New York Law Review

Tag: interest

  • Fru-Con/Fluor Daniel Joint Venture v. O’Brien & Gere Technical Services, Inc., 6 N.Y.3d 587 (2006): Interest Awards in Interpleader Actions

    6 N.Y.3d 587 (2006)

    CPLR 5001(a) does not authorize an award of interest against unsuccessful claimants in an interpleader action where no sum has been awarded against them and they have not been found liable for breach of contract or interference with property.

    Summary

    This case concerns a dispute over interest on funds held in escrow during an interpleader action. A general contractor (Fru-Con/Fluor Daniel Joint Venture) deposited money in escrow to pay a subcontractor’s (O’Brien & Gere) debts to its subcontractors. When disputes arose, an interpleader action was initiated. The Joint Venture ultimately recovered the funds, but sought interest from O’Brien and another claimant, Gives Corporation, for the time the funds were held by the court. The Court of Appeals held that interest could not be awarded against unsuccessful claimants in an interpleader action where there was no judgment against them for breach of contract or interference with property, and where they did not benefit from the delay.

    Facts

    The Joint Venture hired O’Brien as a subcontractor for a construction project. O’Brien, in turn, hired Gives Corporation. Payment problems arose, leading the Joint Venture to place approximately $5.3 million into escrow for O’Brien to settle with its subcontractors by June 15, 1999. Cives, one of O’Brien’s subcontractors, claimed O’Brien owed them money, and requested the escrow agent to cease disbursement of funds. The escrow agent then commenced an interpleader action naming the Joint Venture, O’Brien, Gives, and others as claimants to the remaining $2.4 million in the fund. The escrow agent was discharged and the funds were deposited with the court clerk.

    Procedural History

    The Supreme Court discharged the escrow agent and ordered the funds deposited with the court clerk. The Appellate Division eventually ruled in March 2003 that the fund should be returned to the Joint Venture. After further proceedings, the Joint Venture received the funds (with nominal interest) in late 2003 and early 2004. The Joint Venture then moved for entry of judgment against O’Brien and Gives for statutory interest. The Supreme Court granted the motion, and the Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether CPLR 5001(a) authorizes an award of interest against unsuccessful claimants in an interpleader action, specifically O’Brien and Gives, when the funds were held by the court clerk and no judgment was awarded against them for breach of contract or interference with property rights.

    Holding

    No, because CPLR 5001(a) authorizes interest only “upon a sum awarded,” implying the interest must be paid by the party against whom the sum was awarded, and no sum was awarded against O’Brien or Gives; furthermore, O’Brien and Gives were not found to have breached any contract or unlawfully interfered with property.

    Court’s Reasoning

    The Court of Appeals stated that interest awards are statutory creations. While interpleader actions are equitable, CPLR 5001(a) authorizes interest only “upon a sum awarded.” Here, no sum was awarded against O’Brien or Gives, so there was no basis for awarding interest against them. The court reasoned that interest is compensation for the use of money over time. During the interpleader, the money was held by the court clerk, so neither O’Brien nor Gives had the use of it, and awarding interest against them would penalize them for a delay that brought them no benefit. The court cited Love v. State of New York, stating that “interest is not a penalty. Rather, it is simply the cost of having the use of another person’s money for a specified period.” The court also noted that O’Brien and Gives had not been found to have breached any contract or interfered with property. Their only action was to litigate their claims, which were not found to be frivolous or vexatious. The court emphasized that the Joint Venture’s hardship resulted from the failure to arrange for interest on the escrowed money initially, not from any misconduct by O’Brien or Gives. The court stated, “There is no doubt that the Joint Venture suffered a hardship in being deprived of the money in escrow for four years, with only meager compensation for the delay. This hardship, however, was the result not of any misconduct by O’Brien or Gives, but of the inexplicable failure by all concerned to arrange for the payment of a meaningful interest rate on the escrowed money.”

  • Somers Central School Dist. v. Town of Somers, 77 N.Y.2d 169 (1990): Action for Money Had and Received & Interest

    Somers Central School Dist. v. Town of Somers, 77 N.Y.2d 169 (1990)

    A school district may maintain a cause of action for money had and received to recover unpaid accumulated interest on school tax moneys, even after accepting the principal sum upon which that interest became due.

    Summary

    Nineteen Suffolk County school districts sued towns for failing to disburse collected school tax money on time, as required by the Suffolk County Tax Act. Although the towns eventually paid the principal tax amounts due, the school districts sought to recover the unpaid accumulated interest. The New York Court of Appeals held that the districts could maintain a cause of action for money had and received to recover the unpaid interest, even after accepting the principal. The court reasoned that equitable principles require the towns to compensate the districts for the lost use of their money due to the delayed disbursements.

