Commercial Division Blog
Posted: March 25, 2019 / Categories Commercial, Contracts, Statute of Limitations/Laches, Damages
Once Claim on Principal is Time-Barred, Suit to Recover Post-Maturity Interest on Principal is Time-Barred as Well
On March 21, 2019, the Court of Appeals issued a decision in Ajdler v. Province of Mendoza, 2019 NY Slip Op. 02151, holding that once a claim on a bond's principal is time-barred, a claim for post-maturity interest on that principal is time-barred as well, explaining:
Plaintiff maintains that the logical extension of our holding in NML Capital allows him to recover post-maturity interest payments that were due after a claim for the underlying principal is time-barred, for the four years preceding the commencement of this action. In NML Capital, the recovery of post-maturity interest payments was an incident of a timely claim for recovery of principal. Thus, the Court had no occasion to opine on the viability of claims for unpaid post-maturity interest payments after the limitations period on claims for unpaid principal have expired. Now, squarely presented with this question, we clarify that under New York law, where an indenture provides that interest is due until the principal is paid, once an action to recover outstanding principal is time-barred, there can be no freestanding claim to enforce the obligation to make post-maturity interest payments.
In NML Capital, this Court was asked to consider whether Argentina's obligation to make biannual interest-only payments to bondholders continued after maturity or acceleration of the indebtedness and, if so, whether the bondholders were entitled to CPLR 5001 prejudgment interest on payments that were not made as a consequence of the nation's default—i.e., interest on interest. The indenture at issue in NML Capital contained language substantively identical to the central language in this Indenture, providing that Argentina was obligated to make biannual interest payments to the bondholders until the principal hereof is paid or made available for payment. We held that by its terms, the contract contemplates that the bondholders are entitled to biannual interest payments until the principal is actually repaid in full—and not merely until the bond maturity date as Argentina suggests.
Plaintiff's reliance on NML Capital is misplaced. The statute of limitations applicable to the plaintiffs' claim for principal in that case had not yet run, and the novel issue we addressed concerned whether the plaintiffs were entitled to prejudgment interest on overdue post-maturity or post-acceleration interest payments. To answer that question, we relied on general principles of New York law involving prejudgment interest rates establishing that when a contract specifies the interest rate until the principal is paid, in the event of breach of the obligation to pay principal, the contract interest rate governs rather than the statutory prejudgment interest rate provided in CPLR 5001(a). We reasoned by analogy that bondholders may recover prejudgment interest at the contract rate accruing on unpaid post-maturity interest payments. For timely actions, the parties' negotiated rate governs until payment of the principal, or until the contract is merged in the judgment. Thus, contrary to plaintiff's argument, NML Capital does not stand for the proposition that—in the absence of a timely claim for principal—a bondholder has a legally cognizable claim for unpaid post-maturity interest payments until the principal is actually repaid based on language in the Indenture that the issuer is obligated to pay interest until the principal hereof is paid or made available for payment.
Rather, the date when principal is due—ordinarily the maturity date—serves as a legally significant benchmark because it marks the event upon which the obligation to pay post-maturity interest is conditioned. The obligation to pay post-maturity interest is not a distinct promise of performance, but arises on the maturity date only if the bond issuer breaches the parties' agreement by failing to timely repay the principal. This is consistent with our general view that, aside from the limited mortgage moratorium exception triggered by explicit legislation, the recoverability of post-maturity interest payments is tethered to a claim for principal rather than a debt capable of a distinct claim. Once a creditor can no longer establish a right to repayment of principal, there is no basis or foundation upon which to allege a right to payment of post-maturity interest. To that end, once a claim on the principal is time-barred, a suit to recover post-maturity interest payments is not viable.
The rule we reiterate today effectuates the agreement negotiated by the parties and reinforces our longstanding view of interest as generally dependent on principal. Moreover, it promotes the purposes underlying the statute of limitations. For those reasons, we conclude that once a claim on the principal is time-barred, a claim to recover unpaid post-maturity interest payments is not legally cognizable.
(Internal quotations and citations omitted) (emphasis added).
This decision is at the intersection of two aspects of commercial litigation in New York that non-lawyers seldom consider but that can be decisive: the statute of limitations and interest. If a claim is barred by the statute of limitations, it cannot be brought, no matter how meritorious. As to interest, the New York statutory rate of pre-judgment interest is 9 percent--several times the prevailing Federal Reserve funds rate. This means that, for an old claim (or a claim that has been litigated for a long time), the interest award can be as big as the base damages. Contact Schlam Stone & Dolan partner John Lundin at email@example.com if you or a client have questions regarding the statute of limitations or the calculation of interest on a damages award.