In this action, the plaintiff borrower seeks certain declarations that a commercial mortgage loan agreement, requiring the plaintiff to obtain and maintain "all risk" insurance on the underlying property as well as such "other insurance" as the lender might reasonably request, does not obligate the plaintiff to obtain and maintain terrorism insurance for the property, and to pay a $2.1 million premium for certain terrorism insurance that the defendants purchased for the plaintiff without the plaintiff's authorization.

In motion sequence 003, the defendants move for summary judgment to dismiss the complaint, and to grant the defendants' counterclaims for declaratory relief and damages. In motion sequence 004, the plaintiff cross-moves for summary judgment to dismiss the defendants' counterclaims. In motion sequence 005, the defendants move, pursuant to CPLR 3101(d), to preclude plaintiff from submitting the expert affidavit of Herbert H. Feldman (Feldman Affidavit), sworn to on October 9, 2003. The above motions are consolidated for disposition.

On February 2, 2001, BFP borrowed $500 million from Chase Manhattan Bank (Chase) pursuant to a mortgage loan agreement (Mortgage Agreement). See Samuel A. Gunsburg Affidavit in Support of Plaintiff's Cross Motion (Gunsburg Affidavit), Ex. 1. Around March 2, 2001, in order to secure the loan, Chase sold $500 million worth of mortgage certificates to various institutions and investors. See id., Ex. 3. The defendant Wells Fargo Bank Minnesota, N.A. (Wells Fargo) serves as the trustee for the registered holders of the mortgage certificates, pursuant to a trust and servicing agreement, dated March 10, 2001, and has all of Chase's rights and obligations under the Mortgage Agreement. The defendant GMAC Commercial Mortgage Corporation (GMACCM) is the servicer of the mortgage loan on behalf of Wells Fargo. See H. Peter Haveles, Jr. Affidavit in Support of Defendants' Motion (Haveles Affidavit), Ex. 21. The [*2]above parties dispute whether BFP is obligated under the Mortgage Agreement to obtain and maintain terrorism insurance for the subject property.

The Relevant Terms of the Mortgage Agreement

Section 3.3(a) of the Mortgage Agreement states that:

Borrower shall obtain and maintain, or cause to be maintained, insurance for Borrower and the Property providing at least the following coverages: (i) insurance with respect to the Property . . . , insuring against any peril now or hereafter included within the classification "All Risk" or "Special Perils," in each case (A) in an amount equal to one hundred percent (100%) of the "Full Replacement Cost," . . . (ix) such other insurance and in such amounts as Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against for other first class properties located in the Borough of Manhattan and comparable to the Property.

Section 3.3(e)(ii) of the Mortgage Agreement requires BFP to submit at least thirty days' written notice to GMACCM of any material adverse change in insurance policies. See id., Ex. 1 at 19. In addition, section 3.3(g) of the Mortgage Agreement provides that:

[i]f at any time all insurance required hereunder is not in full force and effect, Lender shall have the right, without notice to Borrower, to take such action as Lender deems reasonably necessary to protect its interest in the Property, including, without limitation, the obtaining of such insurance coverage as Lender in its reasonable discretion deems appropriate consistent with the requirements of this Security Instrument, and all expenses incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender promptly upon demand . . . .

upon the occurrence and during the continuance of an Event of Default, Borrower shall pay to Lender on demand any and all expenses, including legal fees reasonably incurred or paid by Lender in protecting its interest in the Property or . . . in enforcing its rights hereunder with respect to the Property . . . .

On October 17, 2001, Brookfield obtained an $1 billion "all risk" blanket policy with Factory Mutual Global Insurance Company for its portfolio of properties, including the subject property (2001 Policy). See Haveles Affidavit, Ex. 44. However, the 2001 Policy contained a non-negotiable sub-limit of $1 million for losses caused by or resulting from terrorist acts. See id., Ex. 85.

In early February 2002, GMACCM inquired about BFP's terrorism coverage for the

property. See John Lowe Affidavit in Opposition to Defendants' Motion (Lowe Affidavit), ¶ 2. On February 5, 2002, BFP sent GMACCM an e-mail regarding the 2001 Policy and its sub-limit of $1 million for terrorism coverage. See id. ¶ 3, Ex. A. On February 19, 2002, GMACCM wrote to BFP that the amount of coverage in the 2001 Policy failed to comply with section 3.3 of the Mortgage Agreement and demanded written evidence within 10 days of "insurance coverage for terrorist acts in an amount not less than the unpaid principal balance of the Loan." Haveles Affidavit, Ex. 59. The letter further stated that a failure to do so would be a default under the loan documents.

