Opinion
601321/09
11-14-2011
Quoizel, Inc., Plaintiff, v. Hartford Fire Insurance Company, Defendant.
Wilkofsky Friedman Karel & Cummins, Esqs. Attorneys for Plaintiff(s) By: Harry A. Cummins, Esq. Rivkin Radler, Esqs. Attorneys for Defendant(s) By: Michael P. Versichelli, Esq.
Appearances:
Wilkofsky Friedman Karel & Cummins, Esqs. Attorneys for Plaintiff(s) By: Harry A. Cummins, Esq.
Rivkin Radler, Esqs. Attorneys for Defendant(s) By: Michael P. Versichelli, Esq.
Jeffrey K. Oing, J.
Motion sequence numbers 001 and 002 are consolidated for disposition.
Plaintiff, Quoizel, Inc. ("Quoizel"), moves, pursuant to CPLR 3212, for an order granting it summary judgment on its complaint.
Defendant, Hartford Fire Insurance Company ("Hartford"), moves, pursuant to CPLR 3212, for summary judgment dismissing the complaint.
Background
Quoizel is in the business of manufacturing lighting and home décor accessories such as bathroom lights, ceiling lights, chandeliers, pendant lights, wall scones, and outdoor light fixtures. Quoizel has a manufacturing facility in South Carolina. Manufacturing plants in China also produce for Quoizel component parts for these accessories, as well as being fabricators for these accessories.
On November 9, 2007, Quoizel purchased from Hartford a commercial liability insurance policy which, inter alia, provided coverage for damage to Quoizel's building and business property, including stock, located at its South Carolina warehouse (the "South Carolina warehouse"), with a policy limit of approximately $43 million (the "policy"). The policy was in full force during the relevant period.
On or about September 2, 2008, a sprinkler system leak damaged Quoizel's South Carolina warehouse, including its inventory. The damaged inventory consisted of three categories of lamps and lighting products: (1) parts, (2) boxed finished stock, and (3) unboxed finished stock (the "damaged inventory"). After submitting its claim to Hartford, Quoizel and Hartford reached an agreement with respect to the quantity of the damaged inventory and the valuation of loss. Regarding the latter, the loss was valued at replacement cost in the amount of $624,662.56, which is the amount it would cost Quoizel to re-manufacture the damaged inventory. Hartford paid and Quoizel accepted $624,662.56 as the calculation for the replacement cost of the damaged inventory. In that regard, Hartford did not calculate a portion of the damaged inventory at selling price because it took the position that those items were not manufactured by Quoizel, but, instead, by entities in China not related to Quoizel.
Quoizel commenced this action against Hartford claiming additional amounts are owed to it under the policy. In that regard, Quoizel claims entitlement to an additional $944,817.70, as the amount representing the differential between the selling price value of damaged inventory of $1,529,480.26 and the amount paid of $624,662.56, which represented the replacement cost.
Admittedly, the disputed damaged inventory was not manufactured in South Carolina, but in China (June 24, 2011 Tr. at p. 7). Quoizel, nonetheless, asserts that it is a manufacturer of the damaged inventory, and alleges that Hartford breached its contractual obligation by not using the selling price to calculate the damages sustained at the South Carolina warehouse. To support its position, Quoizel claims that the fifteen manufacturing plants in China contributed to manufacturing a component part of the damaged inventory, and that Quoizel has oversight and supervision over these facilities. In addition, of the fifteen manufacturing plants, Quoizel asserts that it has co-ownership interests in one of the factories, Design Emporium Company, Ltd. ("Lamplux") in Shenzhen, People's Republic of China.
Hartford maintains that Quoizel is not a manufacturer of the damaged inventory produced in China, and that these items were properly valued at the replacement cost. In that regard, Hartford maintains that Quoizel has no bona fide ownership interest in the Chinese entities. As such, the disputed damaged inventory were properly calculated at the replacement cost.
Summary Judgment Standard
The "proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law" by presenting "sufficient evidence to eliminate any material issues of fact from the case" (Winegrad v. New York University Medical Center, 64 NY2d 851, 853 [1985]). If the moving party, however, fails to make a prima facie showing, the motion for summary judgment must be denied "regardless of the sufficiency of the opposing papers" (Id.). But, where the movant has established a prima facie case, the opposing party has the burden to show by producing evidentiary proof that a genuine issue of material fact exists (Zuckerman v. City of New York, 49 NY2d 557, 562 [1980]).
