In the wake of the coronavirus, businesses and courts remain shuttered as a result of stay-at-home government orders. Businesses and organizations are grappling daily with the changed circumstances that the virus brought. Below we offer a summary of court complaints filed in four key areas in the weeks immediately following the lockdown orders. No decisions have been reached.
A link to additional analysis on the recent increase in COVID-19 related class actions can be found here.
In New York, the company known for comic con event planning sued its third party software company in federal court for refusing to refund electronic tickets to customers after the March 20-22, 2020 event was canceled due to the coronavirus and attendant governmental orders. Plaintiff seeks refunds and damages, citing a provision in the parties’ Ticketing Agreement that excuses a party’s performance if it was prevented, hindered, delayed or otherwise made impracticable due to “governmental action” or an “act of god.” Similarly, other event ticket buyers have sued in federal court for cash refunds denied them by Seat Geek. In another New York case, a franchisee of 30 children’s theme parks is seeking to prevent the franchisors-defendants from terminating their franchise agreement during the global pandemic, relying on a force majeure provision in those parties’ contract. Plaintiff is seeking a preliminary injunction to prevent termination and damages.
Similar litigation was filed in courts in the Washington, DC-area. A technology company recently filed suit in Virginia federal court against a hotel chain and its affiliates after the hotel charged a hefty fee following the company’s cancellation of its annual conference in May due to pandemic travel restrictions. The company seeks a ruling from the court that the hotel’s $300,000 “cancellation invoice” is unenforceable, relying on the contract’s force majeure clause and the common law defense of impossibility of performance. In another Virginia federal court filing, a company seeking to purchase several real estate plazas sued the current owners of the properties, alleging that the sellers had misrepresented that there were no uncured tenant defaults, whereas in late March tenants had informed the sellers that the tenants would not be paying rent and other charges, presumably related to the pandemic. Plaintiff-buyer is pursuing a breach of contract claim based upon the defendants’ failure to provide that information, as well as a declaratory judgment that the $1 million in escrow should be refunded to the plaintiff.
In New York federal court, various businesses in the hospitality industry have filed four class actions filed on behalf of policyholders seeking coverage from the effects of having been forced to close, each pleaded differently. All are seeking business interruption losses and extra expenses. The first case, filed in April against Lloyd’s of London, is on behalf of pizzerias located in Florida and New York. The complaints allege breach of contract for denial of coverage based on the stay-at-home orders, which are said to have caused direct physical loss and damage, requiring suspension of business operations or prohibiting access to property immediately surrounding the damaged property, within the prohibited area and the orders taken “in response to dangerous physical conditions.” Dentists have also sued individually on the same theory in New York federal court. A second group of class action cases was filed on behalf of restaurants in New York, seeking declarations from the courts that property damages and loss of business income are covered by insurance.
A third class action was also filed by night clubs, a bridal retailer, a bakery, a chain of restaurants and bars, a dental practice, and pizzerias against six insurance companies (Aspen American Insurance Company in Texas, Auto-Owners Insurance Company in Ohio, Lloyd’s of London in New York, Society Insurance Company in Wisconsin, Oregon Mutual Insurance Company in Oregon, and Topa Insurance Company in Wisconsin). The complaint alleges that the businesses were forced to close due to COVID-19, but the carriers denied their claims. In a fourth class action filed in April, restaurants and bakeries in Florida and New York (and other cases filed individually) sued Hartford Financial and related companies for business interruption damages. They allege that business losses are not caused by one of the exclusions in the policy, and they suffered a direct physical loss or damage to their property because they have been unable to use their property for its intended purpose. Also in April, Thor Equities, a commercial property owner of hotels and other residential properties in the US sued Factory Mutual Insurance Company in federal court for failing to provide coverage for significant losses ($100MM+), including losses in rental income and extra expenses. Social Life Magazine also filed a breach of contract lawsuit against Sentinel Insurance Company seeking recovery of business income.
Another class action involving restaurants is moving forward in federal court in Washington, DC. A group of restaurants, led by GCDC Grilled Cheese Bar, filed suit against Hartford Financial, alleging improper denial of insurance coverage. The restaurants allege that they have suffered heavy financial losses as a result of their compliance with local governmental shut down orders. A case in Maryland state court against Lloyd’s of London advances similar arguments and allegations.
