September 11 Litig. World Trade Ctr. Props. LLC v. Am. Airlines, Inc.
| Decision Date | 06 April 2017 |
| Docket Number | 08 Civ. 3719 (AKH),08 Civ. 3722 (AKH),21 MC 101 (AKH) |
| Parties | IN RE SEPTEMBER 11 LITIGATION World Trade Center Properties LLC, 1 World Trade Center LLC, 2 World Trade Center LLC, 3 World Trade Center LLC, 4 World Trade Center LLC, 7 World Trade Center Company, LP, Plaintiffs, v. American Airlines, Inc., AMR Corporation, United Airlines, Inc., UAL Corporation, Massachusetts Port Authority, Colgan Air, Inc., U.S. Airways Group, Inc., Huntleigh USA Corporation, Globe Aviation Services Corporation, U.S. Airways, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
ORDER AND OPINION CONSTRUING WTCP LEASES AND REGULATING FURTHER PROCEEDINGS
This opinion follows remand by the Second Circuit Court of Appeals and construes the relevant provisions of the four identical net leases (the "Lease") for Buildings One, Two, Three, and Four of the World Trade Center, destroyed on September 11, 2001 by terrorist-related aircraft crashes. My interpretation of the terms and conditions of the Lease shall provide the parameters by which the parties' experts should express their opinions as to the values of the the leaseholds immediately following their destruction on September 11, 2001.
Plaintiffs are the lessees of Buildings One, Two, Three, Four, and Seven of the World Trade Center.1 They brought two lawsuits against various aviation companies and security contractors2, alleging that defendants' negligence in overseeing airport security systems allowed terrorists to carry out the attacks of September 11: one lawsuit for the destruction of Buildings One, Three, and Seven, see 08-cv-3722, and the second for the destruction of Buildings Two and Four, see 08-cv-3719. Upon signing the 99-year leases, WTCP procured multiple-company insurance coverage aggregating $3.5468 billion per occurrence, covering both property damage and business interruption risks. After extensive litigation, plaintiffs recovered$4.044 billion from their insurers. In re Sept. 11 Litig., 957 F. Supp. 2d 501, 511 (S.D.N.Y. 2013), aff'd in part, vacated in part, , 802 F.3d 314 (2d Cir. 2015).
Defendants moved for summary judgment after substantial discovery proceedings and fruitless mediations, arguing that the insurance recoveries exceeded plaintiffs' potential tort recoveries. Id. at 501. After a series of rulings and discoveries, culminating in a five day bench trial, I entered judgment for defendants and held that any potential tort recovery by plaintiffs would have to be offset against their insurance recoveries, and that plaintiffs' insurance recovery exceeded their potential tort recovery. Id. at 511. Plaintiffs appealed, and the Court of Appeals affirmed my holdings that plaintiffs are entitled to compensation only for the diminution of value of their leasehold interests as a result of the attacks and not reconstruction costs, that they cannot recover consequential damages, and that, pursuant to CPLR § 4545, their insurance recoveries corresponded to, and offset, their potential tort award. In re Sept. 11 Litig., 802 F.3d 314, 321-22 (2d Cir. 2015).
The Court of Appeals also vacated and remanded for further proceedings. The Court directed me (1) to recalculate the diminution in value of the leasehold interests, utilizing the willing-buyer, willing-seller approach and allowing for negative valuation when calculating the post-attack value, and (2) to recalculate prejudgment interest using New York's statutory prejudgment interest rate rather than the federal funds rate, and only on a final damages award. Id. at 322.
I had held that the damages that plaintiffs could recover were the difference between the market values immediately before and immediately after September 11, 2001. I held that plaintiffs' argument that their leaseholds could have a negative value was a subterfuge to recover reconstruction costs. See In re Sept. 11 Litig., No. 21 MC 101AKH, 2009 WL1181057, at *1, 3 (S.D.N.Y. Apr. 30, 2009), vacated and remanded, 802 F.3d 314 (2d Cir. 2015). However, the Court of Appeals determined that:
WTCP's rental payments created the leasehold interest, but do not necessarily reflect the amount that a buyer in the open market would have paid to assume WTCP's rights and obligations under the leases—the relevant inquiry when assessing the market value of a leasehold estate. Similarly, $0 is an incorrect post-attack valuation. Although WTCP could expect to receive $0 in rent from the destroyed buildings, that figure fails to account for the company's obligation to, at a minimum, continue paying rent.