The Relevant Policy Provision
The policy's relevant provision is as follows:
E. LOSS PAYMENT AND VALUATION CONDITIONS
Covered Property will be valued at either Replacement Cost or Actual Cash Value, as stated in the Property Choice Declarations and as described below except for the items listed below in item 3. Specific Property Valuations. We will not pay more than your financial interest in the lost or damaged property.
***
3. Specific Property Valuations
***
g. "Stock"
(1) Manufactured Stock
We will determine the value of "Stock" you have manufactured at the selling price less discounts and expenses you otherwise would have incurred.
This also applies to component parts manufactured by others that will become part of your finished product.
(2) Mercantile Stock
We will determine the value of "Stock", which you have purchased for resale and have sold but not delivered, at the selling price less discounts and expense you otherwise would have had. This does not apply to "Stock" you have manufactured.
(3) Stock in Process We will determine the value of "Stock" in process of manufacture at the replacement cost of the raw materials, plus labor expended and the proper proportion of overhead charges.
(4) Commodity Stock For "Stock" that is bought and sold at an established market exchange, we will determine the value at:
(a) The posted market price as of the time and place of loss;
(b) Less discounts and expenses you otherwise would have had.
(Dodd Aff., Ex. A, "Property of Choice Coverage Form," pp. 14 and 16). Of these four definitions for "stock", only "manufactured stock" is implicated in this declaratory judgment action. The question to be resolved is whether Quoizel is deemed to be a manufacturer of the damaged inventory that was produced by the Chinese entities. Resolution of this issue will determine whether the damaged inventory is to be calculated at selling price or replacement cost.
Discussion
The principle is well settled that the issue of whether an agreement is ambiguous is a question of law for the courts (In re the Estate of Stravinsky, 4 AD3d 75, 81 [1st Dept 2003]). Ambiguity is to be determined by looking within the four corners of the document and not to outside sources (Id.). Extrinsic evidence of the parties' intent may be considered only if the agreement is ambiguous (NFL Enterprises LLC v Comcast Cable Communications, LLC, 51 AD3d 52, 58 [1st Dept 2008]).
Here, the term "manufacture" or "manufacturer" is not defined in the relevant insurance policy. That term, however, has been defined as a reference to goods resulting from actual, physical work performed on raw materials (Bijan Designer For Men, Inc. v Fireman's Fund Ins. Co., 264 AD2d 48, 52 [1st Dept 2000]). Although the subject matter in Bijan ostensibly addressed whether the policyholder was a manufacturer, the proposition for which it is oft cited is the elementary rule of contract construction, namely, that clauses of a contract should be read together contextually in order to give them meaning (HSBC Bank USA v National Equity Corp., 279 AD2d 251, 253 [1st Dept 2001]; (In re the Estate of Stravinsky, 4 AD3d 75, supra). Nonetheless, Bijan is instructive. There, the policyholder argued that it must be considered a manufacturer because it is involved in the most important aspects of creating clothing, namely, that it designed the garments, selected the materials to be used, and provided specifications to factories (Bijan, 264 AD2d at 53, supra). The First Department rejected that argument. It held that the level of importance of an activity is not what defines that activity, and viewed the policyholder as merely an "architect" of its clothing line rather than a manufacturer of the clothing (Id.).
Quoizel argues that Bijan is distinguishable. Here, rather than being a mere "architect", Quoizel points to the fact that damaged inventory has the Underwriter Laboratories label ("UL"), and that only manufacturers receive such distinction. Contrary to its argument, however, the UL label is not determinative of Quoizel's status as a manufacturer. Absent from the record is an affidavit from a UL representative explaining the significance of such a label.
Next, Quoizel argues that its tax filings list it as a manufacturer. That argument is also unavailing because Quoizel also recognized itself as an importer on its tax filings during the relevant time period. Other indicia, namely, that Quoizel's consolidated financial statements for 2006-2008, which identified Quoizel as a manufacturer, that the products from China are backed by a lifetime warranty honored by Quoizel, that Quoizel was the originator and owner of fifty-four active patents and fourteen active trademarks concerning design and manufacture of their products, do not conclusively demonstrate that Quoizel is a manufacturer. Such indicia could be deemed merely promotional or as standing by your product. Notwithstanding these deficiencies, Quoizel argues it has ownership interests in the China factories. The critical elements of ownership are control, supervision, and domination.
