World Trade Center Properties LLC v. American Airlines, Inc.

Citations: 802 F.3d 314; 2015 U.S. App. LEXIS 16619Docket: Nos. 13-3619-cv, 13-3782-cv

Court: Court of Appeals for the Second Circuit; September 17, 2015; Federal Appellate Court

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Judge Straub concurs in part and dissents in part regarding a case stemming from the property damage caused by the September 11, 2001, terrorist attacks. In April 2001, World Trade Center Properties LLC and its affiliates (WTCP) secured 99-year leases for several buildings at the World Trade Center from the Port Authority of New York and New Jersey. A separate entity, 7 World Trade Company, L.P. (TWTCo), held a lease for 7 World Trade Center. The attacks resulted in the destruction of all five leased buildings, leading WTCP and TWTCo (Plaintiffs) to file a lawsuit in March 2005 against various airlines and security contractors (Defendants) in the U.S. District Court for the Southern District of New York, alleging negligence related to airport security that enabled the hijackings of American Airlines Flight 11 and United Airlines Flight 175.

Judge Hellerstein ruled in favor of the Defendants after a series of legal proceedings, stating that if the Plaintiffs proved liability, they would be entitled to compensation for the loss of their leasehold interests but not for reconstruction or other consequential damages. The court estimated WTCP's leasehold value decline at $2.805 billion and TWTCo's at $737 million. However, both Plaintiffs received insurance payments that exceeded these amounts, aligning with New York Civil Practice Law and Rules § 4545, which requires damage awards to account for insurance recoveries. Thus, the court concluded that the Plaintiffs could not recover damages and upheld the judgment for Defendants. 

Additionally, the court dismissed TWTCo's claims against United Airlines, determining it had no connection to the flight that destroyed 7 World Trade Center. While agreeing on several points with the district court, the appellate court found errors in calculating the decline in leasehold value and in applying the federal funds rate for prejudgment interest. The correct approach would involve using New York's statutory prejudgment interest rate based on the final damages award. Consequently, the appellate court vacated parts of the district court's judgment related to these miscalculations and remanded the case for further proceedings.

On remand, the district court is directed to reassess the reduction in value of the Plaintiffs' leasehold interests, using guidance from this opinion. If applicable, the court should calculate interest on any awarded amounts, adjusted for the offset of Plaintiffs' insurance recoveries, at New York's statutory prejudgment interest rate.

The background details the legislative foundation for the World Trade Center (WTC) complex, authorized by New York and New Jersey in 1962. The WTC, completed in 1973, included a vast public site with various facilities, significantly impacting Manhattan's skyline and economy. The Port Authority acted as the landlord for several office buildings within the complex while exploring opportunities to transfer its role to a private entity. 

In 1996, the Port Authority engaged financial firms to evaluate options for maximizing the value of the WTC, leading to the decision to lease parts of the Main Site Buildings. Following a competitive bidding process, Vornado Realty Trust was initially selected for a 99-year lease worth approximately $3.253 billion. After negotiations with Vornado failed, the Port Authority entered a lease agreement with WTCP in 2001. This agreement allowed WTCP to manage and sublease about ten million square feet of office space, requiring an upfront payment of $491.3 million, along with various rent types and a commitment to restore the buildings if damaged.

The document details financial obligations and insurance arrangements related to the World Trade Center properties, particularly focusing on WTCP and TWTCo. It mentions that both entities committed to covering maintenance, operational costs, tax equivalents, and obtaining substantial insurance policies. WTCP's brochure to investors disclosed the overall purchase price's present value as $2.844 billion. 7 World Trade Center, managed by 7WTCo., was constructed in 1987 under a 99-year lease with the Port Authority, which also required TWTCo. to pay various expenses and rebuild the property if necessary.

The excerpt recounts the September 11, 2001, attacks, detailing how terrorists hijacked flights to crash into the Twin Towers, resulting in destruction of both the Main Site Buildings and 7 World Trade Center, causing significant financial losses for WTCP and TWTCo. Despite the destruction, their leases mandated continued rent payments and reconstruction obligations. Additional financial burdens arose from pursuing insurance claims, replacing tenant improvements, and managing mortgage costs.

