Payment of Interest on Condemnation Awards

By M. Robert Goldstein & Michael J. Goldstein

December 6, 1977

The New York Court of Appeals in a recent decision In the Matter of County of Nassau v Eveandra Enterprises, Inc. 42 NYS 349 (1977), appeal dismissed for want of a substantial Federal question – U.S. -, has put a new light upon the payment of interest on condemnation awards. To some observers it would appear that this decision is a departure from historic concepts of the manner of the determination of a proper rate of interest. It certainly leaves open a question of how, if ever, the statutory rate may be questioned in New York.

Rate in New York

The rate of interest on condemnation awards in the state of New York is provided for in Gen. Mun. Law, Section 3-a(2) and State Finance Law, Section 16. They provide for a rate of 6 percent per annum simple interest payable when the award is paid. The rate of interest has been the subject of litigation particularly when, as has been the case recently, the market rate to borrowers has climbed above the statutory rate. The Supreme Court of the United States has held that interest on a condemnation award is part of the just compensation to be paid and as such its amount is a judicial question and the courts are not bound by statutory provisions. Seaboard Air Line R, Co. V U.S. 261 U.S. 299; Jacobs v. U.S. 290 U.S. 13. This distinguishes it from other rates of interest such as on judgments which are strictly statutory.

There is a history of litigation concerning the rate of interest in condemnation proceedings in this state which has followed this principle. Thus, in Bronx River Parkway 259 AD 552, 556, in the context of the lowering of the statutory rate from 6 percent to 4 percent, it was stated.

Controlling Factor

“The right of just compensation is, of course, the controlling factor. No statute may interfere with or prejudice that right. On April 25, 1938, when title vested herein, the property owner’s right to just compensation, including proper interest, became a vested property right. The statutes of this state recognized that right and provided that interest should be added to an award for the property taken (Administrative Code, Section B-15-18.9; Tax Law, Section 296; General business Law, Section 370). The statutory rate of interest is not controlling if some other rate is required to meet the constitutional requirements… Accordingly at least until evidence is introduced showing that the altered rates do not afford just compensation, the maximum legal rate would be a proper amount to award after change in the law.”
The Court of Appeals, in affirming (284 NY 48, 54 aff’d. 313 U.S. 540 (1941) stated:

“In the absence of evidence as to what such additional sum should be, interest, as provided by law, meets the constitutional requirement… In the absence therefore, of any contractual or statutory right to interest at a specific rate, or any evidence that a four per centum per annum is unreasonably low, the statute of 1939 is applicable…”

Attacks by Condemnees

From time to time thereafter, as interest rates continued to increase above the 4 percent rate provided by statute, periodic attacks were launched by Condemnees against the statutory rate. Inedibly, each failed essentially on the basis of failure of proof. Claimants attacking the rate would call to the trial court’s attention the “common knowledge” of higher rates of interest and introduce no proof of what a proper rate should be (Matter of City of New York (Maxwell) 16 NY2d 497, 499 (2965); Matter of Port Authority Trans-Hudson Corp. 20 NY2d 457, 473 (1967);Matter of City of New York (Fifth Avenue Coach Lines) 18 NY2d 212 (1966), Cert. Den. 386 U.S. 778; Matter of Incorporated Village of Hempstead 59 Misc2d 547,290 NYS2d 859, aff’d 33 AD2d 1036; Matter of Town of Huntington (Crab Meadows) 31 AD2d 759,298 NYS2d 665.

In August 1966, the Legislature amended the State Finance Law to provide for a 6 percent interest rate on State condemnation awards leaving intact the 4 percent rate then in effect on all other awards including those payable by the City of New York. The City rate thereafter was attacked in court proceedings on two grounds, denial of just compensation and denial of equal protection of the laws. Proof was adduced showing various forms of money rates for commercial and real estate loans and municipal borrowings with expert proof also submitted. The statutory rate was declared unconstitutional and a 6 percent rate fixed on both grounds. Matter of City of New York (Manhattan Civic Center Area) 57 Misc2d 156, 291 NYS2d 656, aff’d 32 AD2d 530, 299 NYS2d 675, aff’d 27 NY2d 518, 312 NYS2d 995 (1970).

Buffalo Case

In City of Buffalo v. J.W. Clement Co., Inc., 28 NY2d 241, 256- 266 (1971) the Court commented:

“The determination of the proper rate of interest, however, being a part of just compensation, is necessarily a judicial function which the Legislature may not usurp (cases cited). This is not to say that the statutory provision for the payment of interest is without efficacy, for we have consistently viewed the statutory rate as presumptively reasonable, and, in the absence of evidence sufficient to rebut that presumption capable of being applied the legal rate of interest merely fixes a fair measure or a prima facie measure of the proper rate to afford just compensation. In the absence of proof that some other legal rate must be paid to afford such compensation, the legal rate as it existed during the period elapsed satisfies the constitutional requirement. The question thus becomes whether the evidence introduced by Clement in the instant case is sufficient to rebut the statutory presumption; and as we are presented with affirmed findings of fact, tending to show that the rate of interest was not unreasonable, and as these findings are supported by substantial evidence, we are jurisdictionally precluded from reviewing the same.”

