Case Title: NML Capital v. Republic of Argentina

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2011-06-30T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 128  
NML Capital,
            Respondent-Appellant,
Montreux Partners, et al.,
            Respondents,
        v.
Republic of Argentina,
            Appellant-Respondent.
Carmine D. Boccuzzi, for appellant-respondent.
Robert A. Cohen, for respondent-appellant.
Walter R. Rieman, for respondents.
GRAFFEO, J.:
In this case the United States Court of Appeals for the
Second Circuit has certified questions that require us to
interpret the terms of bonds issued by the nation of Argentina. 
We are asked to determine whether Argentina's obligation to make
biannual interest-only payments to bondholders continued after
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No. 128
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.
In 1998, Argentina issued a series of Floating Rate
Accrual Notes (FRANs) that were scheduled to mature in April 2005
when the principal was due to be repaid in full to bondholders. 
The FRANs were governed by a series of bond documents (a Fiscal
Agency Agreement, Prospectus, Prospectus Supplement and Floating
Rate Accrual Notes Certificate) directing that they were to be
interpreted according to New York law.  As the issuer, Argentina
assumed the obligation to pay the bondholders interest-only
payments twice a year, on April 10 and October 10, "until the
principal hereof is paid or made available for payment," at a
floating interest rate calculated and published by a
Determination Agent pursuant to a complex formula.  The formula
was structured in such a manner that, for each six-month period,
the interest rate would rise or fall depending on Argentina's
financial health as measured by certain market indicators.1 
Acceleration clauses were also included in the bond documents,
permitting bondholders to accelerate the due date of the
1 If the nation's financial condition was poor and the market
perceived the FRANs as a high-risk debt, the interest rate would
rise.  Conversely, if Argentina's prospects improved and the
FRANs were viewed as a lower-risk debt, the interest rate would
decline. 
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No. 128
principal in the event of a default by the issuer. 
From the date it issued the bonds until October 2001,
Argentina fulfilled its obligations under the FRANs by making the
interest-only payments twice a year as required.  Given
Argentina's relatively stable economy during that period, the
floating interest rate (published by Morgan Stanley, the
Determination Agent retained by Argentina) related to the
biannual payments fluctuated between 9% and 14.4% per annum. 
However, after a severe financial crisis in late 2001, Argentina
announced that it would no longer service its approximately $80
billion in external debt, including the FRANs at issue in this
case.  As a consequence of that pronouncement, the floating
interest rate rose meteorically, reaching approximately 101% per
annum (50.526% per biannual period) in April 2005, the last date
such a calculation was made by Morgan Stanley, whose contract
expired at that time.  Since December 2001, Argentina has not
made any of the biannual interest payments nor has it repaid any
of the principal owed to the bondholders that brought this
litigation.  Argentina's failure to make interest-only payments
and its 2001 declaration of a moratorium on servicing foreign
debt were both "events of default" under the terms of the bond
documents.
Plaintiffs are companies that acquired the FRANs at
different points in time, some before Argentina's financial
collapse and some after.  In total, plaintiffs acquired FRANs
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No. 128
representing approximately $290 million in unpaid principal, with
the lead plaintiff in this litigation -- NML Capital -- holding
bonds valued at $102 million.  In February 2005, NML Capital
accelerated about $32 million of that debt.  The principal
relating to the remaining FRANs became due on the April 2005
maturity date.  
Plaintiffs commenced numerous separate actions against
Argentina in the United States District Court, Southern District
of New York, seeking damages for the nation's default on the
bonds, and the claims were subsequently consolidated.  Argentina
did not dispute that it breached its obligations under the FRANs
and was required to repay the principal indebtedness.  But after
plaintiffs were granted summary judgment on liability, a
controversy arose concerning the appropriate calculation of
damages.  
 In particular, Argentina raised several arguments
affecting plaintiffs' entitlement to prejudgment interest. 
First, the nation maintained that it should not be required to
pay prejudgment interest at the contract rate -- the floating
interest rate calculated biannually based on the complex formula
in the bond documents.  Because the interest rate rose to
extraordinary levels, Argentina asserted that the rate was
unconscionable, usurious and amounted to a liquidated damages
clause that imposed an unenforceable penalty.  The District Court
rejected these arguments, finding that the floating interest rate
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No. 128
provision was enforceable.  The Second Circuit affirmed this
aspect of the District Court's analysis on the merits, without
certifying any questions regarding those issues to this Court.
