Business Litigation

June 29, 2012

What a New York Business Should Know About Recovering for Damage to its Property (III)

by The Law Firm of Grasing & Associates

We have been discussing how much a New York business can recover from someone who damages its property. If the property is damaged, but not destroyed, the business normally can recover either the loss in market value caused by the damage, or the cost of repairs, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the property is totally destroyed, it can recover the reasonable market value of the property just before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the destroyed property is a business’ sales inventory, the business normally can recover the wholesale cost of the merchandise, because that is what it would cost to replace the merchandise, and any damages actually sustained by reason of the absence of the articles while they are being replaced. See Dubiner’s Bootery, Inc. v. Gen. Outdoor Adver. Co., 10 A.D.2d 923 (1st Dept. 1960). These rules seem intrinsically fair because each will put the business back to where it was before the loss.

A business also can try to recover for damage to its property by making a claim under the property coverage of its business owner’s insurance policy. If the policy covers the type of property that was damaged, the damage was caused by something the policy insures against, and the insured otherwise has lived up to its obligations under the policy, the business owner should be able to recover for the damage to its property. The amount the business can recover depends on the language of the policy. It might be able to recover only the actual cash value of the property. One way to determine that is replacement cost minus depreciation. It might be able to recover the replacement cost of the property, without deduction for depreciation. For the destruction of sales inventory, it might be able to recover the sales price of that inventory, if it has purchased the proper coverage. Sometimes, an insurance policy, depending on how it is written, might reimburse the business for its lost income. Even then, however, the business should be aware that it cannot recover both the retail selling price of the damaged inventory and the income it would have earned by selling that same merchandise.

This is illustrated by J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept. 2006). The case involved J&R Electronics, an electronics retailer in Manhattan that was badly damaged as a result of the terrorist attacks in New York City on September 11, 2001. As a result, it made a claim to recover, under its policy of property insurance with One Beacon Insurance Company, for, among other things, the damage to its merchandise, and for its loss of business income. Pursuant to the terms of the policy, One Beacon paid J&R the selling price minus unincurred expenses for the damaged merchandise. That basically means that J&R was paid the selling price minus the money it normally would have spent in order to sell the merchandise. When One Beacon paid J&R’s claim for loss of business income, it subtracted the amount it paid J&R for the sales price of the damaged merchandise. J&R objected to this, claimed the sales price should not be subtracted from its lost income, and sued. The appellate court held that J&R could not recover both the selling price of the merchandise and the lost income based on its failure to sell that same merchandise; to do so would have been to give J&R a double recovery.

June 22, 2012

What a New York Business Should Know About Recovering for Damage to its Property (II)

by The Law Firm of Grasing & Associates

A business has to know how to recover for damage to its property. Most times it will need to use the money to repair or replace the damaged property or, in the most severe cases, to re-start the business.

In our last entry, we spoke about how a business can establish the amount it can recover from someone who damages its property. Normally, the business can recoup either the reasonable cost to repair the damaged property, or the loss of market value caused by the damage, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). Where the property is totally destroyed, the owner can recover the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934).

Though everyone likes to think the worst will never happen, it can, and often does, in strange and unexpected ways. Recently, on Long Island, a car crashed into the front of a house and drove all the way through to the backyard. This happened in the middle of the night, while the homeowner was asleep. Similar damage also can happen to a business. A couple of months ago, a car drove through the front of a print shop in Florida, through where the supplies were kept, while the store owner was helping a customer. Only a few weeks earlier, a car drove through the back of the same store.

Property damage affects all types of businesses, from retail stores to factories, from start-ups to well established companies. This winter a fire heavily damaged three stores in Smithtown, Long Island. The fire reportedly started in a bar, which had to be closed for repairs; it had opened only a few weeks earlier. In May, a bell factory in East Hampton, Connecticut, was so badly damaged by fire that it was trying to temporarily re-locate so it could re-start production on a limited basis while rebuilding its facilities; the company had operated for 180 years and was the last bell factory in this country. Sometimes, property damage, even from a mundane cause, can be so extensive that it totally shuts down a business. Last week, a custom car tuning shop outside of Rochester, New York was damaged so severely by fire that it had to close; the fire reportedly started in an electrical circuit box.