To mitigate such risks, WTCP secured an insurance policy covering business interruption and replacement costs up to $3.5468 billion per incident, while TWTCo's policy from Industrial Risk Insurers covered similar losses up to $860 million. Both companies filed insurance claims post-attack; WTCP sought $8.531 billion, with $7.183 billion allocated for replacement costs and $1.348 billion for business interruption. While some insurers promptly paid, others contended the attacks constituted one "occurrence," limiting WTCP's recovery to $3.5468 billion.

WTCP initiated a lawsuit against insurers in the Southern District of New York, resulting in a settlement of approximately $4.1 billion, which included a general release of all claims without allocating the proceeds among WTCP's losses. Separately, 7WTCo. sought $1.497 billion from IRI, with claims for replacement costs, business interruption, and personal property. After initially resisting payment, IRI settled for around $831 million, again without allocating the proceeds among 7WTCo.'s losses.

In 2004, Plaintiffs sued airlines and airport security contractors under the Air Transportation Safety and System Stabilization Act of 2001 (ATSSSA), alleging negligent security contributed to the September 11 attacks. The ATSSSA establishes a federal cause of action for damages related to the hijackings, allowing state law to govern unless preempted by federal law. The applicable substantive law was agreed to be New York law.

Following extensive discovery, Defendants sought summary judgment on WTCP's claims, emphasizing that WTCP should only be compensated for the lost value of their leasehold interests, estimated at $2.805 billion, which they argued represented the present value of rent obligations. They also contended that any tort award must be reduced by WTCP's insurance recoveries under CPLR § 4545. WTCP opposed this, asserting that the market value calculation was inadequate and that the decline in leasehold value exceeded $2.805 billion, also challenging the necessity of offsetting insurance recoveries. Expert testimonies supported WTCP's position, arguing that the agreed rent did not accurately reflect the true decline in leasehold value due to expected profits and additional post-attack costs. On December 11, 2008, the district court partially granted and partially denied Defendants' motion for summary judgment.

New York adheres to the "lesser of two" rule for property damage claims, allowing plaintiffs to recover either the decrease in market value of their property or its replacement cost. In this case, the court determined that the appropriate compensation for WTCP was the decrease in market value, dismissing arguments for replacement costs based on the public purpose of the Main Site Buildings and WTCP's obligation to rebuild. The court did not accept WTCP's assertion that its leasehold interest lost $2.805 billion in value, emphasizing that market values can fluctuate and differ based on ownership type. The court temporarily denied summary judgment to allow WTCP to demonstrate any changes in the value of the Main Site Leases from April to September 2001. WTCP later submitted a declaration from Professor Vandell, who calculated the leasehold's market value to be $1.459 billion before the attacks and negative $5.333 billion afterwards, resulting in a total diminution of $6.792 billion. The district court rejected WTCP's arguments, viewing them as attempts to amend the original summary judgment and limited recovery to $2.805 billion. Additionally, the court granted summary judgment to the defendants on WTCP's claims for retenanting costs and attorney fees, capping potential damages at $2.805 billion. In the related 7WTCo. case, United successfully argued it had no responsibility for security measures related to the hijacking that destroyed its property, leading to the court ruling in its favor due to a lack of evidence connecting it to the incident. The court also addressed a motion regarding 7WTCo.'s recovery, noting any damages must be reduced by insurance recoveries.

The district court determined that 7WTCo. is entitled to compensation for the loss in value of its leasehold interests due to attacks, amounting to a maximum of $737 million, based on a pre-attack valuation by Vandell. However, the court denied claims for reconstruction costs and other consequential damages, including retenanting expenses, lost tenant improvements, attorneys' fees related to litigation with IRI, and mortgage costs. The court also rejected the defendants' argument that 7WTCo.'s potential tort award should be reduced by its insurance recoveries. 