Argentina's second contention involved prejudgment
interest on the biannual interest-only payments.  The nation
acknowledged that, in addition to prejudgment interest on unpaid
principal, it was required to pay 9% statutory prejudgment
interest pursuant to CPLR 5001 on the interest payments it failed
to render between the date of its default and the date the FRANs
matured or were accelerated.  However, Argentina disputed that it
had any obligation to continue biannual interest payments after
the FRANs matured or were accelerated and further contended that
9% statutory interest should not be imposed on such payments
because this constituted the impermissible collection of
"interest on interest" under New York law.
Plaintiffs countered that Argentina had a duty under
the plain language of the bond documents to continue the biannual
interest payments post-maturity or post-acceleration of the debt
until the principal was paid in full.  Because the nation failed
to make such payments (in fact, it ceased making interest
payments in December 2001), plaintiffs maintained that they were
entitled to collect the unpaid interest-only payments as damages,
plus 9% statutory interest on those payments from the date they
were due until the date of entry of a judgment.
The District Court partially credited each of the
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No. 128
parties' arguments.  Based on the language in the bond documents,
the court agreed with the bondholders that Argentina was
obligated to pay interest-only payments after the bonds matured
until the principal was paid and, therefore, the bondholders were
entitled to 9% statutory interest on the unpaid post-maturity
interest-only payments.  But, with respect to the subset of bonds
that were accelerated, the court sided with Argentina.  Relying
on Capital Ventures Intl. v Republic of Argentina (552 F3d 289
[2d Cir], cert denied 130 S Ct 202 [2009]), the District Court
held that the nation's liability for biannual interest payments
ceased on the date of acceleration and, therefore, the 9%
statutory interest was not owed post-acceleration. 
Argentina and NML Capital cross-appealed to the Second
Circuit.  After affirming the District Court's determination that
the floating interest rate provision in the bond documents was
enforceable, the Second Circuit concluded that the remaining
issues concerning the biannual interest payments and the
calculation of prejudgment interest raised unresolved issues of
New York law.  Accordingly, the Second Circuit certified the
following three questions for our review:
1. "Is a bond provision requiring the issuer
of the bond to make, on dates certain, bi-
annual interest payments on principal 'until
the principal hereof is paid' properly
construed as an obligation to pay interest
for so long as the principal is outstanding
including after the date of maturity?" 
2. "Is a bond provision requiring the issuer
of the bond to make, on dates certain, bi-
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No. 128
annual interest payments on principal 'until
the principal hereof is paid' properly
construed as an obligation to pay interest
for so long as the principal is outstanding,
including after acceleration?"
3. "If either of the foregoing questions is
answered in the affirmative, does that
obligation provide a valid basis for awarding
statutory interest under N.Y. CPLR 5001(a) on
post-maturity or post-acceleration interest
payments that came due but were never paid?"
We accepted the certification (15 NY3d 859 [2010]).
I.
Since this appeal primarily involves a dispute
concerning the calculation of prejudgment interest, we begin with
some general principles of New York law pertaining to that topic. 
Under CPLR 5001, interest on a sum awarded as a result of a
breach of contract is computed from the earliest date that the
claim accrued, "except that interest upon damages incurred
thereafter shall be computed from the date incurred" (CPLR 5001
[a], [b]).  Thus, CPLR 5001 permits a party that prevailed in a
breach of contract action to obtain prejudgment interest
(postjudgment interest is addressed in CPLR 5003).  And where a
contract provides for periodic payments or installments, the
defaulting party is required to pay prejudgment interest on any
missed payment from the date the payment became due (see Spodek v
Park Prop. Dev. Assoc., 96 NY2d 577 [2001]).
