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GCS Enterprises International, LLC v. Grant


August 7, 2007


On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-1763-03.

Per curiam.


Argued October 11, 2006

Before Judges Kestin, Weissbard and Graves.

This case arises out of a fire on December 22, 2002, which caused severe damage to a historic two-story office building located at 9 North Main Street in Allentown, New Jersey (the premises). Defendants Todd Grant, Tia Flavell, and the Grant Group (defendants), owned the premises and leased space to three commercial tenants, including plaintiffs GCS Enterprises International, LLC, and Scott Musser (plaintiffs). After the fire, the premises were uninhabitable and all leases were terminated. Defendants filed a fire-loss claim with its own insurance carrier, CNA Insurance, which paid a total of $419,848.07, consisting of $391,436.99 for the building and $28,411.08 for one year of lost rents. In return, defendants provided CNA with signed "Release and Subrogation Receipt[s]" assigning a right of subrogation to CNA to the extent of the insurance payments made by CNA.

On February 25, 2003, plaintiffs filed a Special Civil Part complaint to recover their security deposit. That matter was transferred to the Law Division, and it was ultimately dismissed when defendants filed a counterclaim alleging plaintiffs' negligence proximately caused the fire. In their counterclaim, defendants sought damages in excess of $400,000. The lease between the parties contained a mutual waiver of subrogation, and CNA did not proceed independently. In January 2005, while these proceedings were pending, defendants sold the premises in a partially damaged condition for $235,000.

A bifurcated jury trial was conducted on defendants' counterclaim. On February 23, 2005, a jury found plaintiffs had negligently caused the fire and, on November 17, 2005, a different jury awarded defendants damages in the amount of $587,368. Because defendants had already received more than the amount awarded by the jury (insurance payments of $419,848.07 and sale proceeds of $235,000, totaling $654,848.07), the court ruled as follows:

I am going to apply against that verdict any payouts that had been made to [defendants]. And the number that has been set forth to me was $654,000 and I have indicated that I will not permit a double recovery in this matter.

So therefore I am going to request [plaintiffs'] counsel to submit a judgment. Following my logic and the way I'm molding this verdict, you would be the prevailing party actually, because this verdict is not going to require a payment by your client because it renders it a nullity. So I'm going to ask you to prepare a judgment, submit it under the five day rule to counsel and that will dispose of this matter.

Defendants appeal from the pre-trial order entered on November 10, 2005, directing any award of damages "shall be limited by any and all payments received from collateral sources [and] any verdict shall be so molded by the court," and a final judgment entered on November 30, 2005, dismissing defendants' counterclaim. In a cross-appeal, plaintiffs appeal from the court's determination on November 10, 2005, that the jury was not to be told defendants sold their building prior to trial. Plaintiffs contend the jury should have been aware of "the full history of the property in question," including the fact that defendants received the sum of $235,000 when the property was sold. We reverse and remand for a new trial on damages.

Because defendants' motion to abbreviate the transcript was granted, we have not reviewed a full transcript of the damages trial. Nevertheless, we have no reason to believe the jury instructions regarding damages were inconsistent with the order entered on November 10, 2005, which provides "[t]he jury shall be charged on the measure of damages to be either the reasonable cost of repair or diminution of value, plus such sum that will fairly and justly compensate defendants." We conclude the trial court erred in allowing the jury to select the legal standard it would use to determine the quantum of damages and in precluding the jury from knowing defendants had sold the property for $235,000 prior to trial.

During pre-trial proceedings on November 10, 2005, defendants claimed the reasonable cost to repair and restore the building was the correct measure of damages because of the building's historical significance and its special value to its owners. Defendants' attorney presented the following argument:

MS. SUH: The details of how the tenant caused the fire are irrelevant at this point. What is at issue right now is the damages in the case. What the tenant is claiming is that the measure of damage should be strictly limited to the fair market value of the property, that is the value of the property the day before the fire and the value of the property after the fire.

What we contend is that that is an overly mechanistic view of the measure of damages in this case. This is a unique piece of property. I'm sure all landowners would say that their piece of property is unique. But this one is listed on the National Registry of Historic Sites in the State of New Jersey as well as nationally. There were unique architectural features to this piece of property. It was the Farmers National Bank.

And at trial we will demonstrate that this is not your typical office building, as the tenant may contend. And as a result the fair measure of damages is not the value of the property before and after the fire but is the cost to repair the property.

We have an expert who will testify on that issue and we believe that it is the trier of fact that ultimately determines what in effect is the damage that is owed to my client.

During the same proceeding, the court asked the attorneys to explain whether the sale of the building had any impact on the measure of damages. Plaintiffs' attorney argued the sale of the building "goes to the measure of damages, what is the fair market value. . . . It all depends upon what will come out in the testimony." On the other hand, defendants' attorney claimed the sale of the property was "absolutely irrelevant." The court ruled as follows:

The landlord is not going to recover a windfall on this. I find that the public policy of this State is that insurance is for the purpose of rendering an insured whole. If CNA elected, under whatever theory they wanted, not to proceed with subrogation, that's a business decision. It may very well be a legal decision, but it's also a business decision.

Therefore if this case is tried next week, which I anticipate it will be, the jury is not going to be told about any payoffs or setoffs or sale of the building or anything like that. And the jury can render whatever verdict they render.

