Is It Time for N.Y.'s Prejudgment Interest Rate to Float?
At some point in virtually every high stakes litigation that survives the pleadings stage, parties litigating under New York law have to contend with the prospect of New York's 9 percent prejudgment interest rate. That consideration plays into both sides' strategy, including a party's willingness or desire to settle, and the timing and amount of such settlement.
At a time when the prime rate is 3.25 percent and even the cost of capital for banks and other financial institutions is less than 5 percent,1 New York's prejudgment interest rate of 9 percent may provide a financial windfall to many plaintiffs and create perverse incentives in litigation. Other benchmark rates also affirm that the 9 percent rate has no relationship to the market. For example, although no federal statute specifies the rate at which prejudgment interest should be calculated in matters involving a federal question, federal courts commonly borrow the statutory post-judgment interest rate, 28 U.S.C. §1961, which at the time of this writing is 0.12 percent. The penalizing effect of such a disproportionately high rate for New York state law claims is exacerbated by the vast sums of money at stake in today's litigations, as well as the significantly longer lifespan of complex commercial cases in today's back-logged courts.
This article begins with the scope and application of New York's 9 percent prejudgment interest rate, the statutory history and evolution of the rate, and a comparison of New York's rate with other states' prejudgment interest rates. The article then summarizes the policy arguments behind prejudgment interest rates, as well as the arguments opposing such rates, especially rates that bear no relation to the market. Finally, the article briefly discusses attempts to reform New York's 9 percent rate and suggests a balanced alternative.
N.Y.'s Statutory Prejudgment Interest Rate
New York has a statutory prejudgment interest rate that applies to most commercial actions seeking money damages. CPLR §5001(a) sets out the actions that are subject to prejudgment interest:
Interest shall be recovered upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.
Interest accrues from the "earliest ascertainable date the cause of action existed" and is computed until verdict or decision.2 The prejudgment rate of interest is set out in CPLR §5004:
Interest shall be at the rate of nine per centum per annum, except where otherwise provided by statute.
Courts interpret this statutory scheme fairly literally and find prejudgment interest mandated at the statutory rate for contract claims, unless the parties have contracted to a different rate, which courts will generally honor.3 Prejudgment interest is also mandated for claims such as negligence and fraud where such claims are based on injury to property.4 In equitable actions, whether or not prejudgment interest is imposed and at what rate, and when it accrues, is left to the discretion of the court. Certain claims, however, such as quantum meruit, where plaintiff seeks solely money damages, are generally treated by courts as legal, and not equitable claims, and thus are subject to the 9 percent rate.5
When New York's modern prejudgment interest rate statute was enacted in 1962, it did not set a specific percentage and simply provided that, unless otherwise prescribed by statute, "[i]nterest shall be at the legal rate."6 At that time, the legal rate was 6 percent. In 1968, the statute that supplied the "legal rate" was amended, replacing the legal rate with a rate to be set at the discretion of New York's Banking Board between 5 percent and 7.5 percent. In 1972, the legislature amended CPLR 5004 to specify an interest rate of 6 percent.7
In 1981, the statutory interest rate was amended from 6 percent to 9 percent. This increase was precipitated by the market conditions at the time: The 1970s was a decade of volatile market rates, with benchmark interest rates soaring to the high teens.8 In 1981 alone, the federal benchmark rates fluctuated between 19 percent in January and 12 percent in December.
The difference between the 6 percent prejudgment interest rate and skyrocketing market rates induced defendants to avoid paying judgments, since the cost of delayed payments was lower than the cost of borrowing. Indeed, there were reports of defendants clogging the court system to take advantage of the interest rate discrepancy.9 Alarmed by this practice, a report by the Judicial Conference to the Legislature ("Judicial Conference") recommended raising the statutory interest rate to 9 percent to better reflect the market reality.10 The New York Legislature promptly heeded the Judicial Conference's advice, setting the statutory interest rate to 9 percent, where it remains to this day.
How New York Compares With Other States
New York is not the only state where prejudgment interest rates are out of sync with prevailing market rates. Thirty-seven states have fixed prejudgment interest rates and 13 states have floating interest rates.11 Among the fixed rate states, 18 states have a fixed rate equal to or higher than New York's. The breakdown12 is as follows:
• 13 states have a floating prejudgment interest rate: Alaska, Delaware, Florida, Georgia, Louisiana, Maine, Michigan, Nevada, New Hampshire, New Jersey, Ohio, West Virginia and Wisconsin