11-848-cv (L) In re: Douglas E. Palermo
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ____________________
August Term, 2011
(Argued May 16, 2012 Decided: January 7, 2014)
Docket Nos. 11‐848‐cv(L), 11‐4018‐cv (Con)
____________________
IN THE MATTER OF DOUGLAS E. PALERMO,
Debtor.
______________________________
DAVID R. KITTAY, TRUSTEE,
Plaintiff‐Appellee,
‐v‐
JOSEPH KORFF,
Defendant‐Appellant. ____________________
Before: KEARSE, POOLER, and LIVINGSTON, Circuit Judges.
1 Appeal from a judgment of the United States District Court for the
Southern District of New York (Robert P. Patterson, Jr., J.), entered pursuant to a
jury verdict in favor of Plaintiff‐Appellee David Kittay on his claims that
Defendant‐Appellant Joseph Korff had received fraudulent transfers under New
York’s Debtor and Creditor Law Sections 273, 274, 275, and 276 from Debtor
Douglas Palermo. Korff argues that (1) the complaint against him was untimely;
and (2) the district court erred in failing to provide a rationale for its award of
prejudgment interest running at New York State’s statutory rate of 9 percent per
annum, running from the date of the fraudulent transfer. We conclude that the
bankruptcy judge entered a de facto severance pursuant to Bankruptcy Federal
Rule of Civil Procedure 7021, making the refiled complaint timely. We vacate the
award of prejudgment interest, and remand to the district court for further
proceedings consistent with this opinion.
AFFIRMED in part, VACATED and REMANDED in part.
CARL W. OBERDIER (Kellen G. Ressmeyer, on the brief), Oberdier Ressmeyer LLP, New York, N.Y., for Defendant‐Appellant.
LITA BETH WRIGHT (Thomas M. Monahan, on the brief), Storch Amini & Munves PC, New York, N.Y., for Plaintiff‐Appellee.
2 POOLER, Circuit Judge:
Debtor Douglas Palermo filed for bankruptcy pursuant to Chapter 7 of the
Bankruptcy Code, 11 U.S.C. § 701 et seq., in the Bankruptcy Court for the
Southern District of New York on October 14, 2005. Plaintiff‐Appellee David
Kittay was appointed trustee of Palermo’s estate in bankruptcy. On October 12,
2007, Kittay brought proceedings against Defendant‐Appellant Joseph Korff and
a number of other persons and entities, alleging that these defendants had
received fraudulent transfers from Palermo prior to his Chapter 7 filing.
Subsequent to a request from the Bankruptcy Court, which considered some of
the parties and claims misjoined, Kittay amended the complaint to drop all
parties but Palermo; he then refiled separate complaints against each group of
defendants. The second complaint against Korff was filed outside the limitations
period. Kittay’s claims of fraudulent conveyance against Korff under New
York’s Debtor and Creditor Law (“DCL”) §§ Sections 273, 274, 275, and 276
(McKinney 2013) and 11 U.S.C. §§ 544(b)(1) and 550 were tried before a jury in
the Southern District of New York, which found in favor of Kittay on all counts.
Korff now appeals. He argues, inter alia, that the complaint against him was
3 untimely and that the district court erred in failing to articulate why it applied
New York law in the prejudgment interest calculation. We conclude, however,
that the bankruptcy court entered a de facto Rule 21 severance, and so the refiled
complaint was timely. We also hold that, regardless of whether state or federal
law governs the award of prejudgment interest here, the determination as to such
an award was a matter for the district court’s exercise of discretion. However,
because the district court gave no indication that it knew that it had discretion
we remand for the district court either to (1) exercise its discretion, or (2) explain
that it in fact knew of and exercised its discretion in the first instance, and to
articulate its reasons for any grant of prejudgment interest. The remainder of
Korff’s claims have been considered and addressed in a summary order
published contemporaneously with this opinion. Accordingly, the judgment of
the district court is AFFIRMED in part, VACATED and REMANDED in part.
