# PES Holdings, LLC - Adversary Proceeding

> United States Bankruptcy Court, D. Delaware · December 15, 2021

URL: https://www.frixlaw.com/law-library/cases/10456023

## Case

- **Court:** United States Bankruptcy Court, D. Delaware
- **Decided:** December 15, 2021
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10456023

## How later opinions describe it (automated extraction)

- noting the “inherent logical contradiction of depreciating non- depreciating things” in considering what a reasonable insured would understand the term actual cash value to include
- holding that even if the bankruptcy court does not have the constitutional authority to enter a final order, it may do so if the parties consent
- holding that depreciation did not include obsolescence where ACV was defined as RC less “physical deterioration, depreciation, obsolescence and depletion”

## Opinion text

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
PES HOLDINGS, LLC, et al., )
) Case No. 19-11626 (LSS)
Debtors. ) Jointly Administered
__________________________________ )
)
PES HOLDINGS, LLC, et al., )
)
Plaintiffs, )
)
-and- )
)
ICBC STANDARD BANK PLC, )
)
Intervenor-Plaintiff, )
)
v. ) Adv. No. 20-50454 (MFW)
)
ALLIANZ GLOBAL RISKS US INSURANCE, )
CO., et al., )
) Rel. Docs. 1; 204; 205;
Defendants. ) 207; 208; 215; 222; 224;
__________________________________ ) 236; 237
OPINION1
Before the Court are cross motions for partial summary
judgment filed by the Debtor, PES Holdings, LLC, and its
affiliates (collectively, “PES”) and a subset of its insurers
named as Defendants (the “Insurers”) on the proper interpretation
of their insurance policy. For the reasons stated below, the
Court will grant PES’ motion and deny the Insurers’ motion.
1 This Opinion constitutes the findings of fact and
conclusions of law of the Court pursuant to Rule 7052 of the
Federal Rules of Bankruptcy Procedure.
I. BACKGROUND
PES operated a complex of interdependent oil refineries
(collectively, the “Refinery”) in Philadelphia, Pennsylvania. On
June 21, 2019, a leak in the hydrofluoric alkylation unit (the
“HF Unit”) resulted in a fire and a series of explosions
(collectively, the “Explosion”). As a result of the Explosion,
the HF Unit was destroyed and PES could no longer operate the
Refinery.
Prior to the Explosion, PES had mortgaged the Refinery to
ICBC Standard Bank PLC (“ICBCS”) under the terms of the Sixth
Amended and Restated Supply and Offtake Agreement (the “SOA”),
which inter alia required that PES insure the Refinery for a
minimum of $750 million. (Adv. D.I. 209, Ex. 3.)2 At the time
of the Explosion, PES had a total of $1.25 billion in property
insurance, divided into five $250 million layers and spread among
30 insurers. (Adv. D.I. 209, Ex. 2.) The Defendants are 26 of
those insurers.3

2 References to the docket in this adversary proceeding are to
“Adv. D. I #” while references to the docket in the main case are
to “D.I.#.” The parties have each attached the Policy and the
SOA to Declarations in support of their motions. For
convenience, the Court refers to the exhibits attached to PES’
Declaration. (Adv. D.I. 209.)
3 Four insurers are non-parties because they had arbitration
clauses in their policies. (Adv. D.I. 215 at *10 n.35.)
2
On July 21, 2019, shortly after the Explosion, PES filed a
chapter 11 bankruptcy petition. (D.I. 1.) The Fourth Amended
Joint Chapter 11 Plan (the “Plan”) was confirmed on February 13,
2020. (D.I. 1004.) In conjunction with the Plan, the Refinery
was sold to Hilco Redevelopment Partners (“Hilco”). As a result,
PES will not be rebuilding the Refinery. Under the terms of the
sale, PES retained the right to pursue actions against the
Insurers for damages suffered as a result of the Explosion.
On February 12, 2020, PES sued the Insurers asserting
property damage and business interruption claims resulting from
the Explosion.4 The Court granted ICBCS’ motion to intervene.
On September 20, 2021, PES and the Insurers filed cross
motions for partial summary judgment on PES’ property damage
claim. The Insurers also seek to dismiss Count VI of the
Complaint, which alleges consequential damages flowing from the
alleged breach of their duty of good faith and fair dealing. On
October 27, 2021, the Parties responded to each other’s motions.
On November 12, 2021, the Parties replied to the responses. Oral
argument was held on December 6, 2021. The matter is fully

briefed and ripe for decision.

4 On November 9, 2021, the Parties filed a Joint Status Report
advising that they had settled the business interruption claim.
A hearing on the motion for approval of that settlement is
scheduled for December 20, 2021. Trial on the remaining claims
is scheduled to commence on January 24, 2022.
3
II. JURISDICTION
The Court has subject matter jurisdiction over this
adversary proceeding, which is a core proceeding. 28 U.S.C. §§
157(2)(A) & (O), 1334. The Court may enter a final order on the
Motions because the parties have consented. Wellness Int’l
Network, Ltd. v. Sharif, 575 U.S. 665 (2015) (holding that even
if the bankruptcy court does not have the constitutional
authority to enter a final order, it may do so if the parties
consent). PES has expressly consented. (Adv. D.I. 207.) The
Insurers have impliedly consented by filing their motion for
summary judgment. (Adv. D.I. 204.) Wellness, 575 U.S. at 683
(“Nothing in the Constitution requires that consent to
adjudication by a bankruptcy court be express. Nor does the
relevant statute.”); True Traditions, LC v. Wu, 552 B.R. 826, 838
(N.D. Cal. 2015) (holding that implied consent is given by party
who files a motion for summary judgment).

