invitation to distinguish between Morse/Diesel's pass-through claims and its other claims with respect to the rate of prejudgment interest. Additionally, I point out once again that Trinity suffers no real prejudice from this ruling. Had Morse/Diesel chosen not to pass-through the claims of other damaged parties and elected to pay those other parties damages instead, it could have sought recovery of those damages under the Trinity-Morse/Diesel subcontract and recovered interest at the contract rate.
d. The Maximum Interest Rate Allowed by the Contract is Nine Percent
As noted above, the contract provides for interest to be paid at a rate "three (3) percentage points in excess of the rate of interest announced from time to time by Manufacturers Hanover Trust Co. as its prime rate or if it is less, at the maximum interest rate permitted by law." Trinity contends that this language sets the maximum rate of interest at nine percent, which is New York's statutory rate of prejudgment interest. N.Y. Gen. Oblig. Law § 5004 (McKinney 1992).
The more natural reading of the contract is the one advanced by Morse/Diesel, namely, that the maximum rate of interest under the contract is that prescribed by applicable usury laws. This comports with the parties' use of the phrase "permitted by law." (emphasis added) Moreover, at the time the contract was signed, it was clearly the law of New York that parties were allowed to contract for a rate of interest above that prescribed by § 5004 of the CPLR. See, e.g., Secular v. Royal Athletic Surfacing Co., 66 A.D.2d 761, 411 N.Y.S.2d 615 (1st Dep't 1978); Astoria Federal Savings and Loan Ass'n v. Rambalakos, 49 A.D.2d 715, 372 N.Y.S.2d 689 (2d Dep't 1975). Trinity's position is rejected. New York's usury laws (to the extent they are applicable) constitute the only cap on the contractual rate of interest.
Accordingly, interest on the judgment against Trinity is to be calculated at the rate of three percentage points over the prime rate as announced by Manufacturers Hanover Trust Co., beginning on October 1, 1985 and continuing until the entry of judgment.
The issue of prejudgment interest chargeable to Aetna requires consideration of two types of interest that could be awarded. First, there is the possibility that Aetna, as part of its surety obligations, may be held to account for interest awarded against Trinity. Additionally, there is the question of whether Aetna should be assessed interest due to a default on its part of its own obligation to pay on the bond.
As a matter of New York law, Aetna may be held liable for Trinity's prejudgment interest. Mid-State Precast Systems v. Corbetta, 202 A.D.2d 702, 608 N.Y.S.2d 546 (3d Dep't 1994); 63 N.Y. Jur. 2d, Guaranty and Suretyship § 411. By statute, however, Aetna's liability for that component is capped at the amount of its bond, $ 31.8 million. N.Y. Gen. Oblig. Law § 7-301 (McKinney 1989). Accordingly, judgment against Aetna will be entered for $ 25,775,933.00, the principal amount of the jury's verdict, plus $ 6,024,067.00 of Trinity's prejudgment interest, that is, for the amount of the jury's principal verdict plus so much of Trinity's prejudgment interest as when added to the principal amount equals the amount of Aetna's bond, or a total of $ 31.8 million.
The same statute that limits Aetna's liability for Trinity's prejudgment interest subjects it to unlimited liability for interest stemming from its own default. See U.S. Capital Ins. Co. v. Buffalo & Erie County Regional Development Corp., 177 A.D.2d 949, 578 N.Y.S.2d 307, 308 (4th Dep't 1992). Under the facts of this case, however, no such liability attaches, because no default by Aetna has been shown.
Morse/Diesel's own authorities establish that under New York law, a surety is not considered in default until it has been notified of a default by its principal and unjustly withholds payment due under its bond. Tuzzeo v. American Bonding Co., 226 N.Y. 171, 123 N.E. 142, 144 (N.Y. 1919). See also Stuyvesant Insurance Co. v. Dean Construction Co., 254 F. Supp. 102 (S.D.N.Y. 1966). The element of unjust withholding is plain in several of the cases plaintiff cites. In Town of Clarkstown v. North River Ins. Co., 803 F. Supp. 827, 830 (S.D.N.Y. 1992) and Insurance Co. of North America v. United States, 951 F.2d 1244 (Fed Cir. 1991), for example, sureties were held to have been in default on their performance bonds on the date they received notice of the termination of their principals' contracts. Assuming the performance bonds in those cases were of the standard variety, the sureties became obligated to pay completion costs upon receiving such notice and were unjustified in failing to do so. Similarly, in Greenblatt v. Delta Plumbing & Heating Corp., 849 F. Supp. 247 (S.D.N.Y. 1994), a surety was held to have been in default on a bond guaranteeing benefit contributions owed by its principal as of the date it received notice of the principal's delinquency on a specified sum and a demand for payment.