BACKGROUND
Debtor Douglas Palermo, “a self‐employed real estate consultant,” filed for
bankruptcy pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq.,
in the Bankruptcy Court for the Southern District of New York on October 14,
2005. Plaintiff‐Appellee David Kittay was appointed trustee of Palermo’s estate
4 in bankruptcy on January 23, 2006, after the initial trustee passed away. On
October 12, 2007, two days before the statute of limitations period ended, Kittay
filed proceedings, pursuant to 11 U.S.C. §§ 544(b)(1) and 5501, in the Bankruptcy
Court, against Defendant‐Appellant Joseph Korff (“Korff”) and a number of
other persons and entities. Kittay alleged that these defendants had received
fraudulent transfers pursuant to DCL Sections 273, 274, 275, and 276, from
Palermo prior to his Chapter 7 filing.2 Subsequent to a request from the
Bankruptcy Court, which considered some of the parties and claims misjoined,
on January 7, 2008, Kittay amended the complaint to drop all parties but Palermo.
He then refiled separate complaints against each group of defendants. In August
of 2008, Korff moved, pursuant to 28 U.S.C. § 157(e) and Federal Rule of
Bankruptcy Procedure 5011, to withdraw the reference from the Bankruptcy
1 Additional claims pursuant to 11 U.S.C. § 548 were dismissed on Kittay’s motion before trial. 2 We take judicial notice of the fact that Palermo was ultimately denied a discharge in bankruptcy as a result of these fraudulent conveyances, including the transfers at issue here. Doubet, LLC v. Palermo (In re Palermo), 370 B.R. 599, 613‐14 (Bankr. S.D.N.Y. 2007). We take notice of this fact “not for the truth of the matters asserted in the other litigation, but rather to establish the fact of such litigation and related filings.” Int’l Star Class Yacht Racing Ass’n v. Tommy Hilfiger U.S.A., Inc., 146 F.3d 66, 70 (2d Cir. 1998) (internal quotation marks omitted).
5 Court (Adlai Hardin, J.), and the proceedings against Korff were transferred to
the District Court for the Southern District of New York.
Under Section 544(b)(1) of the Bankruptcy Code, “the trustee [of an estate
in bankruptcy] may avoid any transfer of an interest of the debtor in property or
any obligation incurred by the debtor that is voidable under applicable law by a
creditor holding an unsecured claim.” 11 U.S.C. § 544(b)(1). The “applicable
law” in determining which obligations are voidable under Section 544(b)(1) is
often state law. See, e.g., In re Adelphia Recovery Trust, 634 F.3d 678, 691 n.6 (2d
Cir. 2011) (noting that “state laws governing fraudulent conveyances . . . may
be invoked in federal bankruptcy proceedings by operation of 11 U.S.C. §
544(b)(1)”); In re NextWave Personal Commc’ns, Inc., 200 F.3d 43, 49 (2d Cir. 1999)
(“Applicable law [under Section 544(b)] includes various state fraudulent
conveyance statutes . . . . ”). Pursuant to Section 544(b)(1), Kittay alleged that
Korff, a long‐time friend and associate of Palermo, had received fraudulent
transfers within the meaning of DCL §§ 273, 274, 275, and 276, prior to Palermo’s
Chapter 7 filing. Sections 273‐275 define constructive fraud:
Under the DCL, a conveyance by a debtor is deemed constructively fraudulent if it is made without “fair consideration,” and (inter alia ) if
6 one of the following conditions is met: (i) the transferor is insolvent or will be rendered insolvent by the transfer in question, DCL § 273; (ii) the transferor is engaged in or is about to engage in a business transaction for which its remaining property constitutes unreasonably small capital, DCL § 274; or (iii) the transferor believes that it will incur debt beyond its ability to pay, DCL § 275.
Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 53
(2d Cir. 2005); see also DCL §§ 273, 274, 275. Section 276 governs actual fraud,
providing that “[e]very conveyance made and every obligation incurred with
actual intent, as distinguished from intent presumed in law, to hinder, delay, or
defraud either present or future creditors, is fraudulent as to both present and
future creditors.” DCL § 276.
The trial evidence reflected that, in July 2004, Palermo arranged to assign
to Korff $300,000 of a larger fee Palermo had earned for brokering a large real
estate deal. At trial, Palermo gave vague testimony describing the services
performed by Korff to earn fees. Korff’s testimony on the topic was internally
inconsistent and self‐contradictory. Korff testified both that he was “entitled,
because of [his] participation in the transaction” to the fee, and that it was in
7 repayment for loans3—as to which there was no documentation— that he had
made to Palermo during their long association. Palermo likewise testified both
that Korff fully earned the fee and that it was given to extinguish antecedent
debts.