Following the establishment of maximum recoverable damages for WTCP at $2.805 billion and for 7WTCo. at $737 million, the court conducted a five-day bench trial in July 2013 to assess if any tort award should be adjusted due to insurance recoveries. Testimonies included evaluations from two economists regarding the overlap between potential tort recoveries and insurance resolutions. Ultimately, the court ruled in favor of the defendants, noting that WTCP and 7WTCo. received $4.044 billion and $829 million, respectively, from their insurers, which covered the costs of replacing the leased buildings and business interruptions. The court concluded that these insurance recoveries corresponded entirely to the potential tort recoveries, resulting in a set-off that reduced the tort recoveries to zero. Consequently, judgment was entered for the defendants.

On appeal, the plaintiffs argue that the district court erred in its process leading to the dismissal of their claims. The appellate review of summary judgment grants and legal conclusions is conducted de novo, with factual findings from the bench trial reviewed for clear error. The appellate court agrees with the district court's conclusions regarding the limitations on recoverable damages but notes a miscalculation in measuring the market value of leasehold estates.

The court vacates previous orders from August 30, 2009, and December 5, 2012, regarding the valuation of Plaintiffs’ leasehold interests and remands the case for recalculation based on this opinion. Under New York law, damages for negligence aim to restore the injured party to their prior position, either through the diminution in value or the cost of restoration of the property. Two methods of calculating damages exist: (1) the difference in property value before and after the injury, known as the "diminution-in-value rule," and (2) the cost of restoring the property. Although both measures can yield different compensation amounts, New York law generally dictates that the lesser of the two should be awarded to avoid overcompensating the plaintiff. The court agrees with previous decisions limiting recoverable damages to the diminution in market value, which aligns with the principle that compensatory damages should reflect the full economic loss without imposing excessive burdens on the defendant. This principle is consistently applied across various possessory interests, including those related to leasehold interests. Leaseholds are distinct from fee simple interests and have their own market value based on the rights and obligations assumed by the lessee.

If a leasehold property is damaged or destroyed, the value of the leasehold interest decreases because the rights associated with it become less valuable. Compensation should restore the lessee to their pre-damage position, either through monetary equivalent for lost value or funds for repairs. Lessees, unlike fee simple owners, have ongoing rent obligations even after property damage, impacting the leasehold's market value. Experts like Professor Vandell recognize a negative market value in the leases post-damage due to these obligations. 

While lessees argue that their obligation to reconstruct the property warrants compensation based on reconstruction costs, New York courts maintain that such obligations do not justify exceeding damages beyond the diminished market value. Compensatory damages aim to reflect the actual loss rather than future expenditures for replacement, even if the costs exceed the property's prior value. Therefore, courts have historically limited recovery to market value, regardless of any subsequent reconstruction efforts by the plaintiff.

Plaintiffs' obligations to rebuild the Leased Buildings involve allocating reconstruction costs but do not affect the potential tort recoveries. The economic interest in rebuilding for both lessors and lessees exists, but covenants to repair do not increase the damage value from property destruction or place the rebuilding party in a worse position than an unencumbered landowner. Consequently, lessees like WTCP and 7WTCo. should not receive a higher damage award than what a landowner would receive without a contract. New York courts maintain a stance against factoring landowners' rebuilding choices into damage calculations, emphasizing that lessees are entitled only to the unencumbered value of the property. 

WTCP and TWTCo. assert that the diminution of value fails to reflect the property’s unique public benefits and iconic status, advocating for consideration of replacement costs based on expert testimony. However, this argument is deemed unpersuasive. New York courts generally conclude that the fair compensation for property loss is its market value, except in the rare cases of "specialty" properties that lack market prices and warrant compensation based on replacement costs. Such instances are limited to properties specially built for specific purposes, lacking market sales and expected to be replaceable.

