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J. D'addario & Company, Inc v. Embassy Industries

November 19, 2012


The opinion of the court was delivered by: Lippman, Chief Judge:

This opinion is uncorrected and subject to revision before publication in the New York Reports.

At issue in this appeal is whether the parties' contract language specifying that the seller's "sole remedy" was liquidated damages and the seller had "no further rights" against the defaulting purchaser, trumps language in CPLR 5001 (a) directing that statutory interest be awarded in a contract dispute. The terms of the contract are controlling here, and thereunder, we hold that defendant Embassy Industries is not entitled to statutory interest.

By real estate contract dated January 13, 2006, defendant Embassy Industries, Inc. ("Embassy") agreed to sell commercial real property located in Farmingdale, New York to plaintiff J. D'Addario & Company ("D'Addario") for $6.5 million. D'Addario deposited 10% of the purchase price ($650,000), the down payment under the contract, in escrow with Embassy's attorney (the "Escrow Agent"). The contract provided that the down payment would be held at an interest-bearing account at North Fork Bank in Melville, New York. The contract further stated that the Escrow Agent would hold the down payment until the closing or termination of the contract and "pay over the interest or income earned thereon, if any, to the party entitled to the Downpayment." If the closing did not occur and either party disputed the other's written demand for the down payment, then the Escrow Agent would "continue to hold the Downpayment until otherwise directed by written instructions from Seller and Purchaser or a final judgment of a court of competent jurisdiction."

Negotiating at arm's length and each represented by counsel, the parties agreed in the liquidated damages clause that the seller's "sole remedy" and the purchaser's "sole obligation" would be the $650,000 down payment plus bank-accrued interest.

The seller would also have "no further rights or causes of action" against the purchaser in the event of a default.

The liquidated damages clause provided that:

"[i]f Purchaser defaults, the entire damages which Seller will thereby sustain cannot be exactly determined; therefore, it is agreed that in the event of any default by Purchaser, all amounts paid by Purchaser as a deposit . . . shall be considered as liquidated damages . . . and be permanently retained by Seller as Seller's sole remedy and Purchaser's sole obligation in any and all events. . . . Seller shall retain such amounts as liquidated damages and no further rights or causes of action shall remain against Purchaser, nor shall Purchaser have any further rights under this Contract or otherwise, with respect to Seller . . . ."

Subsequent to the signing of the contract, Embassy scheduled a time-of-the-essence closing for July 31, 2006. On July 21, 2006, D'Addario purported to terminate the contract and did not attend the convened closing on July 31. D'Addario believed it had timely and effectively terminated the contract by reason of Embassy's inability to certify that groundwater contamination at the site had been addressed to the satisfaction of regulatory authorities. Embassy declared D'Addario to be in default by reason of its failure to appear at the closing and retained D'Addario's $650,000 down payment as liquidated damages pursuant to the contract.

D'Addario commenced the underlying action to recover its down payment, and Embassy counterclaimed, alleging that D'Addario defaulted by failing to appear at the closing. After a non-jury trial, Supreme Court rendered a judgment which awarded Embassy the $650,000 down payment plus statutory 9% interest, for a total of $877,406.

The Appellate Division modified to vacate the award of statutory interest, holding that "Supreme Court improvidently exercised its discretion in awarding statutory pre-judgment interest" (J. D'Addario & Co., Inc. v Embassy Indus., Inc., 83 AD3d 1001, 1003 [2d Dept 2011]). Supreme Court then issued an amended judgment directing the Escrow Agent to turn over the down payment and bank-account interest accrued to Embassy.

We granted Embassy leave to appeal (18 NY3d 802 [2011]). The only issue raised is Embassy's entitlement to statutory pre-judgment interest, and we now affirm, although on different grounds from those stated by the Appellate Division.

In breach of contract cases where parties do not specify the exclusive remedy, CPLR 5001 (a) requires that statutory interest be paid. CPLR 5001 (a) states that "[i]nterest shall be recovered upon a sum awarded because of a breach of performance of a contract . . . " (emphasis added). The plain language of CPLR 5001 (a) "mandates the award of interest to verdict in breach of contract actions" (Spodek v Park Prop. Dev. Assoc., 96 NY2d 577, 581 [2001]). There is no requirement that the breaching party obtain some benefit from the wronged party's money for statutory interest to be paid. The principle behind pre-judgment interest is that the breaching party should compensate the wronged party for the loss of use of the money (see NML Capital v Republic of Argentina, 17 NY3d 250, 266 [2011]). We have previously stated that "interest is not a penalty" (Love v State of New York, 78 NY2d 540, 544 [1991]), and the purpose of ordering statutory interest on amounts in escrow is not to punish the breaching party. The breaching party is required to pay interest despite lacking possession or enjoyment of the property in order "to make [the] aggrieved party whole" (Spodek v Park Prop. Dev. Assoc., 96 NY2d at 581).

This long-recognized principle is not in conflict with our holding in Manufacturer's & Traders Trust Co. v Reliance Ins. Co. (8 NY3d 583 [2007]), an equitable interpleader action where we ruled that the trial court did not have discretion to award statutory interest. In Manufacturer's, we held that in an interpleader action where the losing co-claimants were not guilty of any breach, no sum is "awarded" under CPLR 5001 (a) against those who lose (see id. at 589). No judgment was entered against the losing claimants in Manufacturer's, whereas in a breach of contract case, interest must be paid by the party against whom judgment is entered. We recognized a "fundamental objection" to awarding statutory interest in Manufacturer's because the losing claimants were "not . . . found to have breached any contract", not because the co-claimants received no benefit from the disputed funds while it was held in escrow (see id.).

In this case, however, Embassy and D'Addario agreed at the time of contract formation that the "sole remedy" for Embassy and the "sole obligation" of D'Addario in the event of a purchaser default, would be an award of the down payment. Moreover, the parties agreed that the seller would have "no further rights" against the purchaser once the down payment was paid as liquidated damages. The contract required that the down payment be placed in an interest-bearing account, so that the party entitled to the down payment would receive compensation for the deprivation of its use of the money in the form of bank-accrued interest. Embassy's contention that the contract never expressly mentioned statutory interest, and that therefore their right thereto was not waived, is unpersuasive. The use of the terms "sole remedy," "sole obligation," and "no further rights" by the parties, together with the provision for interest on the escrowed sum, was sufficiently clear to establish for purposes of this transaction that interest paid at the statutory rate was not contemplated by the parties at the time the contract was formed. We held in W.W.W. Associates, Inc. v Giancontieri (77 NY2d 157, 162 [1990]) that "when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms." Regardless of what CPLR 5001 (a) customarily requires in terms of statutory interest for breach of contract cases, the parties here decided that the amount escrowed should be the exclusive remedy to the wronged party. As we stated in Town of Orangetown v Magee (88 NY2d 41, [1996]), "parties to a ...

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