Opinion
Case No. 890-81248-478, Adv. Proc. No. 890-8249-478
July 26, 2002
Pryor Mandelup, LLP, By Randolph B. White, Esq., Westbury, New York, Attorneys for the Committee of Unsecured Creditors.
Stewart Occhipini Makow, LLP, By Frank S. Occhipini, Esq., New York, New York, Attorneys for Defendant Congress Financial Corporation.
Parker, Duryee, Rosoff Haft, P.C., By William M. Rifkin, Esq., New York, New York, Attorneys for Interstate Distribution, Inc.
Borges Donovan LLC, By J. Ted Donovan, Esq., Syosset, NY, Attorneys for the Committee of Unsecured Creditors.
MEMORANDUM DECISION
This matter is before the Court pursuant to a motion brought by the Committee of Unsecured Creditors of Interstate Cigar Co., Inc. (the "Committee" or the "Plaintiff") seeking summary judgment against Congress Financial Corporation ("Congress") on a variety of issues arising from a judgment entered against Congress in State Court for violation of Article 6 of the New York State Uniform Commercial Code (the "Bulk Sales Law"). Congress's liability in the State Court action arose as a result of the financing Congress provided to Interstate Distribution, Inc. ("IDI") to enable IDI to purchase, inter alia, the inventory and equipment of Interstate Cigar Co., Inc. (the "Debtor") in violation of the Bulk Sales Law. In a memorandum decision dated May 16, 2002, this Court granted the plaintiff summary judgment in the amount of $14,976,662, and awarded interest at an unspecified rate from the date of the complaint, September 5, 1990. This decision fixes the applicable rate of prejudgment interest to be awarded to the Plaintiff The following constitutes the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
FACTS
In its prior decision dated May 16, 2002, this Court found that an award of prejudgment interest against Congress was appropriate in order to fully compensate the Debtor's estate for actual damages suffered, and based on the equities of the case. Congress financed the transaction with the knowledge that the transaction was not in compliance with the notice provisions mandated by the Bulk Sales Law. The Court further found that New York law should dictate the appropriate rate of prejudgment interest to charge because Congress's liability arose pursuant to the Bulk Sales Law, which is a New York statute. The parties were directed to brief for the Court the narrow issue of the appropriate rate of interest to charge under New York State law in order to ensure that all of the relevant factors were considered prior to fixing the rate, which could result in a sizeable increase in the total judgment to be paid.
DISCUSSION
The Court notes that despite its prior ruling that New York law governs the rate of interest to charge on this issue, Congress continues to argue that federal law governs the appropriate rate of prejudgment interest. In order to clarify the findings in its prior memorandum decision, the Court reiterates and expands on its rationale for finding that New York law governs the rate of prejudgment interest.
Actions brought in the bankruptcy courts arise from either federally-created bankruptcy law or from claims existing under applicable state law. In re The H.P. King Co., Inc., 64 B.R. 487, 490 (Bankr. E.D.N.C. 1986). In order to determine whether federal or state law governs the appropriate rate of interest to charge, the court must look to the law which gives rise to the liability of the party in question. Id. In other words, the law which gives rise to the claim itself determines the applicable rate of prejudgment interest.
For example, preference actions arise from Section 547 of the Bankruptcy Code, and do not exist outside of the bankruptcy context. The Code has created a cause of action which would not exist but for this section of the Code and no part of this cause of action is derived from state law. Therefore, courts awarding prejudgment interest in preference actions look to federal law to determine the appropriate rate, and often rely on 28 U.S.C. § 1961 for guidance Id.; In re Nucorp Energy. Inc., 902 F.2d 729, 734 (9th Cir. 1990); In re Production Steel, Inc., 60 B.R. 4 (Bankr. M.D. Tenn. 1986); In re Rodriguez, 204 B.R. 510 (Bankr. S.D. Tex. 1995); and In re Foreman Industries, Inc., 59 B.R. 145, 155 (Bankr. S.D. Ohio 1986).
