in excess of what National Union paid to the noteholders.
This Court's April 28, 1993 opinion in this matter held that National Union could recover as subrogee of the noteholders. Bruce v. Martin, 1993 U.S. Dist. LEXIS 5776, at *40 (S.D.N.Y. April 28, 1993). A subrogee steps into the shoes of the subrogor and acquires his rights against the person whose debt was discharged. Nacional Financiera, S.N.C. v. Americom Airlease, Inc., 803 F. Supp. 886 (S.D.N.Y. 1992); Salzman v. Holiday Inns, Inc., 48 A.D.2d 258, 369 N.Y.S.2d 238, 243 (N.Y. App. Div. 1975), modified on other grounds, 40 N.Y.2d 919 (1976).
In this case, the subrogor's rights included the right to collect default interest on the notes at the highest rate legally permissible. National Union is subrogated to, and has acquired, this right. The sole case cited in support of Plaintiffs' argument, Lipkowitz & Plaut v. Affrunti, 407 N.Y.S.2d 1010 (Sup. Ct. 1978), did not involve subrogation, and is therefore inapposite.
Plaintiffs submit references to various New York State laws that provide that, unless otherwise specified, a provision for interest in a Note means interest at the judgment rate, and references to cases that hold that this rate is 9%. Here, the Notes provide for the "highest rate legally permissible." No authorities have been submitted to preclude such a definition.
The Plaintiffs have cited cases that have interpreted N.Y.G.O.L. § 5-501 ("Section 5-501") as fixing the maximum legal rate to be applied to a note, citing Woodhouse, Drake & Carey, Ltd. v. Anderson, 61 Misc. 2d 951, 307 N.Y.S.2d 113 (Sup. Ct. 1970) in particular. Section 5-501 provides for a rate of interest, currently 16% per annum, and forbids as usury the charging of interest above this rate on a loan or forbearance of money.
In Woodhouse, the New York Supreme Court considered a defense of usury by the maker of a note that called for interest at the rate of 8 1/2% or at the maximum legal rate. The court held that the "maximum legal rate" in this case was determined by N.Y.G.O.L. § 5-501. However, the interest sought to be charged in the present case is on notes that are in default. In Manfra, Tordella & Brookes, Inc. v. Bunge, 794 F.2d 61, 63 n.3 (2d Cir. 1986), the Second Circuit held that Section 5-501 does not apply to defaulted obligations, citing American Express Co. v. Brown, 392 F. Supp. 235, 238 (S.D.N.Y. 1975), and Bloom v. Trepmal Construction Corp., 29 A.D.2d 951, 289 N.Y.S.2d 447 (N.Y.), aff'd, 23 N.Y.2d 730, 296 N.Y.S.2d 372, 244 N.E.2d 62 (1968).
This point was also made in Giventer v. Arnow, 73 Misc. 2d 413, 341 N.Y.S.2d 661 (N.Y. Sup. 1973), rev'd, 44 A.D.2d 160, 354 N.Y.S.2d 162 (N.Y. App. Div. 1974), and reinstated, 37 N.Y.2d 305 (1975). Giventer involved a promissory note in which interest was charged at the maximum rate allowed under Section 5-501, but was compounded quarterly, resulting in an annual rate higher than that provision allowed. The court stated that it was "mindful of those situations . . . allowing additional interest charges after the maturity of the obligation," but that since this was not the situation in the case under consideration, the note violated Section 5-501. Giventer, 73 Misc. 2d 413, 414, 341 N.Y.S.2d 661.
National Union argues that, rather than being limited by Section 5-501, the highest rate legally permissible is limited only by Section 190, which defines criminal usury as charging interest in excess of 25%. The Plaintiffs contend that, if according to Manfra the New York usury laws do not apply to defaulted obligations, then Section 190 should not apply any more than Section 5-501. With no legal limit to the permissible rate of interest, the Plaintiffs argue that the Notes' interest-fixing terms are ambiguous, and that the Court should therefore fix the rate at the judgment rate of 9%.
The conclusion that the Plaintiffs derive from Manfra is unsupported by the case law. Manfra did not address the applicability of Section 190 to defaulted obligations. Of the cases cited by Manfra, in American Express, the defendant on a suit brought to collect on a defaulted promissory note argued that the interest being charged in default thereon violated Section 190. This Court declined to consider this claim, because neither the Court nor the defendant was authorized to enforce New York State's criminal usury law. American Express, 392 F. Supp. at 237-38. Bloom likewise did not address the applicability of Section 190 to defaulted obligations.
More relevant is the case of Emery v. Fishmarket Inn, 173 A.D.2d 765, 570 N.Y.S.2d 821 (N.Y. 1991). In Emery, the plaintiffs obtained summary judgment in a suit on a purchase money mortgage that provided that, following a default, the mortgagee would be entitled to the highest interest permitted under law. The case was referred to a referee, who set the interest rate from the date of default at 18%.
The Plaintiffs moved to confirm the referees' report, but the trial court reduced the interest rate to 9%, the statutory judgment rate. The Appellate Division held that the trial court erred in fixing prejudgment interest at the statutory rate generally applied to judgments.
The court then addressed an argument similar to the one pressed by the Plaintiffs here. The court first noted that Section 5-501 had no bearing on the obligation of the defendant mortgagors to pay the plaintiffs.
The Court went on to state that, while it could be urged that virtually any rate of interest is lawful under a purchase money mortgage, to construe the interest provision in the default clause of the purchase money mortgage as containing no ceiling would render that provision so vague as to be meaningless. Instead, the court found that the interest rate was intended to be capped by laws prohibiting usury.
The court found that the "highest interest permitted under law" was the 25% per annum limit imposed by Section 190. Since the plaintiff only sought to confirm the referee's award of 18% interest rather than to rase the rate of interest to 25%, the court confirmed the 18% interest rate.
Under Manfra, Section 5-501 is inapplicable to the defaulted obligations under the Notes. As in Emery, this does not leave the interest rate without a discernable cap. Rather, the interest rate is "capped" by Section 190 at 25% per annum.
For the foregoing reasons, the Interest Rate applicable to the default amounts referenced in the National Union judgment shall be 24.9%.
It is so ordered.
New York, N. Y.
February 24, 1994
ROBERT W. SWEET