On October 19, 2010, about one week before trial was set to begin, Korff
moved to dismiss the complaint as barred by the statute of limitations. The
district court denied the motion, finding that equitable tolling saved Kittay’s
filing. The jury found in Kittay’s favor on all counts. After trial, Korff moved for
judgment notwithstanding the verdict pursuant to Federal Rule of Civil
Procedure 50(b), or alternatively, for a new trial pursuant to Rules 50(b) and
59(a). The district court denied both of these motions. On November 4, 2010,
Korff moved for reconsideration of the district court’s prior denial of the motion
to dismiss on timeliness grounds. The district court denied this motion in an
opinion and order entered on February 7, 2011.
Korff now argues that the district court erred in denying his motion for
judgment as a matter of law; that there were errors in the jury charge; that the
3 Though Korff’s general ledgers reflected some advances and checks to Palermo, no contemporaneous loan agreements were entered into evidence.
8 complaint was untimely and that the district court erred in applying equitable
tolling; and that the court erred in awarding prejudgment interest without
explanation. We address the latter two contentions herein; the remainder of
Korff’s arguments have been considered and addressed in a summary order filed
contemporaneously with this opinion.
I. Timeliness
a. Factual Background
Korff argues that the district court erred in not dismissing Kittay’s
complaint as untimely. Some crucial facts are undisputed from the outset:
neither party disputes that the time for filing ended October 14, 2007,4 or that the
complaint upon which trial proceeded in this case was not filed until January 7,
2008. Nor is it disputed that Kittay originally commenced the action against
Korff and the other defendants in Bankruptcy Court on October 12, 2007, two
days before his time to file expired. Although on its face Kittay’s complaint
4 11 U.S.C. § 546(a) generally provides that any action under Section 544 must be commenced by the later of two years after the entry of the order for relief or one year after the appointment or election of the first trustee. 11 U.S.C. § 546(a). In this case, the order for relief was entered on Palermo’s petition date, October 14, 2005, and the original trustee was appointed two days later. The time to file thus ended two years after the entry of the order for relief—October 14, 2007.
9 against Korff may have seemed untimely, however, the proceedings in
Bankruptcy Court giving rise to this facially late filing belie any conclusion that it
was, in fact, untimely.
On November 27, 2007, all parties on the original complaint, except for
Korff and another defendant, appeared in the Bankruptcy Court for the Southern
District of New York. From the outset, the court questioned “the appropriateness
or, indeed, the permissibility of lumping all these Defendants in one adversary
proceeding.” It indicated that separate adversary proceedings were “probably
going to be necessary.” When Kittay’s counsel expressed concern about whether
the refiled proceedings would be timely, the court stated “the statute of
limitations will not be a problem because . . . to the extent that this Complaint
was timely as to any of these people, a refiling will be timely, as well. So that
should not be a – that will not be an issue.” The court directed the parties to
consider “an appropriate way to split [the claims] up” into separate complaints
and adjourned.
The second proceeding in the bankruptcy court was held on December 11,
2007. Korff again did not appear, though process was complete as to Korff on
December 6. As to remedying any misjoinder, Kittay’s counsel told the court that
10 the parties had agreed to maintain one adversary proceeding solely against
Palermo and to split the remainder of the claims into four separate adversary
proceedings. The other parties expressed their agreement, and the court
indicated that if the parties had come to an agreement, it would acquiesce in their
division. Kittay’s counsel and the court then had the following exchange:
The Court: Okay, as a mechanical matter then, I take it you would now file separate Complaints?
[Counsel for Kittay]: Yes, the understanding being, of course, that the statute of limitations would have been satisfied from filing the first Complaint.
The Court: Relating back to the initial Complaint, that’s fine.
Judge Hardin directed that the new complaints be filed by January 7, 2008. The
proceeding ended with the following exchange:
The Court: . . . By the way, I guess once the new Complaints are filed, you should do an appropriate consent order terminating this initial adversary proceeding, but with a specific provision that the—I don’t know quite how you word it, but that the new Complaints will relate back to the filing of this one, all right?
[Counsel for Kittay]: It is my intention, Your Honor, to just amend the Complaint in this action
11 so that it will only cost the— to avoid having to pay for another action.
The Court: Say again?
[Counsel for Kittay]: My intention was just to amend the Complaint in this action to eliminate—or would be to move—to proceed under this caption against Mr. Palermo and then to file the other.
The Court: All right, I see. Okay, so this action would not be terminated; this would just be amended to relate only to one set of Defendants?
[Counsel for Kittay]: Yes, that’s correct, Your Honor.
The Court: Okay, that’s fine. Very good. Thank you.