Likewise, Section 548(a)(2)(A) and (B) create causes of action which are separate and apart from any action arising in state law. Pursuant to this section, the trustee may set aside any transfer of an interest by the debtor within one year of the petition date if the debtor received less than a reasonable equivalent value in exchange for such transfer or if the debtor was engaged in a business or transaction for which any property remaining with the debtor was an unreasonably small capital. See In re Suburban Motor Freight, Inc., 124 B.R. 984 (Bankr S.D. Ohio 1990).
The reason for applying federal law to determine prejudgment interest in these instances is that these actions are created pursuant to the Bankruptcy Code, a federal statute:
Although many issues adjudicated in bankruptcy court concern rights arising under state law, the avoidance of a preferential transfer is not one of them. The source of a trustee's right to avoid a preferential transfer is section 547 of the United States Bankruptcy Code. Section 547 does not merely provide a mechanism for enforcing in bankruptcy court a right existing independently under state law; it creates the right. Because liability in a preferential transfer case arises from § 547, federal, not state law governs the determination of the appropriate rate of interest.
In re H.P. King, 64 B.R. at 490 (other citations omitted).
However, where the cause of action itself has its genesis in state law, the proper interest rate to apply when calculating prejudgment interest is the relevant state law. In re H.P. King, 64 B.R. at 490, In re Stephen Douglas, Ltd., 174 B.R. 16 (Bankr E.D.N.Y. 1994).
In the case before this Court, the action giving rise to liability is the Bulk Sales Law, which is clearly a state law cause of action. There is no equivalent statute under federal law. The fact that section 544 of the Bankruptcy Code creates a mechanism for applying the Bulk Sales Law and that section 550 of the Bankruptcy Code provides for a remedy if a violation of state law occurs does not change the fact that the cause of action itself is entirely based on state law claims. Courts have recognized that section 544 "contains no original substantive provisions to determine when a transfer is voidable; instead it incorporates and makes applicable nonbankruptcy law." In re Stephen Douglas, Ltd., 174 B.R. at 19, 20. In this case, but for Congress's violation of the Bulk Sales Law, there would be no cause of action requiring the application of section 544 of the Bankruptcy Code. Therefore, Congress's focus on the federal remedies afforded the creditors in the event of a violation of the Bulk Sales Law is misplaced. The applicable remedies found in the Bankruptcy Code do not transform this claim into one that is created by federal law. The remedies merely provide a mechanism to redress the violation of state law which was found to have occurred.
Congress makes one more argument in favor of finding that federal law applies in determining interest based on section 726(a)(5) of the Bankruptcy Code. This section governs the payment of post petition interest in a liquidation case. It is true that some cases interpreting this section have found that an award of post petition interest on an unsecured claim should be based on federal, not state law. See In re Laymon, 117 B.R. 856, 861, 862 (Bankr. W.D. Tex. 1990), rev'd on other grounds. Bradford v. Crozier (In re Laymon), 958 F.2d 72 (5th Cir. 1992). The rationale for finding that federal law controls the post petition interest rate awarded on unsecured claims is to employ federal law to decide a federal issue. Another purpose is to ensure that all creditors are treated fairly and equitably under the Bankruptcy Code.Id. However, this section is inapplicable to the issue at hand because this adversary proceeding does not concern the fixing of a claim of a creditor. Rather, this concerns a cause of action commenced by the Committee for the benefit of all creditors pursuant to New York State law. In contrast, the issues set forth in the Laymon case deal with post petition interest, which is derived solely from the Bankruptcy Code.
Although Congress asserts that the Committee made judicial admissions in prior papers that the remedy to be applied is federal in nature and therefore the federal law on prejudgment interest is applicable, the Court declines to follow such logic. The Plaintiff and the Committee recognize, as does this Court, that the rate of prejudgment interest to charge is determined by the nature of the right asserted, not theremedy. Therefore, the Court concludes that state law governs the applicable prejudgment interest rate to apply to the judgment against Congress.