When a claim is predicated on a breach of contract, the
applicable rate of prejudgment interest varies depending on the
nature and terms of the contract.  Most agreements associated
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No. 128
with indebtedness provide a "contract rate" of interest that
determines the value of the loan and that rate is used to
calculate interest on principal prior to loan maturity or a
default in performance.  If the parties failed to include a
provision in the contract addressing the interest rate that
governs after principal is due or in the event of a breach, New
York's statutory rate will be applied as the default rate (see,
Isaias v Fischoff, 39 AD2d 850 [1st Dept 1972], affd 33 NY2d 941
[1974]).  CPLR 5004 sets forth a statutory rate of 9% per annum. 
For example, in Chipetine v McEvoy (238 AD2d 536, 536 [2d Dept
1997]), where a debtor "executed a promissory note for the
principal sum of $1,000,000, with interest at 12% per annum,
payable to the plaintiff," interest on the unpaid principal was
calculated at the contract rate -- 12% -- until the debtor
defaulted on the note and, thereafter, was calculated at the
statutory rate of 9%. 
As an important corollary, New York courts have long
held that when an agreement involving an indebtedness "provides
that the interest shall be at a specified rate until the
principal shall be paid, then the contract rate governs until
payment of the principal, or until the contract is merged in the
judgment" (O'Brien v Young, 50 Sickels 428, 430 [1884][emphasis
added]; see e.g. Stull v Feld, 34 AD2d 655 [2d Dept 1970]; see
generally, NYCTL 1998-2 Trust v Wagner, 61 AD3d 728 [2d Dept
2009]).  Said another way, when the principal on a loan is due on
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No. 128
a date certain and the debtor fails to make payment, the interest
rate in the contract will be used to calculate interest on unpaid
principal from the date of maturity of the loan to the entry of
judgment (see e.g. Astoria Fed. Sav. and Loan Ass'n v Rambalakos,
49 AD2d 715 [2d Dept 1975]).  Thus, inclusion of a clause
directing that interest accrues at a particular rate "until the
principal is paid" (or words to that effect)2 alters the general
rule that interest on principal is calculated pursuant to New
York's statutory interest rate after the loan matures or the
debtor defaults.
If the current dispute involved the proper rate to be
applied when calculating interest on the principal loaned to
Argentina, this well-established precedent would readily settle
the issue.  The bond documents required that Argentina pay
interest at the complex floating rate "until the principal hereof
is paid or made available for payment," triggering the
requirement that interest on principal be assessed at the
contract rate until the principal was repaid (which has not
occurred) or the contract merged in the judgment.  Indeed, it is
undisputed that Argentina must pay interest on principal at the
2  Parties can accomplish the same result without including
the phrase "until the principal is paid" (see e.g. Citibank, N.A.
v Liebowitz, 110 AD2d 615 [2d Dept 1985] [where mortgage granted
creditor the right to demand payment of the entire amount owed,
"with interest up to the day [the creditor] receive[s] payment,"
this amounted to an agreement that the contract rate of interest
would continue to apply after a default]).
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No. 128
contract rate post-maturity and post-acceleration of the debt,
which is a sum equivalent to the total of any unpaid biannual
interest payments.3  But the controversy here is not over the
proper prejudgment interest rate to apply to principal;  rather,
the issue is whether the biannual interest payments continued to
be due after maturity or acceleration of the debt and, if so,
whether the bondholders are entitled to collect prejudgment
interest on the interest-only payments that were due prior to
judgment but were not made.  We therefore turn to the questions
framed by the Second Circuit.
II.
To answer the first inquiry we must interpret the
language in the bond documents to determine whether Argentina's
duty to remit interest biannually on unpaid FRANs principal
continued after the bonds matured in April 2005.  As we have
repeatedly stated, "when parties set down their agreement in a
clear, complete document, their writing should be enforced
according to its terms" (Vermont Teddy Bear Co. v 538 Madison
Realty Co., 1 NY3d 470, 475 [2004][internal ellipses and citation
omitted]).  It is the role of the courts to enforce the agreement
made by the parties -- not to add, excise or distort the meaning
of the terms they chose to include, thereby creating a new
3 As the District Court noted, on the bond maturity date,
the biannual interest rate was 50.526%, the equivalent of an
annual rate of 101.052%.
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No. 128
contract under the guise of construction (Reiss v Financial
Performance Corp., 97 NY2d 195, 199 [2001]).  Adherence to these
principles is particularly appropriate in a case like this
involving interpretation of documents drafted by sophisticated,
counseled parties and involving the loan of substantial sums of
money.