BFP then called GMACCM to clarify whether the February 19, 2002 letter asserted BFP's loan to be in default. In response, GMACCM sent BFP another letter, dated February 22, 2002, generally stating that: (1) "[t]he loan, without further written notice from [GMACCM], will not be considered in default under the loan documents"; (2) that the parties would work together to bring the loan back into compliance; and (3) that BFP "indicated a willingness to actively seek and to purchase such insurance during the time period provided in the [February 19, 2002] Letter." Haveles Affidavit, Ex. 62. On February 27, 2002, BFP wrote to GMACCM, restating its belief that its insurance did not fall out of compliance with the loan documents, and reminding GMACCM that all insurance inquiries were to be made through BFP, and that if GMACCM purchased terrorism insurance unilaterally, it did so at its own risk. See id., Ex. 66.

The AIG and AXIS Policy

Around April 1, 2002, Brookfield informed GMACCM that it had procured a blanket terrorism policy with AIG and AXIS covering the entire Brookfield portfolio, including the subject property, for up to $200 million of terrorism coverage on each property at a premium of $3.2 million. See Haveles Affidavit, Ex. 95. On April 3, 2002, GMACCM responded that, under the Mortgage Agreement, the $200 million in coverage was insufficient and directed BFP to obtain an additional $300 million in coverage. See id., Ex. 99. For the rest of April, the parties continued to dispute whether the loan documents required $500 million of terrorism coverage, and GMACCM's potential inquiries into the market to obtain additional terrorism coverage. See id., Exs. 74, 111, 114, 115, 117, 121.

In the interim, GMACCM held discussions with Moody's and Fitch regarding the mortgage certificate ratings, what would happen to the ratings if the subject property failed to have sufficient terrorism coverage, and whether Moody's and Fitch would accept less than $500 million in terrorism coverage. In early and mid-April 2002, Moody's and Fitch informed GMACCM that the certificates were at risk of a downgrade if there was not full coverage in the [*4]amount of $500 million.

On April16, 2002, GMACCM received a quote from Lloyd's for $300 million of terrorism insurance in excess of the 2001 Policy for the property, at a $350,000 premium. On April 18, 2002, GMACCM received an indication from Berkshire Hathaway for $300 million in terrorism coverage in excess of the 2001 Policy for the property at a $3 million premium. BFP alleges that GMACCM only disclosed the quote from Lloyd's. See Haveles Affidavit, Ex. 120. BFP also claims that GMACCM agreed "that it would not bind any coverage on the Property without notifying BFP in advance." Haveles Affidavit, Ex. 1 ¶ 33 (italics omitted). BFP asserts that it warned GMACCM that GMACCM's inquires into the market would interfere and prejudice BFP's interests in seeking additional coverage. See id., Ex. 1 ¶ 34. By its letter dated April 22, 2002, GMACCM informed BFP that "we have no other choice than to undertake our own efforts to obtain additional insurance for terrorism on the property and to require that you reimburse us for the cost of the premium." Haveles Affidavit, Ex. 122.

The Berkshire Policy

The defendants allege that, on April 24, 2002, the bond rating agencies showed a willingness to accept total coverage of $350 million without a downgrade. On April 24, 2002, GMACCM called and e-mailed BFP, advising BFP that "GMACCM intended by the close of business on April 24, 2002, to bind terrorism insurance coverage for the Property in the amount of $150 million at a premium of $2.1 million and requested that BFP contact GMACCM immediately to discuss the matter." Haveles Affidavit, Ex. 2 ¶ 35. On that same day, without receiving a response from BFP, GMACCM force-placed ^[FN1] $150 million of additional terrorism insurance coverage with Berkshire Hathaway for a premium of $2.1 million (Berkshire Policy). On or about April 26, 2002, GMACCM sent BFP a letter with an enclosed invoice, demanding repayment of the $2.1 million premium by May 1, 2002. See Gunsburg Affidavit, Ex. 39.

BFP argues that GMACCM's demand failed to include a copy of the insurance binder, and that the Berkshire Policy is flawed and excessively overpriced. BFP also claims that, at the time of purchase, GMACCM was aware that BFP was negotiating "with Berkshire Hathaway to obtain blanket coverage for Brookfield properties in the amount of $300 million in excess of the $200 million policy previously bound." Id., Ex. 1 ¶ 36. Subsequently, BFP informed GMACCM that BFP had purchased an additional $100 million in terrorism coverage from Lloyd's for $1.7 million premium.