This case is distinguishable from all of those because Morse/Diesel has failed to establish a date prior to the verdict when Aetna was aware of, and wrongfully ignored, a mature obligation to pay. Unlike the obligees in Town of Clarkston and Insurance Co. of North America, Morse/Diesel never unequivocally terminated its principal's contract and demanded payment on the bond. Also, unlike the situations in Stuyvesant Insurance Co. and Tuzzeo, Aetna was not in a position to pay a sum certain into court in an interpleader action. Here, Morse/Diesel allowed Trinity to continue working on the project and provided Trinity with notice that Trinity's delays were causing additional unspecified expense, for which Morse/Diesel would hold Trinity accountable. Contemporaneously, Morse/Diesel sent Aetna copies of these notices, a fact Morse/Diesel claims establishes that Aetna had notice of Trinity's default. Morse/Diesel fails, however, to make clear what action Aetna should reasonably have taken upon receiving such notice.
Insofar as Trinity had not been terminated, Aetna could not have unilaterally cured Trinity's alleged infirmities. Moreover, because the notice to Aetna neither demanded payment nor set forth any specific amount due, Aetna did not act unreasonably in not remitting any funds. Overall, in the specific circumstances of the case, I find that no default on the part of Aetna has been shown.
In holding that Morse/Diesel has failed to establish a default on the part of Aetna, I do not find, as Aetna would urge, that a surety cannot be held in default until the amount of its liability has been fixed. Nor do I mean to say that a surety cannot be held in default prior to receiving a demand for payment. Rather, my conclusion, limited to the facts of this case, is that the uncertain status of the relationship between Morse/Diesel and Trinity and the uncertain amount of Aetna's liability prevented Aetna's bond obligations from maturing prior to the verdict of the jury in this case. Accordingly, judgment against Aetna will not exceed the amount of its bond.
B. Attorneys' Fees and Costs
New York law plainly allows parties to agree by contract that in the event of litigation between them, the prevailing party may recover from the other attorneys' fees and related costs expended in the prosecution of the suit. Durante Bros. Const. Corp. v. College Point Sports Ass'n, Inc., 207 A.D.2d 379, 615 N.Y.S.2d 455 (2d Dep't 1994); Barba v. Lindissimo Boutique, Inc., 149 Misc. 2d 117, 564 N.Y.S.2d 698 (N.Y. Sup. Ct. Queens Co. 1991). Morse/Diesel maintains that such an agreement is reflected in the Trinity-Morse Diesel Subcontract and, on the basis of that agreement, seeks to recover its costs and fees incurred in this action. It identifies two Subcontract provisions, Art. 11.4 of the Subcontract itself and Art. 9 of the act's General Conditions, as supporting a costs and fees award.
The defendants, as before, raise numerous objections.
a. Morse/Diesel Failed to Plead for Attorneys' Fees and Costs and, Therefore, May Not Recover Them
Trinity contends that Morse/Diesel did not demand attorneys' fees and costs in its pleadings and is, consequently, barred from recovering those damages by Fed. R. Civ. P. 9(g). Rule 9(g) does provide that "when items of special damages are claimed, they shall be specifically stated." Nonetheless, Trinity's argument is without merit. First of all, Morse/Diesel did at least arguably plead for fees and costs; the prayer for relief in its Amended Complaint includes a demand for costs. Secondly, even assuming arguendo that Morse/Diesel never previously demanded fees and costs, it may do so now for the first time. Fed. R. Civ. P. 54(c) provides, in pertinent part:
Every final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in the party's pleadings.