Opinion
02-CV-2841 (JG)
June 10, 2003
JOHN VINCENT, Vincenti Vincenti, P.C., New York, for Plaintiff
JEFFREY SCHREIBER, Meister Seelig Fein, LLP, New York, for Defendants
MEMORANDUM AND ORDER
Plaintiff brought this action seeking damages for defendants' default on a promissory note (the "Note"). On November 26, 2002, following oral argument on plaintiff's motion for summary judgment, I issued an order granting the motion on the first and third causes of action (actions on the Note and a guaranty) and finding plaintiff entitled to $443,750, plus prejudgment interest accruing from January 15, 2002, plus reasonable attorney's fees. In that same order, I directed plaintiff to inform me by no later than December 6, 2002, if she intended to pursue the remaining claims, which sought the same relief granted in connection with the first and third causes of action. The order further directed counsel to confer in an effort to reach an agreement on the issue of attorney's fees.
By letter dated December 2, 2002, plaintiff stated that she was prepared to stipulate to the dismissal of her three remaining claims. By letter dated December 6, 2002, plaintiff informed me that the parties were not able to agree on attorney's fees. By letter dated December 12, 2002, defendants asserted that the November 26 order incorrectly stated the amount due plaintiff. Defendants asserted that plaintiff was entitled to $228,820.22, plus prejudgment interest from the date of breach, which they deemed to be January 29, 2002. By order dated December 16, 2002, 1 directed plaintiff to respond to defendants' letter and to submit an affidavit from counsel in support of plaintiff counsel's fee application. Plaintiff responded by letter dated January 7, 2003, asserting that under the Note she was indeed entitled to $443,750, the remaining "Obligation," which included principal and both accrued and unearned interest. She further asserted that even if she were not entitled to the entire Obligation under the terms of the Note, defendants' calculation would be wrong because they inverted the amortization schedule. Defendants conceded this error in their letter dated January 13, 2003, but they rejected plaintiffs assertion that the Note entitles her to unearned interest. Defendants argued that in the event of a default, the Note does not require payment of all future unearned interest that would accrue if the debt were not accelerated. Defendants further argued that even assuming that the Note required payment of unearned interest in the event of default, such a provision would be unenforceable as a penalty under New York law. In the same letter, defendants also asserted that (1) plaintiff counsel's fee application was deficient; (2) the attorney's fees requested were unreasonable; and (3) plaintiff was not entitled to recover any legal fees because the provision permitting their recovery was an unenforceable penalty.
The Note provides that in the event of a default, plaintiff has the right to declare the "Obligation" due. The Obligation, under the terms of the Note, amounts to $1.5 million and includes both principal and interest. The default provision docs not make any reference to interest, either accrued or unearned. By contrast, the provision permitting the defendants to prepay the Obligation explicitly states that prepayment is made upon payment of the principal and the interest accrued.
Based on the language of the Note, I have no doubt that the parties intended that in the event of a default, plaintiff had the right declare due all the interest, even that which was unearned. If they had intended otherwise, they would have explicitly stated (as they did in the prepayment provision) that only the accrued interest could be declared due. The rationale for the difference between the prepayment and default provisions is obvious. The Note requires payment of the unearned interest in the event of the default in order to discourage the defendants from defaulting. The provision functions as a penalty for default and is not linked to an assessment of probable damages, which would, ultimately, easily be computed based on the interest accrued from the date of default Accordingly, under New York law, the provision is unenforceable. Truck Rent-A-Center v. Puritan Farms 2nd. Inc., 41 N.Y.2d 420, 424 (1977) ("a provision which requires, in the event of contractual breach, the payment of a sum of money grossly disproportionate to the amount of actual damages provides for penalty and is unenforceable"); Quaker Oats Co. v. Reilly, 711 N.Y.S.2d 498, 500 (2d Dep't 2000) (a liquidated damages provision was an "unenforceable penalty because its purpose was to secure performance by threat of a large payment rather than to provide a reasonable assessment of probable damages"); 36 N.Y. Jur. Damages § 164 (1984) ("In the case of a contract simply for the payment of money, a stipulation to pay a fixed sum in default of performance will be regarded as an agreement for a penalty [because] for the nonpayment of money, the law awards interest as damages, and hence there is no difficulty in ascertaining the damages in such case."); see also Aardwoolf Corp. v. Nelson Capital, 861 F.2d 46, 47 (2d Cir. 1988) ("New York legislation and judicial pronouncements demonstrate a consistent intent to deny a creditor the right to charge or retain interest that is unearned");Bostwick-Westbury Corp. v. Commercial Trading Co., 404 N.Y.S.2d 968, 973 (N.Y. Civ. Ct. 1978) (holding that where indebtedness was accelerated as a result of debtor's default, the indebtedness encompassed the unpaid balance of the principal and the matured interest at the time of default and did not include any unearned future interest); Berman v. Schwartz, 198 N.Y.S.2d 185, 187 (N.Y.Sup. Ct 1968) ("The mere fact that the total interest is computed in advance and added in equal proportions to and included in the face amount of the notes, as a form of prepaid interest or discount, does not change the equitable principle that the unearned part of the interest must be deducted upon acceleration and payment of an indebtedness prior to maturity.") Therefore, plaintiff's recovery is limited to the unpaid principal amount of the debt and the interest accrued from January 29, 2001. Accordingly, plaintiff is entitled to $394,683.14, plus interest accrued thereon from January 29, 2001 at 8% per annum compounded monthly.
Plaintiff did not object to defendants' proposal to deem January 29, 2002 the date, of breach, and I find that to be a reasonable assessment of the date of default.
With respect to plaintiffs application for attorney's fees, I find plaintiff counsel's affidavit supporting its fee application sufficient and the fees charged reasonable. Defendants argue that plaintiff should not be entitled to any attorney's fees because the Note contains an unenforceable penalty provision regarding recovery of legal fees. The Note states that in the event that the Obligation is collected through an attorney, plaintiff is entitled to "collect reasonable attorney's fees, which are hereby agreed to be fifteen (15%) percent of the Obligation." Despite that provision, plaintiff seeks to collect only the actual, reasonable fees in connection with this lawsuit. Defendants argue that since the attorney fee provision is an unenforceable penalty, plaintiff is entitled to no reimbursement at all for the legal services she was forced to enlist as a result of defendants' default. This is simply incorrect. Assuming arguendo that this provision is an unenforceable penalty, just as plaintiff's damages are limited to accrued interest, her recovery for attorney's fees is limited to the actual cost of legal services rendered in connection with this action. Rattigan v. Commodore Int'l, 739 F. Supp. 167, 169 (S.D.N.Y. 1990); Brechcr v. Laikin, 430 F. Supp. 103, 106 (S.D.N.Y. 1977); 36 N.Y. Jur. Damages § 170 (1984) ("If the provision of a contract stipulating the amount to be paid upon breach of the agreement is construed to be one for a penalty, recovery will be limited to such an amount as will compensate the plaintiff for the actual loss or damage sustained and proved."). Therefore, plaintiff's application for attorney's fees is granted. Plaintiff is entitled to $29,456.43 for attorney's fees and costs.
Defendants argue that plaintiff should not be able to recover attorney's fees after December 3, 2003, because defendants offered to stipulate to judgment at that time. However, as is evident from this order, there was a dispute as to the dollar amount that would satisfy that judgment. Plaintiff chose to have that dispute decided by this court and defendants have cited no authority in support of their assertion that such a decision under these circumstances causes plaintiff to forfeit a claim for attorney's fees.
So Ordered.
JUDGMENT
A Memorandum and Order of Honorable John Gleeson, United States District Judge, having been filed on June 13, 2003 limiting plaintiff's recovery to the unpaid principa amount of the debt and the interest accrued from January 29, 2001; and awarding plaintiff $394,683,14, plus interest accrued thereon from January 29, 2001 at 8% per annum compounded monthly and granting plaintiff's application for attorney's fees and costs in the amount of $29,456.43; it isORDERED and ADJUDGED that judgment is hereby entered in favor of plaintiff, Charon Chaifetz, and against defendants, Melvin Schreiber and Rivka Schreiber in the amount of $394,683.14, plus interest accrued thereon from January 29, 2001 at 8% per annum compounded monthly; and further, that plaintiff is awarded $29,456.43 for attorney's fees and costs.