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In re September 11 Litigation

United States District Court, S.D. New York

April 6, 2017

IN RE SEPTEMBER 11 LITIGATION
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. 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,

          ORDER AND OPINION CONSTRUING WTCP LEASES AND REGULATING FURTHER PROCEEDINGS

          ALVIN K. HELLERSTEIN, United States District Judge

         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.

         I. PROCEDURAL HISTORY

         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 contractors[2], 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, remanded, 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 WL 1181057, 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” analyzing reasonably 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.

         II. PRE-ATTACK VALUATION

         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, negotiated by 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, and could not sell, that interest.

         The $2.805 billion agreed value, as of April 2001, became the value as of September 11, 2001, since plaintiffs declined the Court's offer to show any change in value between the date of contracting and September 11, 2001. See In re Sept. 11 Litig., No. 21MC101 (AKH), 2009 WL 2058385, at *1 (S.D.N.Y. May 26, 2009); In re Sept. 11th Litig., 590 F.Supp.2d 535, 547 (S.D.N.Y. 2008)[3]. This valuation is further reinforced by WTCP's own contemporaneous audited financial statement, showing a carrying value of its leasehold as $2.8 billion. See 21 MC 101, Barry Declaration, ECF 505, Ex. W, World Trade Center Properties LLC and Subsidiaries Consolidated Financial Statements as of December 31, 2001, dated April 22, 2002 (“Management has estimated the Company's financial reporting loss from the Terrorist Attacks is equivalent to the carrying value of the Impaired Assets, which was approximately $2.8 billion.”). Furthermore, a brochure that Silverstein Properties distributed to investors during the period of purchase showed the value of the leaseholds as $2.844 billion. Id. at Ex. P, Silverstein Properties, Inc., World Trade Center Office Complex Brochure (“The total price [of the net Lease] is $3.239 billion, which is comprised of $2.844 billion for the office portion and $395 million for the retail portion [assumed by The Westfield Group].”).[4]

         Plaintiffs declined to accept the Court's offer to prove a difference in value between the date of contract purchase, April 26, 2001, and September 11, 2001. In re Sept. 11 Litig., 2009 WL 1181057, at *1. Plaintiffs are estopped to claim any different value now. See Simon v. Safelite Glass Corp., 128 F.3d 68, 71 (2d Cir. 1997) (“Judicial estoppel prevents a party in a legal proceeding from taking a position contrary to a position the party has taken in an earlier proceeding.”). In light of my holding, the parties' experts shall not express opinions on the pre-attack value of the leaseholds.

         III. POST-ATTACK VALUATION

         To calculate the post-attack value, I must first construe the terms and conditions of the four identical net Leases, which define the benefits and burdens of the leaseholds, and govern the price a willing buyer and a willing seller, respectively, would demand. Prior to the proceedings following remand, I had no occasion to analyze the terms and conditions of the Leases because the parties had not offered the Leases into evidence to support their value estimates. The parties made their arguments on the basis of proofs of the costs of rebuilding the towers in relation to New York's “lesser of two” rule. See 21 MC 101, ECF 504, 601. On remand, however, the terms and conditions of the Leases must be considered to define the rights and the obligations which the parties, and hypothetical buyers and sellers, must consider. I consider these terms and conditions in the next section below, and follow with an analysis to be used by the parties' experts as the bases for their opinions.

         1.The Relevant Provisions of the Leases

         a. The Net Lessee's Obligations

         i. Rent Obligations The net Lease provides four categories of rent payable by the lessee: an “Initial Rent Payment” at the time of contracting; an escalating “Base Rent” during the 99-year term of the Lease; an “Additional Base Rent” for the first thirty years of the Lease, to the extent operating income exceeds certain expenses; and a “Percentage Rent.” Lease ¶¶ 5.1, 5.2, 5.3, 5.6. Operating income includes insurance recoveries, to wit: “the proceeds of any rental and/or business interruption insurance paid in lieu” of rental revenue from subtenants. Lease ¶ 24.9.12(a).

         As to the Initial Rent Payment, the parties agree that it was $491.3 million and that it was paid. See 21 MC 101, Table of Disputed Provisions, ECF 1930 at 21. Paragraph 5.1 creates this obligation:

5.1 The Lessee shall pay, as rent for the letting of the Premises, to the Port Authority, on the Commencement Date, without notice and demand, an amount equal to the Initial Rent Payment, as adjusted for certain prorations and similar items set forth in the Contract to Lease.

