BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 748 (Eggman)
As Amended June 18, 2013
Hearing Date: July 2, 2013
Fiscal: Yes
Urgency: No
RD
SUBJECT
Judgments Against the State: Interest
DESCRIPTION
Under existing law, judgments against public entities are
generally subject to a 7 percent interest rate. This bill would
instead, with respect to prejudgment interest rates on tax, fee,
and inverse condemnation judgments against public entities,
apply a rate that is equal to the weekly average one year
constant maturity United States Treasury yield (currently at
less than 1 percent), not to exceed 7 percent per annum.
Postjudgment interest in those same cases would be same base
rate, plus 2 percent, not to exceed 7 percent.
BACKGROUND
Article XV of the California Constitution provides that in
setting the interest rate on a judgment rendered in any court in
this state, the rate shall be set by the Legislature at not more
than 10 percent per annum, and may be made variable and based
upon interest rates charged by federal agencies or economic
indicators, or both. At the same time, in the absence of the
setting of such rate by the Legislature, the state constitution
dictates that the rate of interest automatically sets at 7
percent per annum. (Cal. Const., art. XV, Sec. 1.)
While the Legislature has, since 1982, set the interest rate on
judgments under the Enforcement of Judgments Law at 10 percent,
the Enforcement of Judgments law does not apply to judgments
against the state or state entities, or to local entities. As
such, and because the Legislature has not otherwise prescribed a
(more)
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rate for judgments against state or local public entities, the
interest rate for such judgments is automatically set at 7
percent annually, consistent with the state constitution. (See
California Fed. Savings & Loan Assn. v. City of Los Angeles
(1995) 11 Cal.4th 342, 348.)
This bill would, instead, base the pre and postjudgment interest
rates for tax, fee, or inverse condemnation judgments against
public entities on the federal weekly average one year constant
maturity United States Treasury yield rate, which is currently
at less than 1 percent. In the case of postjudgment interest
rates, 2 percent would be added to that rate. With respect to
both types of interest rates, this bill would specify that the
rate shall not exceed 7 percent per annum.
CHANGES TO EXISTING LAW
1. Existing law provides that the rate of interest on a
judgment rendered in any court in this State shall be set by
the Legislature at not more than 10 percent per annum.
Existing law provides that such rate may be variable and based
upon interest rates charged by federal agencies or economic
indicators, or both. In the absence of the setting of such
rate by the Legislature, the rate of interest shall be 7
percent per annum. (Cal. Const., art. XV, Sec. 1.)
Existing law , the Enforcement of Judgments Law, provides that
interest accrues at the rate of 10 percent per annum on the
principal amount of a judgment that remains unsatisfied.
(Code Civ. Proc. Sec. 685.010(a).) However, existing case law
specifies that that the interest rate on judgments against the
state or a local public entity is set at 7 percent per annum,
as public entities are not subject to the Enforcement of
Judgments Law and as the Legislature has not set a specific
rate for public entities. (Harland v. State of California
(1979) 99 Cal.App.3d 839; California Fed. Savings & Loan Assn.
v. City of Los Angeles (1995) 11 Cal.4th 342.)
Existing federal law provides that interest shall be allowed
on any money judgment in a civil case recovered in a district
court and that the judgment interest rate shall be calculated
from the date of the entry of the judgment, at a rate equal to
the weekly average 1-year constant maturity Treasury yield, as
published by the Board of Governors of the Federal Reserve
System, for the calendar week preceding the date of the
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judgment. Existing federal law specifies that interest shall
be computed daily to the date of payment except as provided,
and shall be compounded annually. (28 U.S.C. Sec. 1961(a),
(b).)
Existing federal law provides that the above provisions shall
not apply in any judgment of any court with respect to any
internal revenue tax case. Interest in those cases shall be
allowed at the underpayment rate or overpayment rate
(whichever is appropriate) established under specified
Internal Revenue Service law. (28 U.S.C. Sec. 1961(c); see 26
U.S.C. Sec. 6621.)