    Facts

    Plaintiffs, 19 school districts in Suffolk County, were located within the Towns of Huntington, Smithtown, and Islip. The districts challenged the towns’ disbursements of tax monies collected under the Suffolk County Tax Act. The towns disbursed sums equaling the school districts’ tax levies but allegedly violated the timing requirements of sections 13(a) and 14 of the Act. The school districts claimed the towns’ late disbursements caused them to lose interest income.

    Procedural History

    The school districts commenced consolidated actions. The defendants moved to dismiss, arguing the complaints were legally insufficient because the towns had paid the principal amounts. The Supreme Court denied the motions and granted partial summary judgment to the plaintiffs. The Appellate Division reversed, granting the defendants’ motions to dismiss for failure to state a cause of action for money had and received. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether school districts’ right to timely disbursement of collected school tax levies under sections 13(a) and 14 of the Suffolk County Tax Act can be enforced in a cause of action for money had and received when the districts, before legal action, received the principal amounts but not the accumulated interest?

    Holding

    Yes, because the school districts’ right to collect interest is not negated by receiving the principal sums. The towns were obligated to disburse the funds timely, and failure to do so created an immediate liability for both principal and interest.

    Court’s Reasoning

    The Court of Appeals emphasized that a cause of action for money had and received is based on equitable principles, arising when one party possesses money that, in equity and good conscience, belongs to another. Citing Parsa v. State of New York, 64 N.Y.2d 143, 148 (1984), the court noted it applies “in the absence of an agreement when one party possesses money that in equity and good conscience [it] ought not to retain and that belongs to another.” When towns failed to disburse school taxes on time they breached a statutory duty, thus benefiting from the use of funds belonging to the school districts.

    The court distinguished this case from Peirson v. Board of Supervisors, 155 N.Y. 105 (1898), where the town had already received and used the funds in question. Here, the dispute concerned interest on taxes improperly withheld. The court found that under the self-executing provisions of the Suffolk County Tax Act, the towns’ default triggered an immediate liability for both principal and accumulated interest. The court emphasized that plaintiffs should be made whole: “There can be little question that under any consideration of ‘right, justice and morality’…plaintiffs, in order to be made whole, should be permitted to assert a claim to recover any interest that may be due them.”

    The Court analogized this case to Davison v. Klaess, 280 N.Y. 252 (1939), where the Court held that the receipt of partial payments applied to the principal did not relieve the debtor of the obligation to pay interest. The Court concluded that to allow the towns to avoid paying interest simply by paying the principal before a lawsuit would violate the statutory scheme and equitable principles.

  • Surrey Strathmore Corp. v. Dollar Savings Bank, 36 N.Y.2d 173 (1975): Interest on Mortgage Tax Escrow Accounts

    36 N.Y.2d 173 (1975)

    In the absence of an explicit agreement or clear evidence of intent, a mortgagor is not entitled to interest or earnings on funds held in a tax escrow account by the mortgagee, especially when dealing with sophisticated commercial parties.

    Summary

    Surrey Strathmore Corp., a commercial mortgagor, sought an accounting from Dollar Savings Bank, the mortgagee, for earnings on monthly tax installment payments held in escrow. The mortgage agreement was silent on interest, and the bank explicitly stated it would not pay interest at closing. The New York Court of Appeals held that the mortgagor was not entitled to an accounting or any earnings on the tax account. The court reasoned that the absence of an express agreement, coupled with the closing conversation, indicated no intent to pay interest or earnings. The court further noted that as a matter of public policy, the issue was for the legislature, which subsequently required interest payments on tax accounts for owner-occupied residences.

    Facts

    Appellant, Surrey Strathmore Corp., a business corporation, secured a $450,000 loan from respondent Dollar Savings Bank for an apartment complex, using a first mortgage. The mortgage agreement required monthly installment payments for real estate taxes, stating, “The mortgagee shall hold such monthly payments in trust to apply the same against such taxes, when due.” At the closing, the mortgagor’s representative asked about interest on the tax account and was informed that no interest would be paid. The mortgagor later requested that the tax monies be held in a separate, interest-bearing account, which the bank denied.

    Procedural History

    The mortgagor initiated an Article 77 proceeding for an accounting of the tax payments and any income earned. Special Term ruled against the mortgagor. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. The Court of Appeals affirmed the Appellate Division’s order, denying the mortgagor’s claim.

