New York Law Review

Tag: Acceleration Clause

  • 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 24 N.Y.3d 532 (2014): Enforceability of Lease Acceleration Clauses and the Unlawful Penalty Doctrine

    172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 24 N.Y.3d 532 (2014)

    An acceleration clause in a commercial lease, which allows the landlord to collect all remaining rent immediately upon the tenant’s default, is not automatically invalid but may be deemed an unenforceable penalty if the accelerated damages are grossly disproportionate to the actual damages suffered by the landlord.

    Summary

    In this case, the New York Court of Appeals addressed the enforceability of an acceleration clause in a commercial lease. The court held that such clauses are not automatically invalid simply because the landlord terminated the lease and retook possession of the property. However, the court emphasized that the tenant must be given an opportunity to prove that the acceleration clause constitutes an unenforceable penalty because it results in damages grossly disproportionate to the landlord’s actual losses. The court found that the lower court erred in limiting the hearing on damages, and remanded the case to determine the proportionality of the damages under the acceleration clause.

    Facts

    172 Van Duzer Realty Corp. (Van Duzer) leased a property to Globe Alumni Student Assistance Association, Inc. (Association), with Globe Institute of Technology, Inc. (Globe) as guarantor. The lease was extended for nine years. When the Association failed to maintain the premises and ceased paying rent, Van Duzer terminated the lease and initiated legal proceedings. The lease contained an acceleration clause, entitling Van Duzer to recover the balance of the rent for the remaining lease term as liquidated damages upon the tenant’s default. Van Duzer sought to recover rent arrears and the future remaining rent based on the acceleration clause. The trial court granted Van Duzer summary judgment and entered a judgment in the amount of the accelerated rent minus reletting income. The Appellate Division affirmed.

    Procedural History

    Van Duzer initially sued in Civil Court for possession and past due rent. Van Duzer then commenced a second action in Supreme Court seeking accelerated rent. The Supreme Court granted summary judgment to Van Duzer on liability and referred the matter to a Special Referee for a damages determination. The trial court denied the defendants’ request for discovery and entered a judgment for Van Duzer. The Appellate Division affirmed. The Court of Appeals heard the appeal.

    Issue(s)

    1. Whether the acceleration clause in the lease is per se invalid because the landlord terminated the lease and retook possession of the property.

    2. Whether the tenant should be permitted to present evidence that the undiscounted acceleration of all future rents constitutes an unlawful penalty.

    Holding

    1. No, because the acceleration clause is not automatically invalid; the Court held the clause could be enforceable under the specific facts.

    2. Yes, because the tenant should be allowed to present evidence to establish that the damages resulting from the acceleration clause are an unenforceable penalty.

    Court’s Reasoning

    The Court of Appeals rejected the tenant’s argument that the acceleration clause was per se invalid after the landlord terminated the lease and retook possession of the property. The Court distinguished this case from Fifty States Mgt. Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573 (1979), because the landlord was not seeking to enforce the clause in the context of a continuing leasehold. Here, the landlord terminated the lease and sought damages as a result of the tenant’s breaches. Furthermore, the Court rejected arguments that the landlord had a duty to mitigate damages by re-letting the premises. New York law does not impose a duty to mitigate damages on the landlord.

    However, the Court held that the tenant was entitled to a hearing to prove that the acceleration clause constituted an unenforceable penalty. The Court reiterated the general rule that liquidated damages clauses are enforceable if they are not unconscionable or against public policy. However, such a clause is an unenforceable penalty if it provides for damages grossly disproportionate to the actual damages. The Court stated, “A provision which requires damages ‘grossly disproportionate to the amount of actual damages provides for [a] penalty and is unenforceable.’” Because the tenant argued that the acceleration clause allowed the landlord to recover all future rent while also retaining possession of the property, the Court concluded that the tenant should be allowed to present evidence that the accelerated rent constituted a penalty.

    The Court explained that the lower court had improperly limited the hearing on damages, and that the tenant should have the opportunity to show that the undiscounted accelerated rent was disproportionate to the landlord’s actual losses, even though the landlord had possession and no duty to mitigate damages. As the Court noted, “[O]n its face this argument is compelling because arguably the ability to obtain all future rent due in one lump sum, undiscounted to present-day value, and also enjoy uninterrupted possession of the property provides the landowner with more than the compensation attendant to the losses flowing from the breach—even though such compensation is the recognized purpose of a liquidated damages provision.”

