BILL ANALYSIS                                                                                                                                                                                                    






                             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  
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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  :
                                                                      



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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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