JOSEPH H. McKINLEY, Chief District Judge.
This matter is before the Court on cross-motions for summary judgment [DN 21, DN 26]. Fully briefed, these matters are ripe for decision.
Plaintiff, CHS, Inc., is a farmer-owned cooperative whose business includes purchasing fertilizer and distributing it to customers. Defendant, Yellow Banks River Terminal, LLC., operates a full-service river terminal located on the Ohio River in Owensboro, Kentucky. As part of its business, Yellow Banks loads, unloads, and warehouses bulk products on behalf of customers. CHS purchases fertilizer in bulk from around the country and arranges for the fertilizer to be delivered to the Yellow Banks's terminal. Once received at the terminal, the fertilizer is stored in warehouses until it can be sold and distributed to CHS customers. CHS does not physically handle the fertilizer, but instead contracts with Yellow Banks to handle it.
In the summer of 2014, CHS agreed to finance the construction of a new fertilizer storage warehouse at the Yellow Banks terminal ("New Warehouse"). In connection with the project, CHS and Yellow Banks entered into a Ground Sublease Agreement and an Operating Agreement. Under the Ground Sublease, CHS agreed to lease certain real estate from Yellow Banks at the terminal for the purpose of storing fertilizer products that are owned or controlled by CHS. The Ground Sublease provided CHS the right to build the New Warehouse on this land. Construction of the New Warehouse was completed in June of 2015 at a total cost to CHS of approximately $4 million. Under the Operating Agreement, Yellow Banks agreed to "provide CHS with services to unload wholesale fertilizer products from river barges, to store and safeguard these products inside warehouses, and load out these products to trucks" at prices set forth in the Operating Agreement.
Yellow Banks uses front-end loaders to provide services to CHS at the terminal. On February 24, 2016, a Yellow Banks employee parked a Caterpillar front-end loader inside the New Warehouse after using it to provide services to CHS. Around 2:45 a.m. on February 25, 2016, the front-end loader ignited a fire inside the New Warehouse causing damage to the warehouse. Experts believed the fire started at the front-end loader's battery box.
After the fire, CHS engaged a structural engineer to investigate and provide restoration recommendations. In his report, the expert recommended that CHS remediate and restore fire damage to its New Warehouse, including damage to the roof, rafters, soffit, conveyor system, wood trusses, exterior siding, and interior storage bins. CHS demanded that Yellow Banks pay to remedy all of the fire damage. Yellow Banks refused. As a result, CHS obtained quotes for the remediation work, selected Blue Star Restoration to perform the work, and forwarded the quote for the work to Yellow Banks. Yellow Banks again refused. CHS retained Blue Star to complete the work. CHS paid Blue Star $146,865.30.
On November 23, 2016, CHS filed this civil action against Yellow Banks alleging breach of the Operating Agreement, breach of the Ground Sublease, and negligence. CHS seeks to recover the $146,865.30 paid to Blue Star in connection with the remediation work necessitated by the fire and costs, attorney's fees, pre-suit investigation expenses, and settlement effort expenses. The parties have now filed cross-motions for summary judgment arguing that the Operating Agreement and the Ground Sublease place responsibility for the fire damage squarely on the other party.
Before the Court may grant a motion for summary judgment, it must find that there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The moving party bears the initial burden of specifying the basis for its motion and identifying that portion of the record that demonstrates the absence of a genuine issue of material fact.
Although the Court must review the evidence in the light most favorable to the nonmoving party, the non-moving party must do more than merely show that there is some "metaphysical doubt as to the material facts."
The summary judgment standard does not change when a court is presented with cross-motions for summary judgment.
CHS alleges that under the Ground Sublease and the Operating Agreement, Yellow Banks contractually agreed to indemnify CHS and hold it harmless for all losses incurred by CHS as a result of the fire. Yellow Banks disagrees arguing that the indemnity provisions do not apply to this case. First, Yellow Banks argues that indemnification agreements apply only to third-party claims. Second, Yellow Banks maintains that the indemnification agreement applies only if Yellow Banks acted with ordinary or gross negligence. Finally, Yellow Banks's primary argument is that the Ground Sublease places the responsibility for the fire damage remediation on CHS. Yellow Banks contends that the Ground Sublease specifically required CHS to maintain fire insurance in the amounts equal to the full insurable value of the New Warehouse and improvements and permitted replacement of the New Warehouse building to be paid for with proceeds from the required insurance policy.
The issues raised in the parties' cross-motions for summary judgment are governed by principles of contract interpretation. Under Kentucky law, "the construction and interpretation of a contract including questions regarding ambiguity are questions of law to be decided by the Court."
"[I]n 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."