On January 7, 2008, Kittay filed an amended complaint which functionally
dismissed all defendants except Palermo; that same day, he filed separate
complaints against the other defendants. No consent was obtained prior to these
filings. The amended complaint against Korff alleged that “Judge Hardin held
that for purposes of the statute of limitations, the date of filing for the additional
adversary proceedings would relate back to the date the Initial Adversary
Proceeding was filed.” No further motions were made as to timeliness until
12 October 19, 2010, around one week before trial, when Korff moved to dismiss the
complaint as untimely. Kittay claimed in response that he was entitled to
equitable tolling. Neither party produced the transcripts of the December 11 and
November 27 proceedings at oral argument on October 22, 2010. The court
reserved decision, and on October 25, 2010, immediately before trial began, the
district court orally denied the motion to dismiss, indicating that equitable tolling
was appropriate. After Korff’s counsel objected that the basis for the court’s
determination was hearsay, Kittay’s counsel proffered that she now had the
transcript and would produce it, though she indicated it was consistent with the
timeliness allegation in the original complaint. The court did not make any
further ruling, and the trial began.
After trial, on November 4, 2010, Korff moved for reconsideration of the
court’s equitable tolling determination. Reviewing the transcripts of the
bankruptcy court proceedings, the district court found that it was reasonable to
read the transcripts to mean that the bankruptcy court required consent only if
the initial adversary proceeding was terminated, and not, as actually occurred, if
the initial complaint was amended to drop the misjoined parties. The district
court indicated that it made its prior decision to toll the statute of limitations
13 because “the Plaintiff had not sat on his rights, had timely commenced the initial
adversary proceeding, and . . . [because] there was no prejudice was suffered by
the Defendant.” The court also found that the bankruptcy court transcripts were
not inconsistent with Kittay’s previous position, and thus were not inconsistent
with its original decision. Accordingly, it denied reconsideration. The court also
held that the complaint was timely on an alternative ground, the relation back
provision of Federal Rule of Civil Procedure 15(c). Korff appeals both of these
determinations.
b. Analysis
We need express no view on Rule 15(c) or the applicability of equitable
tolling, the two bases on which the district court found the complaint timely,
because a clearly sufficient basis to affirm the district court is found in Federal
Rule of Civil Procedure 21, which “applies in [bankruptcy] adversary
proceedings” pursuant to Federal Rule of Bankruptcy Procedure 7021. Rule 7021
indicates that “[m]isjoinder of parties is not a ground for dismissing an action.
On motion or on its own, the court may at any time, on just terms, add or drop a
party. The court may also sever any claim against a party.” Fed. R. Civ. P. 21.
When faced with misjoinder, the Rule allows the bankruptcy court to drop a
14 party or sever claims. But the remedy for misjoinder is not, as the bankruptcy
court’s initial instruction suggested, dismissal of the action, which Rule 7021
specifically prohibits. Id.; see also Clay v. Martin, 509 F.2d 109, 113 (2d Cir. 1975)
(“[T]he presence of ‘improper parties’ [is] . . . an invalid basis for dismissal of [a]
complaint. Misjoinder . . . does not justify such an extreme sanction.”); Sabolsky v.
Budzanoski, 457 F.2d 1245, 1249 (3d Cir. 1972) (“Misjoinder or non‐joinder of
parties is not ground for dismissal . The proper remedy in case of misjoinder is to
grant severance or dismissal to the improper party if it will not prejudice any
substantial right.” (citation omitted)). The bankruptcy court’s initial direction to
the parties aimed at curing misjoinder—requiring dismissal of the complaint and
refiling of separate complaints—was thus in violation of Rule 7021. Since the
bankruptcy court clearly considered all claims appropriate to proceed and
intended for them to do so, it should have ordered the misjoined parties to be
severed. Had it done so explicitly, the complaint would unquestionably be
timely, as the date of initiation for statute of limitations purposes would have
been October 12, 2007, the undisputed timely filing date of the original action.
Unlike a suit dismissed without prejudice, in which a suit “is treated for statute
of limitations purposes as if it had never been filed,” Elmore v. Henderson, 227 F.3d
15 1009, 1011 (7th Cir. 2000), “when a court ‘severs’ a claim against a defendant
under [Rule 7021], the suit simply continues against the severed defendant in
another guise. The statute of limitations is held in abeyance, and the severed suit
can proceed so long as it initially was filed within the limitations period,”
DirecTV, Inc. v. Leto, 467 F.3d 842, 845 (3d Cir. 2006) (citations omitted).
