BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 393
Senator Harman
As Introduced
Hearing Date: April 21, 2009
Civil Code; Code of Civil Procedure
ADM:jd
SUBJECT
Judgments: Floating Interest Rate
DESCRIPTION
This bill would provide that interest accrues on the principal
amount of the judgment remaining unsatisfied at a rate that is
the lesser of the following: 1) 10 percent per annum; or 2) an
amount equal to the prime rate determined by the Board of
Governors of the Federal Reserve System (FRS), plus 2 percent on
the day the judgment is entered.
This bill would provide 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 portion of the judgment
awarded as compensatory damages for personal injury would bear
interest at a rate that is the lesser of the following,
calculated from the date of the plaintiff's first offer that is
exceeded by the judgment, and interest would accrue until the
award of judgment: 1) 10 percent per annum; or 2) an amount
equal to the prime rate determined by the Board of Governors of
the FRS, plus 2 percent on the day the judgment is entered.
BACKGROUND
Since 1982, California statutes have provided that "interest
accrues at the rate of 10 percent per annum on the principal
amount of a money judgment remaining unsatisfied. ? 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
(more)
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judgment shall bear interest at the legal rate of 10 percent per
annum." (Code Civ. Proc. Sec. 685.010; Civ. Code Sec. 3291.)
The Legislature has not changed the legal rate of 10 percent in
27 years. As recently noted in Cadlo v. Metalclad Insulation
Corporation (March 30, 2009) 2009 Cal.App.Lexis 469, "the
statute [Civ. Code Sec. 3291] serves two purposes. It
encourages settlements in personal injury cases by creating 'an
incentive for recalcitrant defendants to accept reasonable
settlement offers in a timely manner.'" (Hess v. Ford Motor
Company (2002) 117 Cal.Rptr.2d 220, 233-234.) "'In addition,
section 3291 has a compensatory purpose: 'to provide just
compensation to the injured party for loss of use of the
[damage] 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) 25 Cal.Rptr.2d
109, 121; Steinfeld v. Foote-Goldman Proctologic Medical Group,
Inc. (1997) 70 Cal.Rptr.2d 41, 45-46 ["Section 3291 was intended
'to encourage settlements and penalize those who refuse
reasonable settlement offers.'"].)
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. (Cal. Const., art. 15, Sec. 1.)
Existing law provides that interest accrues at the rate of 10
percent per annum on the principal amount of a money judgment
that remains unsatisfied. (Code Civ. Proc. Sec. 685.010.)
This bill would provide that interest accrues on the principal
amount of the judgment remaining unsatisfied at a rate that is
the lesser of the following: 1) 10 percent per annum; or 2) an
amount equal to the prime rate determined by the FRS, as
published in SR H.15, or any publication that may supersede
it, plus 2 percent on the day the judgment is entered.
2. Existing law provides that, if the plaintiff, in an action
to recover damages for personal injury, 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 judgment shall bear
interest at the legal rate of 10 percent per annum calculated
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from the date of the plaintiff's first offer that is exceeded
by the judgment. (Civ. Code Sec. 3291; Code Civ. Proc. Sec.
998.)
This bill would provide 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 portion of
the judgment awarded as compensatory damages for personal
injury would bear interest at a rate that is the lesser of the
following, calculated from the date of the plaintiff's first
offer that is exceeded by the judgment, and interest would
accrue until the award of judgment: 1) 10 percent per annum;
or 2) an amount equal to the prime rate determined by the FRS,
as published in SR H.15, or any publication that may supersede
it, plus 2 percent on the day the judgment is entered.
This bill would apply to all cases pending on, or filed on or
after, January 1, 2010.
COMMENT
1. Stated need for the bill
The sponsor, Civil Justice Association of California (CJAC),
writes:
[Senate Bill 393] will bring California's judicial interest
rate up to date and ensure that during legal appeals
defendants are paying interest at a rate comparable to market
rates. By supporting SB 393, legislators will send a message
that the state is eliminating - at no cost to taxpayers - an
unfair and costly irritant that has signaled an anti-business
attitude for years. California's outdated interest rate rules
can result in huge windfalls to plaintiffs and discourage
defendants from exercising their fundamental right to appeal.