After a verdict is rendered, the judgment will be molded by this [c]court to reflect any and all benefits that the prevailing party received from insurance and the subsequent sale of the real estate insofar as it relates to the value of the building.

As far as I'm concerned, to do otherwise would be an injustice to the concept of why we have insurance. Because at the end of the day, if I were to adopt the landlord's position and I followed the request in limine, they literally would be walking out of this courtroom with well in excess [of] a million dollars on a building that was worth less than $400,000 and I'm not going to allow it.

The court did not explain how it determined defendants' building was "worth less than $400,000," and we are unable to calculate the value of defendants' building prior to the fire from the limited record before us. Nevertheless, we are in general agreement with the notion that defendants are entitled to one full and fair recovery for their losses but are not entitled to a windfall. We conclude, however, the jury was unable to properly perform its function because it was unaware the premises had been sold and, therefore, would neither be repaired nor restored by defendants. In addition, it appears the jury was given the option to measure damages by using either cost of repairs or diminution of value even though the cost of repairs may have greatly exceeded any diminution in value.

Without a complete transcript of the damages trial, we have no way of knowing what evidence the jury considered or what the attorneys told the jury during their opening remarks or closing comments. We assume, however, based on the record before us, that defendants asked the jury to utilize the reasonable cost of repairs (in the amount of $697,714.17) because of the building's historical features and its special value to defendants. On the other hand, plaintiffs argued to the jury that the fairest measure of damages was the building's diminution in value.

As we have previously stated, the appropriate measure of damages for injury to land "is a complex subject," and it depends "upon the evidence in the particular case." Velop, Inc. v. Kaplan, 301 N.J. Super. 32, 64 (App. Div.), certif. granted, 152 N.J. 9 (1997), appeal dismissed, 153 N.J. 45 (1998). While either the diminution in the value of the property or the reasonable cost of restoring the damage may be an appropriate measure of damages, depending on the circumstances, we have also recognized it may be unfair to use the cost of reconstruction to measure damages when the cost of repairs "vastly exceeds . . . the probable market value of the property." Correa v. Maggiore, 196 N.J. Super. 273, 285 (App. Div. 1984). In this case, both sides have provided us with copies of the reports prepared by their experts. According to plaintiffs' expert, the fee simple market value for the premises on December 21, 2002, the day before the fire, was $370,000. Thus, plaintiffs contend the "correct measure of damages was the diminution in market value of the property, not the cost to repair the building" for two reasons: (1) repairing the building would be economic waste, and (2) repairs were not possible because the property had already been sold.

Although both parties have speculated on the reasons for the jury verdict, we decline to do so. We note, however, that the damages awarded by the jury, in the amount of $587,368, is substantially less than the cost of repairs calculated by defendants' expert ($697,714.17), but substantially more than the figure calculated by plaintiffs' expert ($415,000). In any event, we agree the jury should have been told the defendants sold the premises for $235,000 prior to trial. See Berg v. Reaction Motors Div., 37 N.J. 396, 412 (1962) (stating plaintiffs were entitled to recover reasonable cost of necessary repairs without establishing diminution in the saleable value of their homes because they were "concerned with living in rather than selling their homes"); 525 Main Street Corp. v. Eagle Roofing Co., 34 N.J. 251, 255 (1961) (stating in breach-of-building-contract cases the measure of damages is usually the cost of necessary repairs but if repairs are impossible or economically wasteful, damages are measured by "the difference in value formula"); St. Louis, LLC v. Final Touch Glass & Mirror, Inc., 386 N.J. Super. 177, 188 (App. Div. 2006) (stating whether cost of repairs or diminution in value is the appropriate measure of damages "rests in good sense," but cost of repairs must not "constitute economic waste" (quoting 525 Main Street Corp., supra, 34 N.J. at 254.)); Velop, Inc., supra, 301 N.J. Super. at 64 (noting "reasonable repair costs which exceed the diminution in value should be allowed in some circumstances where the property owner wishes to use the property rather than sell it"); Cromartie v. Carteret Sav. & Loan, 277 N.J. Super. 88, 99 (App. Div. 1994) (observing in the context of a fire insurance policy case, damages are "the replacement cost of the damaged structure if it was replaced or, if it was not replaced, to the diminution in its actual cash value as a result of the fire").

On remand, the court should also be guided by the general holding in Mayfair that when both parties waive their insurers' right to subrogation, thereby creating mutual waivers, they "contemplate that such risks will be covered by insurance" first--not by each other. Mayfair Fabrics v. Henley, 97 N.J. Super. 116, 124 (Law Div.), on remand from, 48 N.J. 483 (1967), aff'd sub nom., 103 N.J. Super. 161 (App. Div. 1968). Nevertheless, as plaintiffs concede in their reply brief, "the landlord has standing to prosecute an excess claim against the tenant for any uncompensated losses," i.e, losses exceeding the insurance proceeds. Moreover, to the extent the sale proceeds represent either the value of the land or the undamaged portion of the building (at the time of the fire), the proceeds are separate and distinct from the damages caused by the fire. Cromartie, supra, 277 N.J. Super. at 99. Of course, absent an agreement regarding these issues, they may be the subject of special interrogatories to the jury. See R. 4:39-1.

Reversed and remanded for further proceedings consistent with this opinion.


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