Churches, hospitals, and similar structures may hold significant intrinsic value for their owners, yet may lack marketability due to a limited buyer pool. In this context, there is no substantial dispute regarding the adequacy of market value as a measure of damages. The 7WTCo. has failed to demonstrate that the 7 World Trade Center possesses unique characteristics or serves an essential public purpose that would justify damages exceeding lost market value. Expert analysis by Professor Kerry Vandell calculated market value changes based on anticipated income streams pre- and post-September 11 attacks.

For WTCP, evidence shows that its interest in the Main Site Buildings is not classified as "specialty" property justifying reproduction cost as the sole damage measure. WTCP holds 99-year leases for five commercial office buildings, with the Port Authority retaining reversionary rights. Contrary to claims of a lack of market, WTCP acquired its leases through a competitive global bidding process, with the properties regarded as "trophy" assets. WTCP operated these buildings as a landlord, subleasing to commercial tenants, and was required to manage them in line with other Manhattan office buildings.

WTCP's assertion of entitlement to replacement costs is further weakened by the nature of its leasehold, which covered only commercial office space, not the broader public purpose of the World Trade Center Complex. WTCP did not lease the non-commercial aspects or the public benefit derived from the properties, as clarified by appraisal expert Sheldon Gottlieb. Furthermore, U.S. Supreme Court precedent indicates that private property owners are not compensated for the broader community benefit their properties provide. WTCP cannot claim damages for public loss since it did not act as a public trustee for its leasehold interests. The conclusion that neither WTCP nor 7WTCo. is entitled to replacement costs does not diminish the World Trade Center Complex's significance to New York, New Jersey, or the nation, but emphasizes that compensatory damages are not intended to address regional or national healing.

Plaintiffs' leases for office space at the World Trade Center can be valued based on market metrics, allowing for compensation related to the loss in market value of their leasehold interests due to the attacks, but not for reconstruction costs. Plaintiffs seek consequential damages for retenanting costs, attorney fees incurred during litigation with insurers, mortgage carrying costs, and losses from tenant improvements. The district court denied these claims, and the ruling is upheld based on the principle that damages should reflect the diminution in market value rather than replacement costs. The loss of tenant improvements and tenants is already accounted for in the market value assessment, making additional claims for retenanting and restoring improvements an instance of double recovery, which is prohibited. Furthermore, claims for mortgage carrying costs are rejected as the obligation existed prior to the attacks and was not caused by the defendants' actions. Claims for attorney fees are also denied since they must be directly related to the defendant’s actions, which is not established in this case.

Defendants' alleged negligence is deemed insufficiently connected to the Plaintiffs' claimed attorneys’ fees, as the necessary causal chain is overly attenuated. Even if Defendants could foresee that inadequate airport security monitoring might lead to a hijacking resulting in destruction, the subsequent steps—Plaintiffs filing insurance claims, insurers denying payment, and Plaintiffs initiating lawsuits—create a disconnect that does not support recovery for attorneys’ fees. Citing case law, the court affirms that Defendants were not the proximate cause of the injuries sustained. Consequently, the district court correctly limited Plaintiffs' recovery to the diminution in the market value of their leasehold interests.

Regarding the calculation of this diminution, the district court previously assessed WTCP and 7WTCo.’s leasehold interests at $2.805 billion and $737 million, respectively, based on rental payment present value and expert evaluations. However, the court found these calculations misinterpreted valuation principles. Market value should reflect the price between a willing buyer and seller, informed and without compulsion, and should focus on the leasehold interests, not the destroyed physical properties. Leasehold interests are distinct assets, and their value is determined by what a competitive market would offer for the rights and obligations of the lease, potentially using a sales comparison approach for accurate valuation. The decision to remand emphasizes the need for the district court to reassess the maximum possible recoveries based on these principles.

Comparative property analysis and the income capitalization approach are essential methods for valuing real estate, particularly for income-producing properties. A leasehold interest can possess positive or negative market value based on market conditions relative to lease terms. For instance, if a lessee pays $500/month while the market rate is $600/month, the leasehold has positive value, as a buyer would pay up to $100/month to assume the lease. Conversely, if the market rate drops to $400/month, the leasehold may have negative value, as no buyer would pay to assume a $500/month lease when a cheaper option is available.