On May 10, 2002, the parties agreed to resolve their disputes through litigation, and entered into an escrow agreement, under which BFP placed $2.1 million into escrow for the Berkshire Policy (the Escrow Agreement). BFP alleges that GMACCM agreed, in exchange, to withdraw any notice of default that it issued.

Present Action

On May 24, 2002, BFP commenced this action seeking: (1) a declaration that BFP is not currently obligated to maintain terrorism insurance on the property under the terms of the Mortgage Agreement, and has no obligation to pay the $2.1 million premium; and (2) a declaration that GMACCM acted in commercially unreasonable manner, in violation of the [*5]implied covenant of good faith and fair dealing, and in breach of its prior representations to BFP.

The defendants counterclaimed. The defendants' first counterclaim seeks a declaration that:

(i) BFP is obligated to obtain and maintain terrorism insurance on the Property under the terms of the Mortgage through the term of the Mortgage, (ii) GMACCM was entitled to obtain terrorism insurance in the amount of $150 million for the Property, (iii) BFP is obligated to pay the premium for the terrorism insurance that GMACCM obtained pursuant to the terms of the mortgage, and (iv) the proceeds held pursuant to the Escrow Agreement should be released to GMACCM.

The defendants now move for summary judgment to dismiss the complaint and grant their counterclaims, while BFP cross-moves for summary judgment to dismiss the counterclaims.

In order to succeed on a summary judgment motion, the movant needs to prove

The parties' motions for summary judgment present three questions of contract interpretation: (1) whether section 3.3(a)(i) of the Mortgage Agreement obligates BFP to obtain and maintain terrorism coverage on the subject property; (2) in the alternative, whether section 3.3(a)(ix) of the Mortgage Agreement obligates BFP to obtain and maintain terrorism coverage on the subject property, and in what amount; and (3) if BFP is obligated to provide terrorism coverage and fails to do so, whether the defendants can force-place the required terrorism insurance coverage and later seek repayment from BFP, pursuant to section 3.3(g).

The interpretation of an unambiguous contract provision is a matter of law and appropriate for the court's determination on a summary judgment motion, "and matters extrinsic to the agreement may not be considered when the intent of the parties can be gleaned from the face of the instrument.'" Helmsley-Spear, Inc. v New York Blood Ctr., Inc., 257 AD2d 64, 68 (1st Dept 1999); Marinas of the Future, Inc. v City of New York, 87 AD2d 270, 277 (1st Dept 1982). "Courts should construe a contract so as to give meaning to all of its language and avoid an interpretation that effectively renders meaningless a part of the contract." Helmsley-Spear, Inc., 257 AD2d at 69 (citations omitted).

Section 3.3(a)(i) of the Mortgage Agreement

The court finds that, as a matter of law, BFP was required to obtain and maintain [*6]terrorism insurance in the amount of $500 million for the subject property, pursuant to section 3.3(a)(i) of the Mortgage Agreement. Section 3.3(a)(i) expressly covers "insuring against any peril now or hereafter included within the classification 'All Risk' or 'Special Perils,' . . . in an amount equal to one hundred percent (100%) of the 'Full Replacement Cost.'" Although the Mortgage Agreement fails to expressly define the phrase "all risk," New York courts have held that "'[a]ll risk' insurance is property insurance that covers damage resulting from all risks other than those that are specifically excluded from coverage; if a risk is not specifically excluded, it is deemed covered." Omni Berkshire Corp. v Wells Fargo Bank, 307 F Supp 2d 534, 2004 WL 375954, at *1 (SD NY 2004); see also Equitable Life Assur. Socy. of the United States v Nico Constr. Co., Inc., 235 AD2d 222, 223 (1st Dept 1997). New York courts have also found that, prior to September 11, 2001, "all risk" policies included losses caused by acts of terrorism since terrorism was not specifically excluded. See e.g., Four Times Square Assocs., LLC v Cigna Invs., Inc., 306 AD2d 4, 5 (1st Dept 2003); Omni Berkshire Corp., 2004 WL 375954, at *5. The court finds that the 2000 Policy covering the subject property at the time the Mortgage Agreement was executed (and the later 2001 Policy) included the risk of acts of terrorism because terrorism was not expressly excluded.