Under New York law, statutory interest is prescribed pursuant to Section 5001(a) of the New York Civil Practice Law and Rules (the "CPLR") as follows:
Action in which recoverable. Interest shall be recovered upon a sum awarded because of the 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 the property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be at the court's discretion.
Pursuant to CPLR § 5004, "interest shall be at the rate of 9 per centum per annum, except where otherwise provided by statute."
In this case, the Court must determine whether the proper rate of interest to charge is mandated by New York statute at 9%, or whether this falls within the exception to this rule because the action is of an equitable nature. The Bulk Sales Law in effect at the time of the transfer in question did not entitle the aggrieved creditor to a money judgment on its face. Rather, the violating purchaser was deemed to be a trustee for the creditors of the seller similar to a receiver, with the duty to account to the creditors for all of the property sold in violation of the Bulk Sales Law. Matter of Curtina, Intern., Inc., 23 B.R. 969, 979 (1982) ("Curtina") (citing In re Pastene Co. Inc., 156 N.Y.S. 524 (Sup. Ct N.Y. Co. 1914)). Cases which discuss whether an action under the Bulk Sales Law is an action at law or equity state that traditionally, the proper action to bring was a suit in equity to designate the purchaser or transferee a receiver and have the party account for the property received. Matter of Perman, 157 N.Y.S. 971, 172 A.D. 14 (1st Dep't 1916); Committee of Unsecured Creditors of Interstate Cigar Co., Inc. v. Interstate Distribution. Inc., 210 A.D.2d 283, 620 N.Y.S.2d 78 (2d Dep't 1994); H.L.C. Imports Corp. v. ML Siegel. Inc., 98 Misc.2d 179, 413 N.Y.S.2d 605 (1979), superseded by statute as stated in Talbot Typographics, Inc. v. Tenba, Inc., 147 Misc.2d 922, 560 N.Y.S.2d 82 (1990).
Although the Bulk Sales Law initially did not appear to provide any remedy to creditors beyond those found in equity, New York courts have read the Bulk Sales Law expansively to allow actions for monetary damages in the amount of the value of the property transferred in violation of this statute. Curtina, 23 B.R. at 979 (citing Darby v. Ewing's Home Furnishings, 278 F. Supp. 917 (W.D. Okla. 1967)); Brod ex rel. Potash's Creditors et al v. Supreme Dress Co., 243 A.D. 622, 276 N.Y.S.2d 526 (App.Div.2d Dep't 1935)). In this case, the Plaintiff is seeking recovery of the property transferred or the value of the property transferred because the property transferred no longer exists, and this Court has already awarded monetary damages as a sole remedy. Therefore, the Court has treated this action as one at law, despite its equitable underpinnings.
In determining whether for the purposes of CPLR § 5001 the action is of an equitable nature, the Court of Appeals for the Second Circuit has looked to the nature of the relief requested to determine whether an award of prejudgment interest is mandatory or discretionary. In Lewis v. S.L. E., Inc., 831 F.2d 37, 39 (2d Cir. 1987), the Second Circuit examined the relief requested to determine the legal or equitable nature of a claim and noted that "`the policy of . . . section [5001] is to facilitate the award of interest and, . . . the equity clause should not become a source of sterile controversy over the classification of causes of action.'" In addition, even on a claim with "equitable underpinnings," prejudgment interest would be mandatory where the only relief sought was compensatory damages and not an equitable remedy such as rescission, an accounting or reformation. Id.
As further guidance on this issue, the Court looks to Grandfinanciera. S.A., et al. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). In this case, the Supreme Court held that where an adequate remedy is available at law, a cause of action should be deemed legal and not equitable. In the Grandfinanciera case, the Court was examining preference actions, but the same holds true in this case. The complaint clearly spells out that the Plaintiff seeks monetary damages, not equitable relief. Therefore, the Court finds that the action brought by the Plaintiff, despite its equitable underpinnings, is legal in nature and the appropriate prejudgment interest rate under New York law is 9% pursuant to CPLR § 5004, as no other rate of interest is prescribed for this action under New York law.