Plaintiffs' experts criticized the district court's valuation of leasehold interests for not adhering to traditional valuation principles and incorrectly assuming leaseholds cannot have negative value. To assess the diminution in value of leasehold estates, one must calculate the difference between pre- and post-attack market values. The court incorrectly determined the pre-attack value of WTCP's leasehold interest at $2.805 billion, which only reflected rental payment obligations rather than actual market value. Additionally, the post-attack value of $0 was flawed, as it did not consider WTCP's ongoing obligation to pay rent, leading to a conclusion that the leasehold had a negative value post-attack. Expert testimonies emphasized that the valuation should reflect this negative market value, contradicting the district court's approach.

Plaintiffs' expert, Professor Vandell, valued 7WTCo.'s leasehold interest at $737 million using the income capitalization approach before September 11, 2001. The district court accepted this valuation as the pre-attack market value but incorrectly assessed the post-attack value as $0. This valuation misrepresents the leasehold's post-attack worth, as it ignores the ongoing obligation to pay rent. Consequently, the district court's method for calculating the decline in value of leasehold interests does not align with established practices, prompting a remand for reassessment of Plaintiffs' recoverable damages.

However, the conclusion regarding the district court's error in valuing the leasehold interests does not imply endorsement of Plaintiffs' damages claims or guarantee a trial or recovery. The district court noted flaws in Plaintiffs' damage appraisals, particularly their omission of denied reconstruction costs. Vandell's calculations included costs associated with replacing the leased buildings, which should not be considered in light of the denial of reconstruction costs. The post-attack valuation must therefore reflect only those obligations unrelated to reconstruction, such as ongoing rent payments.

Additionally, WTCP signed its lease agreements shortly before the attacks, and market value typically considers expected future profits, as recognized by both this Court and New York courts. A recent sale price negotiated at arm's length may serve as the best evidence of market value. WTCP's assertion of entitlement to a reasonable rate of return over the rent it agreed to pay is incorrect, as acquiring a commercial leasehold interest carries inherent risks.

WTCP's agreement to pay $2.805 billion in rent shortly before the attack suggests that the pre-attack value of its leasehold interest might have been $0, indicating no other buyer would have compensated WTCP to take over the lease. WTCP argues the pre-attack value was $1.459 billion, based on expected increases in market rents and net operating income with experienced management. The district court acknowledged potential changes in market value from April to September 2001 and allowed WTCP to raise factual disputes regarding its leasehold interests' value. The court clarified that plaintiffs are not entitled to guaranteed profits but can recover only for the decrease in value of their leasehold interests, excluding reconstruction costs or consequential damages. The court's valuation methods for WTCP and 7WTCo.’s losses were deemed inconsistent with established practices, leading to a remand for reassessment of the diminution in value, factoring pre- and post-attack market conditions. The district court has discretion to determine if further discovery is needed before additional motions or trial on damages. Additionally, regarding collateral offsets, New York law requires that any insurance recoveries should reduce the potential tort award, overriding the general collateral source rule that allows full recovery regardless of indemnification.

The provision aims to prevent plaintiffs from receiving duplicative recoveries for the same type of loss. A defendant must demonstrate, through clear and convincing evidence, that collateral source payments correspond to specific categories of loss for which damages were awarded. In this case, the district court held a bench trial to determine if the plaintiffs' insurance reimbursements were for losses parallel to their potential tort recoveries. After five days of testimony, the court found that the insurance proceeds reimbursed costs for reconstructing buildings and business interruption losses. Consequently, it ruled that these reimbursements related to the same loss categories as the potential tort awards, leading to a reduction in tort awards by the value of the insurance recoveries.

The district court's decision to bifurcate the trial concerning the collateral offset issue was procedural and within its discretion, as permitted by Federal Rule of Civil Procedure 42(b). Plaintiffs argued that the timing was inappropriate under New York law, which states a correspondence hearing should occur after a jury verdict on liability and damages. However, the ATSSSA, which governs this case, establishes federal control over procedural matters, while allowing state law to dictate substantive decisions. The court noted that procedural decisions may vary, and while there could be instances where a pre-damages trial offset decision is unfeasible, this particular case did not present such complexities.

