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In re September 11th Litigation

December 11, 2008

IN RE SEPTEMBER 11TH LITIGATION


The opinion of the court was delivered by: Alvin K. Hellerstein, U.S.D.J.

OPINION GRANTING IN PART AND DENYING IN PART MOTION FOR SUMMARY JUDGMENT REGARDING DAMAGES

In April 2001, the Port Authority of New York and New Jersey, Inc. accepted the bid of a New York real estate developer, Larry Silverstein, to purchase 99-year net leases to four of the World Trade Center towers. In July 2001, the Port Authority executed net leases and related agreements, and conveyed the four net leaseholds to Towers One, Two, Four and Five to corporations formed by Silverstein to hold the net leases. Silverstein paid, and the Port Authority accepted, consideration valued at $2.805 billion. Two months after Silverstein took possession, the towers became rubble, destroyed by the terrorist-related aircraft crashes of September 11, 2001. Towers One and Two were turned into raging infernos and collapsed, bringing down and destroying Tower Four, Tower Five, and additional buildings and properties in and around the World Trade Center. Silverstein's company, World Trade Center Properties LLC, and his several holding companies, 1 World Trade Center LLC, 2 World Trade Center LLC, 4 World Trade Center LLC, and 5 World Trade Center LLC (collectively, "WTCP"), filed suit against American Airlines and United Airlines alleging that, but for the airlines' negligence, the terrorists would not have gained entrance into the aircrafts they hijacked and flew into Towers One and Two. WTCP also sued other aviation defendants, alleging that, because of their negligence and causation, they too are jointly and severally liable for WTCP's damages. WTCP's lawsuit seeks recovery of $16.2 billion, the alleged replacement value of Towers One, Two, Four and Five.

The Aviation Defendants*fn1 deny liability, and allege defenses. This motion for summary judgment seeks a ruling on one defense: whether liability, if found, can exceed the market value of the leaseholds. I am asked to decide whether the lesser of the market value on September 11, 2001 of the four 99-year leaseholds, or the four towers' replacement value, is the proper measure of recoverable damages in this case.

I hold that market value as of September 11, 2001 is the limit of permissible recovery; that the value fixed by the parties a few months earlier is probably, but not necessarily, the market value of the four leaseholds as of September 11, 2001, and that a question of fact therefore is presented as to what was that market value; and that an issue of diminution of recovery pursuant to N.Y. C.P.L.R. section 4545, because of insurance and other possible recoveries, presents additional issues of fact. Thus, I grant the substantive ruling that the Aviation Defendants seek, and deny the balance of the motion. Additional proceedings consistent with my rulings are required.

FACTUAL BACKGROUND

I. The Sale of World Trade Center Buildings One, Two, Four and Five

On July 16, 2001, fifty-five days before September 11, 2001, WTCP and the Port Authority executed the four 99-year net leases for World Trade Center Towers One, Two, Four and Five. The lease executions culminated a worldwide competitive bidding process that the Port Authority had initiated to implement a decision, reached several years earlier, to privatize the World Trade Center. Four finalists emerged from the bidding process. When Vornado Realty Trust, the high bidder, was not able to complete its negotiations with the Port Authority, WTCP, the second finalist, entered the negotiations and, in April 2001, executed an agreement with the Port Authority to net lease the four towers. The net leases were priced at $3.211 billion, of which $395 million was allocated to a commercial space ("Retail Mall") that was leased by The Westfield Group, and $2.805 billion was allocated to the towers.*fn2 WTCP was to pay $491 million, and Westfield, $125 million, at the closings; the balance of the consideration was in the form of a 99-year stream of fixed future rental payments from the four towers, having a present value of $2.419 billion, a 99-year stream of participating future rental payments, having a present value of approximately $65 million, and a stream of additional base rental payments valued at $111 million.*fn3 J.P. Morgan, engaged by the Port Authority as a consultant, found the consideration fair. WTCP valued its net leaseholds to Towers One, Two, Four and Five at $2.84 billion on its books and records.

