INTEREST ON ESCROW – Contract’s Language Prescribing Bank-Rate Interest As “Sole Remedy” Bars Awarding of the Greater Statutory Interest

Sunday, 17 of March , 2013
Contract’s Language Prescribing Bank-Rate Interest As “Sole Remedy” Bars Awarding of the Greater Statutory Interest
Among the claims that carry prejudgment interest under CPLR 5001(a) is the ubiquitous claim of damages for breach of contract. And the statutory rate of interest under CPLR 5004 is a straight 9%, a tidy sum these days, when the going rate in business and banking is a great deal lower. Hence, as long as the party against whom the claim exists is solvent and able to pay, a claimant — assuming the claim prevails in a litigation — has a handsome and secure investment.
The question the Court of Appeals was called on to answer in J. D’Addario & Co. v. Embassy Industries, 20 N.Y.3d 113, 957 N.Y.S.2d 275 (Nov. 19, 2012; 4-2 decision), was whether the parties may substitute their own agreement for interest in displacement of the statutory rules. In an opinion by Chief Judge Lippman, a majority of the Court holds that they may, and that on the facts of Embassy they did.
The contract in Embassy was for the sale of real estate in which the plaintiff buyer (B) agreed to a sales price of $6.5 million with defendant seller S, the contract providing for a 10% down payment ($650,000) to be held in escrow by S’s attorney in “an interest-bearing account” at a named bank. The down payment was made and deposited accordingly. The contract also provided in a liquidated damages clause that in the event the bargain failed, whoever a court deems entitled to the down payment agrees to the “sole remedy” of the amount of it plus bank-accrued interest.
Claiming that S was in breach of the contract for failing to attend to a groundwater problem, B refused to show at the closing date set by S. When B then sued to recover the down payment, S counterclaimed and won. The trial court awarded S the $650,000, but also awarded S the 9% statutory rate of interest. The appellate division kept the victory for S, but modified to cancel the statutory interest. The Court of Appeals agrees, holding that S is entitled to only the bank-account interest as specified in the contract.
The Court’s holding is that if the language of the contract is clear enough, it “trumps” CPLR 5001(a), and the majority finds the language in Embassy clear enough.
The dissent, written by Judge Graffeo, does not. The majority’s position, as the dissent views it, is that allowing prejudgment interest was in effect adding to the stipulated (bank-rate) interest, an improper disregard of what interest is. The dissent says that the proper way to view interest is as compensation “for the different and distinct wrong of not paying the agreed sum when it was due”, which is more consistent with the purpose of interest in the first place: a charge for the use of another’s money.
The dissent agrees that “specific terms in the contract excluding prejudgment interest” can supersede the statutory rules, but it “would not infer limitations on statutory interest in generic liquidated damages provisions” like those of the present contract.
The majority notes its 2007 Manufacturer’s decision (Digest 572), in which it held in an interpleader case that the winning claimant has no right to interest from the loser. Interpleader sounds in equity, where CPLR 5001(a) itself gives the courts broad discretion even as to whether to award interest at all. The present case, involving strictly claims at law, has no equitable analogy to help ground it, but perhaps it can be seen just as a case in which the parties have substituted one category of interest (bank-rate) for the one that would otherwise apply (the CPLR 5004 rate).
The major lesson of the 2007 Manufacturer’s case is that those escrowing money or depositing it into court should discuss and resolve in advance any issues about interest. Embassy advances that lesson into an outright admonition:
[P]arties should make it a matter of routine to decide in advance whether statutory interest is to be paid on amounts held in escrow. … [Doing so in this case] would have prevented this litigation altogether.
NYS Law Digest No. 638 February 2013