The district court determined that WTCP and 7WTCo could recover damages solely for the reduction in market value of their leasehold interests. It found a solid legal basis for addressing the collateral offset issue first, concluding the plaintiffs' arguments against the allocation of insurance recoveries to replacement costs and business interruption losses were unpersuasive. The court identified that WTCP and 7WTCo had two types of insurance coverage: replacement cost coverage for damages to buildings and business interruption coverage for loss of revenue until restoration. The plaintiffs acknowledged that their loss submissions post-terrorist attacks were exclusively tied to replacement and business interruption losses, which exceeded their insurance policy values.

The plaintiffs argued against the district court's allocation due to receiving global settlements from insurers, claiming these settlements could encompass extracontractual claims for bad faith. However, the court dismissed this argument, supported by expert testimony indicating that such settlements are standard and typically include a general release to prevent further claims related to the insurance events. It was emphasized that the settlement documentation did not indicate payments for anything beyond replacement and business interruption claims, and even the plaintiffs' own insurance expert did not ascribe any value to extracontractual claims. The district court noted that recoveries were close to policy limits.

Allocation of the plaintiffs' insurance proceeds to replacement cost coverage and business interruption coverage was appropriate, as both coverages address the same type of loss. The plaintiffs argued that these forms of compensation do not align with the loss from the diminished market value of their leasehold interests, a claim that was rejected. The analysis draws on the New York Court of Appeals case, *Fisher v. Qualico Contracting Corp.*, where the court upheld offsetting insurance recoveries against tort damages related to property loss. It clarified that losses can be measured either by the cost of restoration or the property’s diminished market value, and that both measures are essentially equivalent in representing property loss. Consequently, damages from both the insurance proceeds and potential tort recovery were determined to compensate for the same loss, specifically the destruction of property. Defendants’ expert emphasized that the relevant loss category involved the destruction of property, asserting that both the market value diminution and the combination of insurance compensations address the same injury—loss of expected profits from the properties. Replacement costs facilitate the repair of damaged properties, restoring revenue streams, while business interruption compensation addresses rental income loss during the rebuilding period.

Replacement costs encompass the reduction in rental or usable value of property during an injury's duration, ultimately aimed at restoring the plaintiffs' income stream following the completion of the damaged buildings. Business interruption coverage compensates for revenue losses from the incident until restoration. Although classified differently in insurance terms, both categories address the same type of loss—property destruction—thus justifying a reduction of tort damages by the amount of insurance recoveries under CPLR 4545. The court agreed with the district court's allocation of insurance recoveries but vacated the ruling that set the maximum recoverable damages to zero in favor of the defendants. The district court is instructed to reevaluate the impact of the attacks on the plaintiffs' leasehold values.

Regarding prejudgment interest, New York law mandates recovery on awarded sums at a rate of 9% per annum under CPLR 5001, with no discretion for trial courts to deny this award. In contrast, federal law lacks specific statutes for prejudgment interest, leaving the matter to traditional judicial principles. On appeal, WTCP and 7WTCo. challenged the application of federal principles instead of New York's statutory rate. The ruling determined that under the ATSSSA, New York law governs prejudgment interest rates, as it pertains to the substantive law applicable to damages in cases arising from injuries in the state.

Defendants assert that state substantive law, specifically New York’s prejudgment interest statutes, is applicable under the Air Transportation Safety and System Stabilization Act (ATSSSA) as there is no conflict with federal law. They reference the case of General Motors Corp. v. Devex Corp., which established that federal law can supersede common law regarding prejudgment interest when a statute specifies a measure of damages. Defendants argue that the ATSSSA does not limit the availability of state prejudgment interest, contrasting it with other federal statutes like the Federal Tort Claims Act that explicitly exclude such interest. 

