# Denio v. State of New York

> New York Court of Appeals · June 8, 2006 · 7 N.Y.3d 159

URL: https://www.frixlaw.com/law-library/cases/9734444

## Case

- **Full name:** James S. Denio, as Guardian of the Person and Property of Sarah J. Denio, Respondent-Appellant, v. State of New York, Appellant-Respondent
- **Court:** New York Court of Appeals
- **Decided:** June 8, 2006
- **Citations:** 7 N.Y.3d 159; 818 N.Y.S.2d 802; 851 N.E.2d 1153
- **Precedential status:** Published
- **Opinion:** Concurring in part by Smith
- **Judges:** Graffeo, Smith
- **Cited by:** 25 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9734444

## Opinion text

*172 Read and R.S. Smith, JJ.
(dissenting in part). The majority’s opinion is wrong in several ways. First, it is wrong because it confuses two different things — a reasonable rate of interest and a reasonable return on investment. Under the statute, claimant is entitled to the former, subject to a 9% limitation. The majority reads it as though she were entitled to the latter, subject to the same limitation. The majority’s misreading of the statute to authorize awards based on stock market rates of return leads into complexities and contradictions that, we fear, will in practice be resolved by awarding the 9% maximum in every case — a result contrary to the plain intention of the Legislature, as the Court held in Rodriguez v New York City Hous. Auth. ( 91 NY2d 76 [1997]).
Secondly, the majority’s injection of equity rates of return into interest calculations has disturbing implications for the law of condemnation — an area in which, as the Constitution requires, interest rates are determined without a strict 9% maximum. If the logic of the majority opinion is applied in condemnation cases, condemnees may seek enormous interest rates when the stock market is booming, and condemnors may seek to use the majority opinion in reverse, with unpredictable results.
Finally, the majority opinion is wrong on its own terms. Even if it is correct to use equity rates of return as part of an interest calculation, the record here does not justify the decisions of the courts below, which the majority affirms. The Court should, at a minimum, remit this case to the Court of Claims for determination of a “reasonable” interest rate.
I
State Finance Law § 16 provides: “The rate of interest to be paid by the state upon any judgment or accrued claim against the state shall not exceed nine per centum per annum.” Rodriguez makes clear that under this statute, the trial court is to fix a “fair and reasonable” rate, equal to or lower than 9%, in the exercise of its discretion ( 91 NY2d at 80 ). We said in Rodriguez that, since 9% is the rate generally applied in cases between private parties (CPLR 5004), that rate is “presumptively fair and reasonable” ( 91 NY2d at 81 ), but that does not mean that 9% may be awarded in every case. The presumption is rebut-table.
What the statute provides for is a “rate of interest.” In deciding what rate is reasonable it is important to remember what *173 “interest” is: “a charge for borrowed money” (Merriam-Webster’s Collegiate Dictionary 610 [10th ed 1993]). In cases like this the State has, in effect, borrowed a claimant’s money for a period of time ending with the date the judgment is paid. Thus the question a court should ask is: “What is a fair and reasonable rate of interest for a loan of this amount by this claimant to the State over this period of time?” Here, there is no way that the answer to that question can be 9%.
Claimant’s involuntary loan, an obligation of the State, was virtually risk free. The interest rate on three-year Treasury bonds — risk-free instruments comparable in duration to the loan at issue here — was roughly 5% or 6% throughout the time in question. We do not imply that the interest rate in a case like this must always be identical to the rate on corresponding Treasury obligations. But it is clear here that the State’s proposed prejudgment interest rate of 5.35% was within the range of reasonable choices, and that 9% was not.
Claimant’s argument for the 9% rate, which the majority accepts, is essentially that she was entitled to more than interest on her money. She did not, she points out, choose to make a loan to the State; if she had had the money she might have invested part or all of it in the stock market, and earned a better return. The short answer is that the Legislature has not said she is entitled to the return on investment she might have earned elsewhere; it has said she is entitled to “interest.” No court outside New York, as far as we know, has ever held that “interest” may be calculated on the basis of stock market returns.