The FRANs certificate contains a repayment clause in
which Argentina promised to pay Cede & Co. (an intermediary that
was to pass funds on to the beneficial owners of the bonds) the
principal owed on the bonds
"on April 10, 2005 upon presentation and
surrender of this Security, and to pay
interest thereon . . . every six months in
arrears on April 10 and October 10 in each
year, commencing October 10, 1998 (each an
'Interest Payment Date'), at the rate set
forth below, until the principal hereof is
paid or made available for payment."
The "rate set forth below" refers to the floating interest rate
formula applied biannually by the Determination Agent.
The parties agree that this provision required
Argentina to make biannual interest-only payments from the
commencement date until the date of maturity of the bonds. 
Argentina maintains, however, that its obligation to make these
periodic payments ended when the debt matured.  Based on the
plain language of this provision, plaintiffs assert that the only
event that would terminate the duty to remit interest payments
would be repayment of principal, which did not occur.
Plaintiffs' interpretation best comports with the plain
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No. 128
language of the contract.  After identifying the date that the
bonds would mature and that repayment of principal was required,
the provision imposes an obligation to make interest payments
every six months "in arrears" on specified dates, commencing on a
date certain (October 10, 1998) and continuing at the contract's
floating interest rate "until the principal hereof is paid or
made available for payment."  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.
Had Argentina -- the drafter of the bond documents --
intended that its responsibility to pay interest twice a year
cease upon maturity, it could easily have clarified that intent
in any number of ways.  It could have stated that payments would
continue from October 10, 1998 to April 10, 2005 (the specific
maturity date identified earlier in the clause).  Similarly, it
could have restructured the clause by first referencing the
payment obligation and then stating that the obligation continued
"until" the maturity date.  Or it could have directed that
interest payments were to be made until the principal was due,
thereby referring back to the loan maturity date. 
Instead, both the structure and language of the
provision point to a contrary intent.  The clause begins by
referencing the duty to repay principal on April 10, 2005 and
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No. 128
then proceeds to indicate -- using the word "and" -- that
interest will be paid every six months "in arrears" until the
principal is paid or made available for payment.  This
formulation suggests two potentially separate obligations on the
part of the issuer.  The first is to repay the principal on the
maturity date and the second is to make biannual interest
payments until repayment of the principal.  Nothing in the
language chosen by the drafters suggests that breach of the first
obligation was intended to relieve the issuer of the duty to
fulfill the second.  To the contrary, given the structure and
language chosen in the clause, the natural interpretation is that
principal was due in April 2005 and that interest-only payments
would continue to be due biannually until the principal was
actually paid or made available for payment.
This interpretation is consistent with our well-
established construction of comparable "until the principal is
paid" language in controversies involving the calculation of
prejudgment interest on principal.  Absent such language, the
contract rate ceases to be applicable when the loan matures or
the debtor defaults and prejudgment interest on principal will be
calculated at the statutory rate, currently 9%.  But where the
parties direct that interest on principal accrues at a particular
rate "until the principal shall be paid," this extends the
effectiveness of the contract's interest rate provision beyond
the date of maturity so that it "governs until payment of the
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No. 128
principal, or until the contract is merged in a judgment"
(O'Brien, 50 Sickels at 430).  By analogy, in this case where the
bond not only directed that interest accrue at a particular rate
but also imposed a duty to make biannual interest payments until
the principal was paid, the use of this language signaled that
this periodic payment obligation remained in effect after the
loan matured, until the principal was paid or the contract merged
in a judgment.  Because the FRANs certificate in this case
required the issuer to continue to make biannual interest
payments post-maturity while the principal remained unpaid, we
answer the first certified question in the affirmative.
III.
