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First Department Awards Prejudgment Interest on Escrowed Downpayment Returned to Buyer as Liquidated Damages Upon Seller’s Breach of Real Estate Contract

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  • Posted on: Jan 19 2024

By Jonathan H. Freiberger

Today’s BLOG article addresses the circumstances pursuant to which the buyer under a real estate sales contract is entitled to prejudgment statutory interest pursuant to CPLR 5001(a) on the return of its down payment upon seller’s breach of that contract.

CPLR 5001(a) provides that “[i]nterest shall be recovered upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court’s discretion.”  The purpose of the “interest award is to compensate the wronged party for the loss of use of the money” that is the subject of the underlying claim.  CRP/EXTELL Parcel I, L.P. v. Cuomo, 124 A.D.3d 560, 561 (1st Dep’t 2015), aff’d, 27 N.Y.3d 1034 (2016).

Sometimes contracts contain “liquidated damages” provisions, which are designed to quantify, “‘the compensation which, the parties have agreed, should be paid in order to satisfy any loss or injury flowing from a breach of contract.’”  Seymour v. Hovnanian, 211 A.D.3d 549, 553 (1st Dep’t 2022) (quoting Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 423-24 (1977).  [Eds. Note: this BLOG has addressed liquidated damages, inter alia, [here], [here], [here], [here] and [here].]  Liquidated damages provisions are ideal “‘in those situations where it would be difficult, if not actually impossible, to calculate the amount of actual damage.’”  Id. (quoting Truck Rent).  Such provisions will be sustained if they are not deemed to be a “penalty” (JMD Holding Corp. v. Congress Financial Corp., 4 N.Y.3d 373, 379 (2005)), but reflect a “reasonable estimate of actual damages” (J.P. Morgan Securities Inc. v. Vigilant Ins. Co., 37 N.Y.3d 552, 563 (2021)).  

On January 16, 2024, the Appellate Division, First Department, decided IHG Harlem I LLC v. 406 Manhattan LLCIHG involved three “largely identical” real estate contracts for the purchase/sale of real property.  At the time of signing of the contracts, the plaintiff/purchaser delivered a down payment exceeding $600,000, which, pursuant to the contracts, were to be deposited in the IOLA account of seller’s attorney.  In a prior appeal, the First Department “held that ‘the contracts provided that if defendants refused or failed to convey the properties, [purchaser] ‘shall elect as its sole and exclusive remedy’ either termination of the contract and the return of its deposits or enforcement of [seller’s] obligation to convey the property by seeking specific performance. As [purchaser] has elected not to seek specific performance, its sole remedy is the return of its deposits.’”  [Eds. Note: this BLOG has addressed specific performance of real estate contracts [here], [here], [here], [here], [here] and [here].]

Upon the motion court’s order granting summary judgment to buyer, the parties submitted competing proposed judgments – buyer’s proposed judgment providing for prejudgment interest on the amount held in escrow and seller’s providing for no such interest.  The motion court, denying buyer’s request for interest, signed seller’s proposed judgment, which directed that “the funds being held in escrow be returned to [buyer] without interest.”  Since the contracts were breached in 2015, the accrued interest on $600,000 (at 9% (see CPLR 5004)) is significant. 

The motion court, in denying interest to the buyer, relied on J. D’Addario & Co., Inc. v. Embassy Indus., Inc., 20 N.Y.3d 113 (2012), and Sommer v. General Bronze Corp., 28 A.D.2d 981 (1st Dep’t 1967), aff’d, 21 N.Y.2d 775 (1968), and stated:

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 IHG Court in modifying the motion court’s order to include prejudgment interest distinguished J. D’ Addario & Co. and Sommer and agreed with buyer’s argument that the motion court “erred by employing too broad a reading” of those cases.  The IHG Court framed the issue for it to decide as “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. … and requires denying the nonbreaching party statutory prejudgment interest.”

In reaching its decision that buyer was entitled to interest, the First Department noted that CPLR 5001(a) provides that prejudgment interest “shall be recovered”.  This the Court concluded, demonstrates that the legislature intended the award of such interest to be a “duty, not discretion.”  (Citation and internal quotation marks omitted.)  The Court further noted that 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.”  (Citation omitted.)  The Court, however, recognized a few circumstances where the denial of an award of prejudgment interest would be appropriate – including where the parties to a contract agree to waive statutory interest in a manner that “clearly manifests their intent to do so [and that] comports with the requirements for waivers in other contexts.”  (Citations omitted.)  The IHG Court, unlike the J. D’ Addario & Co. Court, found no such “clear manifestation” precluding an award of prejudgment interest to buyer.  

As noted by the First Department in IHG, the Court of Appeals in J. D’ Addario & Co., based its decision to deny prejudgment interest pursuant to CPLR 5001(a) on a “cumulation of factors” that resulted in the conclusion that the parties waived the right to such prejudgment statutory interest.  J. D’ Addario & Co. involved a real estate contract that was breached by the buyer.  The contract provided that the “sole remedy” upon breach involved a “liquidated sum” that, inter alia, “included compensation for the lost use of that money over time” and “explicitly waived all further rights and obligations.”

The contracts in IHG designated buyer’s “sole and exclusive remedy [as] the return of its downpayment [and, therefore] limits damages to the liquidated sum of plaintiff’s downpayment.”  However, the IHG Court noted that the mere “use of the term ‘liquidated damages’ neither precludes nor waives the application of CPLR 5001 (a).”  Where compensation for the time value of money – such as the inclusion of bank interest – is included as part of the agreed upon liquidated damages “an award of statutory interest would result in a windfall to the nonbreaching party.”  The IHG Court found that no such compensation is reflected in the parties’ contracts because the deposit was placed in an IOLA account and, therefore, the interest “that accrued on [buyer’s] downpayment over seven years was paid to [New York S]tate’s IOLA fund [and] not to [buyer].”

Thus, the Court concluded that “[i]n these carefully drafted agreements there are no express limitations on liability that suggest the parties here intended to vitiate CPLR 5001(a).”  Accordingly, the IHG Court’s award directed the return of the downpayment (in the amount of $626,250.00) plus “statutory prejudgment interest on its deposits at the rate of 9% from November 12, 2015 through November 16, 2022.

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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