III. DISCUSSION
A. Standard of Review

1. Summary Judgment
A court should grant summary judgment “if the movant shows
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.

4
P. 56(a).5 The court must rely upon the record of the case,
including the pleadings, exhibits, and declarations submitted by
the parties. Id. at 56(c).
The movant bears the initial burden of proving its case from
the established record and showing that there is no genuine
dispute of material fact. Celotex Corp. v. Cartrett, 477 U.S.
317, 323 (1986). The court must view the record “in the light
most favorable to the party opposing the motion.” United States
v. Diebold, Inc., 369 U.S. 654, 655 (1962). See also McNamee v.
MinXray, 370 F. Supp. 3d 928, 929 (N.D. Ill. 2019) (“In deciding
cross motions for summary judgment, the Court views the facts in
the light most favorable to the respective non-moving party”).
Where a court finds that there is no genuine dispute of material
fact, it may enter judgment as a matter of law, either for or
against the movant, in full or in part, applying the applicable
substantive law. Fed. R. Civ. P. 56(a) & (f).
2. Interpretation of Contracts Under New York Law6
New York law interprets insurance contracts using general
principles of contract construction. Olin Corp. v. Am. Home

5 Federal Rule of Civil Procedure 56 is made applicable to
adversary proceedings by Federal Rule of Bankruptcy Procedure
7056.
6 The parties agree that New York law is the applicable law
for interpretation of the contracts at issue here. (Adv. D.I.
209, Exs. 1 at ¶ 8 & 3 at § 16.01.)
5
Assur. Co., 704 F.3d 89, 98 (2d Cir. 2012); McGrail v. Equitable
Life Assur. Soc’y of U.S., 55 N.E.2d 483, 486 (N.Y. 1944). Under
New York law, contracts may be construed as a matter of law -
and, hence, through summary judgment - unless “determination of
the intent of the parties depends on the credibility of extrinsic
evidence or on a choice among reasonable inferences to be drawn
from extrinsic evidence.” Uniroyal, Inc. v. Home Ins. Co., 707
F. Supp. 1368, 1374-75 (E.D.N.Y. 1988) (citing Hartford Acc. &
Indem. Co. v. Wesolowski, 305 N.E.2d 907 (N.Y. 1973)). Where a
contract is unambiguous, a court may always construe it as a
matter of law. Wesolowski, 305 N.E.2d at 909. Where a contract
is ambiguous, a court may still construe the contract, including
ambiguous terms, as a matter of law based on extrinsic evidence
if there is no issue of credibility or ambiguity regarding any
such evidence. Uniroyal, 707 F. Supp. at 1375.
B. The Disputed Provisions of the Policy
1. Stipulated Loss Value Clause
The Policy provides, inter alia:
where the Insured is contractually obligated to insure
specific property for a stipulated loss amount, then in
the event of a loss, this Policy will provide for the
stipulated loss value regardless of whether such
property is replaced. However, in no event shall this
amount exceed the Replacement Cost Value of such
property (plus in addition the covered cleanup costs).
In the event of a loss up to USD 250,000,000,
regardless [sic] whether the affected property is
replaced, the loss settlement will be on a replacement
cost basis. In the event of a loss in excess of USD