It is clear that all types of businesses suffer when their property is damaged. One affected by a special set of rules is a retail store. For example, if a car drove through a grocery store, or a clothing shop, in New York, what could the store owner recover from the driver for the destruction of its stock or sales inventory? That would depend on the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). What, however, is the market value of the destroyed food, or clothes, and how is it determined?
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June 19, 2012

What a New York Business Should Know About Recovering for Damage to its Property

by The Law Firm of Grasing & Associates

Everyone knows that if someone damages their property, they should be able to make that person pay for the damage. The Owner of the damaged property should be able to recover as long as it can prove the other person was liable for the damage. Many people, however, including business owners, are unclear about how much they can recover, and what they need to do in order to recover.

A business needs its property to operate, whether that’s its equipment, stock, inventory, or its office or warehouse space. When property is damaged in New York, how much can the owner recover from the party that caused the damage, and how is that amount determined? Knowing the answer, in order to ensure that the damage can be repaired, is essential to good business planning. The answer depends, to a large degree, on the type of property and how badly it is damaged.

Property Damage can occur at any time, and often in unexpected ways. It can consist of damage to real property, such as to a building, or damage to personal property, such as to the contents of a building, the personal belongings in a house or an apartment, the business personal property in a leased store or office, or the equipment and stock a business uses to operate. It can affect anyone who owns property, including a business, a landlord, a tenant, a homeowner, or a car owner.

Recently, there was a story in the news that shows just how easily property can be damaged and how quickly the cost of repairs can add up. A hotel in Austin, Texas, claims it suffered $10,000 of property damage because several beer bottles were dropped from the 29th floor into its pool and hot tub. As a result, the pool and hot tub had to be drained to make sure that all of the glass was removed so that no one would be hurt, and the filters for the pool and hot tub had to be repaired. Evidently, a little mischief can cause a lot of damage. The beer bottles were dropped from a privately owned condominium located above the hotel. According to the article, the owner of the Hotel planned to sue the owner of the condominium to recover the cost to repair the damage. If this happened in New York, what would the Hotel have to do to establish that it suffered $10,000 of damage?

When property is damaged in New York because of the negligence of someone else, like the person who dropped the beer bottles into the Hotel pool (the “Defendant”), the basic goal is to make the Owner of the property “whole”. That means that a court will try to put the Owner back into the exact same position she was in immediately before the damage occurred. See Ward v. New York Cent. R. Co., 47 N.Y. 29, 33 (1871). The Owner of the damaged property cannot wind up being better off than she was before the property was damaged. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44, (1934). This generally means that the Owner can recover either the difference between the market value of the property immediately before and immediately after it was damaged, or the reasonable cost to restore the property to the same condition it was in before it was damaged (the “Repairs”), whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 536-37 (2002), and Dilapi v. Empire Drilling & Blasting, Inc., 62 A.D.3d 936, 937, (2nd Dept. 2009).
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June 15, 2012

Records a New York Business Should Always Keep On file (III)

by The Law Firm of Grasing & Associates

We have been discussing what records a New York Business should keep on file when it is faced with litigation: Records that are relevant to whether it should win or lose the dispute, and any records that could lead to such evidence. We also have spoken briefly about the different penalties that can be imposed for failing to preserve those records. For the most part, they consist of making it harder to win the dispute once a lawsuit has been commenced. Now we are going to analyze the legal requirements for imposing sanctions on the party that fails to save relevant evidence when it has a duty to preserve the evidence.

This may seem like an esoteric discussion, without implication to the typical New York business. There are, however, myriad examples of businesses being penalized for transgressions involving the loss of evidence. They range from the bad faith destruction of evidence (e.g., the accounting firm Arthur Andersen, which reportedly destroyed, over the course of weeks, multiple boxes of documents relevant to an investigation of Enron, and, as a result, lost such a large portion of its business that it had to lay off approximately 85,000 people); to evidence being discarded due to a business’ gross disregard of its obligation to preserve it; to documents being carelessly discarded due to a business not carefully following its attorney’s instructions to save them (see Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004). Knowing the rules, the possible penalties, and the tests for imposing them, therefore, is an important lesson every New York business should learn in order to avoid such costly mistakes.

