A record terrorism-related forfeiture order benefiting families of some Sept. 11 victims and others was reversed on appeal Wednesday, leaving in doubt what will happen to a $1 billion Manhattan office building at the center of the legal case.

The 2nd U.S. Circuit Court of Appeals in Manhattan rejected a judge's reasoning in ordering the sale of the 36-story office building and other properties to benefit family members of victims of terrorism attacks.

The families and the U.S. government had sued the Alavi Foundation and Assa Corp., the building's partial owners. U.S. Attorney Preet Bharara has said the sale of the buildings would constitute the largest ever terrorism-related forfeiture.

In 2013, Judge Katherine Forrest said revenue from the buildings passed through a state-owned Iranian bank, violating a U.S.-trade embargo, and thus were eligible for forfeiture. They were to be sold by the U.S. Marshals Service, with proceeds distributed among 19 holders of over $5 billion in terrorism-related judgments against the government of Iran.

The appeals court disagreed with Forrest, casting doubt on evidence that the properties were controlled by Iran.

The 2nd Circuit decision written by Circuit Judge Richard C. Wesley said the buildings do not qualify as being owned by Iran under the Foreign Sovereign Immunities Act but a three-judge appeals panel left it for the lower court to determine at trial if they could be considered an agency or instrumentality of Iran under the Terrorism Risk Insurance Act.

"Given the lack of evidence demonstrating Iran's day-to-day control of Alavi, we conclude, as a matter of law, that defendants cannot be deemed Iran's alter egos," the appeals court said.

The 2nd Circuit noted that evidence showed Iran created Alavi in 1973 and supervised its board and controlled its affairs in the 1980s and 1990s. But it said the only recent evidence of Iran's control consisted of a 2007 meeting between Alavi board members and Iran's ambassador to the United Nations.

Lawyers for the families of terror victims did not immediately respond to requests for comment.

Bharara spokesman Nicholas Biase declined comment.
Daniel Ruzumna, attorney for Alavi and 650 Fifth Ave. Co., said: "We are very pleased by the rulings of the Court of Appeals. We look forward to vindicating our clients' rights and interests at trial."

The U.S. government had said the Alavi Foundation's sole partner in the ownership of the Manhattan building was a shell company fronting for a secret interest held by the state-owned bank of Iran, Bank Melli. The Iranian government had been designated by the U.S. as a sponsor of international terrorism, an allegation it has repeatedly denied.

Creditors who stood to benefit from the sale of the buildings included families and estates of victims of the 1983 bombings of a U.S. Marine barracks in Beirut, the 1996 bombing of the Khobar Towers in Saudi Arabia and attacks in Israel.

Buildings also were to be sold in New York's Queens borough; Houston; Carmichael, California; Catharpin, Virginia; and Rockville, Maryland.

The Fifth Avenue building was built in the 1970s on property acquired by a not-for-profit corporation formed in New York by then Iranian leader Shah Mohammad Reza Pahlavi, who was overthrown in 1979. It was valued at $83 million in 1989.