Next, in relation to the subset of FRANs debt that was
subject to acceleration prior to the contract maturity date, we
are asked whether Argentina was required, under the same
repayment clause, to make biannual interest-only payments after
acceleration.  As both parties acknowledge, "acceleration" of a
repayment obligation in a note or bond changes the date of
maturity from some point in the future (in this case, April 2005)
to an earlier date based on the debtor's default under the
contract.  In the context of a loan, this is the very definition
of "acceleration" (see Black's Law Dictionary, 9th ed, at 13
[2009] [defining acceleration as "[t]he advancing of a loan
agreement's maturity date so that payment of the entire debt is
due immediately"]).  When NML Capital accelerated $32 million of
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No. 128
the debt in February 2005, it altered the maturity date for that
debt from April 2005 to February 2005.  The question then becomes
whether Argentina's obligation to make the interest payments
twice a year "until the principal hereof is paid" -- which we
have already concluded extended beyond the maturity date of the
loan -- ceased because loan maturity was hastened by a default
and acceleration. 
The parties to a loan agreement are free to include
provisions directing what will happen in the event of default or
acceleration of the debt, supplying specific terms that supercede
other provisions in the contract if those events occur.  They
may, for example, agree that if principal is not repaid on the
maturity date, a default rate of interest will apply thereafter
(see e.g. European Am. Bank v Peddlers Pond Holding Corp., 185
AD2d 805 [2d Dept 1992] [using default interest rate provision in
modification and extension agreement to calculate interest on
principal from the date the loan matured until the date the
contract merged in a judgment]).  Or they may direct that a party
pay a prepayment premium and specify that the premium obligation
will be triggered if there is a default and acceleration of the
indebtedness (see e.g. Northwestern Mut. Life Ins. Co. v
Uniondale Realty Assoc., 11 Misc3d 980 [Sup Ct Nassau County
2006] [based on the contract language, a payment arising from
foreclosure did not constitute prepayment and therefore did not
trigger the duty to remit a prepayment premium]).
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No. 128
In this case, however, the FRANs certificate
unqualifiedly states that the biannual interest payments are to
be made until the principal is paid.  And Argentina has not
pointed to any language in the repayment or acceleration clauses
-- or any other provision of the bond documents -- indicating
that the parties intended this requirement to terminate upon
acceleration of the debt, even if the principal was not repaid at
that time.
Argentina points to the observation in Capital Ventures
Intl. v Republic of Argentina (552 F3d at 296) that "[t]he normal
consequence of acceleration is that interest payments that would
have been due in the future are no longer due, because, after
acceleration, the entire principal is immediately due and owing;
in other words, future interest payments are 'unearned' because
the creditor is no longer loaning the debtor the principal." 
Interpreting Argentinian bonds similar to these, in Capital
Ventures the court held that the bond issuer was not required to
continue making interest payments after acceleration on the
rationale that there was no specific language in the bond
documents indicating that the parties intended to supplant the
"normal" meaning of acceleration. 
As we have indicated, in New York the consequences of
acceleration of the debt depend on the language chosen by the
parties in the pertinent loan agreement.  While it is understood
that acceleration advances the maturity date of the debt, we are
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No. 128
unaware of any rule of New York law declaring that other terms of
the contract not necessarily impacted by acceleration -- such as
an obligation to make biannual interest payments until the loan
is repaid -- automatically cease to be enforceable after
acceleration.4  And although it is true that "unearned" interest
is generally not awarded as damages in New York (absent an
enforceable agreement to the contrary), the interest-only
payments in this case do not involve "unearned" interest as that
term has been used by New York courts.  As pertinent here,
unearned interest is interest that has not accrued, typically
because it is attributable to a period after the loan has been
repaid, when the creditor is no longer lending its money but has
reacquired it either through repayment or a foreclosure sale (see
Atlas Fin. Corp. v Ezrine, 42 AD2d 256 [1st Dept 1973]; Berman v
Schwartz, 59 Misc2d 184 [Sup Ct New York County 1968], affd on
the opn of Special Term 33 AD2d 673 [1st Dept 1969], lv denied 26
4 It bears noting that the contract in this case did not call
for repayment of principal in periodic installments over time,
with interest amortized over the life of the loan and added to
each principal payment.  In that situation, depending on the
language chosen by the parties and the nature of the transaction,
acceleration of the debt -- i.e., a demand for lump sum payment
of all outstanding principal -- might be inconsistent with
continuing enforcement of a periodic payment obligation that
purported to remain in effect until the principal was repaid. 