2. Reducing the interest rate would impair the objectives of
Civil Code Section 3291 to encourage settlement and to
compensate plaintiffs for loss of use of damages awards during
prejudgment proceedings
As a number of courts have noted, the legislative intent of
Section 3291 is to serve two important policy objectives: 1) to
provide an incentive for the defendant to settle a personal
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injury case where the plaintiff has been physically and
economically damaged; and 2) to provide just compensation to the
plaintiff for loss of use of the damage award during prejudgment
proceedings; i.e., to make the plaintiff whole. (See, e.g.,
Gourley v. State Farm Mutual Automobile Insurance Company (1991)
3 Cal.Rptr.2d 666, 669 ["the purpose of section 3291 is to
provide a statutory incentive to settle personal injury
litigation where plaintiff has been physically as well as
economically impaired; Lakin, supra, 25 Cal.Rptr.2d at 121 ["in
enacting section 3291, the Legislature provided a means of
compensating personal injury plaintiffs for the loss of use of
money during the prejudgment period"].)
Under current law, the Legislature has set the interest rate at
10 percent and has not changed that rate since its institution
in 1982. Opponent Consumer Attorneys of California (CAOC)
argues that a floating interest rate based upon a floating prime
rate would impair both of the above-objectives of Section 3291.
The CAOC writes:
[I]f a judgment is entered, someone by definition had to sue
to force payment on a legitimate debt. The debtor has the
benefit of using the money for two, three, four, or more years
before paying a lawful debt. The insurance industry and the
tort reform crowd say it is unfair to make a debtor pay more
than two percent over the federal prime rate for holding onto
that money.
Our courts are growing increasingly congested - diminishing
court budgets, increased population, and a bad economy are
factored into this reality. "Consequently, any judgment for a
plaintiff will be recovered only after extended delay and
considerable, largely unrecoverable costs. The huge backlog
of cases in most jurisdictions now buys a defendant not
months, but years. In the meantime, the defendant uses the
plaintiff's money; restrictions on prejudgment interest give
the defendant, in effect, a low interest or interest-free loan
during the course of litigation." (The Limits of Advocacy: A
Proposal for the Tort of Malicious Defense (1984) 35 Hastings
Law Journal 891, 896.)
The CAOC notes that the above article was published in 1984,
and, given the current economic climate, is all the more
important and applicable in 2009. The CAOC writes:
Consider a judgment entered against AIG in 2010. Under the
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terms of SB 393, AIG would [likely] pay only [approximately]
5.25 [percent] on money that was owed for many years to its
shareholders. Query: would the AIG be better off investing
that money for four years and then paying it back at 5.25
[percent] or paying it when due? Just a simple comparison to
credit card debt is enlightening. Does it make fiscal sense
to pay a debt today that bears a 5.25 [percent] interest rate
off first or a credit card obligation at 18 [percent]?
Reducing the interest paid on judgments from 10 [percent] to a
floating rate creates a massive disincentive to pay judgments
timely.
[In addition,] in California, pre-judgment interest is only
available on a personal injury judgment pursuant to ? [Code of
Civil Procedure Section 998, plaintiff's offer to compromise].
[Under Section 998], a plaintiff is only entitled to
prejudgment interest on a judgment if a defendant rejects an
offer to settle made by a plaintiff and the plaintiff
ultimately receives more in a judgment. If the judgment is
one dollar less than the offer to settle, the defendant does
not have to pay any interest, even though the plaintiff had to
wait two, three, four or more years to receive the payment.
The rationale for [Section 998] is to encourage settlement and
the 10 [percent] interest rate serves as an incentive to
settlement. In [Morin v. ABA Recovery Service (1987) 195
Cal.App.3d 200], the court noted that Section 3291 (the 10
percent interest rate statute) ? "substantially increases the
stakes for a defendant faced with a pretrial offer to settle."
3. Reducing the interest rate on rejected offers to compromise
would ignore the effects of inflation and other economic
factors
This bill would provide that interest accrues on a judgment at a
rate that is the lesser of 10 percent per annum or an amount
equal to the prime rate, as determined by the FRS, as published
in the SR H.15, plus 2 percent on the day the judgment is
entered.
In general, economists define "inflation" to mean "an ongoing
rise in the general level of prices quoted in units of money.
The magnitude of inflation - the inflation rate - is usually
reported as the annualized percentage growth of some broad index
of money prices. With U.S. dollar prices rising, [$1] buys less
each year. Inflation thus means an ongoing fall in overall
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purchasing power of the monetary unit." A generally used
measure of price-level inflation is the "general inflation rate,
which is the percentage change in the general price index,
normally the Consumer Price Index (CPI), over time." As
examples, $100 in 1982 has the same buying power as $219.89 in
2009; $100 in 1992 has the same buying power as $151.24 in 2009;
and $100 in 2002 has the same buying power as $117.95 in 2009.
