouley Consulting. Defendants on the other hand point to several documents that refer to Bouley Consulting, including the purported contract which refers to "David Bouley dba Bouley Consulting Inc." and was signed by David Bouley "President" on October 31, 2001. (The copy attached is not countersigned by anyone at the Red Cross.)
A. No actual loss under the policy
It is well known and the parties agree that for a certain period after September 11, 2001, lower Manhattan was cordoned off by the police. The two restaurants were within the area cordoned off in the immediate aftermath, but after several weeks the cordon was relocated south of the two restaurants. Admiral Indemnity argues that the insured bears the burden of demonstrating an "actual business loss" and that recovery by defendants here would contravene the very purpose of business interruption insurance, which is to pay a business what it would have earned had the covered loss not occurred. Admiral Indemnity contends that the "period of restoration" stopped on September 28, 2001, the date Danube reopened, and thus once the "period of restoration" ended. In short, even if the business suffered a severe slowdown for several months after September 11, this slowdown would only be relevant according to Admiral Indemnity for 30 days after the end of the "period of restoration" for determining the amount of extended business income to which defendants are entitled.
Admiral Indemnity appears to have abandoned a position it took in its initial memorandum that the proceeds from the Red Cross should even have been counted against the claimed business losses incurred prior to the contract with the Red Cross.
It is undisputed that although both restaurants suffered damage, this damage was not very extensive; it consisted principally of dust and debris and water contamination. It is also undisputed that Danube, which is adjacent to and shares some facilities, including kitchen facilities, with Bouley Bakery, was reopened on September 28. As noted, defendants posit the end of the "period of restoration" as January 7, 2002, when the telephone reservation system, which was very important to the restaurants' operations, was restored. However, it appears that Mr. Bouley made a decision to keep Bouley Bakery closed on the belief that business would not support both restaurants — indeed, his counsel stated as much at oral argument. Finally, the facilities at Bouley Bakery were operable given that they were used for the Red Cross contract. Thus, there is no genuine dispute that the property was, or should have been, repaired by September 29, 2001, and accordingly this was the end of the "period of restoration."
Admiral contends that the proceeds from the contract with the American Red Cross should be taken into consideration when the determination is made as to whether defendants incurred an actual loss. If the income is included, defendant did not incur either a "business loss" or "extended business loss" after October 1, 2001 because it earned significantly more from the contract with the Red Cross than it would be entitled to under the insurance policy. Defendants on the other hand contend that Bouley Consulting is an entity separate from Bouley International Holding and thus Bouley International Holdings' claim on behalf of Bouley Bakery and Danube for lost income is not negated by the income that Bouley Consulting received from the Red Cross because Admiral has failed to show that Bouley Consulting's separate corporate identity should be ignored.
Defendants rely on Gordon Chemical Co. v. Aetna Cas. Sur. Co., 358 Mass. 632 (1971), for the proposition that the principal of corporate law that separate corporate identities will be disregarded only in rare circumstances has been applied to business interruption insurance. But see Sylvania Gardens Apts. v. Hartford Fire Ins. Co., 2000 U.S. Dist. LEXIS 8075, at *16 (E.D. Pa. June 8, 2000) (rejecting the insured's contention about piercing the corporate veil). In Gordon Chemical, the Massachusetts Supreme Court rejected the argument that three related companies which were covered for business interruption insurance under one policy should be treated as one for the purposes of the policy. See Gordon Chemical, 358 Mass, at 637-38. The insurer contended that if the insureds were treated separately, the insureds would essentially receive an unwarranted amount because while one company suffered a loss as a result of a fire, another of the companies actually made more than it ordinarily would have. Significant to the court was that though the corporations had common management, they had different ownership, had different employees, and kept separate books. See id. at 638. Similarly, defendants here emphasize that Bouley Consulting is wholly owned by David Bouley, but that Bouley International Holding (which, again, wholly owns the operating companies for the two restaurants) is partly owned by Mr. Bouley and partly owned by another corporation. Moreover, Bouley Consulting maintains a separate bank account, files its own tax returns, and maintains its own accounting records. However, Gordon Chemical is distinguishable. Here, there is no dispute that Bouley Bakery's facilities and employees were used for the contract with the Red Cross and that 75% of the proceeds of the contract with the Red Cross was allocated to Bouley International Holding, of which a portion was invested in the two restaurants. Thus, even if the contract was with Bouley Consulting, Bouley Bakery's facilities and employees who were used to perform the contract and its parent Bouley International Holding received over $4 million, well in excess of what it claimed as lost business income.
