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In re September 11 Litigation

September 1, 2010

IN RE SEPTEMBER 11 LITIGATION
THE PORT AUTHORITY'S CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., ET AL., PLAINTIFFS,
v.
THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY, DEFENDANT.
CERTAIN UNDERWRITERS AT LLOYDS, LONDON, ET AL., PLAINTIFFS,
v.
THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY DEFENDANT.



The opinion of the court was delivered by: Alvin K. Hellerstein, U.S.D.J.

ORDER AND OPINION RESOLVING MOTIONS FOR SUMMARY JUDGMENT ON CLAIMS FOR INDEMNIFICATION

The Port Authority of New York and New Jersey seeks*fn1 to be indemnified by Citigroup, Inc. and its affiliates ("Citigroup") for liability and defense expenses incurred by the Port Authority in the two lawsuits identified in the caption: Consolidated Edison Company of New York, Inc. v. The Port Authority of New York and New Jersey, 02 Civ. 7188, and Certain Underwriters at Lloyds, London v. The Port Authority of New York and New Jersey, 02 Civ. 7328.

In Consolidated Edison, I held that the Port Authority's liability was limited to paying ConEd the insurance proceeds that the Port Authority had recovered that were attributable to ConEd's damaged substation, and I dismissed the balance of ConEd's claims.*fn2 In Certain Underwriters at Lloyds, Citigroup's subrogated insurers (collectively "Lloyds") had sued the Port Authority for negligence in connection with the destruction of Citigroup's property and tenancy. They settled with the Port Authority and dismissed their claims with prejudice.*fn3

Both lawsuits arose from the intense fires and collapse of Tower Seven of the World Trade Center complex on September 11, 2001. The plaintiffs in the two lawsuits alleged that the fires were made more intense, and that Tower Seven was caused to collapse, by diesel tanks and emergency generator systems within Tower Seven.*fn4

The Port Authority, as support for its claim that it should be indemnified by Citigroup for its defense of the ConEd lawsuit and any potential judgment, and for its defense costs in the Lloyds lawsuit, relies on provisions in two agreements between the Port Authority and Citigroup's predecessors in interest, to be discussed presently.

I. Background

(a) The Port Authority's Ownership of Tower Seven

The Port Authority, a bi-state governmental entity created in 1921 by compact between New York and New Jersey, owns the 16-acre World Trade Center site in lower Manhattan. In 1968, it entered into a fifty-year lease with ConEd to construct a substation to provide electricity to the site and the office towers that were proposed, and to other customers nearby. The Port Authority reserved the right to construct a building above the substation.

In 1980, the Port Authority entered into an agreement with an entity controlled by developer Larry Silverstein, 7 World Trade Company, L.P. ("Silverstein"), that gave Silverstein the right to build Tower Seven above the substation and to lease units in the tower to commercial tenants. The Port Authority retained ownership and ultimate control over the design and construction of the building and subsequent tenant alterations. Silverstein agreed to submit its plans for the building to the Port Authority for approval. Silverstein completed construction of the tower in 1987.

(b) Citigroup's Tenancy

On November 23, 1988, Salomon Brothers, which later merged into Citigroup,*fn5 entered into a lease with Silverstein for approximately half the space in Tower Seven, to commence October 1, 1990, and to be preceded by various agreed alterations.

Lease § 3.01, Ex. B § 1.05(a), Ex. C.*fn6 The alterations were to provide for two diesel fuel tanks and a backup generator, id. Ex. C § V(D), designed to supply uninterrupted power to Salomon's trading floor, independent of any disruptions or curtailments of normal supplies of power, to enable Salomon to operate its trading floor twenty-four hours a day, seven days a week.

Two additional agreements fixed the relationships of the parties. The Three Party Agreement, entered into by the Port Authority, Citigroup, and Silverstein, described the process by which the Port Authority would review and approve Citigroup's proposed alterations, and provided a form for Tenant Alteration Applications that Salomon was required to submit along with its plans and designs. The Consent Agreement provided the terms and conditions pursuant to which the Port Authority was to consent to Citigroup's leasehold.

Section 5 of the Consent Agreement described Salomon's obligations to indemnify the Port Authority for, and to hold it harmless against, all reasonable costs, expenses and liabilities arising from Salomon's "operation, maintenance or management" of the demised premises, or from "work done" or "condition created" in the demised premises "during the Term" of the leasehold, or from any "negligent or otherwise wrongful act or omission" of Salomon or of its subtenants or licensees. It provides, in relevant part:

Salomon shall indemnify and hold harmless the Port Authority and its agents against and from (a) any and all claims (i) arising from (A) the operation, maintenance or management by Salomon of the Demised Premises, or (B) any work or thing whatsoever done, or any condition created in or about the Demised Premises during the Term by Salomon, its contractors, licensees, agents, servants, employees, subtenants, invitees or visitors, or (ii) arising from any negligent or otherwise wrongful act or omission of Salomon or any of its subtenants or licensees or its or their employees, agents, visitors, invitees or contractors or subcontractors of any tier, and (b) all reasonable costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon. In case any action or proceeding shall be brought against the Port Authority by reason of any such claim, Salomon, upon notice from the Port Authority, shall defend such action or proceeding.

Berry Decl. Ex. 7 ("Consent Agreement").

Rider B to the Tenant Alteration Applications also provided an indemnification by Salomon to the Port Authority. The indemnification covered injuries or damage to the Port Authority or its property arising out of or in connection with "the performance of the work," whether arising out of "acts or omissions of the Contractor or the owner or their contractors," except to the extent that the Port Authority (owner's) acts or ...


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