Existing law provides that every person who is entitled to
recover damages, as specified, and the right to recover which
is vested in him upon a particular day, is entitled also to
recover interest thereon from that day, except during such
time as the debtor is prevented by law, or by the act of the
creditor from paying the debt. That requirement is applicable
to recovery of damages and interest from any debtor, including
the state or any county, city, city and county, municipal
corporation, public district, public agency, or any political
subdivision of the state. (Civ. Code Sec. 3287(a).)
Existing law permits every person who is entitled under any
judgment to receive damages based upon a cause of action in
contract where the claim was unliquidated, to also recover
interest thereon from a date prior to the entry of judgment as
the court may, in its discretion, fix, but in no event earlier
than the date the action was filed. (Civ. Code Sec. 3287(b).)
This bill would provide that unless another statute provides a
different interest rate, in a tax, fee, or inverse
condemnation claim against a public entity that results in a
judgment against the public entity, interest shall accrue at a
rate equal to the weekly average one year constant maturity
United States Treasury yield, but shall not exceed 7 percent
per annum. That rate shall control until the judgment becomes
enforceable under Section 965.5 or 970.1 of the Government
Code, at which time interest shall accrue at an annual rate
equal to the weekly average one year constant maturity United
States Treasury yield at the time of the judgment plus 2
percent, but shall not exceed 7 percent per annum.
2. Existing law prohibits a suit for money damages against a
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public entity on a cause of action for which a claim is
required to be presented, until a written claim has been
presented to the public entity and acted upon by the
California Victim Compensation and Government Claims Board,
the governing body of a local public entity, the Judicial
Council, or the Trustees of the California State University,
as applicable, or has been deemed to have been rejected,
except as specified. (Gov. Code Sec. 900 et seq.)
Existing law provides that a judgment for the payment of money
against the state or state agency is enforceable until 10
years after the judgment is final or, if the judgment is
payable in installments, until 10 years after the final
installment becomes due. (Gov. Code Sec. 965.5(a).)
Existing law specifies that a judgment for the payment of
money against the state or a state agency is not enforceable
under the Enforcement of Judgments Law in the Code of Civil
Procedure, as specified. (Gov. Code Sec. 965.5(b).)
Existing law provides that interest on the amount of a
judgment or settlement for the payment of money against the
state shall commence to accrue at 180 days from the date of
the final judgment or settlement. This provision does not
apply to any claim approved by the California Victim
Compensation and Government Claims Board. (Gov. Code Sec.
965.5(c).)
This bill would, instead, provide that unless another statute
provides a different interest rate, interest on a tax, fee, or
inverse condemnation judgment or settlement for the payment of
moneys against the state shall commence to accrue 180 days
from the date of the final judgment or settlement and shall
accrue at a rate equal to the weekly average one year constant
maturity United States Treasury yield at the time of the
judgment or settlement plus 2 percent, but shall not exceed 7
percent per annum.
3. Existing law provides that a judgment for payment of money
against a local public entity is enforceable until 10 years
after the time the judgment becomes final or, if the judgment
is payable in installments, until 10 years after the final
installment is due. (Gov. Code Sec. 970.1.)
Existing law specifies that a judgment, whether or not final,
against a local public entity is not enforceable under the
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Enforcement of Judgments Law in the Code of Civil Procedure,
as specified. (Gov. Code Sec. 965.5(b).)
This bill would add that unless another statute provides a
different interest rate, interest on a tax, fee, or inverse
condemnation judgment or settlement against a local public
entity shall accrue at a rate equal to the weekly average one
year constant maturity United States Treasury yield at the
time of the judgment or settlement plus 2 percent, but shall
not exceed 7 percent per annum.
COMMENT
1. Stated need for the bill
According to the author:
The recovery of interest has two aims: 1) to compensate a
plaintiff for the loss of the use of the money that the
plaintiff would have otherwise had and 2) to encourage
settlements.
California's judgment interest rate against public entities
such as schools, special districts, local and state government
is out-of-date and provides an artificially higher rate of
return than what the current market could provide. These rates
result in very large sums of taxpayer money being spent in
legal costs.
