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SUPREME COURT OF NEW YORK, SPECIAL TERM, NEW YORK COUNTY 1968.NY.41929 <>; 291 N.Y.S.2d 656; 57 Misc. 2d 156 June 4, 1968 IN THE MATTER OF CITY OF NEW YORK, RELATIVE TO ACQUIRING TITLE TO REAL PROPERTY FOR THE NEW MUNICIPAL BUILDING AND OTHERS, BOUNDED BY BROADWAY AND OTHER STREETS, IN THE BOROUGH OF MANHATTAN. IN THE MATTER OF CITY OF NEW YORK, RELATIVE TO ACQUIRING TITLE TO REAL PROPERTY FOR AN ADDITION TO THE SITE FOR A NEW MUNICIPAL BUILDING ANNEX AND OTHERS, BOUNDED BY BROADWAY AND OTHER STREETS, IN THE BOROUGH OF MANHATTAN Skinner & Bermant, Leddy & Raber; Frank & Whyman; Burns, Kennedy, Schilling & O'Shea; Conway & Tackella; Raphael, Searles & Vischi ; and Samuel Goldstein & Sons for claimants. J. Lee Rankin, Corporation Counsel (George Newman, Robert D. Joyce and Joseph Stern of counsel), for City of New York. Abraham N. Geller, J. Author: Geller

Abraham N. Geller, J.

Author: Geller

 The question of the proper rate of interest to be directed to be paid in this condemnation proceeding raises fundamental issues of importance.

Section B15-28.0 of the Administrative Code of the City of New York provides that interest from date of vesting shall be paid by the city to the respective owners and section 3-a of the General Municipal Law provides that the rate of interest to be paid upon any judgment or accrued claim against a municipal corporation arising out of condemnation proceedings shall not exceed 4%. When the owners (claimants) urged on the hearing of objections that 6% was the minimum fair and reasonable rate from the respective dates of vesting for the original and supplemental takings herein, April 22, 1965 and November 1, 1965, to the date of payment, and requested the opportunity to present evidence, the court set the matter down for presentation of proof, pointing out that relevant circumstances during the past several years warranted re-examination at this time of the question of interest (N. Y. L. J., May 7, 1968, p. 17, col. 8).

At the outset, and throughout this discussion, it is important to keep in mind that both our Federal and State Constitutions mandate the payment of "just compensation" when private property is taken for public use, compelling, in effect, a sale by the owner to the government or an agency thereof (U. S. Const., 5th Amdt.; N. Y. Const., art. I, § 7). The constitutional requirement of "just compensation" necessarily includes the addition of a proper rate of interest, since the owner is entitled to "some sum in addition to the bare value of the property at the date of taking for the delay in making payment, so that the compensation may be just" (Matter of City of New York [ Bronx Riv. Parkway ], 284 N. Y. 48, 54, affd. 313 U.S. 540).

That interest as an integral part of constitutional "just compensation" is, when appropriately raised, a matter for judicial determination, has been long since settled. In Monongahela Nav. Co. v. United States (148 U.S. 312, 327), the court stated: "It does not rest with the public, taking the property, through Congress or the legislature, its representative, to say what compensation shall be paid, or even what shall be the rule for compensation. The Constitution has declared that just compensation shall be paid, and the ascertainment of that is a judicial inquiry."

In Seaboard Airline Ry. v. United States (261 U.S. 299, 306) it said: "It is obvious that the owner's right to just compensation cannot be made to depend upon state statutory provisions." And in the Appellate Division, in Matter of City of New York (Bronx Riv. Parkway) it was explicitly pointed out (259 App. Div. 552, 555): "The statutory rate of interest is not controlling if some other rate is required to meet the constitutional requirement for just compensation."