250,000,000 and the insured does not replace the
affected property, the loss settlement will be on the
basis of Actual Cash Value with a minimum of USD
250,000,000.
(Adv. D.I. 209, Ex. 1 at §I, 5(e) (emphasis added) (hereinafter
“the SLV Clause”).)
The Parties dispute whether the SLV Clause is applicable
and, in particular, whether PES was “contractually obligated to
insure specific property for a stipulated loss amount.” PES
contends that the SOA between it and ICBCS provided a contractual
obligation satisfying that requirement. The Insurers contend
that the SLV Clause is not applicable because the SOA does not
provide for an obligation to insure “specific property” or
require that it be for a “stipulated loss amount.”
a. Specific Property
PES argues that the SOA, taken as a whole, specifies the
Refinery as property required to be insured. It asserts that the
SOA grants a mortgage in its property to ICBCS and specifically
describes the Mortgaged Property by metes and bounds to encompass
the entire Refinery complex. PES further notes that the SOA
provides, in pertinent part, that PES
shall maintain . . . Comprehensive Property Insurance
on a replacement cost basis, subject to a minimum
amount of $750,000,000 (SEVEN HUNDRED FIFTY MILLION
USD) for All Risk of Physical Loss or Damage. Coverage
must apply to all Crude Oil and Refined Product.
Coverage shall be comprehensive and include but not be
limited to Fire, Explosion, Property Damage, Business
Interruption, Flood, Earthquake, Named Windstorm,
7
Tornado, Tsunami, and Volcano. In the event that a
Transaction Party purchases insurance in excess of the
limits specified in this section, such higher limits
shall apply to ICBCS as an additional insured. Not
later than 30 Business Days from the Effective Date,
each Transaction Party shall name ICBCS as a loss payee
and as an Additional Insured as their interests may
appear. Once annually, each Transaction Party shall
provide ICBCS a certificate of insurance evidencing the
required insurance. At the reasonable request of
ICBCS, and not later than 30 Business Days from the
Effective Date, each Transaction Party shall provide
ICBCS with a complete copy of such insurance policy.
(Adv. D.I. 209, Ex. 3, Part 10, Schedule 10.04 (hereinafter
referred to as the “Insurance Requirement Clause.”)
PES contends that the Insurance Requirement Clause obligated
it to maintain property insurance on, inter alia, the Mortgaged
Properties (i.e., the Refinery) which were damaged in the
Explosion and are the subject of its dispute with the Insurers.
The Insurers argue that the Insurance Requirement Clause
does not mention the Mortgaged Properties but, instead, only
specifically refers to insurance on the Crude Oil and Refined
Product. (Adv. D.I. 209, Ex. 3, Part 10.) They contend that
this is understandable because the SOA was in essence a supply
agreement between ICBCS and PES dealing with the refinement of
crude oil. They argue that reference to other parts of the
Agreement is improper and that PES’ attempt to hobble together
diverse provisions of the SOA is not sufficient to evidence an
agreement to obligate PES to insure the specific property at
issue in this case.
8
The Court disagrees with the Insurers’ argument. Under New
York law, the Court must consider the agreement as a whole and
give effect to every term. See, e.g., In re Viking Pump, 52
N.E.3d 1144, 1151 (N.Y. 2016) (holding that unambiguous terms
must be enforced in accordance with their plain meaning and all
terms must be given effect); Riverside S. Planning Corp. v.
CRP/Extell Riverside, L.P., 920 N.E.2d 359, 363-64 (N.Y. 2009)
(noting that New York courts construe contracts holistically,
rather than taking each term in isolation).
The SOA provides in relevant part:
- Section 10.04(b) requires that PES “Keep its
property insured at all times in accordance with
the insurance requirement set forth in Schedule
10.04.” (Adv. D.I. 209, Ex. 3, Part 1.)
- Section 10.12 requires that PES “shall deliver to ICBCS
Mortgages” relating to each of the Mortgaged Properties
and “shall deliver to ICBCS a copy of, or a certificate
as to coverage under, and a declaration page relating
to, the insurance policies required by Section 10.04.”
(Id. at Part 4.)
- Mortgaged Properties is a defined term that includes
all of PES’ Real Property, described by metes and
bounds in Schedule 1.01(h). (Id. at Part 1.)
- Schedule 10.04 includes the requirement to maintain “so
long as the Agreement remains in effect and until all
Obligations have been paid in full” twelve different
forms of insurance, including “Comprehensive Property
Insurance on a replacement cost basis, subject to a
minimum amount of $750,000,000 . . . for All Risk of
Physical Loss or Damage. Coverage must apply to all
Crude Oil and Refined Product.” (Id. at Part 10.)
(Adv. D.I. 209, Ex. 3.)
The Court concludes that the SOA taken as a whole
unambiguously obligates PES to maintain insurance on all its
9
property, including the property at issue here, which is
specifically described in detail in the SOA. The fact that the
SOA also requires that PES maintain insurance on other property
does not detract from this obligation. Therefore, the Court
concludes that the SOA meets the first requirement of the SLV
Clause that PES be “contractually obligated to insure specific
property.” (Adv. D.I. 209, Ex. 1.)
b. Stipulated Loss Amount
The Insurers also argue that the Insurance Requirement
Clause fails to satisfy the SLV Clause because it does not
provide for a Stipulated Loss Amount. They contend,
specifically, that the “minimum insurance” requirement of the
Insurance Requirement Clause is not a stipulated loss amount.
They contrast it with liquidated damages and other like
provisions that actually obligate a party to pay a specific
amount on a breach of contract or incurrence of a loss. Damages,
Black’s Law Dictionary (11th ed. 2019) (defining liquidated
damages as “an amount contractually stipulated as a reasonable
estimation of actual damages”); Edwin E. Huddleson, III, Old Wine

in New Bottles: UCC Article 2a - Leases, 39 Ala. L. Rev. 648-40
(1988) (“Typical liquidated damages clauses in wide-spread
commercial use, [set] the lessor’s damages equal to the so-called
“stipulated loss value” of the goods.”)

10
The Insurers seek to bolster their argument by noting that
extrinsic evidence (presented by PES in its own brief) proves
that the SLV Clause was intended to require payment of a
stipulated loss amount. In 2012 when negotiating the terms of
the Policy, PES insisted on the SLV Clause in order to satisfy
its contractual obligation to Carlyle and Sunoco who had invested
$250 million in the Refinery and wanted to guarantee that PES
repaid that investment in the event the Refinery was destroyed
and not rebuilt. (Adv. D.I. 215 at 5.)
The Court finds it unnecessary to consider extrinsic
evidence, however, because the language of the SLV Clause is
unambiguous.7 Further, the extrinsic evidence offered by the
Insurers does not change that unambiguous language. The SLV
Clause does not require that PES be contractually obligated to
pay anyone a stipulated loss amount, it requires that PES be
obligated to insure specific property for a stipulated loss
value. That is what PES has done in the SOA: it has obligated
itself to maintain insurance on its property for a minimum of
$750 million.

