802 F.3d 314
2d Cir.2015Background
- In April–July 2001 WTCP and 7 World Trade Co. (7WTCo.) obtained 99‑year leases from the Port Authority for most office space in the World Trade Center complex; both leases required lessees to insure and (to the extent feasible) rebuild if destroyed.
- On September 11, 2001 terrorists destroyed the leased buildings; Plaintiffs sought to recover tort damages against airlines and security contractors for negligent airport security that enabled the hijackings.
- Plaintiffs had large insurance recoveries: WTCP settled for about $4.1 billion and 7WTCo. for about $831 million (each a global settlement, with general releases and no allocation among claimed loss categories).
- The district court held (1) New York’s “lesser of two” rule requires measuring damages for destroyed property by the lesser of diminution in market value or replacement cost, (2) Plaintiffs could recover only diminution in value of their leasehold interests (not reconstruction costs or certain consequential damages), and (3) under CPLR § 4545 the court must reduce any tort award by corresponding insurance recoveries; the court computed maximum diminutions as $2.805 billion (WTCP) and $737 million (7WTCo.) and offset those amounts by insurance proceeds, entering judgment for defendants.
- On appeal the Second Circuit agreed that diminution in leasehold value is the proper measure and that consequential damages were not recoverable and that CPLR § 4545 applies, but concluded the district court used an incorrect valuation method for leasehold diminution and applied the wrong prejudgment interest rule; it vacated in part and remanded for recalculation of diminution and interest, and affirmed dismissal of 7WTCo.’s claims against United.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper measure of damages for destroyed leasehold interests | Plaintiffs urged recovery for replacement (reconstruction) costs and consequential losses; lease terms obligating rebuild make replacement cost necessary to make them whole | Defendants argued New York’s “lesser of two” rule limits recovery to the lesser of diminution in market value or replacement cost, and diminution is adequate here | Court: Apply "lesser of two"; Plaintiffs limited to diminution in market value of leasehold, not reconstruction costs or claimed consequential damages |
| How to calculate diminution in value of leaseholds | Plaintiffs’ experts calculated pre‑ and post‑attack fair market values (post‑attack could be negative once lease obligations and non‑reconstruction continuing costs are included) | District court equated pre‑attack value with WTCP’s agreed rent present value and post‑attack value with $0, producing capped figures | Court: District court used incorrect methodology; correct approach compares pre/post fair market values of the leasehold (post value measured on hypothesis that buildings are not rebuilt); remand to recalculate |
| Effect of insurance recoveries (CPLR § 4545) | Plaintiffs argued global settlements shouldn't be allocated to replacement/business interruption and that insurance proceeds don't correspond to leasehold diminution | Defendants argued policies covered replacement cost and business interruption and those proceeds correspond to the same property loss measured by diminution | Court: District court reasonably allocated settlements to replacement cost and business‑interruption; under CPLR § 4545 the insurance recoveries offset tort award (but offset must be applied after correct diminution calculation) |
| Prejudgment interest rate and base | Plaintiffs argued New York statutory prejudgment interest applies and should be applied after offset | Defendants relied on federal prejudgment‑interest principles and the district court used a federal rate on pre‑offset diminution | Court: ATSSSA incorporates state substantive law including prejudgment interest; use New York statutory rate; compute interest on final award after accounting for insurance offset |
Key Cases Cited
- McDougald v. Garber, 73 N.Y.2d 246 (N.Y. 1989) (purpose of tort damages is to restore plaintiff to position before the wrong)
- Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534 (N.Y. 2002) (replacement cost and diminution in market value are two measures of property loss and correspond for offset purposes)
- Jenkins v. Etlinger, 55 N.Y.2d 35 (N.Y. 1982) (‘‘lesser of two’’ rule governing measure of damages for property injury)
- Oden v. Chemung Cnty. Indus. Dev. Agency, 87 N.Y.2d 81 (N.Y. 1995) (statutory override of the collateral source rule under CPLR § 4545 requires clear showing of correspondence)
- United States v. 50 Acres of Land, 469 U.S. 24 (U.S. 1984) (replacement decisions and compensation principles in takings context)
- Schonfeld v. Hilliard, 218 F.3d 164 (2d Cir. 2000) (market value damages reflect expected future profits as estimated by market participants)
- In re September 11 Property Damage Litigation, 650 F.3d 145 (2d Cir. 2011) (discussion of ATSSSA’s purpose and limits on federal treatment)