The majority seems to have accepted, as did the courts below, claimant’s argument that it is unfair to limit her to a reasonable interest rate on a risk-free loan. Of course, courts are not free to revise the Legislature’s enactments to achieve greater fairness (Matter of Bello v Roswell Park Cancer Inst., 5 NY3d 170, 173 [2005]). But apart from that, the majority’s quest for a truly “fair” rate of return cannot succeed. No one can know what rate of return claimant would have earned if she had had the money to invest as she chose, because no one can know whether she would have been wise or unwise, lucky or unlucky. Implicit in the majority’s decision is that this problem may be solved by assuming claimant to be a typical prudent investor, but that assumption has its own problems, because there are times — and the 1999-2002 period considered in this case was one such time — when, because the stock market is in decline, *174 most prudent investors will do worse than those who lend out their money at a risk-free rate. The record in this case shows that even a relatively conservative investor, who put only 60% of her money into equities that tracked the Standard & Poor’s 500, would have suffered a net loss of around 2% annually (see infra at 178-179).
Thus the approach of assuming the claimant to be a typical prudent investor can lead, in this and in some other cases, to awarding less than a risk-free rate; in strict logic, it could lead to awarding no interest, and even to awarding less than 100% of the principal. These results are obviously unacceptable, and it is probably for that reason that the Appellate Division in Auer v State of New York ( 283 AD2d 122 [3d Dept 2001]) adopted a “heads I win, tails you lose” variation on the “prudent investor” approach. Auer holds, in substance, that a 9% rate of return will be held “reasonable” unless the evidence shows that no prudent investor could possibly have hit that target: “[T]he defendant must show that all reasonable investment possibilities during the relevant time period demonstrate that the [9%] statutory rate is unreasonably high . . .” (id. at 126 [emphasis added]; accord, Matter of New York State Urban Dev. Corp. [Alphonse Hotel Corp.], 293 AD2d 354, 355 [1st Dept 2002]). This will probably never happen; there will always be some “reasonable” portfolio, chosen with the benefit of hindsight, that can produce a 9% return. The evidence in this case, which we analyze in detail below (infra at 178-179), illustrates the point: in a low interest rate environment, with the stock market going steeply down, claimant came up with a “reasonable” combination of investments that yielded, miraculously, 9.03%.
The Auer approach is unfair to the State, and it completely frustrates the direction of the Legislature, confirmed by our holding in Rodriguez , that a rate below 9% is sometimes appropriate. The Appellate Division relied on Auer in this case. The majority affirms the Appellate Division’s order and says that it “endorse[s]” the reasoning of Auer (majority op at 167), but it seems to reject, in a footnote, Auer’s key element — its virtually irrebuttable presumption in favor of 9% (majority op at 169 n 6).
The majority’s approach, as we understand it, is that the trial court is free to pick any “reasonable” rate of return. It does not say how the court is to choose, nor whether there is any floor; may the court choose a return below the risk-free rate, or even a negative return, if that is “reasonable”? Nor does the major *175 ity explain how it can affirm the decision below, while rejecting its fundamental premise. As we show below, the majority is affirming a decision that the courts below did not make.
The likely practical effect of the majority’s decision, despite its disclaimer, will be to drive all decisions into the 9% safe harbor that Auer created. It would be better, we think, to follow the statute, and Rodriguez , by requiring courts to award a reasonable “rate of interest.”
II
The majority decision also has the untoward side effect of unsettling our established condemnation jurisprudence. Before today, this Court required a condemnee challenging the fairness and reasonableness of the presumptively reasonable statutory rate to do so by comparing it to prevailing market rates of interest (see e.g. Matter of City of New York [Brookfield Refrig. Corp. —Zoloto], 58 NY2d 532, 536-537 [1983]; Matter of County of Nassau [Eveandra Enters.], 42 NY2d 849 [1977]; Adventurers Whitestone Corp. v City of New York, 65 NY2d 83 [1985]). The Court never considered rates of return on “reasonably-risked equity funds” (majority op at 167) to be relevant. Indeed, the idea of doing so is sufficiently fanciful that the California Supreme Court dismissed it in a footnote 21 years ago (see Redevelopment Agency v Gilmore, 38 Cal 3d 790, 806 n 17, 700 P2d 794 , 806 n 17 [1985] [“(S)ince interest is at issue, only the rates of return on interest-bearing obligations are relevant. No case has suggested that the Constitution contemplates a ‘prudent investor’ in stocks or other equity securities”], citing City of New York; see also Liberty Sq. Dev. Trust v City of Worcester, 441 Mass 605, 808 NE2d 245 [2004] [holding that an adequate rate of prejudgment interest for a taking reflects what a prudent investor would earn in the usual interest markets], citing Redevelopment Agency and City of New York).
But now the majority has held that the rate of return on reasonably-risked equity funds, selected in hindsight, is indeed relevant to the judicial determination of fair and reasonable prejudgment interest in New York. The implications and consequences of this for condemnees and condemnors are unclear.
