Cantor Fitzgerald’s bid to win more than $1 billion in damages from American Airlines for negligence in failing to prevent one of the Sept. 11, 2001, hijackings that ended in destruction of the World Trade Center has been rejected as excessive by a federal judge.

Southern District Judge Alvin K. Hellerstein ruled yesterday in Cantor Fitzgerald & Co. v. American Airlines, Inc., 21 MC 101 (AKH), that the financial services firm, which lost 658 employees in the terror attacks, presented an amended damages claim that was “substantially inflated by the losses caused by the deaths of its employees.”

New York law, he said, does not allow an employer to recover damages for the loss of its employees. Cantor Fitzgerald acknowledged the law on this point, but argued it was merely seeking consequential damages flowing from the harm to its business property.

The financial services firm had offices on the top five floors of Tower One, which was hit by American Airlines flight 11. Cantor Fitzgerald sued the airline seeking damages for failing to detect and screen the hijackers and permitting them to board the plane.

The firm was one of 21 plaintiffs suing for property damages stemming from the attacks, which took part in mediation before retired Southern District Judge John S. Martin Jr., now a partner at Martin & Obermaier. Nineteen of those plaintiffs ultimately settled and a 20th plaintiff had its case dismissed by Judge Hellerstein.

In his 21-page opinion yesterday, Judge Hellerstein said Cantor Fitzgerald initially submitted in 2005 a net damages claim of $102.5 million, but the firm increased that to more than $1 billion in 2009, an amount amended slightly downward last year to $945 million.

Cantor based this claim on the “holistic” evaluation of damages by its expert, Gregory S. Thaler, who tracked the firm’s lost income from Sept.11, 2001, forward to June 2009. American Airlines objected, arguing that the business-interruption claims could not be supported.

With the firm pursuing damages for harm done to an ongoing business, the judge said such a cause of action “must arise from physical damages to property” and “it cannot be maintained if a plaintiff alleges only economic damages.”

He said the firm was entitled to claim damages for the destruction of its leasehold and property within the leasehold.

“These damages can include injuries to property, and to lost profits naturally and probably flowing from the injury to its property,” Judge Hellerstein said. “But Cantor Fitzgerald cannot bootstrap this entitlement into a wholesale claim of business interruption damages not matching the corresponding duty of the alleged tortfeasor.”

The judge said the concept of master-servant liability, which “posits that an employer has a propriety interest in his employee’s services,” has been “roundly rejected” by the courts, as in Ferguson v. Green Island Construction Corp., 355 NYS 2d 196 (3d Dept. 1974), where a defendant could not be sued for business operation damages where his plane crashed and critically injured an employee critical to the plaintiff’s business.

“In Ferguson, the employee was injured but lived; here, Cantor Fitzgerald employees died,” he said. “The distinction is not legally significant, however, for the death of an employee, from an employer’s economic perspective, is no different from a lesser interruption of an employee’s service.”

Here, it was clear to the judge Cantor was claiming damages based on the deaths.

The damages expert, Mr. Thaler, reported that “when the airplane crashed into the building it destroyed—killed people, it destroyed office space, it destroyed the books of business, it destroyed relationships. I quantified the damages related to all of that.”

But Judge Hellerstein said Mr. Thaler’s report “fails to distinguish, and eliminate, the economic loss resulting from the loss of Cantor Fitzgerald’s employees, and from the loss of the interpersonal client relationships nurtured by its highly talented brokers.”

The judge said, “No one can deny the emotional and financial hurt suffered by Cantor Fitzgerald, and the families of its officers and employees,” but the damages claim cannot be made as a matter of law.

He gave the firm leave to file amended claims by Feb. 28, and said he will meet with them on March 7 to discuss pretrial issues and set a trial date. He asked to be informed if the parties decide to renew mediation before Judge Martin.

Judge Hellerstein, who has presided over most of the litigation resulting from the 2001 terrorist attacks, said the majority of the property claims were settled by other companies for a total of $1.2 billion after the companies had claimed $4.4 billion in damage. Cantor Fitzgerald’s claim is the only one that remains, he wrote.

Desmond Barry of Condon & Forsyth and Roger Podesta of Debevoise & Plimpton represent American Airlines.

John Stoviak of Saul Ewing in Philadelphia represents Cantor Fitzgerald.