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Duane Reade, Inc. v. St. PAul Fire and Marine Insurance Co.

March 31, 2010

DUANE READE, INC., PLAINTIFF-COUNTERCLAIM-DEFENDANT-APPELLANT-CROSS-APPELLEE,
v.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, DEFENDANT-COUNTERCLAIM-PLAINTIFF-APPELLEE-CROSS-APPELLANT.



SYLLABUS BY THE COURT

In this insurance dispute arising from the September 11, 2001 destruction of a drug store in the World Trade Center, Duane Reade, Inc. appeals from a judgment of the United States District Court for the Southern District of New York (Rakoff, J.) dismissing its complaint against its property insurer St. Paul Fire and Marine Insurance Company, on the basis of res judicata. The district court's application of res judicata was proper because Duane Reade could have raised its claims in this litigation in its prior action, but did not. Further, the district court's reduction of the appraisal award was not an error of law. In response to St. Paul's cross-appeal, we modify the judgment to exclude interest accrued prior to the appraisal award. Affirmed as modified.

The opinion of the court was delivered by: Hall, Circuit Judge

Argued: November 5, 2008

Before: CABRANES and HALL, Circuit Judges, and GLEESON, District Judge.*fn1

In this insurance dispute arising from the September 11, 2001 destruction of a drug store in the World Trade Center ("WTC"), Duane Reade, Inc. ("Duane Reade") appeals from a judgment of the United States District Court for the Southern District of New York (Rakoff, J.) dismissing its complaint against its property insurer St. Paul Fire and Marine Insurance Company ("St. Paul"), on the basis of res judicata. The district court's application of res judicata was proper because Duane Reade could have raised in its prior action the claims it raises here, but it did not. Further, the district court's reduction of the appraisal award was not an error of law. In response to St. Paul's cross-appeal, we modify the judgment to exclude interest accrued prior to the appraisal award. Affirmed as modified.

BACKGROUND

This remarkably protracted insurance coverage dispute, which includes no fewer than four opinions from the district court and one prior opinion from this Court, arose from the total destruction of Duane Reade's retail pharmacy in the September 11, 2001 terrorist attack on the WTC. Alleging that its property insurer, St. Paul, had failed to fulfill its obligations under Policy No. 144SP0725 (the "Policy"), Duane Reade commenced an action in the United States District Court for the Southern District of New York. 02 Civ. 7676 (JSR). In its third amended complaint, Duane Reade asserted four causes of action against St. Paul: two claims seeking damages for breach of contract (counts one and three) and two claims for declaratory relief (counts two and four). Counts one and two related specifically to the destruction of the WTC store, while counts three and four addressed injuries suffered at other, non-WTC Duane Reade stores that were closed for periods of time following the September 11, 2001 attacks.

In count two, Duane Reade sought "Declaratory Relief" for its "WTC Loss" resulting from the "respective rights and duties" of Duane Reade and St. Paul "as they relate to Duane Reade's entitlement to coverage pursuant to the Policy." Joint Appendix (hereinafter "J.A.") at 155 (Third Amended Complaint ¶ 40). Specifically, Duane Reade sought relief "pursuant to the Policy's business interruption coverage."*fn2 Id.

Duane Reade asserted that it had the right to recover losses for the entire period actually required to rebuild the World Trade Center complex. St. Paul, in contrast, contended that Duane Reade's recoverable losses were limited to those suffered within twenty-one months following the September 11, 2001 destruction of the store-the amount of time it calculated as reasonably necessary for Duane Reade to relocate its store and resume operations.