We see no reason for a different result simply because the court did not
expressly invoke Rule 7021. As an initial matter, we note Korff concedes that the
bankruptcy court was “exercis[ing] [its] discretion under [Rule 7021].” Even
absent such a concession, the record unequivocally reflects that what the
bankruptcy court intended to do was to effectuate a severance under Rule 7021.
“Nothing on the face of [Rule 7021, incorporating] Rule 21 indicates that it must
be explicitly invoked in order to have effect. There must be, however, a strong
indication that the judge intended to effect a severance.” White v. ABCO Eng’g
Corp., 199 F.3d 140, 145 n.6 (3d Cir. 1999). Here, “[a]lthough the [bankruptcy]
court did not explicitly refer to [Rule 7021], we conclude that [it] clearly intended
to sever.” Allied Elevator, Inc. v. E. Tex. State Bank of Buna, 965 F.2d 34, 36 (5th Cir.
1992).
16 Here, the bankruptcy court indicated that the claims were misjoined and
that separate adversary proceedings were “probably going to be necessary.” It
also unambiguously indicated that “to the extent that th[e original] Complaint
was timely as to any of [the defendants], a refiling [would] be timely, as well.”
The court’s clear intent was that the claims be separated and allowed to proceed
as timely, based on the filing of the original complaint. It is by operation of Rule
7021 that this could be effectuated. Accordingly, we conclude that the
bankruptcy court intended to and did effectuate a Rule 7021 severance. See Allied
Elevator, 965 F.2d at 36; United States v. O’Neil, 709 F.2d 361, 368 (5th Cir. 1983)
(concluding from “judgments themselves, as well as from the context in which
they were rendered, . . . that a Rule 21 severance was intended and purportedly
effected by those judgments”); Hebel v. Ebersole, 543 F.2d 14, 16‐17 (7th Cir. 1976)
(interpreting ambiguous separation of claims as Rule 21 severance rather than
separation for trial pursuant to Federal Rule of Civil Procedure 42(b)).
Korff’s argument that he was dropped as a party pursuant to the Rule,
rather than having the claims against him severed, is completely without merit.
Such a claim is belied by the bankruptcy court’s repeated assurances that the
refiled complaints would be timely and the court’s apparent acceptance of those
17 refiled complaints. The bankruptcy court’s reassurances are particularly
meaningful in a case such as this where even a dismissal without prejudice after
October 14, 2007, would operate in effect as a dismissal with prejudice, since any
refiling would be outside of the statute of limitations and thus barred. The
bankruptcy court obviously intended for all the claims to proceed; thus it
intended to sever rather than drop any parties. The same facts also belie Korff’s
argument that, even if the court intended to sever the claims, it did so only on the
condition that Kittay first obtain a consent order. The district court concluded
that the transcripts reflected that the bankruptcy court required a consent order
only if the original action were entirely dismissed, a finding with which we
agree. But even if we could not draw such a conclusion from the transcripts
themselves, we can certainly draw it from the fact that the bankruptcy court
apparently expressed no dissatisfaction when, ultimately, the newly severed
complaints were refiled without a consent order. Had such consent been
required by the court in order to persuade the court to sever, we have no doubt
that the bankruptcy court would have said so. The bankruptcy court entered a
de facto Rule 7021 severance; accordingly, we find no error in the district court’s
refusal to dismiss the complaint as untimely.
18 II. Prejudgment Interest
In entering judgment against Korff, the district court included an
award for prejudgment interest:
Plaintiff’s motion for pre‐judgment interest, pursuant to Fed. R. Civ. P. 59(e), dated February 7, 2011 is granted and the Clerk shall calculate and enter judgment with prejudgment interest on all sum awarded herein from July 29, 2004 at the statutory rate of nine percent per annum provided in the New York Civil Practice Law and Rules § 5004 in he amount of $177,090.41.
“The decision whether to grant prejudgment interest and the rate used if such
interest is granted are matters confided to the district court’s broad discretion,
and will not be overturned on appeal absent an abuse of that discretion.” Endico
Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1071‐72 (2d Cir. 1995)
(internal quotation marks omitted). Even as generous a standard of review as
abuse of discretion, however, cannot be exercised on such a sparse record.
