Factory Mutual Insurance Company v. Derby Industries, LLC

Filing 47

MEMORANDUM OPINION AND ORDER Signed by Chief Judge Joseph H. McKinley, Jr. on 3/19/2018: Derby's motion to dismiss 19 is GRANTED IN PART and DENIED IN PART; Factory Mutual's motion to exclude 28 is DENIED; Factory Mutual's motion to set an initial case management conference 37 is GRANTED. The Court will set the conference by separate order. cc: counsel cc: Counsel(JM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:17-cv-00198-JHM
FACTORY MUTUAL INSURANCE
COMPANY, as subrogee of General Electric
Company,

PLAINTIFF

v.
DERBY INDUSTRIES, LLC

DEFENDANT

MEMORANDUM OPINION AND ORDER
This matter is before the court on a motion for partial dismissal by defendant Derby
Industries, LLC (“Derby”). (DN 19.) Also before the Court are motions by plaintiff Factory
Mutual Insurance Company (“Factory Mutual”) to exclude all documents outside the pleadings
(DN 28) and to set an initial case management conference. (DN 37.) Fully briefed, these matters
are ripe for decision.
I. BACKGROUND
The present dispute stems from a large fire that occurred at General Electric Company’s
(“GE”) Appliance Park, a 1,000 acre industrial manufacturing campus in Louisville, Kentucky.
(Pl.’s Compl. [DN 1] ¶ 7.) Appliance Park had six main buildings at the time of the fire, one of
which was known as “AP6.” On April 3, 2015, a fire originated in AP6 and quickly spread,
completely destroying the 650,000 square foot warehouse section of AP6 and its contents. (Id. ¶
17.) The fire also significantly damaged the 100,000 square foot office section of AP6 and its
contents, and smoke caused extensive soot damage to the adjacent building and its contents. (Id.
¶¶ 17–18.) Additionally, GE claims that the fire damage disrupted manufacturing and business
operations throughout Appliance Park and the United States. (Id. ¶ 19.)

At the time of the fire, GE was leasing approximately 450,000 square feet of floor space
in AP6 to Derby pursuant to a written lease agreement (“Lease Agreement”). GE exclusively
used and occupied the 100,000 square feet of office space in AP6, while the remaining floor
space was used and occupied in various ways by GE and its subcontractors/tenants. GE and
Derby were also parties to a Supplier Distribution Center Agreement (“SDC Agreement”).
Pursuant to this agreement, Derby used its leased floor space in AP6 as a supplier distribution
center for palletized bulk and high rack storage. (Id. ¶ 12.) The complaint alleges that the
majority of the palletized bulk stored by Derby was comprised of flammable, plastic parts
stacked up to twenty-six feet in the air. (Id. ¶ 17.) The complaint also claims that the rapid
spread of fire across AP6 was the direct and proximate result of the “enormous fuel load” created
by Derby’s bulk storage and high rack storage practices. (Id.) Factory Mutual, which at all
relevant times provided property and business interruption insurance to GE, alleges that damages
from the fire total approximately $140 million. (Id. ¶¶ 8, 20.) Factory Mutual reimbursed GE
for damages in the amount of $134 million, as the policy imposed a $6 million deductible on GE.
(Id. ¶ 28.)
Factory Mutual, as subrogee of GE, filed this complaint against Derby on April 3, 2017,
alleging negligence/negligence per se, breach of contract, and contractual indemnification and
seeking $140 million in damages. (DN 1.)

Derby has filed a motion to partially dismiss the

complaint pursuant to Fed. R. Civ. P. 12(b)(6), as Factory Mutual has failed to state a claim for
the $6 million deductible paid by GE and the $68.5 million cost associated with rebuilding AP6.
(DN 19.) Factory Mutual has responded by seeking to exclude the documents Derby cites to in
support of their motion, as they are matters outside the pleadings. (DN 28.) Alternatively,
Factory Mutual argues that the motion should be converted into one for summary judgment, and