CHS contends that in exchange for its agreement to finance the construction of the New Warehouse, Yellow Banks broadly agreed to defend, indemnify, and hold CHS harmless from all damages or losses: (1) "arising out of or resulting from" Yellow Banks's provision of services to CHS at the Yellow Banks terminal (Operating Agreement § 8); or (2) arising "directly or indirectly in connection with . . . any act or omission of" Yellow Banks (Ground Sublease § 11.) According to CHS, this obligation is triggered here because CHS's losses were caused by the fire, which was caused by Yellow Banks's loader, which was used to provide services to CHS at the terminal, and which Yellow Banks decided to park inside the New Warehouse overnight. CHS maintains that under both the Operating Agreement and Ground Sublease, indemnifiable losses include property or consequential damages arising from the fire ignited by Yellow Banks's front-end loader, plus expenses associated with investigating, settling, or litigating these indemnification claims, including attorney's fees.
Specifically, under Section 11 of the Ground Sublease, Yellow Banks agreed to:
(Ground Sublease § 11.) The "Premises" is the land and easements on which the New Warehouse is built. (
The Operating Agreement incorporates by reference the Ground Sublease Agreement and provides that both agreements shall commence and terminate simultaneously. Under Section 8 of the Operating Agreement, "each party (as such, the `Indemnitor')" agreed to:
(Operating Agreement § 8.)
Yellow Banks argues that the above indemnity provisions apply only to third-party claims asserted against CHS. Yellow Banks further argues that the indemnification agreements apply only if Yellow Banks acted with ordinary or gross negligence.
In reviewing CHS's request for indemnification, the general principles of contract construction discussed above apply equally to indemnification agreements. Indemnity is "[a] duty to make good any loss, damage, or liability incurred by another[,]" and "arises from a promise by the indemnitor to safeguard or hold harmless a party against an existing or future loss, liability, or both."
In fact, "indemnification" is defined by Black's Law Dictionary (10th ed. 2014) as "[t]he action of compensating for loss or damage sustained." The verb "indemnify" means "[t]o reimburse (another) for a loss suffered because of a third party's or one's own act or default." Black's Law Dictionary 886 (10th ed. 2014) (emphasis added). "The mere fact that a provision in a contract uses the term indemnity or indemnification does not restrict that provision to third-party claims. Indemnity or indemnification can mean simply reimbursement."
In this case, section 11 of the Ground Sublease states that Yellow Banks, the Lessor, will "indemnify" CHS from any and all "damages, losses, . . . costs and expenses . . . that arise, directly or indirectly, in connection with any act or omission of Lessor or Lessor's agents, employees, contractors and licensees within the Yellow Banks Premises or otherwise. . . ." (Ground Sublease § 11(b).) Similarly, in section 8 of the Operating Agreement, Yellow Banks agreed to indemnify CHS "from and against any and all Losses [which includes property damage] arising out of or resulting from the provision of the services contemplated by this Operating Agreement by [Yellow Banks] or [Yellow Banks's] employees, agents, contractors or representatives." (Operating Agreement, § 8.) The plain language is broad and does not restrict liability to third-party claims. It encompasses reimbursement for all damages, losses, costs, and expenses that arise in connection with any act or omission of Yellow Banks or arising out of or resulting from the provision of services contemplated by the Operating Agreement. Accordingly, under the language of the Ground Sublease and Operating Agreement, a third-party claim is not a prerequisite to enforcement of these indemnity provisions.
Yellow Banks argues that the indemnification provisions in question apply only if Yellow Banks acted with ordinary or gross negligence. The Court disagrees. Yellow Banks's obligation to hold harmless and indemnify CHS under the relevant portion of section 8 of the Operating Agreement and section 11 of the Ground Sublease is not conditioned on a finding of Yellow Banks's ordinary or gross negligence. Instead, indemnification under these provisions is required upon a showing that the loss was caused by an act, omission, or provision of services to CHS by Yellow Banks.
Here, it is undisputed that an employee of Yellow Banks left the front-end loader inside the New Warehouse the night of the fire and that the front-end loader ignited the fire inside the New Warehouse. It is further undisputed that the New Warehouse suffered damage as a result of the fire and that CHS paid $146,865.30 to Blue Star Restoration in connection with remediation work necessitated by the fire. CHS suffered damage or loss that arose "indirectly . . . in connection with an act" by an employee of Yellow Banks. (Ground Sublease § 11(b).) Based on these undisputed facts, Yellow Banks is liable for indemnification of the reasonable cost of the fire damage absent another provision in either the Ground Sublease or Operating Agreement relieving Yellow Banks from this contractual provision.
