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Gleason & Associates
certified public accountants & consultants One Gateway Center, Suite 525 412.391.9010 phone Copyright 2005 |
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Just as money in the bank earns interest, damage claims can grow by hundreds of thousands or even millions of dollars during the “pre-judgment” period – the time between when your client was damaged and when the case is heard in court. To determine pre-judgment interest, a damage claim is calculated and then a rate of interest is applied to the claim from the date the damage occurred to the present.
But calculating pre-judgment interest is no simple matter.
Which interest rate do you use: the rate in effect at the time the damage occurred, a series of rates that reflect interest rate fluctuations during the pre-judgment period or the statutory rate used by the state in which the case is heard? And do you calculate it based on simple or compounded interest?
“We regularly apply pre-judgment interest in damage claims and work closely with counsel to determine the appropriate rate.” says Jeb Schmitt, manager of Gleason & Associates. “But often it’s ultimately the law and not a financial argument that governs how interest is calculated and awarded.”
By Law
In state courts, pre-judgment interest rates are dictated by legislation created to regulate and encourage the rapid settlement of disputes. But even when a statutory rate exists, it’s not always cut and dried (see chart). In Pennsylvania, the statutory rate that determines pre-judgment interest is 6 percent simple interest. But, for example, California’s statutory interest rate ranges from 7 percent to 10 percent, depending on the type of case. And many states apply “prevailing rates” based on the U.S. Treasury bill rate at the time the claim was filed. In addition, some states limit the type of damage claims in which pre-judgment interest can be applied.
Federal court judgments, on the other hand, are open to an interpretation of a reasonable and fair rate. While federal courts often look to state rates for guidance, the circumstances of a case can influence a pre-judgment interest award. For example, if a client’s borrowing cost during the pre-judgment period was prime plus 2 percent, then an argument could be made that a pre-judgment interest rate based on the T-bill rate wouldn’t fully compensate for the loss of funds.
“We’re currently involved in a case in which we’re working with counsel to determine whether to apply a T-bill rate or an investment rate of return,” notes Schmitt. “The alternatives represent substantial differences in both the approach and the resulting damage claim.”
Statutory Pre-Judgment Interest Rates
States differ broadly on the amount of interest that can be awarded in damage claims, adding to the complexity of damage claim assessments.
| Alaska California Colorado Delaware Ohio Pennsylvania Rhode Island Texas West Virginia Wisconsin |
Federal
Reserve discount rate plus 3% 7-10%, depending on circumstances 8% Federal Reserve discount rate plus 5% 10% 6% simple interest 12% The contract rate not to exceed 18%; otherwise, either 10% or the 10-year T-bill rate, not exceeding 20% 10% 5% or 12% simple interest |
Excerpted from Briefly Speaking, a complimentary newsletter published by Gleason & Associates. Subscribe