On January 16, 2024, the First Department issued a decision in IHG Harlem I LLC v. 406 Manhattan LLC, 2024 NY Slip Op. 00164, holding that a sole remedy provision did not bar an award of statutory interest, explaining:
At issue in this appeal is whether the parties’ contract language specifying that purchaser’s sole remedy in the event of sellers’ breach is the return of its downpayment constitutes a clear waiver of CPLR 5001(a) as defined by the Court of Appeals in J. D’ Addario & Co., Inc. v Embassy Indus., Inc. (20 NY3d 113 [2012]) and requires denying the nonbreaching party statutory prejudgment interest. For the reasons that follow, we conclude that it does not and hold that CPLR 5001 (a) requires that plaintiff IHG Harlem I LLC, the nonbreaching purchaser, be awarded prejudgment interest on its $626,250.00 downpayment, at the statutory rate of 9% from November 12, 2015, through November 16, 2022.
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In its decision denying plaintiff prejudgment interest, the motion court relied on J. D’Addario and Sommer v General Bronze Corp. (28 AD2d 981 [1st Dept 1967], affd 21 NY2d 775 [1968]) stating that:
In J. D’Addario, the Court of Appeals affirmed the First Department’s decision which vacated the trial court’s award of statutory interest on the return of a deposit because the parties agreed the seller would have no further rights once the down payment was paid as liquidated damages and the contract required the deposit be held in an interest-bearing account. Meanwhile, in Sommer, the First Department explicitly held that where a contract of sale limited liability to the amount of the down payment, money damages equivalent to the amount of the down payment or interests on that amount were not warranted J. D’Addario and Sommer are squarely on point and since this court is bound to follow its precedent, the court will sign the judgment proposed by defendants which does not award plaintiff a money judgment.
The motion court further concluded that denying plaintiff statutory interest is consistent with the First Department’s decision/order in this case, which expressly did not award plaintiff a money judgment nor interest thereon. On its appeal from Supreme Court’s order and judgment, plaintiff asserts that the court erred by employing too broad a reading of these decisions and we agree.
CPLR 5001(a) provides that prejudgment interest shall be recovered upon a sum awarded because of a breach of performance of a contract. The legislature’s use of the term shall imports duty, not discretion. The principle behind awarding statutory interest on amounts in escrow is not to punish the breaching party, but rather to compensate the wronged party for the loss of use of their money. The breaching party is required to pay interest despite lacking possession or enjoyment of the property in order to make the aggrieved party whole.
However, courts have declined to award statutory prejudgment interest in a small set of cases where it can be established that the nonbreaching party has otherwise been made whole, including where the parties have contracted around CPLR 5001(a) or where interest would amount to a windfall to the nonbreaching party. In J. D’Addario, the Court of Appeals determined that regardless of what CPLR 5001 (a) requires, the freedom of parties to a civil dispute to chart their own course and fashion how damages are to be computed without interference by the courts is paramount. When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. The Court of Appeals’ holding that a party’s statutory right to interest can be waived only if the allegedly waiving parties clearly manifest their intent to do so comports with the requirements for waivers in other contexts. Such a clear manifestation of a waiver of statutory prejudgment interest is not found in this case.
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Interest is not a separate remedy; rather, it is an essential part of any remedy. Prejudgment interest compensates the nonbreaching party for the economic hardship associated with delayed judgment, due to the time-value of money. The election of a sole remedy may still waive prejudgment interest if the parties have designed that exclusive remedy to compensate the nonbreaching party for the lost use of its money by other means, but where that remedy does not include a substitute for statutory interest, CPLR 5001(a) requires an award of statutory interest. Subsection (b) of section 5.05 of the contracts between the parties here identifies specific performance or termination of the agreement and return of the downpayment as purchaser’s sole and exclusive remedy. While this restricts plaintiff’s potential remedies, by itself it has no bearing on the availability of statutory interest.
By designating as plaintiff purchaser’s sole and exclusive remedy the return of its downpayment, subsection (b) of section 5.05 of the contracts limits damages to the liquidated sum of plaintiff’s downpayment. This Court’s direction in IHG HARLEM I, to delete the language about a trial of damages in Supreme Court’s May 18, 2020 order and direct a return of the deposits to plaintiff as liquidated damages under the terms of the contracts does not preclude the inclusion of statutory prejudgment interest in the final judgment. Interest may be awarded on liquidated damages and has been for over a century. Mere use of the term “liquidated damages” neither precludes nor waives the application of CPLR 5001(a).
Where the parties to a contract have fashioned an exclusive remedy of a liquidated sum that includes bank interest, or another form of compensation for the time-value of money, an award of statutory interest would result in a windfall to the nonbreaching party. We held in Ithilien Realty Corp. v 176 Ludlow, LLC (139 AD3d 582[1st Dept 2016]), that the nonbreaching party was not entitled to statutory prejudgment interest where the contract’s terms, requiring 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 accrued interest, were sufficiently clear to establish that interest paid at the statutory rate was not contemplated by the parties at the time the contract was formed and that the amount escrowed, including interest earned, should be the exclusive remedy to the wronged party. In J. D’ Addario, 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.
It is determinative here that the parties to the contracts made no such provision for the lost use of their money. Section 2.03 of the contracts provides for the funds to be held in escrow, but the escrow account specified is an interest on lawyer account (IOLA). While every lawyer in the state must maintain an IOLA and use it for qualifying funds, the clear exception is that a lawyer may instead use a separate interest-bearing account that will generate, compute, and pay net interest to the client or beneficial owner. As a result, all of the interest that accrued on plaintiff’s downpayment over seven years was paid to the state IOLA fund, not to the prevailing party.
In these carefully drafted agreements there are no express limitations on liability that suggest the parties here intended to vitiate CPLR 5001(a). The parties in J. D’Addario agreed that in the event of purchaser’s default its deposit shall be permanently retained by Seller as Seller’s sole remedy and Purchaser’s sole obligation in any and all events 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. Similarly, in a very short memorandum decision, this Court in Sommer emphasized that the parties, by their written contract of sale, had agreed that the amount of the down payment should represent the limit of the liability of the plaintiff purchaser for damages for default in performance of the contract. Here, subsection (b) of section 5.05 of the contracts contains no such language. Subsection (b), which applies when there is a breach by the sellers, is wholly distinct in its construction from subsection (a) which applies in the event of a breach by the purchaser. Under section 5.05 (a), seller’s retention of the downpayment as liquidated damages for all loss, damage, and expense, including the loss of its bargain, is expressly intended to settle all issues and questions about the amount of damages suffered by Seller in the event of a default by Purchaser. Subsection (b), by comparison, is devoid of the absolute language used in the subsection immediately preceding it and clearly is not intended to be the final word on damages in the event of default by the seller.
Despite electing a sole remedy and defining liquidated damages in the event of the seller’s breach, the parties here did not provide for another form of compensation for loss of use of the purchaser’s money nor expressly limit defendants’ liability in the event of their default. Thus, unlike in J. D’Addario, it cannot be said that the parties clearly waived the provisions of CPLR 5001 (a). Plaintiff has been denied use of its money for seven years. Thus, the statutory prejudgment interest provided for in CPLR 5001 (a) must be awarded.
(Internal quotations and citations omitted).