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that under either standard, Derby’s motion should be denied. (Id.) Finally, Factory Mutual has
also filed a motion to set an initial case management conference. (DN 37.)
II. STANDARD OF REVIEW
The first issue before the court is the proper standard to apply to Derby’s motion for
partial dismissal. Generally, under Rule 12(b)(6), the court must assess the facial sufficiency of
the complaint without resorting to matters outside the pleadings. See Wysocki v. Int’l Bus. Mack
Corp., 607 F.3d 1102, 1004 (6th Cir. 2010). If “matters outside the pleadings are presented to
and not excluded by the court” when deciding a Rule 12(b)(6) motion, “the motion must be
treated as one for summary judgment under Rule 56.” Fed. R. Civ. P. 12(d).
In support of its motion, Derby attached a document called “Agreement Relating to AP6
Lease and SDC” (“Termination Agreement”) not contained in the pleadings. (DN 19-1, at 15.)
Derby’s motion also references the contents of a “Confidential Settlement Agreement” (“CSA”)
which was not attached to the pleadings or the present motion but has since been filed under seal
with the Court. (DN 43.)

Factory Mutual urges the court to strike and exclude the attached

document and reference to the CSA as unauthenticated documents outside the pleadings and
consider the motion under Rule 12(b)(6). Alternatively, Factory Mutual argues that the motion
should be converted to a motion for summary judgment under Rule 56.
The Court will convert Derby’s motion into one for summary judgment.

Factory

Mutual’s contention that the Termination Agreement and CSA are unauthenticated and therefore
should be stricken is rendered moot by Factory Mutual’s filing of the same documents, along
with affidavits for authentication purposes, as exhibits to its response to Derby’s motion. (DN
28-1, 28-2.) Further, Factory Mutual has also attached and relied upon a document entitled
“Assignment of Claims Agreement” (“Assignment Agreement”) in its response to Derby’s

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motion. This Assignment Agreement is not contained in the pleadings, and thus the court must
convert Derby’s motion to one for summary judgment in order to consider this document in
Factory Mutual’s response.

As both parties have attached and relied upon documents not

contained in the pleadings and had an opportunity to respond to the documents submitted by the
opposing parties, the court finds it appropriate to convert Derby’s motion into a motion for
summary judgment. Therefore, Factory Mutual’s motion to exclude those documents included
by Derby in its motion (DN 28) is DENIED.
A party moving for summary judgment must show that “there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). The moving party bears the burden of demonstrating the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Additionally, the Court must
draw all factual inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986). A genuine issue for trial exists when “there is
sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).
III. DISCUSSION
Derby’s motion argues that Factory Mutual may not recover (1) the $6 million paid by
GE as a deductible and (2) damages for the rebuild value of AP6, estimated by Factory Mutual to
be $68.5 million. The Court will address each in turn.
A. RECOVERY OF DEDUCTIBLE
While GE’s total loss from the fire was $140 million, it was required to pay $6 million
towards the loss as a deductible. (Assignment Agreement [DN 28-1] ¶ E.) However, Factory
Mutual now seeks to recover the entire value of GE’s $140 million loss from Derby, including

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the $6 million deductible that Factory Mutual never paid to GE. Derby argues that any claim for
this $6 million belongs to GE, not Factory Mutual, as GE is the party that actually lost the $6
million. It also argues that Factory Mutual cannot assert this claim on GE’s behalf, as GE agreed
to not seek any recovery from Derby for any direct claims arising from the fire in AP6. (See
CSA [DN 43] ¶ 6.) Factory Mutual opposes the motion by arguing that GE agreed to assign its
claim for the $6 million deductible to Factory Mutual, making it the proper party to bring this
claim. (See Assignment Agreement [DN 28-1] ¶ 2.) It also argues that the CSA did not limit GE
from pursuing any claims against Derby; instead, it only specified that any claims against Derby
would only be compensable with funds from a separate insurance policy, protecting Derby’s
individual assets. In its reply, Derby argues that GE’s assignment of its claim to Factory Mutual
is invalid, as it was executed on June 28, 2017, during the pendency of Derby’s present motion
and outside the two-year statute of limitations for property damage claims.
To begin, Factory Mutual cannot maintain a claim for the $6 million deductible as the
subrogee of GE, as it never actually paid that amount. “The requisites for subrogation are
usually described as (1) payment by one of a debt of another . . .” Wine v. Globe American Cas.
Co., 917 S.W.2d 558, 561 (Ky. 1996) (quoting Bryan v. Henderson Elec. Co., 566 S.W.2d 823,
825 (Ky. Ct. App. 1978)).