II. A Brief History of the World Trade Center

In 1962, New York and New Jersey, through coordinated legislation, directed that the World Trade Center be built by the Hudson Tubes railway system for "the single object of preserving . . . the economic well-being of the northern New Jersey-New York metropolitan area [which] is found and determined to be in the public interest." N.Y. UNCONSOL. LAW at § 6601(7), (9); see Courtesy Sandwich Shop, Inc. v. Port of N.Y. Auth., 190 N.E.2d 402, 404 (N.Y. 1963) (recognizing World Trade Center's public purpose). The Port of New York was suffering economically and the complex's construction was seen as a way to revitalize the area.

Specifically, the legislators intended through building the World Trade Center to improve transportation between New York and New Jersey; centralize, enable, and attract port-related activity; and provide an optimal platform upon which to conduct international trade.

The Port Authority of New York and New Jersey, Inc., a nonprofit, bi-state agency, had been created in 1921 to carry out a public trust "benefiting the nation, as well as the States of New York and New Jersey." Id. at § 6401 (preamble). The Port Authority was formed "by agreement of the two states as their joint agent for the development of the transportation and terminal facilities and other facilities of commerce of the port district and for the promotion and protection of the commerce of their port." Id. at § 6601(8). The two states granted the Port Authority control of the World Trade Center's construction and operation. Construction commenced in 1965 and cost approximately one billion dollars.

It took time before the World Trade Center brought about substantial changes to the downtown business area. During the 1970s, the World Trade Center struggled to fill its space, relying heavily on government tenants. By the early 1980s, the towers began to enjoy commercial success, replacing government tenants with a variety of higher paying commercial tenants, among them premier law, accounting and financial services firms.

By September 11, 2001, the World Trade Center had become a profit center. Forty thousand workers, and many more tourists, came into the towers daily. Shopping arcades beneath the towers served tenants and visitors, and were themselves profit centers. The towers were a symbol of the city and an integral part of its skyline. New York City's downtown area flourished. If it was not the equal of the city's midtown, the downtown area was nevertheless profitable and full of businesses and residents.

WTCP argues that the World Trade Center buildings were built and used for a special and specific purpose. That may have been so, but clearly a market had developed for the buildings by the 1990s, and buyers were ready, willing, and able to pay full and fair prices. The World Trade Center may have had a unique size, design, and location, as WTCP argues, and it may have been built years ago to achieve a public benefit purpose, but nothing suggests that the bids Port Authority received did not reflect the towers' full and fair price, including their symbolic value.

III. Insurance and Repair Provisions of the Net Leases

WTCP covenanted by the terms of the leases to insure the buildings against loss from fire and other causes for the lesser of $1.5 billion or "actual replacement cost." See, e.g., Agreement of Lease: One World Trade Center, § 14.1.1 (requiring insurance "equal to the lesser of (x) an amount sufficient to insure . . . the items of property described in this Subsection, except for the footings and foundations, to the extent of not less than the [actual replacement cost], and (y) One Billion Five Hundred Million and 00/100 Dollars . . . per occurrence"). The leases provide that there is to be no exclusion for terrorist acts, so long as such a policy term is available "at commercially reasonable rates." Id.

In addition, the leases require WTCP to remove "all debris" from fire or destruction, and to "rebuild, restore, repair and replace" the premises to the extent "feasible, prudent and commercially reasonable" in accordance with the pre-existing plan and specifications or as modified by mutual consent. The lease provides:

If the Premises . . . or any structures, improvements, fixtures and equipment, furnishings and physical property located thereon, or any part thereof, shall be damaged or destroyed by fire, the elements, the public enemy or other casualty, or by reason of any cause whatsoever and whether partial or total, the Lessee, at its sole cost and expense, and whether or not such damage or destruction is covered by insurance proceeds sufficient for the purpose, shall remove all debris resulting from such damage or destruction, and shall rebuild, restore, repair and replace the Premises . . . and any structures, improvements, fixtures and equipment, furnishings and physical property located thereon substantially in accordance, to the extent feasible, prudent and commercially reasonable, with the plans and specifications, for the same as they existed prior to such damage or destruction or with the consent in writing of the Port Authority, which consent shall not be unreasonably withheld, conditioned, or delayed, make such repairs, replacements, changes or alterations as is mutually agreed to by the Port Authority and the Lessee.