  • NML Capital v. Republic of Argentina, 17 N.Y.3d 245 (2011): Enforceability of Interest Payments Post-Maturity and Acceleration

    NML Capital v. Republic of Argentina, 17 N.Y.3d 245 (2011)

    When a bond agreement requires biannual interest payments “until the principal hereof is paid,” the issuer must continue these payments both after the bond’s maturity date and after acceleration of the debt, and statutory prejudgment interest applies to any unpaid post-maturity or post-acceleration interest payments.

    Summary

    NML Capital sued Argentina for defaulting on floating rate accrual notes (FRANs). The bonds required Argentina to make biannual interest payments “until the principal hereof is paid.” Argentina argued that its obligation to pay interest ceased upon maturity or acceleration of the debt and that prejudgment interest on unpaid post-maturity/acceleration interest constituted impermissible “interest on interest.” The New York Court of Appeals held that Argentina was obligated to continue biannual interest payments after both the maturity date and the acceleration of the debt until the principal was paid, and that statutory prejudgment interest applied to those unpaid interest payments.

    Facts

    In 1998, Argentina issued FRANs, governed by New York law, requiring biannual interest-only payments on April 10 and October 10 “until the principal hereof is paid or made available for payment.” The interest rate was determined by a complex formula. The bond documents included acceleration clauses. From 1998 to 2001, Argentina made the required interest payments. After a financial crisis in late 2001, Argentina defaulted on approximately $80 billion in external debt, including the FRANs. The floating interest rate rose dramatically. Plaintiffs, who acquired the FRANs, sued Argentina for its default. NML Capital accelerated a portion of the debt in February 2005; the remainder became due on the April 2005 maturity date.

    Procedural History

    Plaintiffs sued in the United States District Court, Southern District of New York; the claims were consolidated. The District Court granted summary judgment to plaintiffs on liability. A dispute arose regarding the calculation of damages, specifically prejudgment interest. The District Court held that Argentina was obligated to pay interest-only payments after the bonds matured until the principal was paid, and therefore, bondholders were entitled to 9% statutory interest on the unpaid post-maturity interest. However, for the accelerated bonds, the court sided with Argentina, holding that the nation’s liability for biannual interest payments ceased on the date of acceleration and, therefore, the 9% statutory interest was not owed post-acceleration. Both Argentina and NML Capital appealed to the Second Circuit, which certified three questions to the New York Court of Appeals.

    Issue(s)

    1. Is a bond provision requiring biannual interest payments on principal “until the principal hereof is paid” properly construed as an obligation to pay interest so long as the principal is outstanding, including after the date of maturity?
    2. Is a bond provision requiring biannual interest payments on principal “until the principal hereof is paid” properly construed as an obligation to pay interest so long as the principal is outstanding, including after acceleration?
    3. If either of the foregoing questions is answered in the affirmative, does that obligation provide a valid basis for awarding statutory interest under N.Y. C.P.L.R. § 5001 (a) on post-maturity or post-acceleration interest payments that came due but were never paid?

    Holding

    1. Yes, because the plain language of the contract indicates that the bondholders are entitled to biannual interest payments until the principal is actually repaid in full.
    2. Yes, because Argentina has not pointed to any language in the repayment or acceleration clauses indicating that the parties intended this requirement to terminate upon acceleration of the debt, even if the principal was not repaid at that time.
    3. Yes, because the bondholders are entitled to prejudgment interest under CPLR 5001 on the unpaid biannual interest payments that were due— but were not paid — after the loans were either accelerated or matured on the due date.

    Court’s Reasoning

    The Court reasoned that under New York law, contracts should be enforced according to their terms. The bond documents stated that Argentina was to make biannual interest payments “until the principal hereof is paid or made available for payment.” The Court interpreted this to mean that the obligation to make these payments continued until the principal was actually repaid, not just until the maturity date. The Court stated, “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.” Had Argentina intended to cease interest payments upon maturity, it could have included language to that effect. The Court also rejected Argentina’s argument that acceleration terminated the obligation to make interest payments. The Court found no language in the bond documents indicating that the biannual payments were to stop in the event of acceleration. The Court distinguished the Second Circuit case of Capital Ventures Intl. v Republic of Argentina, noting that, in New York, the consequences of acceleration depend on the language chosen by the parties in the loan agreement. Finally, the Court held that the bondholders were entitled to statutory prejudgment interest on the unpaid interest payments. The Court cited Spodek v Park Prop. Dev. Assoc., stating that awarding prejudgment interest on unpaid interest payments compensates the bondholders for the failure to timely make interest payments. It is not impermissible “interest on interest” because the function of prejudgment interest is to compensate the creditor for the loss of use of money. As the Court stated, “There is no question that the judgment against Argentina will be extraordinarily large, primarily due to the passage of time and the application of the contract’s floating interest rate. But this is no reason to depart from the legal principle that contracts must be enforced according to the language adopted by the parties, particularly here where Argentina drafted the bond documents.”