On the issue of ownership, Quoizel argues it has such an interest with the Chinese entities because the damaged inventory produced in China was in accordance with Quoizel's organized plan and division of labor. Quoizel's vice president of operations, Timothy Hensch, states in two separate affidavits that Quoizel is intricately involved in the management and daily process of manufacturing at the factories in China. In that regard, Mr. Hensch points out that these relationships involve design of the items, and the sourcing of raw materials and component parts, all of which become part of the finished product. In addition, Mr. Hensch states that Quoizel retains "hands-on" involvement in the day-to-day process of manufacturing at the Chinese companies. He maintains that Quoizel's employees design specific items, remain on site at these factories on a daily basis for the purpose of supervising, overseeing, instructing, and managing the manufacturing process involved in producing its products.
For further support, Quoizel proffers the following to demonstrate that it has an ownership interest and that, as such, it manufactured the damaged inventory: (1) it maintains an office in Dongguan, Guangdong Province, Peoples Republic of China, with a staff of approximately twenty-seven employees including designers, cad operators, and inspectors who work closely with the fifteen factories in China; (2) Quoizel has expended over $2 million for costs associated with its manufacturing activities in China; and (3) Quoizel has a quality control procedure in place that permits it to "stop production" in these Chinese factories.
Clearly, under these circumstances, Quoizel has some relationship with the China factories. The question is whether these relationships are sufficient to support a finding that Quoizel has ownership interests for it to be deemed a de facto manufacturer of the damaged inventory. The weakness in these purported indicia of ownership is the absence of an affidavit from a principal of any of these China factories corroborating these factual assertions. Indeed, in response to this Court's inquiry as to whether Quoizel has "anything in the documentation that establishes ownership of that factory", counsel responded, "[w]e did not have anything about that and we established to counsel one could not be located" (June 24, 2001 Tr. at p. 9). Further, as for the $2 million expenditure, Quoizel failed to set forth an amount allocated for labor costs. Absent such evidentiary proof, Quoizel's claims are nothing more than self-serving statements. In fact, with respect to Quoizel's ability to stop production, which would be a persuasive indicator of ownership authority, counsel merely stated that that was his "understanding from my client" (Id. at p. 27). Indeed, based on this record, whether Quoizel could actually stop production is questionable given that these Chinese factories manufacture products for other entities, and could refuse to produce merchandise for Quoizel.
Notwithstanding these factual issues, Hartford points to the fact that the damaged inventory is set forth in purchase orders, which it argues is conclusive proof that Quoizel is not a manufacturer. That argument is unavailing. Here, the record demonstrates that the purchase orders are a means by which Quoizel has the merchandise enter the United States. Indeed, as counsel explained:
MR. CUMMINS:This whole issue of the purchase order, these are imported goods and there needs to be documentation in order to get them into the country.
THE COURT:It is called tariffs.
MR. CUMMINS:Yes, exactly. And the purchase order is an accounting device to memorialize transfer of the goods from China's factory into this country.
June 24, 2011 Tr. at p. 28).
With respect to Quoizel's ownership interest in Lamplux, although approximately 15% of Quoizel's annual production output came from Lamplux, Quoizel failed to proffer the joint venture agreement between it and Lamplux to establish such a relationship. Even if there were an ownership interest in that one factory, a factual issue would still remain. The thrust of Quoizel's argument is that a portion of the damaged inventory originated from Lamplux by way of purchase orders. That fact, standing alone, is insufficient to warrant summary relief because the record demonstrates that Lamplux had dealings with multiple unrelated factories in China with regard to product manufacture and fabrication.
Based on the foregoing, factual issues exist as to whether Quoizel can be deemed a manufacturer of the damaged inventory.
Accordingly, it is
ORDERED that Quoizel's motion for summary judgment is denied; and it is further
ORDERED that Hartford's motion for summary judgment dismissing plaintiff's complaint is denied.
Counsel are directed to telephone Part 48 at 646-386-3298 to schedule a status conference.
This memorandum opinion constitutes the decision and order of the Court.
Dated:
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HON. JEFFREY K. OING, J.S.C.