The average inflation rate (percentage change in the CPI) for
California in 2008 was 3.4 percent. (Sacramento Forecast
Project, California State University, Sacramento.)
Courts have noted that, in the context of judgments and
accounting for inflation, reasonable interest, defined as 10% by
the Legislature, provides just compensation to an injured party
for the loss of use of an award during the prejudgment period.
(See, e.g., Hess, supra, 117 Cal.Rptr.2d at 233-234 [an award of
simple interest reimburses plaintiff "for the added cost and
delay [the plaintiff] suffers when the defendant refuses to
settle the case in good faith"]; Lakin, supra (1993) 25
Cal.Rptr.2d at 121.)
4. Allowing the interest rate to fluctuate over time would
introduce uncertainty into the law; proposed mechanism in SB
393 for determining the "prime rate" would likely amount to
less than 10 percent in current economic climate
The sponsor, CJAC, proposes that plaintiffs in personal injury
actions who obtain a judgment more favorable than an offer to
compromise, be limited to the lesser of 10 percent interest on
the judgment or an interest rate equal to the prime rate
determined by the FRS, as published in SR H.15, plus 2 percent
on the day the judgment is entered. The CJAC provided committee
staff with a Web site for SR H.15 data. The Historical Data
(updated every business day, excluding holidays) on the Web site
provides a mass of information concerning interest rates, which
fluctuate by business day, weekly, monthly, and annually; and by
financial instrument, commercial paper, finance paper, bankers
acceptances, CDs, bank loans, Eurodollar deposits, U.S.
government securities, treasury bills, etc. With respect to
bank loans, the Internet chart defines them as follows: 1)
average majority prime rate charged by banks on short-term loans
to business, quoted on an investment basis; 2) weekly figures
are averages of 7 calendar days ending on Wednesday of the
current week; 3) monthly figures include each calendar day in
the month; 4) annualized using a 360-day year or bank interest;
5) rate posted by a majority of top 25 (by assets in domestic
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offices) insured U.S.-chartered commercial banks; and 6) prime
is one of several base rates used by banks to price short-term
business loans.
The bank loan prime rate has fluctuated widely over the years.
Examples include: 1974, 10.51 percent; 1979, 11.20 percent;
1981, 16.39 percent; 1982, 12.24 percent; 1989, 9.21 percent;
2000, 6.24 percent; 2006, 4.97 percent; 2007, 5.02 percent; and
2008, 1.92 percent. Given the wide fluctuations in the bank
loan interest rate, the question arises as to which year's rate
would be fair to use to compensate plaintiffs who may have
waited years for a final judgment award. In addition, committee
staff notes that the FRS bank loan interest rate is specifically
targeted at short-term bank loans and has no connection in law
or intent to the interest rate on personal injury judgments,
which is currently set by the Legislature at 10 percent.
Finally, while the California Constitution allows the
Legislature to vary the interest rate up to 10 percent, nothing
in current statutory or case law suggests the current interest
rate is meant to reflect the federal short-term or any other
federal interest rate. (Code Civ. Proc. Sec. 685.010; Civ. Code
Sec. 3291; Cadlo, supra.)
5. Opposition
In addition to the CAOC's opposition arguments described in
Comment 2, the CAOC writes:
[W]e understand that insurers believe that the 10 [percent]
rate is unfair and in effect acts as a penalty. They would
seek to have a lower rate that they believe more accurately
reflects a fair return on money. Because the prejudgment
interest is solely limited to the statute that is designed to
encourage settlement, a lower rate [would] in fact reduce the
incentive to settle - and [would create] an incentive to file
frivolous appeals. It would make it less expensive for losing
defendants to delay by appealing adverse verdicts and would
hurt consumers.
Over the past 10 years, we have seen large corporate
defendants and insurance companies appeal large verdicts even
where no strong grounds for reversal exist. For many years,
those defendants were continuing to make money on their
investments - they made a calculated decision that it was
cheaper to appeal and continue to make money on investments
rather than pay what is due to consumers.
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Support : California Chamber of Commerce
Opposition : California Consumer Attorneys
HISTORY
Source : Civil Justice Association of California
Related Pending Legislation : None Known
Prior Legislation :
AB 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.
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