When California's judgment interest rate was codified, in the
late 70s and early 80s, the U.S. had been in severe economic
recession - characterized by high inflation but low business
activity - and interest rates had begun to skyrocket, reaching
as high as 21 [percent].
At the time, the rates adopted were considered significant
relief. Now the reverse has happened and market rates are far
lower, but there has been no adjustment to reflect this. At a
time when local governments continue to struggle, with loss of
revenue forcing cuts to vital services - education, public
safety, social services - the rate of interest these public
entities pay on judgments remains high. That rate is not
responsive to the times or to the public interest. In current
economic conditions, it is far higher than the market can
justify, posing an unnecessary burden to taxpayers, contra[ry]
to the public good. Interest on judgments arising from tax and
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inverse condemnation cases have cost California counties $14
million in the past three years alone.
This bill saves taxpayer money for vital services by tying the
rate applying to public entities to a market rate - as does
the federal government - that serves as a close indicator of
the economy's health, and a fair approximation of the value of
the judgment.
[Specifically,] AB [748] would tie the pre-judgment interest
rate against public entities - limited only to tax, fee and
inverse condemnation cases - to the weekly average 1-year
constant maturity (nominal) Treasury yield, and that rate plus
2 percent in post-judgment interest.
The sponsor of this bill, the Urban Counties Caucus, adds that,
Under existing law, local governments are charged 7 [percent]
in interest rate for these [tax or inverse condemnation claims
cases against a public entity] judgments. This is
significantly higher than what is required in federal court
judgments which are tied to the weekly average one-year
constant maturity Treasury yield, currently well below 1
[percent]. This bill would also make similar changes for
judgments against the state. It is our understanding that
this percentage was placed in statute at a time when interest
rates were at an all-time high and the 7 [percent] interest
rate was to protect local governments. However, with the
major changes that have occurred in the real estate market, it
makes more sense to tie the interest rate to a rate that can
fluctuate with the market.
. . .
This bill would ensure that local governments would be charged
a reasonable interest rate on claims. These are taxpayer
funds and lowering the interest rate will help to save money
and ensure that all parties are given a level playing field.
This is an issue of fairness and providing some cap on the
interest rate, counties and other local governments can save
money at a time of scarce resources.
2. This bill has been substantially narrowed in scope since it
was introduced
As noted by the author, interest rates on pre and postjudgments
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serve two primary functions. Firstly, they encourage settlement
of cases (prejudgment interest) and quick payment of rendered
judgments (postjudgment interest). Secondly, "[f]or more than a
century it has been settled that one purpose of Section 3287,
and of prejudgment interest in general, is to provide just
compensation to the injured party for loss of use of the award
during the prejudgment period--in other words, to make the
plaintiff whole as of the date of the injury." (Lakin v.
Watkins Associated Industries (1993) 6 Cal.4th 644, 664,
citations omitted.)
As amended in the Assembly Judiciary Committee, this bill would
lower the current 7 percent interest rate generally applicable
to judgments against both state and local public entities to
instead be tied to the weekly average one year constant maturity
United States Treasury yield (currently at less than 1 percent),
not to ever exceed 7 percent per annum in the cases of tax, fee
and inverse condemnation judgments. In the case of postjudgment
interest in those same cases, this bill would add 2 percent to
that rate, but not to ever exceed 7 percent.
Staff notes, however, that while the amendments sought to apply
the same rate as applied in federal courts, the rate for cases
involving taxes under federal law is in fact, not tied to the
weekly average one year constant maturity Treasury yield, which
is currently well below 1 percent. Federal law states that
interest shall be allowed on any money judgment in a civil case
recovered in a district court and that the judgment interest
rate shall be calculated from the date of the entry of the
judgment, at a rate equal to the weekly average one year
constant maturity Treasury yield, as specified, for the calendar
week preceding the date of the judgment. (28 U.S.C. Sec.
