February 11, 2017
Authored by: Jacob Maskovich and Bob Miller
Post-judgment interest is not something most lenders consider when making a loan. In fact, it is not ordinarily the subject of significant analysis even when litigation becomes necessary. Where the United States District Court is the preferred venue, however, parties easily can fall into the quandary of being stuck with the federal statutory post-judgment interest rate, which is currently less than 1% per annum.
Pre-judgment, a lender often has solid rights to contract interest and potentially very high default interest rates, which often approach double-digits, added to a recovery when a solvent obligor is on the other side. But a final judgment may be a game-changer on the rate of interest a lender is able to receive. Recent circuit court decisions are developing the law on post-judgment interest in a way contrary to the economic recovery of contracting parties, and lenders in particular. It may be possible, however, to draft around this problem.
Current State of the Law
In cases pending before the United States District Court, “post-judgment interest is governed by federal law,” even where jurisdiction is based upon diversity, because post-judgment interest is viewed as a procedural issue. Citicorp Real Estate Inc. v. Smith, 155 F.3d 1097, 1107 (9th Cir. 1998). Federal post-judgment interest is governed by 28 U.S.C. § 1961(a), which provides for “a rate equal to the weekly average 1-year constant maturity Treasury yield” (currently 0.79% and 0.46% a year ago, see here under 1-year Treasury bills).
While federal case law uniformly holds that an “exception to § 1961 exists when the parties contractually agree to waive its application,” there has been significant recent litigation concerning how explicit contracts must be to constitute a waiver. See Fidelity Federal Bank, FSB v. Durga MA Corp., 387 F.3d 1021, 1023 (9th Cir. 2004). Importantly, a typical contract imposing interest at a specific rate upon a default “until paid” is insufficient under the case law in the Second, Fifth, and Tenth Circuits. FCS Advisors, Inc. v. Fair Finance Co., Inc., 605 F.3d 144 (2d Cir. 2010); Tricon Energy Ltd. v. Vinmar Int’l, Ltd., 718 F.3d 448 (5th Cir. 2013); In re Riebesell, 586 F.3d 782 (10th Cir. 2009). The Fifth Circuit has gone so far as to hold that the term “post-judgment” should be used in order to evidence a clear intent by the parties to waive 28 U.S.C. § 1961 and impose the default contract interest rate post-judgment. Tricon Energy Limited, 718 F.3d at 459.
The Ninth Circuit is the only jurisdiction with an arguable basis in which to assert that a contractual default rate should apply to post-judgment interest. In Citicorp Real Estate, Inc. v. Smith, the court affirmed a judgment awarding post-judgment interest greater than that provided in 28 U.S.C. § 1961 because: 1) the promissory note at issue included an agreed-upon interest rate upon a default; and 2) the parties had previously stipulated to an arbitration award establishing liability that included an interest rate at the rate specified in the note “after judgment until collected.” 155 F.3d at 1108. It is not clear from the Citicorp holding whether the outcome would have been the same if the parties had not stipulated to an arbitration award with a post-judgment interest rate. Some trial courts within the Ninth Circuit, however, interpreted Citicorp to allow the application of a contractual default rate of interest to post-judgment interest based solely on a default interest clause. See Mission Produce, Inc. v. Organic Alliance Inc., 2016 WL 1161988 *11 (N.D. Cal. Mar. 24, 2016); Abbate Family Farms Ltd. Part. v. GD Fresh Dist., Inc., 2012 WL 2160959 *6 (E.D. Cal. Jun. 13, 2012); Best Western Intern., Inc. v. Richland Hotel Corp. GP, LLC, 2012 WL 608016 *11-12 (D. Ariz. Jan. 18, 2012); Beaulieu Group LLC v. Inman, 2011 WL 4971701 *5 (D. Ariz. Oct. 19, 2011).
Even Ninth Circuit courts now may require more explicit language before finding a waiver of the federal statutory post-judgment interest rate. While not binding precedent, the Ninth Circuit’s March 16, 2016 holding in the unpublished opinion OREO Corp. v. Winnerman, 642 Fed. Appx. 1951 (9th Cir. 2016), seems to signal that a typical default interest rate in a contract is insufficient to waive § 1961. In OREO, the court reversed a trial court’s award of post-judgment interest at a promissory note’s default rate. In doing so, the Ninth Circuit took a very narrow view of Citicorp and reasoned that post-judgment interest at the default rate was allowed in Citicorp only because the parties had stipulated to an arbitration award with a higher rate of interest.
Plaintiffs should carefully consider the likely application of the federal statutory post-judgment interest rate when analyzing the benefits of filing in federal court. Unless the contract at issue includes a provision expressly applying the default interest rate post judgment, there is a strong probability the court will impose post-judgment interest at only the federal statutory rate, which is presently less than 1%.
Lenders and other contracting parties currently crafting documents would be wise to include language making clear that the parties intend for the default interest rate to apply not just upon an event of default, but also to post-judgment interest to the extent a lawsuit is necessary.