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Following a partial building collapse, economic damages can be recovered without proof of physical injury or property damage, a divided panel of the Appellate Division, First Department ruled yesterday. In two cases, by identical 3-2 votes, the appeals court said that business owners could seek recovery of revenues lost in the wake of the partial collapse of a wall in December 1997, when city officials ordered Madison Avenue closed between 42nd and 57th streets for two weeks. The majority reversed a ruling by a Manhattan Supreme Court justice who said that the business owners could not recoup under the common law rule that economic losses cannot be recovered in the absence of some allegation that the defendant’s conduct caused some physical injury or property damage. The lawsuits also included a cause of action for creating a public nuisance. Writing for the majority in one of the cases, 532 Madison Avenue Gourmet Foods Inc. v. Finlandia Center Inc., 1665, Justice Angela M. Mazzarelli said that it was appropriate to deviate from the traditional “economic loss” rule because there were allegations that the collapse resulted from an ill-advised attempt by the building owners to renovate a structure with serious structural defects. In the companion case, Fifth Avenue Chocolatiere Ltd. v. 540 Acquisition Co., 1664, Justice Betty Weinberg Ellerin said that the “economic loss” rule was an “arbitrary formula that has the effect of holding to a lower standard those whose negligence causes only non-physical damage.” In the dissent to both cases, Justice Richard T. Andrias wrote that the court’s decision to allow a pure economic damages claim to go to a jury would open a floodgate of liability with no limit in sight. In both cases, plaintiffs sued the owners of an office building at 540 Madison Avenue, charging that they were negligent in attempting to create holes for 94 windows in a building with severe structural flaws. On Dec. 7, 1997, portions of a wall into which holes had been punched collapsed and fell onto the street. The plaintiffs owned stores which had to be closed for two weeks or more near the damaged office building, as city officials ordered 15 blocks of Madison Avenue closed. Neither store was physically damaged and neither plaintiff claimed that any physical injury resulted from the building collapse. The First Department panel reversed the decision of Manhattan Supreme Court Justice Sheila Abdus-Salaam. In Fifth Avenue Chocolatiere, Justice Ellerin said that the defendants were alleged to have begun the building renovations in a negligent fashion. The economic injuries sustained by nearby businesses, Justice Ellerin reasoned, were the “natural and proximate consequences of [defendants'alleged] misconduct.” “These merchants, without any fault or participation on their part, and with a right to carry on their businesses free from the wrongful conduct of nearby property owners, were subjected to the consequences of defendants’ failure to maintain their building in a reasonably safe manner,” Justice Ellerin wrote, adding that the defendants had “obvious notice” of “overt risks” of their actions. IRONY OF THE RULE Justice Ellerin said that the economic loss rule is inappropriate for tort damage claims such as these. “These cases demonstrate the irony of a rule that posits the right to recover economic losses, no matter how great, upon the fortuitous occurrence of some concomitant physical damage, no matter how slight,” she wrote. Justice Mazzarelli, writing in 532 Madison Avenue, said that abandoning the “economic loss” rule in this case and allowing the negligence claim to proceed was fairer to all parties. “Allowing the negligence cause of action … to proceed properly allocates the risk of loss and the costs of engaging in dangerous activities such as defendants are alleged to have done,” Justice Mazzarelli wrote. “Holding defendants liable for their tortious acts creates an incentive for others not to follow suit but to act reasonably with regard for the safety of others.” The majority also said that the plaintiffs had stated valid causes of action for public nuisance. The dissenters said that economic losses such as those claimed by the plaintiffs may only be sought in contract cases, and that tort law was not designed to deal with purely economic injury. Justice Ellerin and Justice Mazzarelli were in the majority in both cases, and were joined in both cases by Justice Israel Rubin. Justice Andrias was joined by Justice John T. Buckley in dissent in both cases. Harry Steinberg of Newman Fitch Altheim Myers represented Finlandia Center Inc., the owner of the 540 Madison office building, and 540 Acquisition Co., the holder of ground rights to the property. The attorney for plaintiff Fifth Avenue Chocolatiere is Kenneth J. Ashman of Ashman & Griffin. Representing plaintiff 532 Madison Avenue Gourmet Foods is Steven Sarshik of Eisenberg & Margolis.

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