BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 393
Senator Harman
As Amended May 4, 2009
Hearing Date: May 12, 2009
Civil Code; Code of Civil Procedure
ADM:jd
SUBJECT
Judgments: Floating Interest Rate
DESCRIPTION
This bill would provide that the interest that 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
provide that the total interest rate may not exceed 10 percent
per annum.
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 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 analysis reflects author's amendments to be offered in
committee.)
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
judgment shall bear interest at the legal rate of 10 percent per
(more)
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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
determined annually by the Controller, as specified, not to
exceed 10 percent per annum.
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
from the date of the plaintiff's first offer that is exceeded
by the judgment. (Civ. Code Sec. 3291; Code Civ. Proc. Sec.
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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 determined annually by
the Controller, as specified, not to exceed 10 percent per
annum calculated from the date of the plaintiff's first offer
to compromise which is exceeded by the judgment.
This bill would require the Controller, on the 15th day of
October of each year, to ascertain the federal short-term
rate. This bill would provide that the federal short-term
interest rate as ascertained by the Controller, plus two
percent, in a total amount not to exceed 10 percent, would be
the interest rate used in personal injury judgments for the
following year. This bill would require the Controller to
notify each county auditor in writing of the determined
interest rate.
This bill would define "federal short-term rate" to mean the
rate of the average market yield on outstanding marketable
obligations of the United States with remaining periods to
maturity of three years or less, as determined under the
Internal Revenue Code.
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
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Civil Code Section 3291 to encourage settlement and to
compensate plaintiffs for loss of use of damages awards during
prejudgment proceedings
This bill would likely result in significantly reduced interest
rates on judgments, which would in turn impair the objectives of
Section 3291. 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 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 fluctuating
federal short-term 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 short-term 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
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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.
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,
following a rejected offer to compromise, at a rate based upon
the federal short-term rate (as determined by the Controller)
plus two percent, the total amount of which may not exceed 10
percent.
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
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
10percent 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.)
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4. Allowing the interest rate to fluctuate over time would
introduce uncertainty into the law; proposed mechanism in SB
393 for determining the federal short-term rate plus two
percent 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 federal short-term rate, as
determined annually by the Controller, plus two percent, the
total of which may not exceed 10 percent. There may be costs
associated with this determination by the Controller.
The federal short-term rate is determined from a one-month
average of the market yields from marketable obligations of the
United States with maturities of three years or less. The
federal short-term rate has fluctuated dramatically over the
years, at times working a benefit to debtors and at times a
benefit to creditors. The fluctuations occur from month to
month and from year to year. For example, in 2009, the annual
rate has ranged from 0.60 percent to 0.83 percent (averaged 0.74
percent); in 2008, it ranged from 1.36 percent to 3.18 percent
(averaged 2.2 percent); in 2007, it ranged from 3.88 percent to
5.06 percent (averaged 4.7 percent); in 2006, it ranged from
4.34 percent to 5.26 percent (averaged 4.8 percent); and in
2005, it ranged from 2.78 percent to 4.34 percent (averaged 3.5
percent). Given the wide fluctuations in the short-term
interest rate, the question arises as to whether using any
year's rate would be fair to compensate plaintiffs who may have
waited years for a final judgment award.
The federal short-term rate is used for a number of different
purposes under the Internal Revenue Code, including the
determinations of original issue discount and unstated interest
and the gift tax and income tax consequences of below-market
loans. Thus, the short-term rate 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. Author's amendments
SB 393 (Harman)
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On page 3, lines 1 and 2, delete: "except as otherwise provided
in a written contract"
On page 4, lines 6 and 7, delete: "except as otherwise provided
in a written contract"
Support : California Chamber of Commerce; Association of
California Insurance Companies
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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