St. Paul answered and counterclaimed against Duane Reade. Duane Reade filed a reply to St. Paul's counterclaims, but did not advance any counterclaims against St. Paul with regard to the insurance contract or the clauses at issue. St. Paul moved to dismiss Duane Reade's complaint and to compel appraisal.*fn3 The district court dismissed without prejudice Duane Reade's breach of contract claims as not ripe.*fn4 Duane Reade's claims for declaratory relief survived. The district court also denied St. Paul's motion to compel appraisal as premature due to issues of law still to be determined.*fn5

Duane Reade, which had already received $9,863,853 from St. Paul for its Business Interruption loss, filed a proof of loss and then reasserted its breach of contract claims. The district court again dismissed these claims without prejudice as unripe, finding that "the valuation aspects of the breach of contract claims had to be submitted to an appraiser before Duane Reade could recover damages." Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F. Supp. 2d 235, 236 n.1 (S.D.N.Y. 2003) (hereinafter "Duane Reade II")

Following discovery, both parties moved for summary judgment. The district court denied St. Paul's motion for summary judgment in its entirety and, for reasons not pertinent to this opinion, granted Duane Reade's motion to the extent that it dismissed all three of St. Paul's counterclaims. Id. at 242. The district court issued a declaratory judgment construing the Policy's Business Interruption coverage, finding that "[o]nce Duane Reade could resume functionally equivalent operations in the location where its WTC store once stood, the Restoration Period would be at an end." Id. at 239.

Following a bench trial on other related issues, the district court entered final judgment.*fn6 The district court also granted St. Paul's motion to refer to appraisal the calculation of the duration of the Restoration Period. Id. at 242. Under the agreement between Duane Reade and St. Paul, the appraisers were to limit their appraisal to the value of Duane Reade's Business Interruption loss at the WTC store as well as the value of Duane Reade's claims under the Extended Recovery period for the WTC store and other stores. J.A. at 346-47 (Agreement on Protocols for Appraisal ¶ 2).

Duane Reade timely appealed the district court's final judgment, arguing that the district court had misconstrued the scope of the Policy's Business Interruption coverage. While the appeal was pending before this Court, the appraisers received submissions, conducted a four-day hearing, id. at 420 (Baliban Affidavit in Support of Motion for Summary Judgment (hereinafter "Baliban Aff.") ¶ 7), and determined that the total value of Duane Reade's Business Interruption loss was more than $40 million above the amount previously paid by St. Paul, id. (Baliban Aff. ¶ 8). The appraisers were in the process of drafting their written award when this Court issued its decision resolving Duane Reade's appeal. Id. at 422 (Baliban Aff. ¶ 13). Although we affirmed the judgment of the district court, we modified its declaration so that it "eliminate[d] any reference to 'the location where [the] WTC store once stood'" and changed "'functionally equivalent operations' to 'operations.'" Duane Reade III, 411 F.3d at 386 (alteration in original). We ruled that the St. Paul policy does not provide [business interruption] coverage until Duane Reade can resume operations in a store located at its former WTC site. Instead, coverage extends only for the hypothetical time it would reasonably take Duane Reade to "repair, rebuild, or replace" its WTC store at a suitable location.

Id. at 398. We also noted that Duane Reade's lost profits for its WTC store would properly fall under the Leasehold Interest clause of the Policy rather than the Business Interruption clause:

To be sure, there are few if any locations in New York City comparable to the WTC, and Duane Reade will most likely not be able to recreate the profit stream it once enjoyed there. But any discrepancies between the new building and WTC in terms of benefits and advantages are exclusively accounted for under the Leasehold Interest clause.

Id. We did not remand the case to the district court or otherwise provide for further proceedings.

Following our opinion in Duane Reade III, the appraisal panel issued its award relating to Duane Reade's covered losses under the Business Interruption provision of the Policy. According to the appraisers, the Restoration period ended twenty-four months after September 11, 2001. The appraisal panel valued Duane Reade's loss for the WTC store at roughly $14 million*fn7 -far less than the amount the appraisal panel had been prepared to award prior to this Court's opinion. In applying Duane Reade III, the appraisers noted that:

[A]ny difference in the cost of leasing the replacement property and... any differences caused by the move of the store to a reasonably equivalent location and the concurrent loss of benefits of the WTC, such as increased foot traffic, entrenched customer base, or superior location is properly covered ...


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