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) AB 748 (Eggman) Page 2 of ? 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 AB 748 (Eggman) Page 3 of ? 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 AB 748 (Eggman) Page 4 of ? 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 AB 748 (Eggman) Page 5 of ? 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 AB 748 (Eggman) Page 6 of ? 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 AB 748 (Eggman) Page 7 of ? 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 AB 748 (Eggman) Page 8 of ? 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 AB 748 (Eggman) Page 9 of ? 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 AB 748 (Eggman) Page 10 of ? 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 AB 748 (Eggman) Page 11 of ? 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) Page 12 of ? Assembly Floor (Ayes 64, Noes 14) Assembly Appropriations (Ayes 12, Noes 5) Assembly Judiciary Committee (Ayes 9, Noes 0) **************