J. D'Addario & Co. v. Embassy Industries, Inc.

OPINION OF THE COURT

At issue in this appeal is whether the parties’ contract language specifying that the seller’s “sole remedy” was liquidated

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 . . . .”

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 9% statutory interest and costs, 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 prejudgment 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 prejudgment 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 prejudgment 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

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. Assoc. 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)

In Manufacturer’s, we chastised the parties for the “inexplicable failure by all concerned to arrange for the payment of a meaningful interest rate on the escrowed money” ( 8 NY3d at 590 ). Here, the parties placed the down payment in an interest-bearing account as the contract required. It may be worth repeating, however, that parties should make it a matter of routine to decide in advance whether statutory interest is to be paid on amounts held in escrow. A contract clause providing that no statutory interest would accrue during an escrow dispute would have prevented this litigation altogether. But the language that was used, that the down payment on the property was to be the “sole remedy” for a breach by the purchaser and that the seller had “no further rights” against purchaser, is sufficiently clear in the end to reach the same result. The contract language will always control, as it should in this case.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

I respectfully dissent because I disagree that the liquidated damages provision in the parties’ contract vitiates the prejudgment interest provided in CPLR 5001 (a).

In a breach of contract action, an award of prejudgment interest is required under CPLR 5001 (a) (“[i]nterest shall be recovered upon a sum awarded because of a breach of performance of a contract”) and the accrual of interest is mandatory (see Matter of Syquia v Board of Educ. of Harpursville Cent. School Dist., 80 NY2d 531 , 536 [1992] [legislature’s use of the term “shall” implies “duty, not discretion”]; see also Gizzi v Hall, 309 AD2d 1140 , 1142 [3d Dept 2003]). As the majority correctly recognizes, “interest is not a punishment arbitrarily levied upon a culpable party” but compensation intended to

The entitlement to interest under CPLR 5001 (a) should also not depend on whether the down payment was placed in an escrow account managed by Embassy’s counsel during the four-year pendency of this litigation. Under the terms of the parties’ agreement, the attorney could not transfer the down payment to Embassy unless both Embassy and D’Addario agreed to release the funds. By refusing Embassy’s demand for disbursement, D’Addario effectively restrained Embassy’s use of the money for the remaining duration of the action. That refusal constituted a distinct and separate wrong not covered by the liquidated damages provision and prejudgment interest should have been awarded.

Accordingly, I would modify the Appellate Division order by reversing so much of it as vacated the Supreme Court’s judgment granting Embassy statutory interest, order that portion of the judgment reinstated and otherwise affirm.

Judges Ciparick, Read and Smith concur with Chief Judge Lippman; Judge Graffeo dissents in a separate opinion in which Judge Pigott concurs.

Order affirmed, with costs.