The ATSSSA aims to protect the airlines from excessive tort liability without reducing plaintiffs' recoveries, as established in In re September 11 Property Damage Litigation. Therefore, it is concluded that New York’s prejudgment interest statutes govern the interest awarded, as opposed to federal common law.

Additionally, the calculation of prejudgment interest should be based on the final tort award rather than the diminished value of plaintiffs’ leasehold interests. The district court is instructed to apply the insurance setoff before calculating prejudgment interest, as stipulated by CPLR § 5001, which allows recovery on the awarded sum to compensate plaintiffs for nonpayment, not to penalize defendants. CPLR § 4545 requires courts to adjust awards to reflect collateral setoffs, emphasizing that plaintiffs are not entitled to amounts before these adjustments, thus making it illogical for defendants to pay prejudgment interest on sums they never owed.

The district court erred in determining the prejudgment interest rate and in calculating interest based on the decrease in value of the Plaintiffs’ leasehold interests. On remand, the court is instructed to compute prejudgment interest on the final award amount using the New York statutory rate. This involves reassessing the lost value of the leasehold estates, subtracting collateral setoff, and then calculating prejudgment interest from the date of the attacks based on the adjusted award.

Regarding the claims against United Continental Holdings, Inc. and United Airlines, the district court dismissed these claims, concluding that United had no connection to Flight 11 or its hijackers and therefore owed no duty of care to 7WTCo. The facts indicated that the hijackers passed through security at Portland International Jetport and then Boston’s Logan Airport, where they boarded American Airlines Flight 11. United’s only involvement was through a “Shared Responsibility Agreement” for security at PWM, which did not extend to the hijackers' subsequent actions. The court affirmed that under New York law, the determination of a tortfeasor’s duty is a legal issue, focused on risk allocation and liability limits, thus supporting the dismissal of 7WTCo.’s claims against United.

Liability for defendants is limited to circumstances where their relationship with the tortfeasor or plaintiff positions them to effectively mitigate the risk of harm, as emphasized in Hamilton v. Beretta U.S.A. Corp. This limitation is crucial to prevent “limitless liability” and to restrict the pool of potential plaintiffs. The principles were applied in Stanford v. Kuwait Airways Corp., where Middle East Airlines (MEA) was found to owe a duty of care to plaintiffs after terrorists hijacked a flight, as MEA had control over ticketing and was aware of lax security protocols. In contrast, United Airlines did not hold a similar duty regarding Flight 11. Responsibility for ticketing and security in Portland fell to U.S. Airways and Delta Airlines, respectively, with United lacking control over the security processes utilized by the hijackers, who underwent separate security checks. The court determined that extending liability to United would not significantly enhance safety measures, as airlines are already incentivized to ensure security at their own operations. Consequently, the district court's dismissal of claims against United is affirmed.

Plaintiffs can recover the reduction in value of their leasehold interests but not the rebuilding costs of the Leased Buildings. The district court correctly ruled that Plaintiffs are not entitled to damages for retenanting, attorney fees during litigation, mortgage carrying costs, or lost tenant improvements. It also appropriately deducted the costs of preparing insurance claims from Plaintiffs’ insurance recoveries instead of treating these as separate damages. However, the court used an incorrect valuation method for the leasehold interests of WTCP and 7WTCo., which decreased by a maximum of $2.805 billion and $737 million, respectively, warranting a remand for reevaluation. 

The ATSSSA provides a federal cause of action while only applying state substantive law, allowing the district court to conduct a collateral offset hearing per CPLR 4545 prior to a trial on liability or damages. The court’s determination that Plaintiffs’ insurance recoveries compensated for reconstruction costs and business interruption was not erroneous, as these were linked to the same loss category as the leasehold value reduction. 