In re Sept. 11 Litig., 802 F.3d at 336.
Continuing its reasoning, the Court ruled that since WTCP had continuing rental obligations to the Port Authority, "WTCP's leasehold interests had a negative value after the attacks, and the diminution-in-value calculation must incorporate that negative market value." Id. Accordingly, the Court remanded so that "those continuing obligations [under the Lease] that are unrelated to reconstruction" of the WTC Towers could be considered and valued. Id. at 337.
My task now is to "reassess the diminution in value of th[e] leasehold estates by considering their pre- and post-attack market values, with the post-attack values measured as if the Leased Buildings were not reconstructed." Id. at 338. The market value of the leaseholds is to be determined by "the price at which the lease-rather than the physical property in the estate-would change hands between a willing buyer and a willing seller in a competitive market," considering "the rights and the obligations associated with the lease." Id. at 335. Furthermore, in valuing the leaseholds, the Court held that "it is emphatically not the case that Plaintiffs are entitled to damages that reflect a guaranteed profit on their leases." Id. at 338.
The Court suggested two ways to determine the value of the leaseholds under a "willing-buyer, willing-seller approach": (1) a "sales comparison approach" comparing properties similar to the subject property, and (2) an "income capitalization approach" analyzingreasonably anticipated costs and revenues and capitalizing the income into an indication of present value. Id. at 335. The result could be "either a positive or a negative market value." Id.
I had determined the pre-9/11 value as $2.805 billion, the price that the Silverstein companies had offered, and that the Port Authority had accepted, in April, 2001 for four identical 99-year net Leases to the World Trade Center properties other than Tower Seven. The Court of Appeals disagreed, ruling that the $2.805 billion figure "reflects only the net present value . . . of rental payments that WTCP committed to make to the Port Authority and not the pre-attack value of the leasehold interest." Id. at 336 (internal quotation marks omitted). However, it left to me "to decide, in the first instance, whether there is a genuine dispute of material fact about whether WTCP's pre-attack leasehold interests had positive value, using the principles outlined [in the mandate]." Id. at 338.
I hold, on remand and after careful consideration of the record, that $2.805 billion reflects the amount that a buyer in the open market would have paid to assume WTCP's rights and obligations under the Lease immediately before the terrorists' attack on September 11, 2001. The plaintiffs agreed to pay this value in April 2001, when their bid at auction was accepted by the Port Authority. That $2.805 billion value encompasses more than the net present value of rental payments: it reflects all income that Silverstein anticipated he would earn over the 99-year life of the leaseholds, less costs and anticipated expenses. The Court of Appeals recognized this:
It is also significant that WTCP signed its lease agreements shortly before the terrorist attacks. The district court was correct to observe that market value often reflects expected profits. Indeed, both this Court and New York courts agree that [m]arket value damages are based on future profits as estimated by potential buyers who form the market and reflect the buyer's discount for the fact that the profits would be postponed and ... uncertain. When there is a recent sale price for the subject asset, negotiatedby parties at arm's length, that price may be the best evidence of the asset's market value taking into account expected profits.
In re Sept. 11 Litig., 802 F.3d at 337 (internal quotation marks and citations omitted) (emphasis added); see Schonfeld v. Hilliard, 218 F.3d 164, 178 (2d Cir. 2000). The agreed price followed a worldwide auction conducted by the Port Authority for the World Trade Center properties, in which Silverstein Properties and other real estate companies bid for the 99-year net Leases. The bundle of rights, obligations and expectations that WTCP purchased in the competitive auction, and that were reflected in the lease agreements for the properties, were eventually the same rights, obligations and expectations that a willing buyer would have paid, and a willing seller would have accepted, immediately before the destruction of the properties on September 11, 2001.
I recognize that the Second Circuit, citing plaintiff's expert Sheldon Gottlieb, stated that "$2.805 billion reflects only the net present value . . . of rental payments that WTCP committed to make to the Port Authority and not the pre-attack value of the leasehold interest." In re Sept. 11 Litig., 802 F.3d at 336. However, Gottlieb, in his fuller remarks, explained that the $2.805 valuation also "included the up-front payment, fixed lease payments and the contingent supplemental lease payments." 21 MC 101, Gottlieb Declaration, ECF 598 at 4. The Port Authority's reversionary fee interest in the World Trade Center properties was not included in the values of the leaseholds, and should not be included, for the Port Authority is not a party plaintiff, and the WTCP plaintiffs did not own,...
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