Firm News: punitive damages



         The First Department has reduced the awards to plaintiffs in the widely covered crane collapse case of May 30, 2008. The First Department also upheld the preclusion of a defense expert whose testimony was deemed to be speculative and conclusory. Additionally, the First Department upheld the piercing of the corporate veil to hold defendant James Lomma, personally, and many of his other companies liable to plaintiffs. Below is a recap of the First Department’s lengthy decision.

The Crane Collapse
         On May 30, 2008, a crane collapsed on East 91st Street in Manhattan, resulting in the deaths of crane operator Donald Leo and construction worker Ramdan Kurtaj. The subject crane was leased from defendant NY Crane, a company owned by individual defendant James Lomma. In 2007, before being used on the 91st Street project, it was determined that the crane’s bearing ring, upon which both the operator’s cab and counterweight arm rested, had developed a crack and required replacement. Lomma admitted knowing that any failure of the bearing ring would have catastrophic results. Upon being informed that a replacement from the original manufacturer would cost $34,000.00 dollars, and would take one (1) year to manufacture, Lomma directed an employee to find an alternative. This employee, who had no technical expertise, performed a Google search and located a China-based company, RTR, who claimed it could make the bearing ring for only $20,000.00 dollars and on the needed timeline. Defendant corporation JF Lomma paid for the bearing ring.

         Lomma pressed forward with RTR to manufacture the bearing ring, despite RTR’s own stated reservations about its ability to weld the bearing. Lomma paid RTR an additional $1,710.00 dollars, and provided them general information from the manufacturer regarding the welds. RTR then agreed to weld the bearing. During the manufacturing process for this bearing, Lomma contacted engineers to get their input on the bearing and potential certification of same, however none of the engineers would sign off on the bearing for DOB certification. As a result, Lomma, who is not an engineer, certified the bearing himself. Upon receipt of the replacement bearing, Lomma had the steel tested to ensure compliance with industry requirements but he did not have the weld tested. The bearing was then installed by Brady Marine Repair Co., who did not test the welds because Lomma did not request they do so. Lomma then contacted a former NY Crane employee, now employed with DOB, to inspect the crane to be placed back in service. This DOB employee only visually inspected the crane, a breach of DOB protocol. On April 19 and 20, 2008 the crane was erected, and at that time passed DOB testing. In late April, Brady Marine informed Lomma that another RTR-manufactured turntable had a bad weld that was pitted and not fused properly. Lomma did not take any action to determine if the just installed bearing ring had similar flaws, and instead negotiated a discount of $6,000 for the other ring.

         For the next five weeks, the crane performed without issue. However at 8:00 a.m. on May 30, 2008, as Donald Leo was operating the crane to lift a basked of electricians' tools, the “headache ball”, a ballast used to keep the lifting line taught, was 30 to 40 feet off the ground, and stationary when the crane began to tip backwards. Donald Leo was trapped, alone, in the operator cab. Witnesses testified to seeing him pray and then brace himself against the coming impact. He suffered catastrophic injuries, and died less than 20 minutes after the accident. Ramadan Kurtaj screamed at his coworkers to run, and his injuries were indicative of attempts to brace himself against the impact. Kurtaj succumbed to his injuries approximately four (4) hours after the accident.

The Trial and Jury Award
         Plaintiffs presented testimony from numerous experts all of whom pointed to the inadequacy of the RTR welds in bringing about the crane collapse. Defendants were only able to present one expert at trial, Edward Cox, as another expert, James Wiethorn, was precluded. Even Cox, defendants' own expert, testified that he would not have certified the RTR bearing.

         The jury found defendants Lomma, NY Crane and JF Lomma negligent. For Plaintiff Leo the jury awarded $7.5 million for pre-impact terror, $8 million for pain and suffering, and $24 million in punitive damages. For Plaintiff Kurtaj the jury awarded $7.5 million for pre-impact terror, $24 million for pain and suffering, and $24 million for punitive damages. Lomma, NY Crane and JF Lomma appealed the awards as well as the preclusion of their expert witness, Wiethorn, and the piercing of the corporate veil subjecting Lomma to personal liability. Though the appellate court did reduce the awards, it upheld Wiethorn’s preclusion and the piercing of the corporate veil.

Where Entities Are Treated As One, The Corporate Veil Will Be Pierced
         Mr. Lomma was found to have exercised complete dominion over multiple businesses, all of which were determined to have operated, essentially, as one entity and were treated as such by Lomma himself. The First Department found that each of the various companies would rent equipment from the other at will, profits were readily shifted between companies, and they all shared the same offices, email and staff. Most damning for Lomma was his personal involvement in the events that brought about the crane collapse. The court found that Lomma was personally involved in the events that launched a dangerous instrumentality, failed to respect the corporate form of his businesses and was therefore able to be held personally liable to plaintiffs. It is important to note that Lomma himself was acquitted of criminally negligent homicide, and all charges, resulting from this accident.

Expert Testimony Precluded Where Plainly Contradicted by Facts in Evidence
         The First Department also upheld the trial court’s preclusion of defense expert Wiethorn, holding that his opinion was conclusory and plainly contradicted by the record. Essentially, Wiethorn placed the blame for the accident on Leo, opining that Leo “high boomed” and “two-blocked” the crane. The First Department found that none of the eyewitness accounts of the accident would support Wiethorn’s theory, and that he was contradicted by the physical evidence. The First Department upheld the trial court’s decision to preclude the testimony as it would have lacked probative value in that it was conclusory, speculative and contradicted by the evidence.

