Best Buy Stores v. Developers Diversified Realty, Civil No. 05-2310(DSD/JJG).

• Decision Date: 14 July 2009
• Docket Number: Civil No. 05-2310(DSD/JJG).
• Citation: 636 F.Supp.2d 869
• Parties: BEST BUY STORES, L.P., Plaintiff, v. DEVELOPERS DIVERSIFIED REALTY CORPORATION, DDR GLH, LLC.; Benderson-Wainberg Associates, LP; DDR MDT Cool Springs Point LLC; DDRA Ahwatukee Foot-hills, LLC; DDR Flatiron LLC; DDRA Community Centers Four, LP; DDR MDT Lakepointe Crossing, LP; DDR MDT Great Northern, LLC; DDR MDT Shoppers World, LLC; DDR MDT Riverdale Village Outer Ring, LLC; DDR Hendon Nassau Park II, LP; DDRC PDK Salisbury LLC, Defendants.
• Court: U.S. District Court — District of Minnesota

Page 869

636 F.Supp.2d 869

BEST BUY STORES, L.P., Plaintiff, v. DEVELOPERS DIVERSIFIED REALTY CORPORATION, DDR GLH, LLC.; Benderson-Wainberg Associates, LP; DDR MDT Cool Springs Point LLC; DDRA Ahwatukee Foot-hills, LLC; DDR Flatiron LLC; DDRA Community Centers Four, LP; DDR MDT Lakepointe Crossing, LP; DDR MDT Great Northern, LLC; DDR MDT Shoppers World, LLC; DDR MDT Riverdale Village Outer Ring, LLC; DDR Hendon Nassau Park II, LP; DDRC PDK Salisbury LLC, Defendants.

Civil No. 05-2310(DSD/JJG).

United States District Court, D. Minnesota.

July 14, 2009.

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Thomas C. Mahlum, Esq., Mpatanishi S. Tayari Garrett, Esq., Joel Mintzer, Esq. and Robins, Kaplan, Miller & Ciresi, Minneapolis, MN, and Robert A. Machson, Esq., Weston, CT, counsel for plaintiff.

James L. DeFeo, Esq., Jennifer A. Fleming, Esq., Steven S. Kaufman, Esq., Thomas L. Feher, Esq. and Thompson Hine, LLP., Cleveland, OH; Marc J. Zwillinger, Esq., Washington, D.C., and D. Charles MacDonald, Esq., Martin S. Chester, Esq. and Faegre & Benson, Minneapolis, MN, counsel for defendants.

ORDER

DAVID S. DOTY, District Judge.

This matter is before the court on plaintiff's and defendants' the file, record and proceedings herein, and for the following reasons, the court grants both motions in part.

BACKGROUND

In this commercial landlord-tenant dispute, plaintiff Best Buy Stores, L.P. ("Best Buy") alleges that it was overcharged for insurance-related costs under various lease agreements. Best Buy is the largest consumer electronics retailer in the United States. Defendant Developers Diversified Realty Corporation ("DDRC") is a publicly traded real estate investment trust that owns and manages numerous shopping centers. Pursuant to various lease agreements, Best Buy rented fifteen retail properties between 1998 and 2005 from the following defendants: DDRA Ahwatukee Foothills, L.L.C. ("Ahwatukee"); DDR MDT Fayetteville Spring Creek, L.L.C. ("Spring Creek"); DDR Flatiron, L.L.C. ("Flatiron"); JDN Realty Corp.;¹ DDR MDT Turner Hill Marketplace, L.L.C. ("Turner Hill"); DDR PDK Salisbury, L.L.C. ("Salisbury"); DDR MDT Shoppers World, L.L.C. ("Shoppers World"); DDR MDT Riverdale Village Outer Ring, L.L.C. ("Riverdale"); DDR Hendon Nassau Park II, L.P. ("Nassau Park"); Benderson-Wainberg Associates, L.P. ("B-W"); BG Boulevard III, L.L.C. ("Boulevard"); DDR MDT Great Northern, L.L.C. ("Great Northern"); DDR MDT Cool Springs Pointe, L.L.C. ("Cool Springs"); DDR MDT Lakepointe Crossing, L.P. ("Lakepointe") (collectively "landlord defendants").² The landlord defendants were distinct legal entities that DDRC owned in whole or in part. DDRC managed the properties pursuant to separate management agreements with each landlord defendant.

Subject to certain variations, the lease agreements generally required the landlord defendants to obtain property and liability insurance for the common areas of the shopping centers and Best Buy to reimburse its pro rata share of the cost of insurance. (See Pl. Exs. 1 arts. 9(F), 9(H); 2 art. 22.2; 3 art. 22.6; 4 art. 22.2; 5 art. 22.2; 6 arts. 4, 19; 7 art. 22.2; 8 art. 22.2; 9 art. 23.2; 10 art. 22.2; 11 art. 22.2; 12 art. 12.7; 13 art. 13(A); 14 art. 23(b); 15 art. 22.2.) As property manager, DDRC procured blanket insurance policies with high deductibles—typically $100,000—from third-party commercial insurance companies for all of the properties that it managed.³ DDRC assumed responsibility for losses within the deductible ("first dollar program"⁴) and billed the landlords for taking on that risk ("first dollar premiums"). The landlords in turn billed the tenants for their proportionate cost of the first dollar premiums. DDRC determined the amount to charge the landlords, relying on market indicator letters from insurance companies that provided estimates for a first dollar insurance policy.⁵ Most of the insurance companies, however, expressed that they would not issue such policies, and DDRC generally charged less than the quoted prices. During the lease years, DDRC billed substantially more for first dollar premiums than it paid out in claims.