Prejudgment interest should be calculated using New York’s statutory rate based on the award amount post-collateral offset, rather than the leasehold value reduction. The court properly dismissed 7WTCo.'s claims against United, finding no duty of care related to Flight 11. On remand, the district court is instructed to reassess the leasehold value based on existing evidence, allow for further fact-gathering or a damages trial, offset insurance proceeds against tort recoveries, and recalculate prejudgment interest if needed. The court affirms the dismissal of 7WTCo.'s claims against United, the limitation of Plaintiffs’ damages under the “lesser of two” principle, the denial of consequential damages, and the application of CPLR 4545. The judgment is vacated in part, and remand is ordered for the assessment of lost market value and potential recalculation of prejudgment interest.

The Port Authority, formed by an interstate compact in 1921 and authorized by Congress, is governed jointly by the governors of New York and New Jersey and oversees major regional transportation infrastructure, including bridges, tunnels, airports, and seaports. Westfield America, Inc. operates the retail mall at the World Trade Center complex, but since it is not an appellant, related lease issues are not addressed in this opinion. The lease for the retail mall was valued at $395 million, contributing to a total purchase price of $3.239 billion, closely aligning with the Port Authority's evaluation of $3.211 billion for WTCP and Westfield America's bid.

Despite the attacks potentially being classified as two "occurrences," WTCP's claims for replacement costs and business interruption exceeded its insurance policy limits. Pre-attack, WTCP's leasehold interest was valued at $737 million, with a post-attack value of negative $222 million, the latter factoring in reconstruction costs. The district court allowed WTCP to recover lost personal property, which was settled before appeal, but limited recoveries to the diminution in market value, denying claims for tenanting, mortgage carrying costs, and attorneys’ fees in subsequent orders. Plaintiffs believed the district court ruled that Defendants’ negligence did not cause their obligation to rebuild, but this characterization was not necessary for the case's resolution.

Defendants contested Plaintiffs’ interpretation of their rebuilding obligations under the lease, which required rebuilding only "to the extent feasible, prudent and commercially reasonable." The court found that this rebuilding covenant did not affect potential tort recoveries and did not determine if the lease imposed an unconditional rebuilding obligation. Furthermore, even if comparable buildings were unavailable, it did not negate the market value of leases, as alternative valuation methods, including income capitalization, are valid.

Evidence from comparable sales is the preferred method for determining property value, but when relevant data is lacking, alternative methods can be utilized. Courts may accept the income valuation method for unique, income-producing properties where no comparables exist. However, reproduction cost methodologies are typically reserved for properties classified as "specialties." In the case at hand, the defendants argued that the Port Authority's issuance of 99-year leases privatized the Leased Buildings, but this characterization did not affect the damages analysis. Plaintiffs’ expert, Professor Vandell, applied the income capitalization approach to assess changes in the value of leasehold interests post-attacks. However, his calculations improperly included costs for rebuilding the leased buildings, which should be excluded in determining post-attack value. The district court may reassess valuations using the income capitalization approach on remand, focusing solely on projected costs WTCP would incur had the Main Site Buildings not been rebuilt. The district court allocated $1.8 million of WTCP's insurance recoveries to lost personal property, which is now irrelevant due to a settlement on those claims. Before offsetting insurance recoveries against potential tort awards, the court appropriately deducted claims-preparation expenses from total recoveries. CPLR 4545 mandates that awards be reduced by collateral recoveries, net of certain costs, including those incurred for maintaining insurance benefits.

In Boshnakov v. Board of Education of Town of Eden, the court declined to recognize unitemized jury verdicts as comparable to insurance recoveries due to the lack of detailed damage assignments. Defendants could request itemized verdicts during trial, which would clarify jury decision-making. The district court, however, could determine settlement allocations based on expert testimony regarding industry practices and insurance claims circumstances. Plaintiffs asserted that their actual rebuilding costs surpassed both the decrease in leasehold value and their insurance recoveries, but this was viewed as an attempt to revisit a previously resolved issue regarding WTCP and 7WTCo.'s entitlement to reconstruction cost recovery. The court clarified that WTCP's claim for separate recovery of its $491.3 million payment to the Port Authority was not justified, as tort damages are meant to compensate for loss in leasehold value, not for specific payments made to acquire those interests. There is no distinct category of damages for the initial payment associated with obtaining leasehold interests.