Notwithstanding the language of the indemnification provisions, Yellow Banks argues that the Ground Sublease places the responsibility for the fire damage remediation on CHS. Yellow Banks contends that the Ground Sublease specifically requires CHS to maintain fire insurance in amounts equal to the full insurable value of the New Warehouse and improvements and permits replacement of the New Warehouse building to be paid for with proceeds from the required insurance policy. Yellow Banks maintains that where one party to an agreement assumes responsibility for insuring a building against fire loss, it has contracted to bear the risks attendant to the fire loss.
CHS disagrees arguing that Yellow Banks agreed to shoulder responsibility for all losses caused by its acts, omissions, and provision of services to CHS at the terminal, including but not limited to losses caused by fire. According to CHS, nothing in the fire insurance provisions relied upon by Yellow Banks requires CHS to assume responsibility for all losses caused by fire. Furthermore, CHS maintains that nothing in the Ground Sublease or Operating Agreement requires CHS to make a claim on its fire insurance policy, even if the policy covers a particular loss. CHS contends that it intentionally retained discretion to call on this policy because Yellow Banks agreed to hold harmless and identify CHS from any losses (including fire losses) caused by Yellow Banks. Essentially, the question is whether the Ground Sublease assigns the contractual responsibility to CHS to pay for any fire damage to the New Warehouse.
Under section 7 of the Ground Sublease, Yellow Banks agreed to perform:
(Ground Sublease § 7(f).)
Under section 8 of the Ground Sublease, CHS agreed to
(
Section 10 of the Ground Sublease governs the procurement of insurance by the parties. Section 10(a) requires CHS or its general contractor to obtain "public liability insurance, all risk builder's risk insurance and workmen's compensation insurance to cover every contractor to be employed. . . ." (
(
Section 10(c) provides that Yellow Banks
(
Finally, section 20 of the Ground Sublease provides that "[a]ll insurance policies carried by either party covering the Premises, including but not limited to contents, fire and casualty insurance, shall expressly waive any rights on the part of the insurer against the other party." (
The Operating Agreement further provides that
(Operating Agreement at § 9.)
In
Relying on
The remainder of the cases cited by Yellow Banks generally hold that, based on the specific language of the contracts at issue in those cases, the lessor's insurance company has no right of subrogation against a lessee that caused the fire because the parties intended the tenant to be co-insured under the landlord's fire insurance policy.
Yellow Banks argues that these cases mandate summary judgment in its favor because CHS contractually and specifically agreed to purchase insurance to protect against all losses from fire, notwithstanding the indemnity agreement.
An agreement by a party to a lease agreement to purchase a fire insurance policy does not necessarily obligate that party to bear all of the risks associated with a fire loss. Instead, the case law cited by Yellow Banks recognizes that the Court must examine the contents of the lease to determine the intent of the parties. As discussed above, the primary object in construing a contract is to effectuate the intentions of the parties.
In Sections 7 and 8 of the Ground Sublease, CHS and Yellow Banks agreed that Yellow Banks would perform routine and preventative maintenance and that CHS would perform all capital expenditures. Both parties excepted from these obligations reasonable wear and tear and damage by fire or unavoidable casualty agreeing that "[i]n the event said building or improvements are damaged or destroyed the same may be replaced or rebuilt from the proceeds of the insurance as provided in
When viewing the record most favorably to the non-moving party, the Court must conclude that a reasonable person could find the language of Sections 7(f), 8(b), 9, and 10 of the Ground Sublease capable of two inconsistent interpretations.
A reasonable person could construe the Ground Sublease as providing that if a warehouse fire arose from any direct or indirect act or omission of Yellow Banks, then Yellow Banks would be liable for any damage to the warehouse, and further that CHS's agreement to purchase fire insurance does not evidence its intent to shoulder responsibility for all harm caused by fire, instead of seeking direct recovery from Yellow Banks. A reasonable inference could be drawn that CHS agreed to only draw upon the proceeds of the fire insurance policy to pay for the repair of the warehouse if the fire did not arise from any act or omission of Yellow Banks and CHS chose to rebuild.
On the other hand, a reasonable person could construe the language contained in Section 10 of the Ground Sublease to require CHS to assume the risk of fire loss. Section 8(b) places the responsibility for replacements of improvements on CHS, except in the event of fire. In that case, the damaged or destroyed improvements may be replaced or rebuilt from the insurance. Section 10 requires CHS to purchase and maintain fire insurance coverage for the property in question, provides that in the event of a loss by fire the proceeds from the insurance policy shall be payable to CHS, and grants CHS the right to adjust any loss occurring to the building or improvements with the insurance companies.
These reasonable interpretations offered by CHS and Yellow Banks indicate an ambiguity exists. Because the terms of Ground Sublease are ambiguous, extrinsic evidence must be considered to determine the parties' intent.
For the reasons set forth above,