A Look at Pre- and Post-judgment
Interest
Interest can be an important part of a total compensatory damage award.
That’s because the litigation process for any given case can take years to
complete, and interest can quickly add up.
Some states authorize pre-judgment rates as high as 12%. Thus, a case on a
three-year track raises the possibility of an additional 36% (or more, due
to potential compounding) being tacked on to any judgment.
The applicable interest rate(s) that is to be applied in any given case may
be a function of jurisdiction, case law or statute, or it may be within the
discretion of the judge. The input and advice of a financial expert, such as
a CPA, can help quantify the gravity of the effect of estimated interest on
potential damages. Such input is needed at the beginning of a case. A
particular state’s statutory interest rate for pre-judgment interest may be
so high that it exceeds the rate at which a defendant may borrow. For a
plaintiff, this creates leverage and may even instigate or accelerate
settlement discussions. Details regarding interest damages vary greatly
among jurisdictions and causes of action, but certain concepts and
categories apply across the board.
Pre vs. Post
Different rules and rationales are applied for the imposition of interest in
these varying time frames. Post-judgment interest applies to all monetary
awards and is widely accepted across jurisdictions. Levying it serves as an
incentive for prompt payment on the judgment entered. The applicability and
imposition of pre-judgment interest is intended to compensate a plaintiff
for an economic loss in certain circumstances. Its availability depends on
the application of federal or state law, whether the damages are deemed
liquidated or unliquidated in nature and whether the damages arise from a
tort action or a breach of contract action.
A Function of Jurisdiction
The particular venue in which an action is brought and the determination of
what law applies will govern the overall impact of interest on an award.
Quite frequently, state statutes and the state case law interpreting those
statutes will dictate—even in a federal courtroom. However, if a
plaintiff commences action under a federal statute, then federal law will
apply. If so, the federal statute may allow for the imposition of
pre-judgment interest, or it may be specifically excluded.
If the statute is silent on the issue, the judge will have discretion as to
whether interest can be assessed and, if so, what method will be used and
what market rate will apply. At this point, economic testimony from
financial experts can be worthwhile. Knowing what rates and methodologies
have been used within the same jurisdiction in similar cases is important
when fashioning an argument to the court that projects damage calculations
favorable to the client.
Liquidated vs. Unliquidated
The characterization of damages as liquidated or unliquidated will generally
dictate whether pre-judgment interest is applicable. At common law,
pre-judgment interest is associated only with liquidated, not unliquidated,
damages. Awards for pain and suffering, as well as any punitive damages
assessed, are unliquidated and nonpecuniary. Depending on state law, damages
that may have originally been characterized as unliquidated may be deemed
liquidated—and therefore subject to pre-judgment interest—if a
good-faith settlement offer is rejected or some other triggering event
occurs based on a court’s findings.
Tort vs. Contract
Tort law allows for the imposition of pre-judgment interest to compensate
for economic loss—at the discretion of the court. Nonpecuniary damages
are not afforded the same treatment (and, per above, are unliquidated). In a
contractual matter, the plaintiff has the right to pre-judgment interest on
liquidated damages, calculated based on any lawful interest rate (within a
state’s usury law’s limits) stipulated by the parties in the contract. Most
states tend to utilize the contractual rate to calculate post-judgment
interest.
Conclusion
Discussion with a Somerset advisor early in the litigation process can
address the various questions raised by both pre- and post-judgment
interest. Strategies can be developed to maximize their impact and posture
the case in the most advantageous light for the client. Please
contact us.
This newsletter is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Steve Riddle,
Tom
Thieme,
Rex Collins or
Doug
Ayres
of our
Litigation & Valuation Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