As distinguished from the "all risk" provision referred to in the recent decision, Omni Berkshire Corp. v Wells Fargo Bank, 307 F Supp 2d 534 (SD NY 2004), which also involved whether mortgagor was required to obtain terrorism coverage pursuant to an "all risk" clause in a mortgage loan agreement, the express language of section 3.3(a)(i) shows the parties considered the fact that "all risk" policies would vary over time, and provided additional language of "insuring against any peril now or hereafter included within the classification of 'All Risk'" to expressly cover all perils as of the date the agreement was entered.^[FN2] There is no other explanation for the additional language.

Section 3.3(a)(ix) of the Mortgage Agreement

Contrary to BFP's assertion, the above interpretation of section 3.3(a)(i) of the Mortgage Agreement does not render section 3.3(a)(ix) of the Mortgage Agreement meaningless. The record shows that the "other insurance" clause, in section 3.3(a)(ix), applies not only to section [*7]3.3(a)(i), but also applies to subsections (a)(ii) to (a)(viii). Furthermore, the court notes that, if the risk of terrorism was excluded from the 2000 Policy at the time parties entered the Mortgage Agreement, and such exclusion was never removed, and the risk subsequently became commonly insured against for other first class and comparable properties in Manhattan, the defendants could at that point request coverage for the risk of terrorism under section 3.3(a)(ix). In that situation, the reasonable amount of insurance and the reasonable price of premiums would involve questions of fact to be determined at trial.

Given the above, the court grants summary judgment in favor of the defendants, dismissing the first cause of action to the extent that it seeks "a declaration that (i) BFP is not currently obligated to maintain terrorism insurance on the Property under the terms of the Mortgage," and granting defendants' first counterclaim with respect to a declaration that "(i) BFP is obligated to obtain and maintain terrorism insurance on the property under the terms of the Mortgage through the term of the Mortgage."

Section 3.3(g) of the Mortgage Agreement

Given BFP's failure to obtain and maintain the required amount of terrorism insurance for the subject property pursuant to section 3.3(a)(i) of the Mortgage Agreement, the court finds that, as a matter of law, section 3.3(g) of the Mortgage Agreement affords the defendants the right to force-place terrorism insurance coverage up to $500 million. Therefore, the court grants summary judgment in favor of the defendants as to their first counterclaim with respect to a declaration that "(ii) GMACCM was entitled to obtain terrorism insurance in the amount of $150 million for the Property." The court, however, cannot determine at this point whether the $2.1 million premium price, which GMACCM agreed to for the $150 million additional terrorism coverage, was reasonable. The court finds issues of fact exist in determining whether the $2.1 million premium price was reasonable, precluding summary judgment for either side. See Ruggeri v Sbarro, Inc., ___ AD3d __, 772 NYS2d 514 (1st Dept 2004).

Therefore, the court denies the defendants' motion to dismiss the remainder of BFP's first cause of action, seeking a declaration that "(ii) BFP has no obligation to pay the premium for the terrorism insurance unilaterally purchased by [GMACCM] purporting to cover [GMACCM's] interest in the Property," and BFP's second cause of action. The court also denies the defendants' summary judgment motion as to the remainder of the first counterclaim, seeking a declaration that, "(iii) BFP is obligated to pay the premium for the terrorism insurance that GMACCM obtained pursuant to the terms of the Mortgage, and (iv) the proceeds held pursuant to the Escrow Agreement should be released to GMACCM," and as to the second counterclaim for any and all costs and expenses in connection with the action.

Motion to Exclude Expert Affidavit of Herman H. Feldman

Given the above determinations, the court need not decide the defendants' motion, pursuant to CPLR 3101(d), to preclude the Feldman Affidavit, which BFP offers in opposition to the defendants' summary judgment motion and in support of BFP's cross motion for summary judgment.

Accordingly, it is

ORDERED that the defendants' motion for summary judgment is granted in part to the

ORDERED that the defendants' motion for summary judgment on their first and second counterclaims is granted in part as to the first counterclaim, and is otherwise denied; it is further

ADJUDGED AND DECLARED that: (1) BFP is obligated to obtain and maintain terrorism insurance on the subject commercial office building and related property located at 245 Park Avenue in New York, New York under the terms of the Mortgage Agreement through the term of the mortgage; and (2) GMACCM was entitled to force-place additional terrorism insurance of $150 million on top of the $200 million BFP obtained prior; and it is further

ORDERED that plaintiff's cross motion for summary judgment to dismiss defendants' counterclaims is denied; and it is further

ORDERED that defendants' motion to preclude the expert affidavit of Herbert H. Feldman is denied; and it is further

ORDERED that an immediate trial on the remainder of the action is directed.

Dated: May 13, 2004ENTER:

_____________________________ J.S.C.