Id. at § 15.1.

WTCP insured the World Trade Center for $3.5468 billion per occurrence, an amount higher than that required by the lease. The term "occurrence" was defined variously in the insurance agreements and binders; one common definition insured "all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes" and provided that "[a]ll such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur." World Trade Ctr. Props., LLC v. Hartford Fire Ins. Co., 345 F.3d 154, 160 (2d Cir. 2003). Under the net leases, and subject to various modifying agreements, the proceeds obtained by WTCP were intended to cover losses, to defray expenses, and to fund such replacement structures as the Port Authority, New York State, New York City, other governmental and quasi-governmental authorities, and WTCP agree to build. After extensive litigation against its insurers, and judicial determinations interpreting the varying insuring policy agreements, WTCP recovered an aggregate of approximately $4.1 billion from its insurers.*fn4

There has been an extensive post-recovery history, not part of the record of this motion, concerning the towers, the extensive negotiations of interested parties and government, and the manner and design of one or more replacement towers for those that previously stood.

IV. September 11 Litigation and the Instant Motion

Congress provided that all claims arising from, or in connection with, the terrorist-related aircraft crashes into the World Trade Center were to be brought exclusively in the United States District Court for the Southern District of New York. See Air Transportation Safety and System Stabilization Act ("ATSSSA"), 49 U.S.C. § 40101. The law governing such suits was to be the law of the state where the crash occurred, that is, New York State law, unless preempted by, or inconsistent with, federal law. Id. The Aviation Defendants' insurance limited their potential liability. Id. The great bulk of wrongful death and personal injury claims against the airlines was paid and discharged without affecting these liability policies. Pursuant to another provision of ATSSSA, claimants suffering deaths or personal injuries from the September 11th aircraft crashes could opt to bring their claims to the Special Master of the Victim Compensation Fund ("Fund"). Ultimately, 97% of all potential individual wrongful death claimants presented their claims to the Special Master, Kenneth Feinberg. The fund disbursed $7.049 billion in congressionally appropriated funds to wrongful death and personal injury claimants.*fn5 The Special Master's success meant that these many claims were not paid from the Aviation Defendants' limited insurance pool.

Ninety-six wrongful death and personal injury claimants filed suits in this court, seeking recovery of substantial but unquantifiable damages. Seventeen other claimants filed suits against the Aviation Defendants alleging property damages aggregating to approximately $6.8 billion. In addition, WTCP filed a claim for $12.3 billion ($8.4 billion of replacement cost and $3.9 billion of lost rental income). It was uncertain when ATSSSA was passed and when all of these lawsuits were filed that there was sufficient insurance to pay all the claims existing against the Aviation Defendants.

The parties have advanced their cases by extensive discovery proceedings. Ninety-three of the original ninety-six wrongful death and personal injury claims have settled. According to the residual claimants-three wrongful death claimants and all of the property claimants, including WTCP-significantly more discovery remains. The parties' contentions regarding much of the remaining discovery will be the subjects of rulings soon to be issued, and these rulings may determine how much discovery actually remains to be conducted.

The Aviation Defendants' pending motions for summary judgment seek rulings that would limit WTCP's potential recovery on the following issues: (1) whether WTCP is entitled only to the fair market value of the destroyed towers, rather than the higher replacement value; (2) whether WTCP is entitled to recover, in addition to market value or replacement value, its lost rental income, plus expenses in relation to preserving such rental income; (3) whether the fair market value of WTCP's leaseholds to Towers One, Two, Four and Five, as of September 11, 2001, was $2.8 billion, the amount WTCP agreed to pay in April, 2001 or some different value yet to be determined; and (4) whether, pursuant to N.Y. C.P.L.R. section 4545, WTCP's claim for damages for market value is diminished, and offset, by the $4.1 billion in insurance payments, and by other payments, that it ...


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