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Citigroup Inc. cannot be held responsible for the large stocks of diesel fuel it kept at 7 World Trade Center — fuel that an insurance company claimed was a main culprit in the destruction of the building on Sept. 11, 2001 — a federal judge ruled Friday. Southern District Judge Alvin K. Hellerstein found that covenants in Citigroup’s lease with Larry Silverstein, and an insurance company’s agreement with Silverstein, bar the company from proceeding as Silverstein’s subrogee against Citigroup Inc. and Citigroup Global Market Holdings Inc. In Industrial Risk Insurers v. The Port Authority of New York and New Jersey, 02 Civ. 7170, Industrial Risk, or IRI, claimed that several parties were responsible for the destruction of 7 World Trade Center, which sat adjacent to the twin towers that were destroyed by terrorists. Fires from the twin towers spread to 7 World Trade Center when chunks of the collapsing buildings fell on it. Citigroup had a long-term lease for portions of its floors one through five and floors 28 through 47 for trading operations for Salomon Smith Barney. Seeking damages of $75 million, IRI claimed that the system, including the pipes connecting two 6,000 gallon tanks of diesel fuel kept on site by Citigroup in the event of a power outage, were negligently installed and maintained, and that the ignited fuel intensified the fires and ensured the building would fall. In addition to Citigroup, IRI sued the airlines, the airport security companies and the airline manufacturers. Earlier, Hellerstein ruled that suits against the airline-related companies would proceed on a different track from those against the Port Authority and Citigroup. The Port Authority and Citigroup moved to dismiss the complaint. At a Nov. 30 hearing, Hellerstein ruled that there were facts outside the complaint that required limited discovery involving the Port Authority. That is pending. As to Citigroup, Hellerstein said Friday, the lease agreement between Silverstein and Salomon provided specifically for the emergency generator system, that the parties had released each other from liability, and “the parties involved the insurer, with regard to such risks, and negotiated provisions that allocated the risk of loss to IRI.” While the parties for the most part agreed on the interpretation of the language in these agreements, they disagreed on the public policy that should apply, specifically where gross negligence is alleged. But Hellerstein said there was nothing in federal or New York law that “should enable IRI to recover from Citigroup for losses from the risks that it knowingly agreed to assume.” He said that “as subrogee, IRI has only the same claims that Silverstein could make. Thus, if Silverstein and Citigroup each have released the other, IRI’s claim must be dismissed if Silverstein’s claim against Citigroup would be released.” IRI had argued that it would be against New York public policy to apply the release clause to claims of gross negligence and the state Court of Appeals, although setting a high standard for such a showing, has held that releases for claims of gross negligence are unenforceable. The purpose of this policy, Hellerstein said, “is to ensure that parties will have legal recourse for injuries from particularly malicious behavior.” “The rule exists to protect parties in positions of weaker bargaining power from unknowingly agreeing in advance to allow the other party to recklessly disregard its rights in broad and unforeseeable ways,” he said. “However, parties, especially those of equal bargaining power, should be able to rely on the general New York rule that enforces contracts for the release of claims of liability. “If a party needs only to add gross negligence as a theory of liability to force litigation to proceed through discovery and a trial, contracting parties would be stripped of the substantial benefit of their bargain, that is avoiding the expense of lengthy litigation.” IRI’s claim is barred, the judge went on, because Silverstein “assumed the risks posed by Citigroup’s emergency generator and diesel fuel tank system” — risks he clearly “encountered” by asserting his right to disapprove the system for its potential to “jeopardize the structural integrity of the Building.” IRI, he said, also argued that the same reasons that public policy prohibits people from being released against claims based on their reckless disregard for the rights of others, should also “prohibit waivers of subrogation for such conduct.” “In other words, according to IRI, the public policy should require a defendant to always pay for its own acts of gross negligence,” he said. But the judge said that “the focus of New York public policy with respect to gross negligence claims lies with ensuring that there not be an impediment against the right of a plaintiff to recover, not with ensuring that the defendant will not be able to obtain insurance against the risk of his tortious conduct and its impact on others.” The judge said he was agreeing with his colleague, Judge Kimba Wood, who ruled in the case of the collapse of a 49-story scaffolding structure at 4 Times Square that “New York law does permit” waivers of subrogation of gross negligence in St. Paul Fire and Marine Insurance Company v. Universal Builders Supply, 317 F.Supp. 2d (S.D.N.Y. 2004). Hellerstein said three other federal cases that reached the opposite conclusion were “unpersuasive.” Tom Moloney of Cleary Gottlieb was the lead attorney for Citigroup. Gregory P. Joseph represented IRI.

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