Under that scenario, it could be argued that the installment
payments were designed to effectuate the repayment of principal
over time, something the accelerating creditor no longer sought. 
We note that, in this case, the principal was to be repaid in a
lump sum -- the periodic payments were not a vehicle for
repayment of principal.
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No. 128
NY2d 612 [1970]; Bostwick-Westbury Corp. v Commercial Trading
Co., 94 Misc2d 401 [NYC Civ Ct 1978]; see generally, Aardwoolf
Corp. v Nelson Capital Corp., 861 F2d 46 [2d Cir 1988]).5  In
this case, principal has not been repaid and the biannual
payments reflect interest that has already been earned (i.e., the
interest in each unmade payment relates to a six-month interval
between February 2005 and the judgment -- a period when the loan
remained outstanding).6  As such, New York's "unearned interest"
5  Unearned interest issues usually arise when repayment of
the loan is to occur in installments of combined principal and
interest over an extended time period and interest is precomputed
at loan commencement based on the assumption that the loan will
continue until full maturity.  When that assumption is upset, and
the loan is repaid early, such as through a foreclosure sale, the
creditor is generally not entitled to recover the total amount of
interest that it would have earned had the loan continued until
the expected maturity date -- unless the parties have agreed
otherwise. 
6 For this, and other reasons, Argentina's reliance on Gizzi
v Hall (309 AD2d 1140 [3d Dept 2003]) is misplaced.  Gizzi
involved a mortgage note that was to be repaid in installments of
principal and interest.  The loan document did not include an
"until the principal is paid" clause of any kind.  When the
debtor failed to make several installment payments, the creditor
accelerated the debt and subsequently brought suit, arguing that
damages should be calculated as "the sum of all future mortgage
payments, including unpaid principal and all future interest
amounts, plus statutory interest" (309 AD2d at 1141).  Thus, the
creditor sought "unearned interest" -- interest that had not
accrued -- and then demanded statutory interest on top of the
unearned contract interest.  The court properly denied that
relief.  Given the absence of "until the principal is paid"
language, no similar argument could have been made in Gizzi that
the obligation to make interest payments continued after
acceleration of the debt, thereby generating an obligation to pay
interest on unpaid interest payments that accrued prior to
judgment.  
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No. 128
jurisprudence is inapplicable to this controversy. 
Having concluded that the obligation to make biannual
interest payments continued after the bonds matured if principal
was not promptly repaid, and that nothing in the bond documents
indicates that the payments were to stop in the event of
acceleration of the debt, it follows that Argentina's duty to
make the payments continued after NML Capital accelerated $32
million of the debt in February 2005.  We therefore answer the
second certified question in the affirmative. 
IV.
Since we have determined that the biannual interest
payments continued after the bonds matured either on the expected
maturity date or through acceleration of the debt, we reach the
last question posed by the Second Circuit: whether the
bondholders were entitled to statutory prejudgment interest on
the unmade payments from the date that they were due.  Argentina
acknowledged in the District Court that it was required to pay
prejudgment interest at the statutory rate on the biannual
payments it failed to make prior to the maturity or acceleration
of the bonds.  But it contended that it should not be charged
with prejudgment interest on unpaid post-maturity or post-
acceleration interest payments because the contract did not
require it to make those payments (an argument we have rejected)
and the imposition of such interest would constitute
impermissible "interest on interest," providing a windfall to the
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No. 128
bondholders.  Plaintiffs counter that they are entitled to
prejudgment interest at the statutory rate on any unpaid interest
payments under this Court's holding in Spodek (96 NY2d 577),
arguing that the imposition of "interest on interest" is neither
inappropriate nor amounts to a double recovery.  
Historically, there may have been some question as to
whether the collection of "interest on interest" was disfavored
in New York but New York public policy concerning the recovery of
simple interest on overdue interest payments has become evident
over time.  In 1989, General Obligations Law § 5-527 was enacted,
which clarified that agreements calling for "compound interest" 
-- defined broadly as "the accruing of interest upon unpaid
interest irrespective of whether such unpaid interest is added to
the principal debt" -- were enforceable if the principal debt
involved more than $250,000 (see L 1989, ch 202, § 1).  And, in
our 2001 decision in Spodek, we held that a promissory note
holder could collect prejudgment interest pursuant to CPLR 5001
on unpaid, overdue installment payments from the date they were
due, even where the payments were comprised of both principal and
interest.  
