First Tuesday Update is our monthly take on current issues in judgment enforcement. This month we continue our discussion about another issue that very much varies depending on the relevant jurisdiction—pre-and post-judgment interest rates. Almost every jurisdiction has different rates (both fixed and variable), dates of accrual, whether the interest is simple or compound, and whether the awarding of interest is mandatory or discretionary. Each of these variables can have a significant impact on the amount ultimately owed on the judgment. Like many other issues in judgment enforcement, this is worth considering before the action is filed and/or considering in which jurisdictions you might seek to recognize and enforce a judgment.
Both pre-judgment and post-judgment interest serve similar purposes. "Prejudgment interest serves two purposes: first, it compensates the plaintiff for the loss of the use of his or her money; and, second, it forces the defendant to relinquish any benefit that it has received by retaining the plaintiff’s money in the interim." Brandywine Smyrna, Inc. v. Millennium Builders, LLC, 34 A.3d 482, 486 (Del. 2011). Post-judgment interest "is awarded to compensate a plaintiff for having been deprived of the value of principal losses from the time of judgment to the time that the plaintiff is actually paid." Becker Holding Corp. v. Becker, 78 F.3d 514, 516 (11th Cir. 1996). "Thus, pre-judgment and post-judgment interest serve exactly the same purpose, albeit for different time periods: they make the plaintiff whole for having been deprived of the use of the principal loss amount." Id.
The interest rate is the amount charged on top of the principal or amount owed for the "use" of the amount owed. While simple in concept, the applicable rate can vary significantly depending on the legal system. The starkest example is a comparison of the federal rate for post-judgment interest compared with almost any other state system.
Pursuant to 28 U.S.C. § 1961, the interest rate used to calculate post-judgment interest on a federal court judgment is the weekly average one-year constant maturity (nominal) Treasury yield, as published by the Federal Reserve System each Monday for the preceding week. The post-judgment interest rate for judgments entered from September 27, 2021 through October 3, 2021 was 0.08%. Compare that to, by way of example, the post-judgment interest rate in New York on state court judgments: "Interest shall be at the rate of nine per centum per annum, except where otherwise provided by statute." NY CPLR § 5004 (2012). Here you have two different court systems justifying post-judgment interest on the exact same rationale and yet the delta between the two rates is substantial and difficult to explain other than to say that is what the statutes provide.
Other states, like Delaware, take a middle-of-the-road approach by applying a federal index rate but with an added kicker. Del. Code Ann. tit. 6, § 2301 provides a rate of: "5% over Federal Reserve discount rate including any surcharge thereon or the contract rate, whichever is less." As one commentator pointed out: "Correctly calculating prejudgment interest requires the proper use of financial principles,"1 and yet almost no courts consider the time-value-of-money, inflation, or the real rate of interest in determining an award.
Whether to award pre-judgment interest in particular and in some rare cases post-judgment interest is often left to the court’s discretion although many jurisdictions have enacted statutes mandating interest awards. Another component of interest calculations is whether it is simple or compound interest, which also is left to the court's discretion. Simple interest is calculated by multiplying the interest rate by the principal. Compound interest, by contrast, is calculated on the principal and the interest that accumulates every period. Since simple interest is calculated only on the principal, it is easier to determine. But compounding can, over time, begin to have a significant impact on the amount owed. Here again, the precise answer depends on relevant jurisdiction. Indeed, some courts have discretion to decide whether the interest should be simple or compound. See, e.g., Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 173 (Del. 2002) (although the Delaware Supreme Court explained that Delaware courts have "traditionally disfavored compound interest," it also noted that it is within a court’s discretion to award compound interest).
A judgment-debtor, however, is not without any defenses. There are equitable defenses to interest awards. See, e.g., West Virginia v. United States, 479 U.S. 305, 311 n.3 (1987) (equitable consideration such as laches could justify a denial of interest). In addition to laches, we anticipate that courts will need to deal with the delays caused by COVID-19, which may not be attributable to either party. It will not surprise us if judgment-debtors, at minimum, raise COVID orders that otherwise tolled all procedural deadlines as a bar to interest accruing during those periods.
A thorough check of state law is critical to analyzing the applicable rate and method of calculation. Whatever your specific circumstances, we can help enforce a judgment or advise whether your assets are protected. Feel free to contact us directly with any questions.
1 Knoll, Michael S., "A Primer on Prejudgment Interest" (1996). Faculty Scholarship at Penn Law 1146, https://scholarship.law.upenn.edu/faculty_scholarship/1146.