Can a condemnee now rebut the presumption that 9% is reasonable by presenting hypothetical portfolios of stocks and bonds with a rate of return in excess of 9% for the period of delay between the taking and payment? This would be an easy hurdle to clear when the period of delay coincides generally *176 with a strong bull market, as was the case in the late 1990’s. Of course, as the evidence in this case, which we analyze below, demonstrates, a hypothetical portfolio of stocks and bonds may be crafted to exhibit almost any rate of return, regardless of general market conditions, so long as a major part of the portfolio may be allocated to any combination of well-recognized indices (of which there are many) after their performance is already known. Or would the condemnee have to show that prevailing market rates also significantly exceeded 9%? Suppose there is a return to double-digit interest rates — the feature of the economic landscape in the late 1970’s and early 1980’s which prompted the Legislature to raise the ceiling rate from 6% to 9% (see majority op at 165-166). In that event, may a trial judge in his discretion still award interest to the condemnee at the rate of 9% so long as the condemnor presents a single hypothetical portfolio of stocks and bonds returning 9% or less? The majority seems to say that equity rates of return are still not relevant to the question of the fairness of the statutory rate in a condemnation case (see majority op at 168 n 4 [“Evidence of stock market rates plays no part in this analysis”]). But a condemnee is entitled to prejudgment interest as part of constitutionally required just compensation. By contrast, a tort claimant obtains prejudgment interest only as a matter of legislative grace. Why, then, is it the tort claimant and not the condemnee who gets the benefit of stock returns? Does this pass constitutional muster?
Ill
The majority concludes that the State has rebutted the statutory presumption, but then opines that “[i]t is clear that the Court of Claims then weighed the conflicting evidence [presented by the State and claimant] in making its determination to apply the nine percent rate for both prejudgment and postjudgment interest”; and that this determination is beyond review in this Court because it is supported by affirmed findings of fact (majority op at 170). The record supporting these affirmed findings — which the majority concedes dwells at “the outer limits of sufficiency” — consists of a single hypothetical portfolio, allocated 75% to equities and 25% to bonds, which exhibited an annual average rate of return of 9.03% during the relevant time period (majority op at 171). In fact, however, there is no basis for the majority to conclude that the trial judge ever weighed the parties’ conflicting evidence, much less made findings of fact related to the conflicting evidence.
*177 The relevant part of the trial judge’s opinion reads in its entirety as follows:
“The court has reviewed all of the arguments presented by both claimant and defendant and their experts on the pre-judgment and post-judgment interest rate issue, and finds the position of the claimant more persuasive. The court does not believe the defendant has overcome the presumption of reasonableness and fairness attributed to the statutory interest rate of 9%. Consequently, the court finds the rate of interest payable will be 9% for the period from the date of the liability decision to the date of entry of final judgment herein, and 9% for the period from the date of entry of final judgment to the date of payment or delivery of the annuity contract, whichever is appropriate” (emphasis added).
While the majority states that “[i]t is clear that the Court of Claims . . . weighed the conflicting evidence” (majority op at 170 [emphasis added]) and “[a]fter reviewing the proof presented by the parties, the Court of Claims found claimant’s position ‘more persuasive’ and ordered the application of a nine percent rate” (majority op at 164 [emphasis added]), the trial judge did not mention weighing “evidence” or reviewing “proof.” Instead, he stated that after reviewing the parties’ arguments — hardly the same thing as proof or evidence — he found the claimant’s position — again, not proof or evidence— “more persuasive.”
Secondly, the trial judge erroneously decided that the State had not “overcome the presumption of reasonableness and fairness attributed to the statutory interest rate of 9%.” After concluding (albeit incorrectly) that the State had not rebutted the presumption and “ [consequently” awarding claimant interest at 9%, the judge had no reason to weigh the parties’ conflicting evidence, and the majority has no basis for assuming that he nonetheless took this unnecessary step. Certainly, there is no indication on the face of the judge’s opinion that he did so. There are no findings of fact stated in his opinion, or discussions of the proof, which in and of itself constitutes reversible error by forestalling meaningful appellate review. The absence of any explanation (assuming the trial judge, in fact, weighed the parties’ conflicting evidence) is particularly worrisome in this case because claimant’s proof is, as the majority charitably labels it, “admittedly slim” (majority op at 171).