7 Only if a term is ambiguous may a court consider extrinsic
evidence. Viking Pump, 52 N.E.3d at 1151 (under New York law
unambiguous terms must be enforced in accordance with their plain
meaning); Ellington v. EMI Music, Inc., 21 N.E.3d 1000, 1003
(N.Y. 2014) (ambiguity arises “when the contract . . . fails to
disclose its purpose and the parties’ intent, or when specific
language is susceptible of two reasonable interpretations”).
11
The Insurers argue further, however, that the Required
Insurance Provision does not satisfy the SLV Clause because it
provides that ICBCS is to be an additional insured and loss payee
on the comprehensive property insurance. (Adv. D.I. 209, Ex. 3,
Part 10.) As a result, they argue that PES and ICBCS agreed that
the latter would have the right to a direct action against the
Insurers if there were a loss but not that ICBCS would be
entitled to be paid a “stipulated loss amount” by PES.
Again, the Court rejects the Insurers’ argument, because
the SLV Clause does not require that PES be obligated as the
payor of the stipulated loss amount, only that it insure its
property for such an amount. (Adv. D.I. 209, Ex. 1.) The fact
that PES agreed that ICBCS would be named a loss payee on the
Policy does not negate the fact that the SOA specifically
required that PES maintain insurance in the amount of $750
million on its property. As stated above, the express terms of
the SLV Clause in the Policy require an obligation to insure the
property for a specific amount, not an obligation to pay a
specific amount.

The Insurers also argue that the obligation in the SOA is
not sufficient to satisfy the SLV Clause because it just
specifies a “minimum” insurance that is required without stating
a specific loss amount. The Court rejects this argument. While
PES is permitted in the SOA to insure its property for more than
12
$750 million, it is not obligated to do so. But it is obligated
to insure the property for $750 million. This, the Court
concludes, satisfies the SLV Clause in the Policy that PES “is
contractually obligated to insure specific property for a
stipulated loss amount.” (Adv. D.I. 209, Ex. 1 at § I(5)(e).)
2. Effect of the SLV Clause
Under the SLV Clause, the Policy provides for the payment of
the Stipulated Loss Value. (Adv. D.I. 209, Ex. 1 § I(5)(e).) If
the loss is less than $250 million the payment will be the
replacement cost (“RC”); if the loss is more than $250 million
and the property is not replaced, the payment will be the Actual
Cash Value (“ACV”) with a minimum of $250 million. (Id.)
RC is defined in the Policy, in pertinent part, as “[t]he
amount it would take to repair or replace the damaged or
destroyed property with materials of like kind and quality,
without deduction for depreciation or obsolescence . . . all
determined at the time and place of loss.” (Id.) ACV is defined
in the Policy as the “Replacement Cost less deduction for
physical depreciation.” (Id.)

The Parties dispute the meaning of “physical depreciation.”
PES argues that, as a matter of law, physical depreciation does
not include obsolescence or labor depreciation. While the
Insurers agree that obsolescence is not included in the term
“physical depreciation,” they contend that labor depreciation is
included.
The Insurers assert that the public policy underlying
indemnity insurance is simply to return the insured to as good a
position as it was at the time of the loss. McAnarney v. Newark
Fire Insurance Co., 159 N.E. 902, 904-05 (N.Y. 1928). In keeping
with that principle, the Insurers argue that physical
depreciation must include depreciation of labor where PES does
not repair its property because otherwise PES “would receive a
windfall based on labor costs [it] never incurred... .”
Graves v. Am. Fam. Mut. Ins. Co., 686 F. Appx. 536, 539 (10th
Cir. 2017) (concluding that depreciation of labor in calculation
of actual cash value was appropriate under general principles of
indemnity insurance which seek “to prevent an insured from
directly profiting through the receipt of cash funds beyond the
actual cash value of the loss.”).®

8 See also Papurello v. State Farm Fire & Cas. Co., 144 F.
Supp. 3d 746, 765-67 (W.D. Pa. 2015) (where contract just uses
term actual cash value, court applied Pennsylvania law to
determine that labor was part of depreciation); Henn v. Am, Fam,
Mut. Ins., Co., 894 N.W.2d 179, 189-91 (Neb. 2017) (because
actual cash value was not defined in the policy, court applied
well-developed case law that labor was included in depreciation);
Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn.
2016) (holding that if policy did not define actual cash value,
trial court was permitted to include labor-cost depreciation when
estimated cost to repair or replace damaged property included
materials and embedded-labor components); Redcorn v. State Farm
Fire & Cas. Co., 55 P.3d 1017, 1020 (Okla. 2002) (in determining
actual cash value of a damaged roof, court held that a roof is
the product of both materials and labor and therefore both should
be depreciated under general purpose of indemnification).

14

PES argues, however, that many of the cases cited by the
Insurers are distinguishable because they had no express
definition of the actual cash value to be paid and therefore
reliance on the broad concepts of indemnity insurance was
appropriate. However, where the term actual cash value is
defined by the parties in their contract those principles cannot
be applied to change the actual language chosen by the parties.
In the latter instance, PES contends that the Court must enforce
the terms of the contract as the parties wrote them. See SR
Int’l Bus. Ins. Co. v. World Trade Ctr. Props., LLC, 445 F. Supp.
2d 320, 346 (S.D.N.Y. 2006) (rejecting the ruling in McAnarney
that broad evidence of the meaning of actual cash value should be
considered in contrast to the express terms defined in the
parties’ contract).
The Court agrees with PES. Because the parties have defined
the term ACV in their Policy, general principles of indemnity law
cannot be applied in contravention of that express language. SR
Int’l, 445 F. Supp. 2d at 346.
The Insurers contend nonetheless that, even where the actual

cash value is defined in the policy, courts conclude that a
deduction for depreciation includes labor depreciation.9
9 E.g., Graves, 686 F. App’x at 537 (affirming decision that
“physical deterioration and depreciation” used in calculation of
actual cash value had to include “all costs necessary to
15
PES responds that none of the cases cited by the Insurers
construe New York law. It argues that the trend in this area is
to exclude labor from the term “depreciation” as evidenced by
more recent cases and recent legislation.'® Even if the term

