Fair Is Fair: The Fifth Circuit Decides Fair Market Value In The Absence Of A Market

When Alon's Big Spring, Texas oil refinery exploded on February 18, 2008, destroying Veolia's waste treatment facility, Alon did not even bother to contest its liability for the damages to Veolia's facility. Nor did Alon dispute that the only proper measure of damages for the completely destroyed facility was its fair market value immediately prior to the explosion. However, the problem faced by the Fifth Circuit in Factory Mutual Insurance Co. v. Alon USA L.P. is that there is a market for the facility's used parts but no "market" for the facility system itself.

After stipulating to liability, Alon contended that Veolia's insurer, FM, was only entitled to the cost of the facility's component parts. The value of the component parts was $877,882. FM claimed that Alon instead owed $6,106,880, the total replacement cost of new parts and labor adjusted downward for depreciation from the time the facility was built until the explosion that destroyed it. The Northern District of Texas court ultimately awarded FM $3,790,391.96 plus interest. The trial court first took the total cost of new equipment, including taxes and shipping, then incorporated additional money for contingency, installation, testing, and startup and finally multiplied the total by .65 to account for 35% depreciation. Alon appealed. Based on the reasoning below, the Fifth Circuit affirmed.

Typically, a court called upon to determine fair market value would simply look to the price that willing buyers were offering for similar property being sold by unobligated sellers. Thomas v. Oldham, 895 S.W.2d 352, 359 (Tex. 1995). The Northern District of Texas court faced with Alon's case said that it could not do that because "the market price of such used subsystems does not reflect the market value...