Factory Mutual did not pay GE the full $140 million that

corresponded with its loss, but rather only $134 million. Therefore, its posture as subrogee of
GE in this case precludes it from recovering the $6 million deductible paid by GE, as that claim
only belongs to GE.
However, GE has assigned its personal claim for this $6 million against Debry to Factory
Mutual. (Assignment Agreement [DN 28-1] ¶ 2.) “Where the cause of action is assignable, and
the entire cause has been assigned, clearly the assignee has become the owner of the cause and

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he is the real party in interest.” Louisville & N. R. Co. v. Mack Mfg. Corp., 269 S.W.2d 707, 709
(Ky. 1954) (citations omitted). The issue, however, is that Factory Mutual has not alleged that it
is the real party in interest in its complaint, and understandably so, since the assignment did not
take place until over two months after this action was initiated. Instead, Factory Mutual has
exclusively pursued claims against Derby as the subrogee of GE, a theory that does not permit it
to recover the deductible. (See Pl.’s Compl. [DN 1] ¶¶ 1–2, 22, 28, 39, 43.) The assignment of
GE’s claim to Factory Mutual does not resolve this pleading deficiency, as Factory Mutual can
only recover as the real party in interest if it has brought a claim in that capacity. See Fed. R.
Civ. P. 8(a)(2) (complaint must contain “a short and plain statement of the claim showing that
the pleader is entitled to relief”) (emphasis added). If Factory Mutual wishes to pursue claims
against Derby for the $6 million deductible as the real party in interest, it should file a proper
motion for leave to amend its complaint, which should include a proposed amended complaint
that alleges that theory of recovery.1 But Factory Mutual has failed to show that it would be
entitled to recover the deductible as GE’s subrogee, the only theory of recovery that it has
alleged. As such, the Court will GRANT the motion by Derby and dismiss all claims by Factory
Mutual, as subrogee of GE, for the $6 million deductible.
B. RECOVERY OF THE COST TO REBUILD AP6
Next, Derby argues that Factory Mutual may not bring any claims seeking to recover the
cost to rebuild AP6, which has been valued at $68.5 million. It argues that GE relieved Derby
of any duty to rebuild AP6 through the Termination Agreement that the parties agreed to on
April 10, 2015, one week after the fire. (Termination Agreement [DN 19-1] ¶ 1(b).) Factory
Mutual argues that, while the Termination Agreement states that there is no duty to rebuild AP6,

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If Factory Mutual does seek leave to amend its complaint, Derby may raise the statute of limitations in opposition
at that time.

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the same agreement calls for Derby to indemnify GE for certain obligations, including the cost of
rebuilding AP6. (Id. ¶ 2.) It also argues that, even if Derby was not obligated to rebuild AP6, the
cost of rebuilding the structure is the proper measure of damages in a case of property damage
like this one.
The Termination Agreement reads, in relevant part, as follows:
GE and Derby hereby agree as follows:
1. As a result of the destruction of AP6 on April 3, 2015, (a) the
continuing rent, utility, additional rent, charge, and cost payment
obligations under the AP6 Lease, the lease term under the AP6
Lease, Derby’s operation under the SDC, and the SDC Agreement
are all terminated effective as of April 3, 2015 and (b) there is no
duty to repair or rebuild AP6.
2. The obligations of either party to indemnify the other party
arising under both the AP6 Lease and the SDC Agreement shall
survive the termination of the AP6 Lease and the SDC Agreement
with respect to activities or events that occurred during the term of
both.
(Id. ¶¶ 1–2.) Thus, the issue before the Court is whether this language relieves Derby of any
liability towards GE that Factory Mutual, as GE’s subrogee, could recover in the present action.
In interpreting the agreement, the Court’s review
must begin with an examination of the plain language of the
instrument. In the absence of ambiguity, a written instrument will
be enforced strictly according to its terms, and a court will interpret
the contract’s terms by assigning language its ordinary meaning
and without resort to extrinsic evidence. A contract is ambiguous
if a reasonable person would find it susceptible to different or
inconsistent interpretations.
When no ambiguity exists in the contract, we look only as far as
the four corners of the document to determine the parties’
intentions. [But i]f the language is ambiguous, the court's primary
objective is to effectuate the intentions of the parties.