(re)creating the insured ‘property’ - including the costs
associated with labor - when calculating actual cash value”); In
re State Farm Fire & Cas. Co., 872 F.3d 567, 572 (8th Cir. 2017)
(reversing order certifying class because deducting the cost of
labor as part of depreciation was not unreasonable); Basham v.
U.S. Auto. Ass'n, C.A. No. 16-cv—-03057-RBJ, 2017 WL 3217768, at
*3 (D. Col. July 28, 2017) (concluding that labor is included in
depreciation because, although labor itself does not depreciate,
it can add value to an asset and that value depreciates); Branch
v. Farmers Ins. Co., 55 P.3d 1023, 1027 (Okla. 2002) (concluding
that labor was depreciable under broad evidence rule even where
actual cash value defined in the policy as replacement cost less
depreciation).
10 E.g., Perry v. Allstate Indem. Co., 953 F.3d 417, 423 (6th
Cir. 2020) (concluding that plaintiff’s “interpretation — that in
calculating ACV depreciation does not include labor costs — has
been recognized as reasonable by numerous state and federal
courts, including our own, because depreciation traditionally
refers to value lost from physical wear and tear”); Hicks v.
State Farm Fire & Cas. Co., 751 F. App’x 703, 709 (6th Cir. 2018)
(holding that a “layperson confronted with State Farm's policy
could reasonably interpret the term depreciation to include only
the cost of materials”); Cal. Fair Plan Ass’n v. Garnes, 218 Cal.
Rptr. 3d 246, 259-62 (Cal. Ct. App. 2017) (holding that labor is
not depreciable under California statute which provides “a
deduction for physical depreciation shall apply only to
components of a structure that are normally subject to repair and
replacement during the useful life of that structure”) (citing
Cal. Ins. Code § 2051(b) (West 2021)); Lains v. Am. Family Mut.
Ins. Co., Case No. C14-1982-Jcc, 2016 WL 4533075, at *2-3 (W.D.
Wash. Feb. 9, 2016) (finding policy ambiguous and construing it
in favor of insured to exclude labor costs in depreciation);
Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 179
(Tenn. 2019) (same); Adams v. Cameron Mut. Ins. Co., 430 S.W.3d
675, 678 (Ark. 2013) (stating that the court, like the dissent in
Redcorn, “simoly cannot say that labor falls within that which

16

depreciation includes labor, however, PES argues that the Policy
mandated that RC only be reduced by “physical depreciation” not
by depreciation.
The Court agrees with PES that it need not decide which line
of cases is correct and whether depreciation includes the
depreciation of labor. The Court is called upon to determine the
meaning of the term “physical depreciation” which the parties in
this case used, rather than the term depreciation.
PES argues that the only reasonable interpretation of
“physical depreciation” is that it does not include the
depreciation of intangible, non-material costs, such as labor.
PES argues that, because physical depreciation is not defined in
the Policy, it must be considered based on its meaning in common
speech. It contends that the term “depreciation” in common

can be depreciable”), superseded by statute, Ark. Code Ann. §
23-88-106(a)(2) (2017). See also Wash. Admin. Code § 284-20-010
(2021), printed in 2021 WA REG TEXT 587383 (netscan) (“Except for
the intrinsic labor costs that are included in the cost of
manufactured materials or goods, the expense of labor necessary
to repair, rebuild, or replace covered property is not a
component of physical depreciation and may not be subject to
depreciation or betterment.”); Depreciation of Labor Expenses in
Property Loss Claims, Miss. Ins. Dep’t Bulletin 2017-8 (Aug. 4,
2017), https://www.mid.ms.gov/legal/bulletins/20178bul.pdf
(insurers must “clearly provide for the depreciation of labor in
the insurance policy”); Property Loss Claims: No Labor
Depreciation, VT Dep’t Financial Reg., Div. of Ins., Bullet No.
184 (May 1, 2015), available at https://dfr.vermont.gov/sites/
finreg/files/regbul/dfr-bulletin-insurance-184.pdf (“Labor,
unlike physical materials, does not break down or lose value over
time.”).
17
parlance means “a decline in an asset’s value because of use,
wear, obsolescence, or age.” Depreciation, Black’s Law
Dictionary (11th ed. 2019). PES argues that adding “physical” as
a modifier to depreciation in the definition of ACV means that
the deduction only includes depreciation “of, or relating to, or
involving material things” or “pertaining to real tangible
objects.” Physical, Black’s Law Dictionary (11th ed. 2019).
Consequently, PES contends that labor that is not already
imbedded in the materials’ costs11 cannot be part of the physical
depreciation component of ACV.
The Insurers argue that the term “physical depreciation”
means that economic and functional obsolescence must be excluded
from the depreciation deduction. In their view, all other
depreciation - including labor depreciation - is included in the
term “physical depreciation.”
The Court disagrees with the Insurers on this point.
Obsolescence is already excluded from depreciation under the
terms of the Policy because the definition of RC uses