The majority of complaints in California that originate from COVID-19 and stay-at-home orders relate to insurance claims. The most common claims are for declaratory judgment under an All-Risk policy with Civil Authority coverage. The central coverage issue relates to whether the presence of the virus constitutes physical damage to property that prompted the local and state stay-at-home orders the caused resulting business losses. Such claims have been made by:
- A Newport Beach marketing agency, which filed a class action in the Northern District of California against Transportation Insurance Company;
- A Los Angeles law firm, which filed a state court complaint against Travelers Indemnity Company (and Travelers filed a similar suit against the same law firm in the Central District of California);
- A Los Angeles-based museum and cultural center that was forced to cancel certain fundraising events, a movie premier, and all other income-producing operations due to state and local stay-at-home orders, which filed a federal court complaint in Los Angeles against Chubb Insurance;
- A Los Angeles commercial office landlord, which filed suit in Los Angeles Superior Court against Hartford Insurance Company and Sentinel Insurance Company, and included a claim for bad faith due to knowing the claim denial was improper and ignoring directives from the California Department of Insurance;
- A Los Angeles beauty salon, which filed a class action complaint in the Central District of California against Sentinel Insurance Company;
- A Southern California restaurant owner, which filed suit in Los Angeles Superior Court against Travelers Indemnity Company;
- A Los Angeles-area owner of a print shop and beauty services businesses, which filed suit in Los Angeles Superior Court against Travelers Indemnity Company;
- A San Diego County restaurant and nightclub owner, which filed a class action complaint in the Central District of California against Topa Insurance Company;
- A Los Angeles restaurant, which filed suit in Los Angeles Superior Court against Travelers Indemnity Company;
- A collection of Connecticut footwear wholesalers doing business in California, which filed a complaint in Los Angeles Superior Court against Hartford Fire Insurance Company;
- A Los Angeles restaurant, which filed suit in Los Angeles Superior Court against Travelers Indemnity Company;
- the owner of several artisan-craft retail stores, which filed a class action complaint in the Southern District of California against Hartford Financial Services Group and Sentinel Insurance Company.
- A Los Angeles restaurant, which filed a breach of contract and bad faith case against Mitsui Sumitomo Insurance and a negligence claim against insurance broker HUB International.
Real Estate Transactions, Leases
In cases filed in New York, real estate buyers are seeking either court-ordered extensions of closing dates and/or rescission of their contracts to purchase. In these cases, the buyers have sought temporary restraining orders/preliminary injunctions to prevent the sellers from reneging on the transaction. In a similar case filed in Maryland state court, the plaintiff filed an action against the seller in a commercial real estate transaction where the seller refused to extend the closing date or refund the plaintiffs’ deposit in a transaction delayed by COVID-19. Plaintiff is seeking a declaratory judgment that it was not obligated to consummate the closing on the specified date and is entitled to a reasonable extension until after the pandemic subsides. Other cases filed in state courts in New York and Queens involve sellers whose buyers defaulted in closing and that are seeking to retain the escrowed deposit.
Meanwhile, numerous commercial tenants in New York and elsewhere have rescinded their leases. In response, landlords have filed suits contesting the rescission, or tenants have filed suits seeking rescission of their leases as a result of state government stay-at-home orders. Tenants are also delaying vacating premises due to the orders requiring tenants to remain at home. In Virginia, property owners have proactively filed lawsuits and sought injunctive relief to prevent pending foreclosure actions due to COVID-related inability to make mortgage payments.
In California, an LLC that had a $4,200,000 contract to purchase real property (a former gas station) from a petroleum company filed suit to invoke the purchase agreement’s force majeure clause. The parties signed the purchase agreement in early February 2020 and set the closing date for March 31, 2020. Between the signing and closing dates, California’s governor declared a state of emergency in the state, President Trump declared a state of emergency in the country, and both the governor and the mayors of Los Angeles and Culver City – where the property is located – issued stay-at-home orders. Based on these orders, the purchaser alleges that it was illegal for its agent to execute purchase documents in person before a notary, and it became impractical and illegal to use the property for its stated purpose after closing for redevelopment. For these reasons, the purchaser invoked the force majeure clause to excuse its performance, though it wished to complete the transaction once the emergencies and stay-at-home orders had been lifted. The seller instead terminated the purchase agreement due to the failure to close by March 31, the seller blamed on the loss of a tenant, and thus did not extend the closing date due to the force majeure events as required by the contract.
Mergers and Acquisitions
In New York federal court, purchasers of American Depository Shares of Phoenix Tree Holdings Ltd. sued the directors, officers, and underwriters for violating Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The suit claims that at the time of the IPO in late January 2020, the Offering Materials materially misrepresented or omitted the Company’s exposure to significant adverse developments resulting from the effects of the coronavirus, including the Company’s investments in the residential rental market in China, notably in Wuhan, where the virus began.