    Issue(s)

    Whether, under the terms of a commercial mortgage agreement requiring monthly tax installment payments, the corporate mortgagor is entitled to an accounting and any earnings realized by the mortgagee on those funds.

    Holding

    No, because the written agreement contained no explicit provision for interest or earnings, and parol evidence from the closing confirmed the parties’ intent that no such payment would be made.

    Court’s Reasoning

    The court determined that resolving the issue does not depend on labels such as “trust” or “debtor-creditor relationship,” but rather on the parties’ intended rights and obligations as shown in their written agreement. “Reasoning predicated on such concepts would accordingly be untrustworthy.” The court noted the absence of an express provision for interest or earnings in the agreement. While the mortgage stated that payments shall be held “in trust,” the court found that the language did not create an obligation to pay the mortgagor any income the bank may have earned by using those funds, specifically noting the silence on the matter suggests that no such payment was intended. Further, the court relied on parol evidence – specifically, the undisputed discussion at the closing where the bank explicitly stated that no interest would be paid on the tax payments. The court emphasized the sophistication of the mortgagor, precluding any claims of a contract of adhesion. Legislative action requiring interest on tax accounts for residential mortgages, passed after this mortgage was initiated, was also addressed. Dissenting judges argued that the “in trust” language created a trust relationship, entitling the mortgagor to any earnings, and that the parol evidence rule should bar consideration of the closing conversation. Judge Fuchsberg directly quoted the Restatement of Trusts to support the argument that the absence of an interest obligation does not negate the existence of a trust relationship, and therefore an obligation to remit earned income. However, the majority held that the legislature was the more appropriate venue to address a policy decision on those financial vehicles.

  • Matter of Joseph Hellerstein v. New York State Tax Commission, 25 N.Y.2d 518 (1969): Interest on Tax Refunds

    Matter of Joseph Hellerstein v. New York State Tax Commission, 25 N.Y.2d 518 (1969)

    Interest on tax refunds is not authorized unless the tax statute or other statute applicable to refunds explicitly provides for the payment of interest, especially when the tax is collected under a valid statute.

    Summary

    The case concerns whether a taxpayer is entitled to interest on a tax refund when the statute authorizing the refund is silent on the matter. Hellerstein sought a refund of mortgage taxes improperly collected by the State. After obtaining the refund, Hellerstein sought interest from the time of the initial tax payment. The New York Court of Appeals held that interest is not authorized unless explicitly stated in the relevant statute, particularly when the tax was collected under a valid statute. The court distinguished between taxes collected under wholly void statutes and those erroneously collected under valid statutes, denying interest in the latter case absent explicit statutory authorization.

    Facts

    Joseph Hellerstein paid mortgage taxes to New York State. Hellerstein contended that the tax was erroneously imposed on a supplemental mortgage that should have been exempt under the Tax Law. Hellerstein initiated proceedings, eventually securing a refund of the mortgage taxes. The statute under which the refund was granted, however, was silent regarding the payment of interest on the refunded amount. Hellerstein subsequently sought interest on the refund from the State Tax Commission, which was denied, leading to the present action.

    Procedural History

    Hellerstein initiated a CPLR Article 78 proceeding in the nature of mandamus after the State Tax Commission refused to direct payment of interest on the tax refund. Special Term denied the request for interest. The Appellate Division affirmed, citing a procedural issue requiring amendment of the prior remittitur from the Court of Appeals. The Court of Appeals granted leave to appeal to consider the substantive issue of interest on tax refunds.

    Issue(s)

    Whether a taxpayer, entitled to a refund of taxes improperly paid and collected by the State under compulsion, is also entitled to interest on the refund from the time of payment of the taxes when the statute authorizing refunds is silent concerning interest.

    Holding

    No, because with respect to tax refunds under valid statutes, interest is not authorized unless the tax statute or other statute applicable to refunds explicitly makes provision for the payment of interest.

    Court’s Reasoning

    The Court of Appeals reviewed existing case law, noting a lack of uniformity regarding interest on tax refunds. It distinguished Matter of O’Berry, 179 N.Y. 285, which allowed interest on refunds of taxes collected under a wholly void and unconstitutional statute. The court reasoned that a void statute is as if it never existed, representing a greater intrusion on taxpayer rights. The court observed a lack of a uniform statutory pattern. Some statutes expressly prohibit interest on refunds, while others mandate it. The court emphasized that absent explicit statutory authorization, interest is not permitted on tax refunds under valid statutes. The Court reasoned that erroneous collections under valid statutes may arise from various circumstances, not always attributable to the tax collector. "With respect to such tax refunds, interest is not authorized unless the tax statute or other statute applicable to refunds explicitly makes provision for the payment of interest, and perhaps with such limitations, conditions, and qualifications as may be appropriate to correct whatever injustice has resulted from the imposition and collection of the tax under a valid statute." The court also considered CPLR provisions on interest but determined the legislature intended tax statutes to govern interest on refunds, not general practice statutes, citing the number of tax statutes that expressly address the issue. The court affirmed the Appellate Division’s order denying interest.