11 PES concedes that some labor costs – intrinsic labor costs –
reflected in the price of materials and equipment will be
depreciated as those materials and equipment are themselves
depreciated. PES does not argue that the Court must extricate
these costs from the cost of tangible things to avoid their
depreciation. PES argues, however, that extrinsic labor costs,
namely the costs to plan and implement a rebuild or repair on
site, which it would pay as overhead rather than as part of the
materials, cannot be physically depreciated.
18
depreciation and obsolescence as two separate and distinct terms.
See SR Int’l, 445 F. Supp. 2d at 351-53 (holding that
depreciation did not include obsolescence where ACV was defined
as RC less “physical deterioration, depreciation, obsolescence
and depletion”). Therefore, the use of the term “physical
depreciation” in the definition of ACV could not have been
intended to exclude obsolescence.
The Court further agrees with PES that physical depreciation
must mean something less than depreciation. E.g., Westview
Assocs. v. Guar. Nat. Ins. Co., 740 N.E.2d 220, 222 (N.Y. 2000)
(“surplusage [is] a result to be avoided”). Therefore, the cases
cited by the Insurers concluding that depreciation includes labor
depreciation are not on point.”

te While three of the cases the Insurers cite have policy
definitions of ACV that include reference to “physical,” all
three based their conclusion on a finding that “depreciation”
alone includes “labor depreciation.” Graves, 686 F. App’x at 537
(policy defined ACV as RC less “physical deterioration and
depreciation, including obsolescence”); Riggins v. Am. Fam. Mut.
Ins. Co., 281 F. Supp. 3d 785, 789 (W.D. Mo. 2017) (policy
defined ACV as RC “less depreciation for physical deterioration
and obsolescence”); Ware v. Metro. Prop. & Cas. Ins. Co., 220 F.
Supp. 3d 1288, 1290-91 (M.D. Ala. 2016) (policy defined ACV as
the replacement cost “less allowance for physical deterioration
and depreciation including obsolescence”). Notably, the Riggins
Court originally ruled that the term “less depreciation for
physical deterioration and obsolescence” excluded labor
depreciation. Riggins, 281 F. Supp. 3d at 786. After the Eighth
Circuit’s State Farm decision, however, the Riggins Court
concluded that labor depreciation was included in “depreciation”
because the policy did not expressly exclude it. Id. at 789
(citing State Farm, 872 F.3d at 570-77).

19

Moreover, the Court agrees with PES that “physical” should
properly be given its plain meaning and the reference to its
definition in Black’s Law Dictionary is appropriate. See CT Inv.
Mgmt. Co., LLC v. Chartis Specialty Ins. Co., 9 N.Y.S.3d 220, 223
n.2 (N.Y. App. Div. 2015) (“It is common practice for the courts
of [New York] to refer to the dictionary to determine the plain
and ordinary meaning of words to a contract.”). Thus, the Court
concludes that “physical” depreciation is the physical
deterioration or wear and tear of tangible property resulting in
a diminution in value. See also 2 Real Estate Transactions:
Structure and Analysis with Forms section 19:7 (stating that
depreciation is “the deterioration or the physical wearing out of
man-made buildings or improvements due to the passage of time,
the effect of weather, or the manner of using the property”).
The Court concludes that labor costs that are imbedded in
the cost of materials is depreciable as the value of those
materials depreciate through wear and tear. Brown v. Travelers
Cas. Ins. Co., Civ. No. 15-50-ART, 2016 WL 1644342 (E.D. Ky. Apr.
25, 2016) (concluding that “[t]o the extent that labor does not

increase the market value of a finished good — as with a haircut
— the value of the labor does not depreciate along with the good.
For this reason, the ordinary meaning of “depreciation” allows an
insurer to depreciate the value of labor that has merged with a

20
finished good. It does not, however, allow an insurer to
depreciate the value of pure labor that has not merged with a
finished good”). However, the Court agrees that labor which is
procured separately from materials, is unlike physical property
and it is hard to conceive of how it can be physically
depreciated. The labor used in constructing the Refinery was not
subject to deterioration or wear and tear from the elements. The
Illinois Supreme Court recently expressed just this analysis in
concluding that labor is not included in the term depreciation □□
let alone physical depreciation - in calculating the actual cash
value in an insurance policy.
[L]abor is not logically depreciable, as it does not
lose value over time due to wear and tear. Materials
deteriorate with time, but labor does not. Labor isa
fixed cost that is not subject to wear and tear,
deterioration, or obsolescence.
Sproull v. State Farm Fire & Cas. Co., Docket No. 126446, 2021 WL
4314060, *13 (Ill. Sept. 23, 2021).'° While the Court does not
opine on whether depreciation simpliciter includes labor

13 See also Bailey v. State Farm Fire & Cas. Co., Civ. A. No.
14-53-HRW, 2015 WL 1401640, at *8 (D. Minn. Mar. 25, 2015) (“The
very idea of depreciating labor defies good common society.”),
aff’d sub nom Hicks, 751 F. App’x 703; Arnold v. State Farm Fire
& Cas. Co., 268 F. Supp. 3d 1297, 1312 (S.D. Ala. 2017) (noting
the “inherent logical contradiction of depreciating non-
depreciating things” in considering what a reasonable insured
would understand the term actual cash value to include); Adams,
430 S.W.3d at 679 (“The very idea of depreciating the value of
labor is illogical.”) (superseded by statute) Ark. Code Ann. §
23-88-106(a) (2) (2017).