If the Court were to find that the relief sought in this adversary proceeding was equitable in nature and it had the discretion to fix the appropriate rate of prejudgment interest, the Court would still apply the 9% interest rate. This Court has already ruled that the relief it has fashioned is intended to compensate the creditor body of the Debtor by granting a judgment equal to the value of the inventory and equipment transferred in violation of the Bulk Sales Law. Since the intent of the Bulk Sales Law is to protect creditors from conveyances that may harm the creditor body, an award of prejudgment interest to fully compensate the estate for a wrongful bulk transfer would be consistent with an intent to protect the creditors and make them whole for such losses. The rationale for awarding interest also helps dictate the appropriate rate of prejudgment interest. Jones v. UNUM Life Insurance Company of America, 223 F.3d 130, 139 (2nd Cir. 2000). Another factor to take into consideration is the interest that Congress would have had to pay to borrow the money in an amount equal to the judgment at the time the transfer took place. It is also appropriate to look at the rate of interest which the Debtor would have enjoyed had the Debtor been able to invest an amount equal to the judgment.
With regard to the rate at which Congress would have had to pay to borrow the funds, the Court notes that as of September 5, 1990, the prime rate for corporate loans at large U.S. commercial banks was 10%. Money Rates, Wall Street Journal, September 5, 1990, at C21. As far as investments are concerned at that time, certificates of deposit were earning between 6.75% and 7.93% depending upon the length of time the certificates of deposit were to be held. Id., The average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System as of September 5, 1990 was 7.76%. The Court also notes that during the time period running from the date of the complaint to the present, the stock market enjoyed sizeable gains, even including the recent downturn. Therefore, if the Court were to use its discretion in fixing the prejudgment interest on the judgment, the Court would still apply 9% as it falls within the range of these various rates, and is reasonable.
As this Court is bound by New York law in fixing the prejudgment interest rate, the Court would also follow New York case law, in which New York courts have deemed 9% to be a presumptively fair and reasonable rate where no interest rate has been fixed. See In Matter of Metropolitan Transportation Authority v. American Pen Corp., 94 N.Y.2d 154, 701 N.Y.S.2d 301 (1999) (9% prejudgment interest awarded in a condemnation action affirmed in order to assure the prevailing party just compensation); Rodriguez v. New York City Housing Authority, 91 N.Y.2d 76, 689 N.E.2d 903, 666 N.Y.S.2d 1009, 1011 (1997) (9% prejudgment interest awarded as presumptively fair and reasonable, notwithstanding any grant of discretion to award a lesser amount.); and Baines v. City of New York, 269 A.D.2d 309, 703 N.Y.S.2d 463 (1St Dep't 2000) (trial court properly exercised its discretion in awarding prejudgment interest at the "presumptively reasonable statutory rate of" 9% in personal injury action).
This adversary proceeding was commenced in 1990, and was pending during a period of time when the returns on investments were significant. There is no reason to award a lesser amount, even if the Court were permitted to exercise its discretion and fix a rate of prejudgment interest. The creditors of the Debtor have waited a long time to be compensated for this violation of the Bulk Sales Law. If prejudgment interest is intended to compensate them for this long wait, then 9% is an appropriate rate of interest.
CONCLUSION
1. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 (b). This is a core proceeding pursuant to 28 U.S.C. § 157 (b)(2)(A), (E) and (H).
2. State law applies to determine the rate of prejudgment interest to assess against Congress because the Bulk Sales Law, which gives rise to this cause of action, is based on state law. The fact that the remedy for the cause of action is grounded in the Bankruptcy Code, a federal statute, does not change this analysis.
3. Under relevant New York state law, the applicable rate of prejudgment interest is 9%.
4. Even if this Court were found to have discretion to fix an appropriate rate of prejudgment interest, the Court would award interest at 9% based on the facts of this case and the relevant case law.
Settle an order in accordance with this decision.