In Sylvania Gardens, the court determined that rental income that the insured earned by relocating tenants to other apartments should be considered in the determination of whether the insured lost business income. See sylvania Gardens, 2000 U.S. Dist. LEXIS 8075, at *16. In rejecting the insured's attempt to hide behind the corporate veil, the court stated:
Such arguments by Plaintiffs, however, do not address the fact that the disputed business income has not technically been lost, but rather shifted to and earned by other properties which are also insured under the excess policy issued by Defendant. Consequently, Plaintiffs would have the Court take a highly narrow and technical view of their claim, rather than one which accounts for the reality of the attended circumstances. Id.
The entity whose machinery was destroyed in the fire made a raw product that it then sold to another entity. The insurance company contended that the company whose machinery was damaged could have and should have purchased the materials and sold them to the related entity, in which case it Was agreed there would have been no business loss.
In sum, I conclude that there is no genuine dispute, to say nothing of a genuine issue of fact, that the "period of restoration" ended on or about September 29, 2001, and, most significantly, that defendants did not incur an actual loss of business income from the point the Red Cross contract went into effect. Thus, the only question remaining is the amount that defendants are entitled to under the policy for the period prior to October 1. Defendants contend that amount is in excess of the $350,000 that Admiral Indemnity advanced.
B. Defendants misrepresentations vitiates their right to coverage
Admiral Indemnity contends that the defendants lost all right to coverage because of fraud — i.e., they not only failed to disclose information about the Red Cross contract but actively hid it.
Where, as here, the policy contains a clause to the effect that a claim is void if an insured intentionally conceals or misrepresents a material fact concerning a claim under the policy, "it [is] clear that good faith and fair dealing are the norms by which proofs of loss are to be measured." Kaffalos, Inc. v. Excelsior Ins. Co., 482 N.Y.S.2d 96, 98 (App.Div. 1984). "To establish its defense, the insurance company must demonstrate that the representations made by the insured were `relevant, material and intentionally false.'" Id "The insurer must prove fraud by clear and convincing evidence." Varda, Inc. v. Insurance Co. of N. Am., 45 F.3d 634, 639 (2d Cir. 1995). Admiral Indemnity points to three primary pieces of evidence to show defendants' fraud: 1) that defendants nowhere mentioned the contract with the Red Cross in its claim for coverage, 2) that defendants failed to disclose to Admiral Indemnity a document that appears to indicate that the contract was with David Bouley, not Bouley Consulting, and 3) a letter from the insurance broker to Mr. Bouley which notes that insurer's concern about the activity at Bouley Bakery even though it remained closed and suggested a face-to-face discussion (rather than written communications) about how to handle the situation. Contrary to Admiral Indemnity's contention, the second and third of these facts are disputed. Although the defendants failed to turn over the "Memorandum of Understanding" with the Red Cross, this memo also states it "will be memorialized with the signing of a formal contract," and defendants include a contract with "David Bouley dba Bouley Consulting" signed only by David Bouley a month after the contract went into effect. With respect to the broker's letter with the insinuation of subterfuge, defendants note that this broker was as much Admiral Indemnity's agent as it was defendants'. In addition, there is no evidence that any such off-the-record conversation ever transpired between Mr. Bouley and the broker. To be sure, defendants' failure to refer to the contract with the Red Cross in its claim is very troubling, especially since 75% of the proceeds of the contract was directed to Bouley International Holding and since the facilities and employees of Bouley Bakery were used to perform the contract. Although there is no merit to defendants' justification for not reporting the Red Cross contract, Admiral Indemnity has failed to show fraud by clear and convincing evidence, when viewed in the light most favorable to defendants, and thus the issue of the defendants' intent must be decided by a jury.
The case Admiral Indemnity relies on is factually distinguishable. In Saks Co. v. Continental Ins. Co., 23 N.Y.2d 161 (1968), a person claimed nearly $1 million worth of damage to clothes, jewelry, rugs, etc due to a fire in his apartment. The trial judge awarded him $104,316 and disallowed the rest for failure of proof by the plaintiff. The appellate division determined that the proof of loss was fraudulent as a matter of law, which the Court of Appeals affirmed. The Court of Appeals noted that there is a conclusive presumption of fraud when the difference between the amount claimed and the loss proven is "grossly disproportionate" and the tendered explanation is unreasonable or fantastic. See Saks Co., 23 N.Y.2d at 165. The court also noted the strong evidence of arson. See id. at 166-67.
III. CONCLUSION
For the foregoing reasons, plaintiffs motion for summary judgment is granted in part and denied in part. The trial of this matter will begin on Monday, November 17, 2003. Any motions in limine and any disputes about exhibits will be resolved Monday morning before jury selection.IT IS SO ORDERED.