1961(a).) At the same time, however, that same federal law also
provides that this provision does not apply in any judgment of
any court with respect to any internal revenue tax case.
Interest in those cases are prescribed to be at the underpayment
rate or overpayment rate (whichever is appropriate) established
under specified Internal Revenue Service law. (28 U.S.C. Sec.
1961(c); see 26 U.S.C. Sec. 6621.)
The author, in support of using the weekly average 1 year
constant maturity Treasury yield, asserts:
. . . AB 748 is aligned with precedent. Since 1994, that rate
has ranged as high as 7.34 percent and [as low as] .11
percent, following the health of the economy. At least eight
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other states also index judgment interest to U.S. Treasury
yields, as does the federal government. California also uses
the U.S. treasury yield for determining the rate of interest
rewarded in refunds of tax overpayments. The majority of other
states use similar rates, including the prime rate and the
Federal discount rate.
The U.S. Treasury yield is, therefore, an appropriate rate, in
that it is within the power granted to the Legislature by the
California Constitution; it is a market-sensitive rate that
ensures compensation is rational and just; it aligns with
other rates and it follows precedent.
It should be noted that this bill saves money for public
entities by reducing the amount that must be paid to consumers
with a judgment against those entities.
3. Limiting the interest on inverse condemnation raises
constitutional issues
As noted in Comment 2, since this bill was introduced, it was
substantially limited in scope to apply the lower interest rate
for judgments against the state to cases involving taxes, fees,
and inverse condemnation cases.
Staff notes, however, that in applying to inverse condemnation
cases, this bill potentially raises constitutional issues.
Namely, the right to prejudgment interest in inverse
condemnation derives from federal Constitution, under the Fifth
Amendment, which prohibits the taking of private property for
public use without just compensation. In turn, the Supremacy
Clause, binds the courts of this state to require just
compensation notwithstanding anything in the Constitution or law
of this state to the contrary. (U.S. Const. Art IV, cl. 2.)
"Because 'just compensation' is a concept rooted in the federal
Constitution it cannot be abrogated by state law. The process of
determining just compensation is purely a judicial function
which cannot be circumscribed by the Legislature. When the state
takes or damages private property it cannot through its
legislative arm limit the price it will pay or the manner of its
payment." (Aetna Life & Casualty Co. v. City of Los Angeles
(1985) 170 Cal.App.3d 865, 879.)
In Aetna Life & Casualty Co., 38 homeowners, eight insurance
companies, and the Great Western Council of the Boy Scouts of
America brought a suit against the City of Los Angeles and its
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Department of Water and Power, seeking compensation for damages
resulting from the Mandeville Canyon Fire of October 1978, which
was alleged to be caused by sparks from the defendants'
electrical power transmission lines. The case involved an
inverse condemnation claim, as well as a negligent maintenance
of a dangerous condition of public property, though the cases
were subsequently bifurcated. In relevant part, the court in
that case found in favor of the plaintiffs on the inverse
condemnation claim and fixed the prejudgment interest on the
damages at the market rate rather than at the interest rates
prescribed under California law. On appeal, the Court of Appeal
upheld the trial court's application of the market rates, noting
that the purpose of the award of prejudgment interest "is to
provide constitutionally mandated just compensation to persons
whose property has been taken or damaged by the government."
(Id. at p. 878.) To award otherwise would therefore violate of
the Fifth Amendment.
As such, to avoid potential constitutional issues that could be
raised by choosing this market rate over other potential market
rate calculations, as well as by setting a statutory maximum of
seven percent for those cases where the market rate could be
higher in certain cases, the following amendments are suggested
to further limit the scope of this bill by removing any
reference to inverse condemnation cases.
Suggested Amendments :
On page 3, lines 4-5 strike "tax, fee, or inverse
condemnation" and insert "tax or fee"
On page 3, lines 26-27, strike "tax, fee, or inverse
condemnation" and insert "tax or fee"
On page 4, lines 6-7, strike "tax, fee, or inverse
condemnation" and insert "tax or fee"
4. Pending litigation
This Committee has historically expressed concern about
approving bills that would affect pending litigation. That
concern is based on the policy that the Legislature should not
decide the outcome of a specific case in favor of one party or
another, particularly where the effect of the legislation would
be to decide the case in favor of a defendant who, absent the
passage of the legislation, would otherwise be subject to a
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substantial monetary judgment in favor of the plaintiff.