  • Marine Midland Bank, N.A. v. Wickwire, 78 N.Y.2d 182 (1991): Statute of Limitations and Guarantor Liability on Installment Debt

    Marine Midland Bank, N.A. v. Wickwire, 78 N.Y.2d 182 (1991)

    When a promissory note is payable in installments and the creditor has the option to accelerate the entire debt upon default of an installment, the statute of limitations begins to run on each installment separately unless the creditor exercises its option to accelerate; a guarantor’s liability is coextensive with the debtor’s, absent acceleration.

    Summary

    Marine Midland Bank loaned Campcore $500,000, secured by a promissory note with an acceleration clause. Wickwire guaranteed $105,000 of the loan. Campcore defaulted on an April 1983 payment, but Marine did not accelerate the debt. Campcore made partial payments until 1987. In 1990, Wickwire sought a declaration that Marine’s claim against his guaranty was time-barred, arguing the statute of limitations began running on the entire debt upon the initial default in 1983. The New York Court of Appeals reversed the lower courts, holding that separate causes of action accrued as each installment became due, and the statute of limitations did not bar Marine’s claim because it never accelerated the debt. The guarantor’s liability extended only to amounts due and payable.

    Facts

    In July 1978, Marine Midland Bank loaned Campcore, Inc. $500,000, secured by a promissory note. The note allowed Marine the option to accelerate the entire balance upon nonpayment of principal or interest. Wickwire guaranteed $105,000 of Campcore’s debt, promising “full and prompt payment to Bank when due, whether by acceleration or otherwise.” Marine agreed to notify Wickwire of any default within 30 days. On April 1, 1983, Campcore defaulted on a $6,000 principal payment plus interest. From October 1983 to October 1987, Campcore made partial payments but never became current. In January 1988, Marine notified Campcore that the loan had matured and demanded full payment.

    Procedural History

    In August 1990, Phoenix Acquisition Corp. and Dome Corp. sued to rescind the mortgage securing the loan. In October 1990, Wickwire cross-claimed, seeking a declaration that Marine’s claim against his guaranty was time-barred. The Supreme Court granted Wickwire’s motion for summary judgment. The Appellate Division affirmed. Marine appealed to the New York Court of Appeals.

    Issue(s)

    Whether Campcore’s default on one installment payment triggered the Statute of Limitations accrual against the entire debt, even though Marine Midland Bank chose not to exercise its option to accelerate the balance of the indebtedness?

    Holding

    No, because separate causes of action accrued as installments of the loan indebtedness became due and payable and the creditor-Marine did not exercise their right to accelerate the loan.

    Court’s Reasoning

    The court reasoned that the contractual language of the promissory note and guaranty dictate the scope of the guarantor’s legal obligation. Because Marine Midland Bank did not accelerate the entire debt, Wickwire was only liable for the installment that was due and payable and in default. The Statute of Limitations began to run only for that specific amount. The court stated, “The fact that Marine had a bargained-for, exclusive acceleration option to call the entire indebtedness due immediately upon any default does not, by operation of law, trigger the accrual of a cause of action for portions of the indebtedness which neither the debtor nor the guarantor were then liable to pay.”

    The court rejected Wickwire’s argument that his obligation as guarantor was broader than the debtor’s, finding that the guaranty obligated him to make payments “when due, whether by acceleration or otherwise,” meaning his liability was coextensive with Campcore’s, up to $105,000 plus interest. The court interpreted the phrase “to the extent above provided” in conjunction with the primary guaranty obligation clause, “when due, whether by acceleration or otherwise” to refer only to amounts due and payable to the limit of $105,000.

    The court also addressed the policy implications, stating that if a creditor’s action against a guarantor accrues wholly and immediately at the point of the first default in payment, creditors would be left with no alternative or incentive but to accelerate the entire debt or risk losing all opportunity to pursue the guaranty. This would disincentivize flexible arrangements between debtors and creditors to resolve issues amicably. Finally, the court addressed the issue of whether the notice requirement in the guaranty was a condition precedent to the enforcement of the guaranty and found that it was not.