The 6% legal rate of interest prescribed by section 370 of the General Business Law (now General Obligations Law, § 5-501) was generally applicable to all transactions until 1939, when, as the product of the depression era, three statutes were enacted to prescribe a maximum rate of 4% on judgments and accrued claims against the State (State Finance Law, § 16), against municipal corporations (General Municipal Law, § 3-a), and against public corporations (L. 1939, ch. 585). Section 3-a of the General Municipal Law was amended in 1956 to reduce that rate to 3% except as to claims arising out of condemnation proceedings and for wrongful death, where the 4% rate was retained.

In Matter of City of New York (Bronx Riv. Parkway) decided in 1940, claimants challenged the constitutionality of section 3-a of the General Municipal Law. The court held (284 N. Y. 48, 55): (1) "Claimants' contention that interest at the rate of four per centum is so unreasonably low as to deprive them of just compensation is not supported by any evidence, and is contrary to common experience"; (2) The fact that the statute provides a lower interest rate for obligations of municipal corporations than the general interest rate does not constitute a denial of the equal protection of the laws to claimants. The Legislature did not indulge "in an unreasonable and palpably arbitrary classification when it provided for this differentiation. * * * The sovereign and public character of the favored debtors and the lower rates of interest usually applicable on their borrowings may well form a basis for differentiation. The classification cannot be deemed unreasonable" (p. 54). Interest at the rate of 6% was directed to be paid from the date title was taken by the city to July 1, 1939, and at the rate of 4% thereafter to date of payment.

It should be noted that at that time Federal, State and municipal bonds were paying from 1 1/2% to 3%, savings banks 2%, and mortgages about 4%.

The statute was attacked again in 1959 in the Lincoln Square condemnation. The court stated (Matter of City of New York [ Maxwell ], 15 A.D.2d 153, 179, affd. 16 N.Y.2d 497): "And since the ascertainment of just compensation is a judicial question * * * the specific provision in section 3-a of the General Municipal Law does not foreclose consideration of claimants' contentions as to what constitutes just compensation".

But the court found that, despite some rise in interest rates generally since 1939, such proof would not overcome the "presumptive" applicability of section 3-a; that the 4% interest rate, "common knowledge tells us reflects a reasonable balance between return and safety. The objective of courts in eminent domain proceedings is to do substantial justice * * * just, not merely to the individual whose property is taken, but to the public which is to pay for it" (pp. 181-182). The court held (p. 182) that "the 4% rate * * * seems to us a median which cannot seriously be questioned as substantially just".

As to the "favored debtors" argument, the court stated (p. 182): "The record reveals no offer of proof that the 4% rate unduly favors them. If a municipality expects to pay an award with funds in hand, presumably those funds yield it an income during the period of delay in payment; and if it expects to pay with funds to be borrowed, it saves interest of course on the deferred borrowing. Claimants do not even hint that the municipality, which is the condemnor herein, procured benefits of this nature at rates exceeding 4% per annum".

It is, of course, a matter of common knowledge and experience that interest rates have been rising since then and during the last two years have reached a level which represents a complete swing of the pendulum from those prevailing in the depression era. The bank prime rate to the largest corporations was increased shortly before August, 1966 to 5 3/4% and is presently 6 1/2%. Bank loans to others are based on the prime rates, ranging from 1/2 to 1 1/2% more, so that the interest rate in the money market has been 6 1/4 to 7 1/4% shortly before August, 1966 and is presently 7 to 8%. The State's interest rate ceiling on bank loans to individuals has now been increased from 6 to 7 1/2%. Real estate mortgage money, including F. H. A. and Veterans' Administration mortgages, has for some time been unobtainable at even 6%. The interest rate on home loans insured or guaranteed by the F. H. A. or the Veterans' Administration is now 6.75%, with the borrower paying an additional 1/2% to the Government.

Sound corporate bonds have been yielding about 7%. New York savings bank interest has since July, 1966 been 5% compounded quarterly. Federal Government issues have been paying 6%. The yield on the city's tax-exempt bonds in August, 1966 was 4.6518% and in March, 1968 was 4.9203%. In 1968, passed on home rule request, the Legislature amended the Local Finance Law to authorize the City of New York to sell its tax-exempt bonds and notes at a rate not to exceed ...

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