96 N.Y.2d 577 (2001)

In a breach of contract action involving a promissory note with monthly interest and principal installment payments, a creditor is entitled to prejudgment interest on both the unpaid interest and principal from the date each payment was due until liability is fixed.

Summary

This case addresses whether a creditor can recover prejudgment interest under CPLR 5001 in a breach of contract action concerning a promissory note that stipulated monthly interest and principal payments. The New York Court of Appeals held that the creditor is entitled to simple interest on both the unpaid interest and principal payments, calculated from the date each payment was due under the note’s terms until the date liability was established. This decision affirms the principle that prejudgment interest serves to make the aggrieved party whole by compensating them for the time they were deprived of the money.

Facts

In 1980, Defendant executed a promissory note for $1,437,500 with interest accruing at 8% per annum, payable monthly. For the first 60 months, only interest payments were required. Starting with the 61st month, principal payments at 1% per annum were to be made until the remaining balance was due on December 31, 2000. Defendant made no payments between 1980 and 1997. Plaintiff sued in 1997, seeking repayment of principal and interest installments owed from 1991 onward, acknowledging the statute of limitations barred claims for earlier defaults.

Procedural History

Plaintiff moved for summary judgment, which the Supreme Court denied. The Appellate Division reversed and granted summary judgment to the Plaintiff. On remand, Supreme Court awarded Plaintiff $1,094,083.60 for unpaid interest and principal but denied prejudgment interest. The Appellate Division reversed the denial of prejudgment interest and remitted the case for calculation of such interest. The New York Court of Appeals granted Defendant leave to appeal.

Issue(s)

Whether, in a breach of contract action involving a promissory note providing for monthly interest and principal payments, the creditor is entitled to prejudgment interest under CPLR 5001 on the unpaid interest and principal payments from the date each payment became due until the date liability was established.

Holding

Yes, because CPLR 5001(a) permits a creditor to recover prejudgment interest on unpaid interest and principal payments awarded from the date each payment became due under the terms of the promissory note to the date liability is established.

Court’s Reasoning

The Court of Appeals reasoned that CPLR 5001(a) mandates the award of interest in breach of contract actions to make the aggrieved party whole. The Court distinguished between compound interest (interest on interest) and simple interest (interest on principal only), clarifying that CPLR 5001 provides for simple interest. The Court found Young v Hill, 67 NY 162 (1876) and Giventer v Arnow, 37 NY2d 305 (1975), which disallowed compound interest, inapplicable because those cases involved agreements for compound interest, while this case interprets a statutory provision for simple interest. The court emphasized that awarding prejudgment interest on overdue payments compensates the plaintiff for the defendant’s use of money rightfully belonging to the plaintiff during the period of default. As Chief Judge Cardozo stated in Prager v New Jersey Fid. & Plate Glass Ins. Co., 245 NY 1, 5-6: “While the dispute as to value was going on, the defendant had the benefit of the money, and the plaintiff was without it. Interest must be added if we are to make the plaintiff whole. * * * If [defendant] chose to keep the money, it should pay for what it kept.” The Court also cited Love v State of New York, 78 NY2d 540, 545, noting that a debtor who has used the money has presumably benefited from it and should pay the creditor for that benefit in the form of interest. The court therefore held that the plaintiff is entitled to interest under CPLR 5001(a) on the overdue interest and principal payments from the accrual of the action for breach of contract.