*178 Specifically, of the three hypothetical portfolios that claimant presented, each of which allocated 75% to equities and 25% to bonds, only one covered the relevant time period, as the majority acknowledges. If the trial judge relied on either of the two irrelevant portfolios to find in claimant’s favor, he abused his discretion as a matter of law. There is no way to know what proof of claimant’s the judge may have considered — again assuming that he weighed the parties’ conflicting evidence in the first place — because his opinion is silent on the point. Further, claimant’s portfolio evidence was, in fact, disputed; the majority is just wrong when it states that “[t]he State did not directly challenge the reasonableness of claimant’s investment portfolio selections” (majority op at 171).
The three hypothetical portfolios were attachments to claimant’s attorney’s affidavit. He stated that he secured them from UBS/PaineWebber and that each was “tied to well known market indices” for various time periods. There is no explanation or justification in the record as to why UBS/PaineWebber allocated 75% of each of these three hypothetical portfolios to equities and 25% to bonds. Claimant’s attorney submitted only a chart captioned “Performance Results Based on Various Portfolio Asset Allocations.” There is no indication who prepared this chart, which identifies a 75% equity/25% fixed income portfolio as a “growth” portfolio, not a “balanced” portfolio. The majority, by contrast, says that a claimant “must. . . proffer balanced investment alternatives . . . , which may include government securities, reasonably-risked corporate bond indices, money market vehicles and recognized indices for low-to-moderately-risked securities” (majority op at 168 n 5 [emphasis added]).
Next, the State submitted its expert’s affidavit. Although the State’s expert opined that returns on equities were not a proper benchmark for setting a prejudgment interest rate, he nonetheless looked at the rate of return that a hypothetical “prudent investor” would have received over the relevant time period, assuming 60% invested in equities (measured by the S & P 500) and 40% invested in fixed income securities with a portion maintained in liquid short-term investments (measured by the Lehman Brothers Intermediate Government/Corporate Index). The rate of return was a negative 1.93%.
In reply, claimant finally presented the affidavit of her expert, who likewise “recommend[ed] the 60%/40% balanced investment approach [which] represents a prudent investment”; and *179 conceded that the State’s expert “is correct that if a 60% S&P and 40% LBIN is used[,] the rate of return for the pre-judgment period in Denio would be -1.93%.” He squared this uncomfortable fact with his opinion that the statutory rate of 9% was nonetheless “appropriate” by observing that, based on historical patterns, the market was likely to rebound and perform better over the long term. But the expert’s prediction about the long-term future is not relevant to the proper rates of prejudgment and postjudgment interest in this case (see majority op at 171 n 9).
In short, the State disputed both claimant’s investment portfolio choices and her unexplained 75%/25% allocation formula. Critically, claimant’s expert opined that a prudent investor would have invested 60% in equities and 40% in bonds, yet claimant presented no evidence showing what such an investment would have returned over the relevant time period; the only competent evidence in the record for such a hypothetical portfolio, which was provided by the State’s expert, concededly showed a negative return. As a result, we would hold that, as a matter of law, the State has established by a preponderance of the evidence that the 9% statutory rate of interest is unreasonably high for the time period at issue, and would remit this matter for the Court of Claims to set an interest rate below 9% within the range of the State’s proof. Even if the majority is not willing to go so far, it should — having held that the State rebutted the presumption that the 9% statutory rate of interest is fair and reasonable in this case — remit to the Court of Claims for it to weigh the parties’ conflicting evidence, exercise its discretion, and award interest accordingly.
In sum, the majority decision suffers from a confusion — apparently unique to New York’s state courts — between interest and equity rates of return. This confusion has cost the taxpayers an additional $1 million in this case alone, and threatens to disrupt the State’s condemnation jurisprudence. Even assuming that equity rates of return are relevant, the majority has taken the astonishing position that the Court has no choice but to affirm here because the trial judge must have made certain findings of fact that he had no reason to believe he needed to make, and does not say he made. And the only possible record support for these supposed findings of fact — a single hypothetical portfolio allocating 75% to equities and 25% to bonds and yielding 9.03% — was not endorsed by claimant’s own expert, who instead “recommend[ed] the 60%/40% balanced investment ap *180 proach.” But the only hypothetical 60%/40% portfolio in the record showed a loss for the relevant time period. We respectfully dissent.
Chief Judge Kaye and Judges G.B. Smith, Ciparick and Rosenblatt concur with Judge Graffeo; Judges Read and R.S. Smith dissent in part in a separate opinion.
Judgment appealed from and order of the Appellate Division brought up for review affirmed, without costs.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9734444. Public record. Not legal advice.