A. DDRC's Billing and Disclosures

As early as March 3, 1999, Best Buy received a 1998 memorandum from DDRC explaining "the self-funded insurance program that is maintained by [DDRC]."⁶ (Pl. Ex. 112.) The memorandum stated that:

In addition to the standard variables considered by the insurer to establish the premium for the public liability and property damage coverage, [DDRC] has been able to negotiate significant reductions of the premium by agreeing to self fund the first $100,000 of public liability claims, inclusive of attorney fees, court costs and related expenses, and the first $25,000 of property loss, before the insurer would be required to pay any excess loss.... Because of its obligation to self fund the initial $100,000 of public liability claims and $25,000 of property damage claims, [DDRC] is given more control over the administration and resolution of its claims which helps to maintain the lower premium regardless of fluctuations in the marketplace. This self-funded coverage, while similar to a deductible, is not, in fact, a deductible. ...

While [DDRC] has assumed 100% of the risk for self-funded and uninsured losses, this risk is not passed on to the shopping center tenants who are obligated to reimburse the landlord its prorata share of insurance. Instead, [DDRC] includes in its insurance billing to its tenants a self-funded allocation which is intended to compensate [DDRC] for assuming 100% of the risk for self-funded and uninsured loss. However, the aggregate cost of the premium and the self-funded allocation is less than the cost for first dollar coverage for each property on a "stand alone" basis (i.e. insurance quoted on a single property basis rather than a blanket policy basis for multiple properties) under a standard commercial policy with no self-funded reimbursement obligation by the insured. It should also be noted that while many insurance companies may be willing to quote a price for first dollar or higher deductible coverage, most insurance companies are unwilling to actually issue a policy of this nature due to the higher risks involved in insuring only a single property. Additionally, tenants should be made aware that its prorata share of the premium and self-funded allocation is the only insurance obligation the tenant is required to pay during the fiscal year. Most landlords who maintain standard commercial insurance policies with deductibles will include with the annual common area maintenance ("CAM") charge any dollars the landlord is required to pay for legal expense and/or deductible payments in addition to the prorata share of the higher premium. Therefore, the tenant pays its prorata share of the premium, plus any out-of-pocket expenses incurred by the landlord to pay the deductible portion of coverage and legal expenses, if applicable. This amount is not fixed and could significantly increase the tenant's CAM charge.

(Id.)

Near the beginning of each lease year, DDRC provided budgets to Best Buy on behalf of the landlord defendants anticipating the amount Best Buy would be billed in the coming year for CAM and insurance. DDRC then billed Best Buy monthly pursuant to that budget. Several months after the conclusion of each lease year, DDRC submitted documents to Best Buy either requesting additional payments because the actual costs exceeded the budget or crediting overpayments ("reconciliation documents"). The reconciliation documents did not explain how the insurance charges were calculated.

The reconciliation documents for the 1998 and 1999 lease years noted that the insurance allocations "include premiums collected by Mesirow Insurance Services and funding for large deductibles collected by DDRC." (Defs. Ex. O.) That language was altered in the 2000 and 2001 lease years to provide that the insurance allocations "include premiums and funding for large deductibles. Premiums are collected by Mesirow Insurance Services. Funding for large deductibles [is] collected by DDRC."⁷ (Defs. Ex. P.) In 2002 and 2003, DDRC included a separate line item identifying the "deductible cost." In addition, the reconciliation documents noted that "[i]nsurance company costs collected by Mesirow Insurance Services. Self-Insured Deductible costs charged for and collected by DDRC."⁸ (Defs. Ex. Q.) The 2004 reconciliation documents provided a "First Dollar Program Cost Summary." This summary identified the charges for the first dollar premiums and noted that DDRC's "program provides first dollar coverage to Tenants for incurred General Liability and Property losses. In the event of an insured loss, incurred losses are not charged back to a Tenant but retained by [DDRC]." (Defs. Ex. R.)

For the 2005 lease year, DDRC created two captive insurance companies—American Property Protection Company ("APPC") and National Property Protection Company ("NPPC")—to provide the first dollar coverage ("captive coverage").⁹ DDRC paid premiums ("captive premiums") to the captive insurance companies for insuring the within-deductible risk and billed the landlord defendants for those premiums. The landlord defendants then billed Best Buy its pro rata share of the premiums.¹⁰ The reconciliation documents again explained the first dollar program using language nearly identical to the 2004 documents but replaced "retained" with "absorbed." In addition, the 2005 documents included invoices from NPPC or APPC indicating that the charges were for first dollar premiums. (Defs. Ex. S.)

B. Best Buy's Review Process and Objections

Before 2000, Best Buy paid its rent only after a thorough review of the documentation provided by DDRC, which often resulted in Best Buy making late payments. Best Buy changed its review process in 2000 to ensure timely payments. Under the new process, an operating expense analyst ("OEA"...