Damages Reduced, but Remain Significant
          In reducing the awards to plaintiffs the First Department sought guidance from similar cases. Pre-impact terror is a subcategory of conscious pain and suffering designed to compensate for the time between the first apprehension of danger and the resulting injuries. The First Department noted that each plaintiff experienced inconceivable pre-impact terror, and tried to shield themselves from the debris. The pre-impact terror awards to Leo and Kurtaj of $7.5 million each were found to be excessive regardless, and reduced to $2.5 million and $2 million, respectively.
         The awards to Leo and Kurtaj for conscious pain and suffering, $8 million and $24 million, respectively, were also reduced by the First Department. An award of conscious pain and suffering requires proof of some level of cognitive awareness following the injury. The burden of proof falls to plaintiff to prove consciousness following an accident. The record established that Leo was conscious for less than 20 minutes following the accident, and that Kurtaj would remain alive for some four (4) hours. The injuries suffered by each man, as detailed in the record, were catastrophic. With regard to Leo, the First Department noted that other plaintiffs, also surviving for a brief period of time following an accident, were awarded damages of less than $1 million for conscious pain and suffering. However, the court also noted that the injures suffered by Leo were extreme, and then reduced the award to $5.5 million. As to Kurtaj, the court again looked to similar plaintiffs and found awards ranging from $1.2 million to $3 million. The court again noted, however, that Kurtaj’s injuries were almost singular in their devastation, and then reduced his award to $7.5 million.
         Each plaintiff was awarded $24 million in punitive damages, which was then reduced to $8 million for Leo and $9.5 million for Kurtaj. In upholding an award of punitive damages in this case, the court found that Lomma placed profit over the safety of the public and construction workers, and made numerous calculated decisions toward that end. The court noted that Lomma failed to test the welds, have them properly certified and failed to act when warned about the welds on another crane. The court noted that the accident occurred early in the day, and that had it occurred later, the result could have been even more devastating. However, the court also noted that punitive damages must comport with constitutional limitations, specifically the Due Process Clause which prohibits grossly excessive punishments. The First Department found that a reduction in the awards was necessary, but that a sizeable award was required to punish the defendants and to deter any future misconduct. It should be noted that, in addition to Lomma himself, all of his companies were also acquitted of criminal charges in this matter.
Anne Armstrong, corporate veil, crane collapse, excessive, expert preclusion, insurance, jury award, punitive damages

Binding Arbitration: A New Timebomb for Lawyer and Client, by Arthur Xanthos

It is customary to recommend to a range of clients that they agree to binding arbitration as a mechanism to resolve future disputes under an agreement. Arbitration is often regarded as a cheaper, quicker alternative to litigation.  The typical arbitration clause reads as follows: "Any dispute arising under this agreement shall be resolved by arbitration before the American Arbitration Association in New York City under the commercial arbitration rules then in effect." It is just as customary in the same agreement to choose a particular State law, e.g., New York law, to govern the resolution of future disputes.  A simple version of this choice of law clause reads as follows: "This agreement shall be governed by the laws of the State of New York."

Yesterday, the New York State Appellate Division, First Department, had the opportunity to consider a case involving an agreement containing both clauses.  A limited liability company's operating agreement contained both an arbitration clause and a choice of law (New York) clause. But the commercial arbitration rules (mandated by the arbitration clause) conflicted with New York State law (mandated by the choice of law clause) in one important respect: commercial arbitration rules permit an arbitrator under some circumstances to assess punitive damages against a party to the arbitration.  New York State law, on the other hand, does not permit an arbitrator to assess punitive damages.  So when an agreement contains both clauses (commercial arbitration rules, and New York State choice of law), may an arbitrator award punitive damages?

Yes, said the Appellate Division in a sharply divided 3-2 decision. Matter of Flintlock Constr. Servs. LLC v. Weiss, 2014 NY Slip Op 05818 (8/14/2014).  The majority held that the operating agreement's choice of law provision, in the absence of additional limiting language, "is insufficient to remove the issue of punitive damages from the arbitrator".

The Flintlock decision is problematic for two reasons: First, what do contracting parties do about their already executed agreements that now have conflicting clauses? It is barely overstatement to say that the overwhelming majority of shareholder agreements, operating agreements, asset sale agreements, and even employment agreements contain both of these clauses.  Second, how should such agreements be drafted going forward?  Pending an appeal of the Flintlock decision, attorneys should follow the First Department's direction and place limits on the arbitrator's power to impose punitive damages.  The new clauses might read as follows:

              "ARBITRATION. Any dispute arising under this agreement shall be resolved by arbitration before the [NAME OF ARBITRATION TRIBUNAL] in [LOCATION].  The arbitration shall be conducted under commercial arbitration rules then in effect, but the arbitrator(s) shall resolve the dispute in accordance with the laws of the State of New York without giving effect to principles of conflict of laws. The arbitrator(s) shall have the limitations on his, her and their power and authority as are found in New York State law, including without limitation no power or authority to award or assess punitive damages."

                "CHOICE OF LAW. This agreement, its validity, construction, and enforcement, shall be governed by the laws of the State of New York, without giving effect to principles of conflict of laws."

                                                                                            APX 8/15/14 


ADR, alternative dispute resolution, arbitration, Arthur Xanthos, choice of law, contracts, Flintlock, Gartner + Bloom, limited liability company, operating agreement, punitive damages