In this case, the author notes in background material provided
to this Committee that there is at least one active case in the
state, namely involving the County of Los Angeles, where the
case (in settlement negotiations phase) continues to litigate
over various issues, including whether interest is owed.
Seemingly, this bill could also affect the interest granted in
other cases in other counties.
Staff notes, however, that oftentimes legislation will
unavoidably have an impact on ongoing cases, and it is important
to distinguish such cases from those bills that would actively
decide the outcome of pending litigation. This bill appears to
be in the former category (in that it might affect how much
interest would be owed, if interest is indeed owed), as opposed
to the latter (which would be the case if the bill were to
affect what types of cases interest is owed, which it does not).
Therefore, it does not appear to contravene the policy of this
Committee against bills that affect the outcome of pending
litigation.
5. Removal of opposition
Staff notes that both the Consumer Attorneys of California and
the California Labor Federation have removed their opposition to
this bill since it was amended to narrow its scope in the
Assembly Judiciary Committee.
Support : California Association of County Treasurers and Tax
Collectors (CACTTC); California Association of Joint Powers
Authorities; California State Association of Counties (CSAC);
City and County of San Francisco; Civil Justice Association of
California (CJAC); Los Angeles County Board of Supervisors;
Rural County Representatives of California (RCRC); Santa Clara
County Board of Supervisors
Opposition : None Known
HISTORY
Source : Urban Counties Caucus
Related Pending Legislation : AB 1007 (Wagner) would have
required the interest on the amount of a claim, judgment, or
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settlement against the State of California to be calculated
based on the same 13-week U.S. Treasury rate that is applied to
the overpayment of taxes, fees, and surcharges to the state.
This bill failed passage in the Assembly Judiciary Committee on
a 3-7 vote.
Prior Legislation :
SB 1504 (Kehoe, Ch. 19, Stats. 2011), with respect to amounts
allowed by the California Victim Compensation and Government
Claims Board, provided that interest shall commence to accrue on
the amount of a judgment or settlement for the payment of money
against the state 180 days from the date of the final judgment
or settlement.
SB 1117 (Walters, 2010) was nearly identical to SB 393 (Harman,
2009). Additionally, this bill would have provided that
judgments against local governmental entities would have an
interest accrual rate limited to the federal short-term rate
plus two percent. This bill failed passage in the Senate
Judiciary Committee.
SB 393 (Harman, 2009) would have provided that the interest
which accrues on the principal amount of a judgment remaining
unsatisfied would be limited to the federal-short term rate, as
determined annually by the Controller, plus two percent. This
bill would also have provided that the total interest rate may
not exceed 10 percent per annum. Additionally, this bill would
have provided that, if the plaintiff makes an offer to
compromise that the defendant does not accept prior to trial or
within 30 days, whichever occurs first, and the plaintiff
obtains a more favorable judgment, the interest on the portion
of the judgment awarded as compensatory damages for personal
injury would be limited to the federal-short term rate, as
determined annually by the Controller, plus two percent. This
bill failed passage in the Senate Judiciary Committee.
SB 1042 (Harman, 2005) would have provided that interest accrues
at the federal short-term rate plus 3 percent, except as
otherwise provided in a written contract, not to exceed 10
percent per annum on judgments, as specified. The bill would
have required the Controller to annually establish the interest
rate, as specified, and to notify the auditor of each county of
the rate. This bill died in the Assembly Judiciary Committee.
Prior Vote :
AB 748 (Eggman)
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Assembly Floor (Ayes 64, Noes 14)
Assembly Appropriations (Ayes 12, Noes 5)
Assembly Judiciary Committee (Ayes 9, Noes 0)
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