With this as a background the latest push of interest rates which carried them to historic highs triggered yet another round of litigation against the now statutory rate of 6 percent. Some were back to allegations of unreasonable low rates without proof (Perament v. State of New York, 39 AD2d 781; Matter of City of New York (Avenue II) NYLJ June 3, 1975, page 19, Column 8 (Sup. Co., Queens Co., Castaldi, J.); Matter of Hillside Avenue and Park Avenue. (Nassau Co. Sup. Ct.) Not reported, Index No. 7638/70, with predictable results. Others submitted proof but still lost despite the failure of the condemnor to offer any proof other than relying on the statute Matter of City of New York (Washington Heights Highbridge Park Development Area), NYLJ, April 10, 1975, page 14, Co. 3 (Sup. Ct. NYCo., Cotton, J.) On grounds such as that the then prevailing high interest rate was but temporary and that 6 percent was a fair rate.

Nassau County Case

In Eveandra Enterprises, Inc., v. County of Nassau, supra, uncontradicted proof was submitted as to commercial and municipal interest rates and expert testimony elicited that from the period of 1969 through 1975, 9.75 percent was a mid point between the average cost to a borrower of 12 percent and the 7.5 percent return the County was receiving on its short-term investment six year period involved. No proof was submitted by the County to substantiate the statutory rates. Despite this the trial court found that “the general policy of the courts has been to follow the rate of interest as set by the Legislature” and the Appellate Division stated “In our opinion, claimant’s evidence did not overcome the presumptive validity of the statutory rate.”

In the appeal to the Court of Appeals it was argued that while substantial proof was submitted by claimant no proof was adduced by the County, that the presumptive validity of the statute was not evidence in that it merely cast on the condemnee the burden of going forward with the evidence, and that when the burden was met the presumptive rate disappeared as evidence.

Court’s Affirmance

The Court of Appeals in affirming in a memorandum decision noted that:
“Claimant has not demonstrated that the validity of the prejudgement interest rate of 6 percent is constitutionally unfirm. Compensation accruing at the time of vesting and for the period prior to any award in a condemnation proceeding ‘is payable as a substitute for the beneficial use of the real property’ (Matter of Rochester Carting v. Levitt, 36 NY2d 264, 268). Such compensation is awarded in these cases upon the theory that it is necessary to make it full compensation for the loss sustained by the landowner and we are unable to agree with the claimant that the statutory rate of interest as provided in the General Municipal Law, Section 3-a(2) and State Finance Law, Section 16, is in conflict with the constitutional right of just compensation. The result we here reach is not unreasonable and lends stability to the mandate for the payment of full and equitable compensation as fixed by the Legislature. The appropriate interest rate is not measured by particular fluctuations in categories of interest rates for public or private securities or lending. So long as the statutory rate constitutes a judicially acceptable fair return for the deprivation of the use of that property or the money equivalent of that use either or in combination the statutory rate.

This decision appears to raise more questions then it answers. If indeed the statutory rate is merely presumptive, as has previously been held, what kind of proof do the courts require to overcome the effect of the statute? The proof actually offered which was deemed insufficient was the same as proved successful. In Matter of City of New York (Manhattan Civic Center), supra.

Interest as Substitute

The Court refers to interest as a substitute for the beneficial use of the property. Does the Court require proof of fair rental value wither exclusively or in combination with money use rates? In Matter of City of New York (Maxwell) supra, that type of proof was rejected. If so, what happens to the line of cases that speak of interest as compensation for delay in payment, for being deprived of the money equivalent of the loss of use of the money from the time the property was taken? Most condemnees would prefer the beneficial use test as it inevitably is more than a rate relating only to the use of money.

How does the Court make a determination that the statutory rate is “judicially acceptable?” Is it related to evidence or may the Court merely establish a criterion on some unknown standard that a particular rate is judicially acceptable? If the former, how did the Court make that finding in the absence of confirmatory evidence in the record and if the latter, what role does evidence of interest or other rates play in that determination?

How important is stability so that the rate is not “measured by particular fluctuations in categories of interest rates for public or private securities or lending,” as against the statement in People ei rel. Emigrant Industrial savings Bank v. Sexton 284 NY 57, 62:
“Interest is given as damages for delay in payment of the principal obligation Matter of O’Berry, 179 NY 285. Thus the rate of interest should be that current in the periods during which the delay in payment has occurred O’Brien v. Young, 95 NY 428; Reese v Rutherford 80 NY 644.” How is fairness in interest rates to be judged? On Long-term cyclical savings so as to achieve stability or representing the rates actually current during the particular periods involved?

Finally, how does one now go about getting a judicial determination on the quantum of an interest award? After Matter of City of New York (Manhattan Civic Center), supra. We thought we knew. We do not anymore.

Reprinted with permission from the December 6, 1977 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.