21

depreciation, it finds the reasoning of these courts supportive
of its conclusion that the use of the term “physical
depreciation” was meant to exclude depreciation of extrinsic
labor.14
For the foregoing reasons, the Court concludes that the
definition of ACV in the Policy, which reduces RC only by
“physical depreciation” means that ACV is not reduced by any
extrinsic “labor depreciation.” Accordingly, the Court will
grant PES’ Motion and deny the Insurers’ Motion for summary
judgment on this issue.
C. Consequential Damages
In their motion for summary judgment, the Insurers also ask
the Court to dismiss Count VI of the Complaint which seeks
consequential damages for breach of the implied covenant of good
faith and fair dealing. The Insurers acknowledge that New York
law recognizes such a claim with respect to insurance contracts.
See, e.g., Bi-Econ. Mkt. Inc. v. Harleysville Ins. Co. of N.Y.,
886 N.E.2d 127, 131 (N.Y. 2008) (holding that the implied
covenant requires an insurer to “investigate in good faith and

pay covered claims.”). However, they note that the burden to
establish such a breach is extremely high. Sukup v. New York,
227 N.E.2d 842, 844 (N.Y. 1967) (“It would require more than an
14 See cases cited at n. 10 supra.

22
arguable difference of opinion between carrier and insured over
coverage to impose an extra-contractual liability for legal
expenses in a controversy of this kind. It would require a
showing of such bad faith in denying coverage that no reasonable
carrier would, under the given facts, be expected to assert
it.”).
While not conceding that there has been any breach of the
covenant of good faith and fair dealing, the Insurers argue that
they are entitled to summary judgment on this count because PES
has presented no evidence in discovery (or in response to their
summary judgment motion) to establish it suffered any damages as
a result of any such breach. They contend that all the damages
alleged in the Complaint and articulated in PES’ expert reports
and discovery responses are not consequential damages but,
instead, are merely damages resulting from the Insurers’ alleged
breach of the Policy. E.g., Biotronik A.G. v. Conor Medsystems
Ireland, Ltd., 11 N.E.3d 676, (N.Y. 2014) (“General damages ‘are
the natural and probable consequence of the breach’ of a
contract.”) (citations omitted)).

PES responds that it seeks the attorneys’ fees it incurred
as consequential damages resulting from the Insurers’ breach of
the implied covenant of good faith and fair dealing. PES argues
that its claim for attorneys’ fees is the type of damages

23
foreseeable from such a breach and have been allowed by New York
courts. E.g., Certain Underwriters at Lloyd’s v. BioEnergy Dev.
Grp. LLC, 115 N.Y.S.3d 240, 241 (N.Y. App. Div. 2019) (denying
motion to dismiss claim for attorneys’ fees for the breach of the
implied covenant of good faith and fair dealing because it was
foreseeable that an insurer’s breach would cause the policyholder
to incur attorneys’ fees in order to obtain payment of its
claim).
The Insurers argue in response that any claim for attorneys’
fees is expressly excluded under the terms of the Policy. (Adv.
D.I. 209, Ex. 1 at § 3 7 4 (excluding expenses of public
adjusters or attorneys).) They contend that New York courts do
not allow attorneys’ fees for a breach of the implied covenant of
good faith and fair dealing in the face of such express contract
provisions.’

ts E.g., 30-40 E. Main Street Bayshore, Inc. v. Rep. Franklin
Ins. Co., 981 N.Y.S. 2d 616, 617 (N.Y. App. Div. 2014) (denying
leave to amend complaint where “the inability of the plaintiffs
to recover an attorney’s fee, costs, and interest as
consequential damages in this affirmative action against their
insurer is clear and free from doubt”); N.Y. Univ. v. Cont’l Ins.
Co., 662 N.E.2d 763, 769-72 (N.Y. 1995) (noting that “[t]t is
well established that an insured may not recover the expenses
incurred in bringing an affirmative action against an insurer to
settle its rights under the policy”); Stein, LLC v. Lawyers Title
Ins. Corp., 953 N.Y.S.2d 303 (N.Y. App. Div. 2012) (“nothing in
Bi-Economy or Panasia alters the common-law rule that, absent a
contractual or policy provision permitting the recovery of an
attorney’s fee, an “insured may not recover the expenses incurred
in bringing an affirmative action against an insurer to settle

24

PES contends that any language of the Policy excluding
attorneys’ fees is irrelevant because under New York law, “an
insured may recover foreseeable damages, beyond the limits of its
policy, for breach of the covenant of good faith.” Panasia
Ests., 886 N.E.2d at 136-37 (citation omitted) (affirming denial
of motion for partial summary judgment which asserted that
contract provision precluding attorneys’ fees barred any action
seeking such fees as consequential damages for breach of covenant
of good faith and fair dealing). Accord Bi-Econ., 886 N.E.2d at
196.
The Court agrees with PES. The attorneys’ fees claimed by
PES are not for breach of the insurance policy but rather for
breach of the covenant of good faith and fair dealing.
Consequential damages are recoverable for a breach of the
covenant of good faith and fair dealing under New York law, if
they are proximately caused by the breach and are foreseeable to
the parties at the time of contracting. Bi-Econ., 886 N.E.2d at
192–93; Sukup, 227 N.E.2d at 844 (acknowledging that attorneys’
fees may be awarded if bad faith were found but denying them in

the absence of such a finding). Such attorneys’ fees are
recoverable even in the face of a contract provision that
generally precludes attorneys’ fees, such as the one here.
its rights under the policy”) (citations omitted)).