         As to the Base Rent, set out in Schedule 5.1(a) of the Lease, the aggregate Base Rent begins at $93.50 million per year for the first five years of the Lease, increases to $111.50 million per year for the next five years, and continues to escalate in five-year intervals to $2.19 billion per year for the last five years. The sum for the full lease term of 99 years, without discounting to present value, amounts to $75.79 billion. 21 MC 101, Letter re: Response to Questions Raised in the July 19 Conference, ECF 1935 at 1. The obligation to pay Base Rent is stated in ¶ 5.2:

5.2 The Lessee shall pay, as rent for the letting of the Premises, to the Port Authority, without notice or demand, the amounts set forth on Schedule 5.1(a) for each Lease Year (collectively, “Base Rent”), in equal monthly installments in advance, commencing on the Commencement Date and continuing thereafter on the first day of each calendar month throughout the Term, which amounts shall be prorated for any partial calendar months.

         As to Additional Base Rent, paragraph 5.3 provides for an additional $6.47 million per year in equal monthly installments for the first thirty years of the Lease, but only to the extent of “Excess Income, ” defined as operating income for the immediately preceding month less the reserves used to pay the senior mortgage, debt service, operating expenses, payments on a specified loan, and capital costs expended in the immediately preceding month.

         Paragraph 5.3 provides:

5.3 The Lessee shall pay, as additional rent for the letting of the Premises, to the Port Authority, without notice or demand, an amount equal to . . . $6, 473, 500[] for each full calendar year . . . during the first 30[] Lease Years. . . .in equal monthly installments in arrears, to the extent of Excess Income . . . . “Excess Income” shall be deemed to be equal to (x) Operating Income for the immediately preceding month, less (y) (i) Rental (other than Additional Base Rent and Unpaid Additional Base Rent) paid during such immediately preceding calendar month, (ii) any and all reserves required to have been funded during such immediately preceding calendar month pursuant to the terms of the Senior Mortgage or any refinancing thereof, (iii) Debt Service payable during the immediately preceding calendar month, (iv) Operating Expenses (exclusive of Rental) paid during the immediately preceding calendar month, (v) Operating Expenses (exclusive of Rental) paid during the immediately preceding calendar month, (v) regularly scheduled payments of principal and interest on the Mezzanine Loan payable during the immediately preceding calendar month, and (vi) any Capital Costs expended during the immediately preceding calendar month (other than Capital Costs that were actually paid for with proceeds of the Mezzanine Loan).

         As to Percentage Rent, the lessee is to pay 0.5% of its gross revenue per year for the first 10 years of the Lease and 1.5% of its gross revenues per year for the remaining years. Paragraph 5.6 provides this obligation and paragraphs 5.7.1 and 5.7.2 define relevant terms, as follows:

5.6 For each full or partial calendar year during the Term, the Lessee shall pay, for the letting of the Premises during such period . . . an amount (“Percentage Rent” . . .) equal to the Applicable Percentage of the amount of Gross Revenues for such full or partial calendar year . . . .
5.7.1 . . . the term “Applicable Percentage” shall mean, with respect to (i) the first (1st) Lease Year through and including the tenth (10th) Lease Year, one-half of one percent (0.5%), and (ii) the eleventh (11th) Lease Year and thereafter throughout the remainder of the Term, one and one-half of one percent (1.5%).
5.7.2 . . . Gross Revenues” shall mean . . . . fixed rent, percentage rent, antenna income, parking income and amounts received in connection with exterior Signs, or the net proceeds of any rental and/or business interruption insurance paid in lieu thereof, received by the Lessee or for the account of the Lessee from . . . the use and occupancy of all or any portion of the Premises . . . and [] the Fair Market Rental Value of the premises. . . .

         ii. Payments in Lieu of Taxes

         In addition to rent, the net lessee provides for payments to the Port Authority to reimburse it for a portion of the payments in lieu of taxes that the Port Authority had agreed to pay to the City of New York (“PILOT” payments). A “City Agreement” between the Port Authority and the City fixes the Port Authority's PILOT as a base amount of $1.709.[5] The lessee's obligation to the Port Authority is determined according to the rentable square feet available each year for leasing. Paragraphs 6.10 and 6.10.1 provide:

6.10 The Lessee shall pay to the Port Authority . . . in semi-annual installments . . . commencing on January 1, 2002 and thereafter on the first day of each January and July throughout the Term . . . the following amounts[:] . . . .
6.10.1 The Lessee's Allocated Share of the amount that is currently payable by the Port Authority to the City of New York in lieu of taxes with respect to the World Trade Center (the ‘Existing PILOT Base') pursuant to the Existing City Agreement . . . ., which amount shall be adjusted annually . . . in accordance with the provisions of the Existing City Agreement . . .

         The Lease calculates the “Lessee's Allocated Share” as a proportional fraction reassessed from time to time: the number of square feet leased to the lessee to the total number of square feet in all of the WTC buildings ...


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