Based on our analysis in Spodek, we conclude that the
bondholders are entitled to prejudgment interest under CPLR 5001
on the unpaid biannual interest payments that were due -- but
were not paid -- after the loans were either accelerated or
matured on the due date.  To be sure, there are significant
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No. 128
differences between this case and Spodek.  These Argentinian
bonds do not call for repayment through installments of principal
and interest and, here, the prejudgment interest dispute involves
post-maturity and post-acceleration interest payments (the Spodek
note did not contain "until the principal is paid" language and
the unpaid installments had become due prior to loan maturity). 
But, for purposes of determining whether the bondholders are
entitled to prejudgment interest at the statutory rate on unpaid
periodic interest payments, these distinctions are not material.  
As we have previously explained, the function of
prejudgment interest is to compensate the creditor for the loss
of use of money the creditor was owed during a particular period
of time (see id. at 581; Love v State of New York, 78 NY2d 540,
545 [1991]).  In this case, the biannual interest payments were
designed to reimburse the bondholders for the loss of use of the
principal during the relevant six month time interval.  The
imposition of statutory interest on the unpaid interest payments
compensates the bondholders for a different loss -- the failure
of the issuer to timely make the interest-only payments.  If
those interest payments had been made, the bondholders could have
invested those funds, generating income.  As a consequence of
this default, plaintiffs are entitled to be compensated for the
loss of the time value of that money -- which can be accomplished
only by awarding them statutory interest on the unpaid interest-
only payments.  Absent this component of damages, plaintiffs
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No. 128
would be reimbursed only for their loss of use of the principal 
-- and not for loss of use of the periodic interest payments, a
separate injury.  
We do not agree with Argentina that the imposition of
prejudgment interest on the unpaid interest payments permits the
bondholders to recover interest twice on the same principal.  The
bondholders are receiving interest relating to their retention of
the principal only once (represented by the recovery of the
interest-only payments).  The application of statutory interest
on unpaid interest payments compensates them for a distinct
injury -- Argentina's failure to timely make interest payments.
Argentina emphasizes that fact that, in prior New York
cases interpreting "until the principal is paid" language,
interest has been applied to principal at the contract rate -- a
second level of statutory interest has not been recovered on the
contract interest.  But it overlooks the fact that the contracts
in the other cases are distinguishable because the "until the
principal is paid" terminology was not attached to an obligation
to make periodic interest-only payments.  In most, the pertinent
language was included in a clause that did nothing more than
establish the overall value of the debt by declaring the amount
of the principal and the applicable interest rate (see e.g. NYCTL
1998-2 Trust v Wagner, 61 AD3d at 729 [tax lien certificate
directed that the holder of the lien was entitled to principal
plus interest at 18%, compounded, "until the Tax Lien Principal
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No. 128
Balance is paid in full"]).  As a result, the issue in these
other cases was which interest rate should be applied to
calculate damages for non-payment of principal -- they did not
involve the computation of damages for unpaid interest payments.  
The "interest on interest" question posed by the Second
Circuit is raised in this case because the "until the principal
hereof is paid" phrase is an integral component of the
requirement that Argentina pay interest twice a year.  For the
reasons articulated above, our answer to the question of whether
the bondholders are entitled to statutory interest on the
delinquent interest-only payments is also "yes." 
There is no question that the judgment against
Argentina will be extraordinarily large, primarily due to the
passage of time and the application of the contract's floating
interest rate.  But this is no reason to depart from the legal
principle that contracts must be enforced according to the
language adopted by the parties, particularly here where
Argentina drafted the bond documents.  
Accordingly, the certified questions should be answered
in the affirmative. 
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Following certification of questions by the United States Court
of Appeals for the Second Circuit and acceptance of the questions
by this Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after hearing
argument by counsel for the parties and consideration of the
briefs and the record submitted, certified questions answered in
the affirmative.  Opinion by Judge Graffeo.  Chief Judge Lippman
and Judges Ciparick, Read, Smith, Pigott and Jones concur.
Decided June 30, 2011
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