In his motion for prejudgment interest, Kittay argued he was entitled to
prejudgment interest “as a matter of right,” from the date of the fraudulent
transfer, at the New York statutory rate of 9 percent per annum. (Memorandum
of Law in Support of Plaintiff’s Motion for Prejudgment Interest at 6‐7). In
opposition, Korff argued any prejudgment interest award rested entirely in the
19 court’s discretion, and if made should run from the date of the commencement of
the adversary proceeding at the federal rate. (Memorandum of Law in
Opposition to Plaintiff’s Motion for Prejudgment Interest at 1‐4).
The question of whether prejudgment interest should be awarded in an
avoidance and recovery action brought under federal bankruptcy law is an open
one in our Court. Many of the courts in this Circuit look to the source of the law
underlying plaintiff’s claims: claims that arise out of federal law are governed by
federal rules, claims arising out of state law are governed by state rules. See, e.g.,
CNB Int’l, Inc. v. Kelleher (In re CNB Int’l, Inc.), 393 B.R. 306, 335‐36 (Bankr.
W.D.N.Y. 2008) (finding that because “the right to recover prejudgment interest
on a fraudulent conveyance arises from that language in 11 U.S.C. § 550(a) which
allows a trustee to recover ‘the value’ of the transferred property,” any
prejudgment interest must be determined by reference to federal law); Geltzer v.
Artists Mktg. Corp. (In re Cassandra Grp.), 338 B.R. 583, 600 (Bankr. S.D.N.Y. 2006)
(looking to the “nature of the right asserted” and applying state law); Comm. of
Unsecured Creditors of Interstate Cigar Co. v. Interstate Distrib., Inc. (In re Interstate
Cigar Co.), 278 B.R. 8, 26 (Bankr. E.D.N.Y. 2002) (“Because this [Section 544] action
is predicated on New York substantive law, the rate of interest shall be dictated
20 by New York law as well.”); see also Goldman Sachs Execution & Clearing, L.P. v.
The Official Unsecured Creditors’ Comm., No. 10 Civ. 5622, 2011 WL 2224629, at *2
(S.D.N.Y. May 31, 2011) (if a case “ar[ises] under federal bankruptcy law[,] . . . the
federal interest rate should apply.”), aff’d, 491 F. App’x 201, 206 (2d Cir. 2012)
(summary order). We agree this is the proper framework for the analysis.
Here, implicit in the district court’s award of interest is its decision that
state law formed the basis for its award, as the district court specifically
referenced N.Y. C.P.L.R. § 5004. We find no fault with that determination. New
York law provides that
Interest shall be recovered upon a sum awarded because of a 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, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the courtʹs discretion.
N.Y. C.P.L.R. § 5001(a). Prejudgment interest was not available to Kitty as a
matter of right under New York law, as the first part of Section 5001(a) is
inapplicable here. Kittay’s action against Korff was one to pursue the interests of
the creditors, who had neither “title to, [n]or possession or enjoyment of,
21 property”; and there is no contract at issue. However, Kittay’s action sounded in
equity, and thus the district court was free to exercise its discretion to make an
award pursuant to the second part of the statute.5
What is lacking in the district court’s decision is any indication that the
court appreciated that an award of prejudgment interest pursuant to New York
state law implicated the court’s discretion. The statute vests in the court
discretion to award prejudgment interest in the first instance; and discretion as to
the rate and date from which the interest run. Absent some explanation from the
district court, we are unable to discern whether the district court thought it
lacked discretion and made a mandatory grant of interest at New York’s
statutory rate of 9 percent per annum, or if it appreciated it had discretion to
select an alternate rate and staring date from which the interest is to run. We
emphasize that the district court is free, in the exercise of its discretion on
remand, to award interest at the same rate and for the same interval.
5 We note that this record may have permitted the district court to conclude that it possessed authority to award prejudgment interest under federal law pursuant to 11 U.S.C. § 550(a). An award of prejudgment interest based on federal law would also afford the district court discretion as to the rate and interval.
22 CONCLUSION
The district court did not err in declining to dismiss the complaint as
untimely, as the bankruptcy court’s order constituted a de facto Rule 7021
severance. Nor did it err in applying state law to the award of prejudgment
interest. However, in the absence of further explanation, we must remand for the
court to either exercise its discretion or to explain that it was aware of and in fact
exercised its discretion; the court should articulate its reasons for any grant of
interest. The remainder of Korff’s arguments have been considered in the
summary order filed along with this opinion.
Accordingly, the judgment of the district court is hereby AFFIRMED in
part, VACATED and REMANDED in part.