Spoliation is usually penalized during the litigation itself, with penalties that are intended to level the playing field; i.e., to try to ensure that the party that should have preserved the evidence does not gain an unfair advantage by depriving its opponent of the opportunity to use the evidence. The party that is deprived of the evidence (the “Injured Party”) is the one that asks the court to sanction the party that “lost” the evidence (the “Spoliator”). In order to penalize a party for Spoliation, however, the offending party must have had control over the evidence and a duty to preserve it at the time it was lost or destroyed. That is, if a party had a record or document, but did not have to keep it, then the party cannot be penalized for discarding it. The party must have lost or destroyed the document with a culpable state of mind: It could have deliberately destroyed the document to keep it from being used in the dispute; it could have failed even to try to save the document after it knew the document should be kept; or it could have negligently discarded the document. Finally, the missing evidence must be relevant to the party’s claim or defense, which means at the time of trial it reasonably could have been used to help decide who should win the dispute. See VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (1st Dept.2012); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003); and Gaffield v. Wal-Mart Stores E., LP, 616 F. Supp. 2d 329, 337 (N.D.N.Y. 2009).

Perhaps the hardest part of the test to satisfy is to demonstrate that the missing evidence is relevant to the Injured Party’s claim or defense, since the Injured Party cannot know exactly what is in it, because the Injured Party does not have access to it, since the evidence was lost or destroyed.
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June 11, 2012

Records a New York Business Should Always Keep On File (II)

by The Law Firm of Grasing & Associates

In our last post we asked the question: What records does a business have to keep when it is, or it reasonably believes it will become, involved in litigation? The answer is, generally, that a business must preserve records and documents which support its claims, or support defenses against its claims, or which might lead to discoverable evidence. See Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). That is, it must keep records that could help it or hurt it, or which might lead to other evidence that could help it or hurt it, in the dispute/litigation. If the business does not save those records, it can be penalized for “Spoliation.”

Spoliation is the significant alteration or destruction of evidence, or the failure to save or preserve evidence or something that could be used as evidence in litigation, whether it is reasonably foreseeable that the litigation will occur or it already has commenced. See West v. Goodyear Tire & Rubber Co., 167 F.3d 776 (2d Cir.1999); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). See also VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (First Dept. 2012). Penalizing Spoliation is in essence a way to prevent one side from losing, or even destroying, evidence that could help its opponent. Both state and federal courts in New York favor deciding cases on the merits. See Robles v. Grace Episcopal Church, 192 A.D.2d 515 (2nd Dept. 1993); and Traguth v. Zuck, 710 F.2d 90 (2d Cir. 1983). Preserving documentary evidence relevant to the issues in a dispute is one way to ensure that the merits are reached.

A business runs a major risk if it fails to save documents that are relevant to a dispute that could devolve into litigation. The risk involves the litigation itself: The penalty is enforced by making it more difficult, if not impossible, for the offending party to prevail in the litigation. The more egregious the offense, the harsher the penalty and the more difficult it will be for the offending party to win.

June 6, 2012

Records A New York Business Should Always Keep On File

by The Law Firm of Grasing & Associates

What records does a business have to keep and for how long? That may seem simple enough to answer, but it isn’t. It depends on the situation. There are rules governing tax records; rules for certain kinds of licensed professionals; and rules for when a business becomes involved in litigation. We’re going to talk about a business involved in litigation. What makes that so important is that the same rules often apply even before anyone has been sued.

A business normally generates a lot of paperwork. This frequently includes correspondence, bids, proposals, contracts, sales records, invoices, and receipts. It would cost a tremendous amount of money to maintain all of those records for an indefinite period of time, and that money probably could be better spent elsewhere, including on improving the business. As a result, a business often keeps certain types of documents, such as letters or emails, for only a relatively short time before it discards them.

Most New York businesses are faced with litigation at one time or another. It might be a contract dispute, where your customer doesn’t want to pay you for the goods it purchased, or you don’t want to pay your supplier full price because some of the items you bought were defective or arrived late. It could be an action for wrongful termination of an employee. Maybe the dispute is about the terms of a lease, including whether the landlord or the tenant is responsible for making repairs; or the duties under a financing agreement or insurance policy. Most times, the business becomes aware of the problem before someone starts a lawsuit. Often, the parties will try to settle the dispute first, on their own, without going to court. It’s only after negotiations fail that one of them will sue the other to get what it wants. When, exactly, should a business begin to make sure it keeps all the records necessary to protect itself, and what records, out of all the ones that it generates, should it keep?