25
Panasia Ests., 886 N.E.2d at 136-37 (contract provision
precluding attorneys’ fees does not bar recovery of such fees as
consequential damages for breach of covenant of good faith and
fair dealing).
While the Insurers cite New York cases denying attorneys’
fees, the Court finds them unpersuasive. For example, the
Bayshore case cites the Bi-Econ. case as support for its blanket
assertion that attorneys’ fees cannot be recovered as
consequential damages. 981 N.Y.S. 2d at 617. However, the Bi-
Econ. court made no such holding; to the contrary it upheld the
right of the insured to assert consequential damages for breach
of the covenant of good faith and fair dealing even in the face
of a contract provision precluding consequential losses. 886
N.E.2d at 132. Furthermore, while the Court in the NYU case
ruled that generally attorneys’ fees are not recoverable for an
ordinary breach of contract, it did not address whether they are
recoverable for a breach of the implied covenant of good faith
and fair dealing. N.Y.U., 662 N.E.2d at 772. Similarly, the
Stein case dealt with a breach of insurance contract, not a claim

for breach of the covenant of good faith and fair dealing. 953
N.Y.S.2d at 304.
In addition, however, the Insurers argue that they are
entitled to summary judgment on Count VI because PES provided no

26
evidence during discovery (or in response to their motion)
supporting its claim for attorneys’ fees. E.g., In re Indesco
Int’l, Inc., 451 B.R. 274, 316 (Bankr. S.D.N.Y. 2011) (granting
summary judgment for defendant because plaintiff failed to prove
any damages).
While PES acknowledges that no evidence to support the
attorneys’ fees has been presented to date, it contends that the
time to do so is after the Court finds bad faith.16 This, PES
contends, is appropriate because those fees continue to accrue
and it is not possible to finally calculate them until the trial
is concluded. In the event the Court does find bad faith, PES
asserts that it will submit a fee application detailing those
damages.
The Court agrees with PES that the time to consider any
claim it may have for legal fees is after trial. Such
consequential damages are due only if, and when, the Court
determines that the Insurers’ acted in bad faith. If it does,
PES will be in a better position to present evidence of any claim
for consequential damages and the Insurers will be in a better

16 E.g., Maule v. Phila. Media Holdings, LLC, 2010 WL 3859613,
at *5 n.3 (E.D. Pa. Oct. 1, 2010) (rejecting argument that
defendant had no notice of claim for attorneys’ fees, noting that
prayer for relief clearly asserted such a claim); Fed. R. Civ. P.
54(d), incorporated by Fed. R. Bankr. P. 7054 (allowing the
filing of a motion and proof of fees incurred by prevailing party
after a favorable award).
27
position (after reviewing any fee request) to respond if they are
not properly characterized as consequential damages because they
were not foreseeable or not a consequence of their bad faith.
The Court will accordingly, sua sponte, bifurcate the trial
on Count VI between liability and damages. Fed. R. Bankr. P.
7042, incorporating Fed. R. Civ. P. 42(b) (“For convenience, to
avoid prejudice, or to expedite and economize, the court may
order a separate trial of one or more separate issues, claims,
crossclaims, counterclaims, or third-party claims.”) (emphasis
added). See also Franklin Music Co. v. Am. Broadcasting Cos.,
Inc., 616 F.2d 528, 538 (3d Cir. 1979) (upholding district
court’s sua sponte decision to bifurcate). Courts have
discretion to bifurcate issues in a case if it will not be
prejudicial to the parties. Barr Labs., Inc. v. Abbott Labs.,
978 F.2d 98, 115 (3d Cir. 1992); Lis v. Robert Packer Hosp., 579
F.2d 819, 824 (3d Cir. 1978).
The Court finds that there will be no prejudice to PES
because bifurcation will protect any attorney-client privilege
PES may have by not requiring the production of the attorneys

bills while this litigation is pending. Similarly, the Court
concludes that bifurcation will not be prejudicial to the
Insurers. First, this is not a jury trial, where prejudice
arising from bifurcation has usually been contested. E.g., Lis,

28
579 F.2d at 821. Second, the Court will provide ample
opportunity for discovery and preparation for the damages trial,
in the event one is necessary. E.g., In re Vaso Active Pharm.,
Inc., 500 B.R. 384, 400 (Bankr. D. Del. 2014) (amending
scheduling order to avoid prejudice flowing from bifurcation).

Bifurcation will also promote judicial economy by allowing
the Court to consider the threshold and potentially dispositive
issue of liability alone, without the necessity to consider any
proof of damages unless liability is established. This is
especially true, where, as here, the plaintiff has a heavy burden
in establishing liability. Sukup, 227 N.E.2d at 844. This
benefit has no significant counterbalance: the issues of
liability and damages are not, in this case, inseparable. Barr,
978 F.2d at 115 (bifurcation is proper where issues are not
“inextricably interwoven”).
Accordingly, the Court will deny the Insurers’ Motion for
summary judgment on Count VI and will enter an order bifurcating
the issues of liability and damages on that Count.

IV. CONCLUSION
For the foregoing reasons, the Court will grant PES’ Motion

29
for summary judgment and deny the Insurers’ Motion for summary
judgment.

Dated: December 15, 2021 BY THE COURT:

Mary F. Walrath
United States Bankruptcy Judge

30

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10456023. Public record. Not legal advice.