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Ky. Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691, 694–95 (Ky. 2016) (citations and
quotations omitted). See also Abell v. Sky Bridge Resources, LLC , --- F. App’x ---, 2017 WL
4711917, at *5 (6th Cir. Oct. 19, 2017) (applying Kentucky law) (considering extrinsic evidence
only after finding employment agreement was “silent or ambiguous” on whether “hours worked”
included an employee’s travel time). Derby argues that the contract unambiguously relieves it of
any duty to pay the cost to rebuild AP6, stating, “[i]f there is no duty to repair or rebuild, then
there is no duty to provide the monetary value of same either.” (Def.’s Reply [DN 36] at 5.)
Factory Mutual counters this by noting that the contract lacks words such as “waiver” or
“release,” which would typically be associated with a complete absolution of liability. With
these words lacking, Factory Mutual argues that the contract only relieves Derby of the duty to
construct a new building to replace AP6, not the duty to compensate GE for its loss. Further, it
argues that paragraph 2 explicitly states that Derby is not released from its preexisting duties to
indemnify GE under the Lease and SDC Agreements.
Upon examination of the document, the Court concludes that there is no ambiguity in the
Termination Agreement, as the plain language of the contract does not release Derby from any
duty to reimburse GE for its loss. Paragraph 2 contains the key language that requires this
conclusion, as it explicitly contemplates Derby compensating GE through two specific
indemnification clauses found in the Lease Agreement and the SDC Agreement. (See Lease
Agreement [DN 1-1] ¶ 13) (“Lessee [Derby] further agrees to indemnify and hold Lessor [GE]
harmless from all . . . expenses . . . resulting from . . . damage to any property caused by or
resulting from any act or omission of Lessee . . .”); (SDC Agreement [DN 1-2] ¶ 16) (“The
performing party shall defend, indemnify and hold harmless the other party . . . against any and
all claims which may result in any way from any act or omission from the performing party . . .”)

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The Court must construe the contract “as a whole, giving effect to all parts and every word in it if
possible.” Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384–85 (Ky. Ct. App.
2002) (quoting City of Louisa v. Newland, 705 S.W.2d 916, 919 (Ky. 1986)). If the Court were
to conclude that the release of Derby’s duty to repair or rebuild AP6 necessarily included a
release of the duty to reimburse GE for its loss of AP6, this would undermine the contract’s
statement that the indemnification clauses remain in effect, as these indemnification clauses
contemplate Derby reimbursing GE. Thus, the Court concludes that the Termination Agreement
does not release Derby from any potential duty to reimburse GE for the loss of AP, as the
contract specifically acknowledges the continuing viability of Derby’s duty to indemnify GE
under the Lease and SDC Agreements.
As for Derby’s motion to preclude recovery of the cost to rebuild AP6, Factory Mutual
has brought a contractual indemnification claim against Derby that references the
indemnification clause in the Lease Agreement. (Pl.’s Compl. [DN 1] ¶¶ 40–43.) Thus, Factory
Mutual has stated a claim under which it may recover the $68.5 million associated with
rebuilding AP6. Further, the Termination Agreement’s release of Derby from any duty to
rebuild or repair AP6 does not entitle Derby to summary judgment on this claim, as the
indemnification clauses remain in effect under the Termination Agreement. Therefore, Derby’s
motion to preclude Factory Mutual from seeking the cost to rebuild AP6 is DENIED.
IV. MOTION TO SET INITIAL CASE MANAGEMENT CONFERENCE
Finally, Factory Mutual has moved to set an initial case management conference. (DN
37.) The motion is GRANTED. The Court will issue a separate order setting a scheduling
conference.

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V. CONCLUSION
Therefore, for the reasons stated herein, IT IS HEREBY ORDERED that Derby’s
motion to dismiss (DN 19) is GRANTED IN PART and DENIED IN PART, and Factory
Mutual’s motion to exclude (DN 28) is DENIED. IT IS FURTHER ORDERED that Factory
Mutual’s motion to set an initial case management conference (DN 37) is GRANTED. The
Court will set the conference by separate order.

March 19, 2018

cc: counsel of record

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