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A federal judge has refused to block a state court suit brought by Larry Silverstein to protect financing for the new plan to redevelop the World Trade Center site. Southern District Judge Michael B. Mukasey denied the motion for an injunction sought by Royal Insurance Co. and three other insurers ? a decision that allows Mr. Silverstein’s state action to proceed. The judge’s ruling in SR International Business Insurance v. World Trade Center Properties , 01 Civ. 9291, was the latest in the marathon litigation over insurance proceeds that began in the wake of the Sept. 11, 2001, terror attacks. The decision will be published Monday. Judge Mukasey said in his decision the “complicated, time-consuming and sensitive” litigation is far from over. “Moreover, and regrettably, this court is aware of no fact that suggests the parties are on the verge of a settlement: in fact, the end is nowhere in sight,” he said. At issue is the “conceptual framework” reached by Mr. Silverstein, the Port Authority and other parties in April under which Mr. Silverstein would no longer control the Freedom Tower site and a second site on the World Trade Center perimeter now occupied by the fatally damaged Deutsche Bank building. Mr. Silverstein agreed to cede control to the Port Authority for those two buildings while keeping control of three other sites (Sites 2, 3, and 4). Under the agreement, insurance proceeds from the World Trade Center would be allocated to match the new rebuilding agreement. On June 26, Mr. Silverstein filed an action in state Supreme Court seeking a declaration that the conceptual framework would not be considered an impermissible assignment under the insurance agreements and that, therefore, the amount of insurance proceeds recovered would not be reduced. Lawyers for Mr. Silverstein say that Royal and six other insurers, who have projected future payments of some $525 million, were reluctant to allow those funds to be used for the building of the Freedom Tower. The complaint asked Supreme Court Justice Herman Cahn ( See Profile ) to retain jurisdiction “to assure that each of the defendants complies fully with its ongoing insurance coverage obligations.” Royal and six other insurers removed the case to federal court two days later, but Judge Mukasey remanded what he characterized as a state law contract case back last week. ( NYLJ, Aug. 8 ). Royal, joined by Travelers Indemnity Co., Gulf Insurance Co. and Employers Insurance Co. of Wausau, asked Judge Mukasey to enjoin the state action under the All Writs Act, 28 U.S.C. ?1651, and exceptions to the Anti-Injunction Act, 28 U.S.C. ?2283. The Anti-Injunction Act, the judge explained, prevents federal courts from enjoining state court actions unless the injunction falls within one of three exceptions. The exception invoked by Royal was one that allows a district court to grant an injunction “where necessary in aid of its jurisdiction.” In the language of the U.S. Supreme Court in Atl. Coast Line R.R. Co. v. Bhd. Of Locomotive Engineers, 398 U.S. 281 (1970), “some federal injunctive relief may be necessary to prevent a state court from so interfering with a federal court’s flexibility and authority to decide that case.” But this exception, Judge Mukasey said, has been narrowly interpreted by both the Supreme Court and the U.S. Court of Appeals for the Second Circuit. He said it has been “limited to cases based on in rem or quasi in rem jurisdiction, and the rare occasion when the litigation itself can be treated as a res, most notably in complex multidistrict actions on the verge of settlement.” ‘Fanciful Argument’ Judge Mukasey also said it is “settled law” that a federal judge cannot just issue an injunction to be the first court to decide an issue. “Notwithstanding Royal’s energetic effort to squeeze the WTC coverage into the narrow aid-of-jurisdiction exception” the suits over insurance monies are in personam actions, he said. “Even accepting Royal’s contention, still speculative at this point, that the ‘overlapping issues’ in the state actions before this court are ‘indisputable and expansive,’ the Anti-Injunction Act prohibits an injunction to ensure that this court is the first to decide those issues.” He said the insurance company made a “fanciful argument” that the judge had jurisdiction over a “res” ? the insurance proceeds available to the insureds in the litigation. But other courts in the district, he said, have “both explicitly and implicitly refused to treat insurance proceeds as a res for purposes of the Anti-Injunction Act.” The judge also rejected the argument of the insurance company based on a line of cases where state proceedings have been enjoined because “the federal litigation itself can by analogized to a res.” “An injunction against the state action would serve no purpose other than to preserve this court’s prerogative to rule on coverage issues before the state court does ? a purpose that does not qualify for the aid-of-jurisdiction exception to the Anti-Injunction Act,” he said. Marc Wolinsky, Gordon M. Mead, Meredith L. Turner and William Edwards of Wachtell, Lipton, Rosen & Katz represented World Trade Center Properties and the other insureds. “It’s clear to us that the federal court believes this dispute should be resolved in state court,” Mr. Wolinsky said. Michael H. Barr, Sandra D. Hauser and Edward J. Reich of Sonnenschein Nath & Rosenthal represented Royal. ? Mark Hamblett can be reached at [email protected] .

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