  • Yonkers Contracting Co. v. State, 24 N.Y.2d 167 (1969): State’s Waiver of ‘No-Interest’ Provision in Construction Contract

    Yonkers Contracting Co. v. State, 24 N.Y.2d 167 (1969)

    When the State reserves the question of interest on a severed claim until the determination of additional claims and the claimant successfully recovers judgment on those additional claims, the State waives the contract’s ‘no-interest’ provision on the severed claim.

    Summary

    Yonkers Contracting Co. sued the State of New York for breach of contract related to the construction of a bridge. The claim included a cause of action for the unpaid contract balance and three additional claims. The State initially refused to pay interest on the contract balance, citing a contract provision that acceptance of final payment waived any interest claim. However, the parties agreed to sever the cause of action for the contract balance and reserve the question of interest. The Court of Appeals held that because the State reserved the interest question and the claimant prevailed on one of its additional claims, the State waived the ‘no-interest’ provision. The court also addressed and rejected the claimant’s other claims regarding fabrication costs and alleged extra work.

    Facts

    Yonkers Contracting Co. contracted with the State to construct a bridge. After completing the work, Yonkers filed a claim that included the unpaid contract balance, increased fabrication costs due to the State’s rejection of horizontal girder fabrication, and payment for alleged extra work. The State accepted the work on October 20, 1961, but Yonkers did not submit required affidavits until October 24, 1962. The State tendered final payment on November 2, 1962, but Yonkers refused it due to a clause that acceptance would waive additional claims. The contract contained a standard specification that refusal of final payment waived any claim to interest.

    Procedural History

    Yonkers filed a claim in the Court of Claims. The cause of action for the contract balance was severed, and judgment was entered and paid on March 20, 1963, with the interest question reserved. The Court of Claims initially awarded interest. The Appellate Division reversed the interest award and dismissed some of the other causes of action. Yonkers appealed to the Court of Appeals.

    Issue(s)

    1. Whether the State waived the contract’s ‘no-interest’ provision by stipulating to reserve the question of interest on the severed contract balance claim until the resolution of the remaining claims, where the claimant was ultimately successful on one of those claims.

    2. Whether the State breached the contract by refusing to approve the claimant’s proposal to fabricate bridge girders horizontally, thereby entitling the claimant to recover increased costs of vertical fabrication.

    3. Whether the claimant was entitled to additional compensation for alleged extra work not required by the original contract or a supplemental agreement.

    Holding

    1. Yes, because the State’s reservation of the interest question coupled with the claimant’s successful recovery on another claim constituted a waiver of the contract provision. The Court reasoned that otherwise, the claimant would face an unfair choice of either waiving additional claims or forfeiting interest.

    2. No, because the contract and specifications, taken as a whole, contemplated vertical casting, and the State’s refusal to approve horizontal fabrication did not constitute a breach of contract.

    3. No, because the items were either required by the original contract specifications or the claimant was fully compensated for the work performed as required by the contract.

    Court’s Reasoning

    Regarding the interest claim, the Court distinguished its prior holding in Wood v. State of New York, which enforced a similar ‘no-interest’ provision, by relying on Higgins & Sons v. State of New York. The Court stated that Higgins held that the State could waive the ‘no-interest’ provision “by stipulating at the time of the severance of the cause of action for the conceded contract balance that the question of interest be reserved until such time as the remaining portions of the claim were decided.” The court reasoned that reserving the question of interest with the validity of the additional claims hinging upon the resolution of those claims allows for fairness. Here, Yonkers prevailed on its third cause of action. As to the fabrication method, the Court deferred to the lower courts’ findings that the contract specifications, when viewed holistically, indicated that vertical casting was intended. For example, the specifications detailed the girder’s underside when in a vertical position. Regarding the “extra” work claim, the court affirmed the lower courts’ factual findings that the items were either part of the original contract or already covered by a supplemental agreement, precluding additional compensation. The court emphasized that the specifications called for preparation of the concrete deck and that the area covered by the waterproofing substance was consistent with contract requirements.