Jerome Powell, Chairman of the Federal Reserve, is credited with bear markets in major U.S. stock indices for having raised the federal funds rate throughout 2018. Powell has also drawn the ire of President Donald Trump who insists that the federal funds rate—which as of March 2019 sits at a target range of 2.25 percent to 2.5 percent—is too high.
Inflation warriors of the 1970s, though, would find no grit in Powell’s resolve. The warriors banded together—in carpools and in local gardens to (intendedly) reduce gasoline and food price pressures—while proudly brandishing WIN pins (an acronym for Whip Inflation Now). They rejoiced on Oct. 6, 1979 when Paul Volcker, then Chairman of the Federal Reserve, cited the “pervasive influence” of inflation (which then stood near 13 percent) as justification for raising the discount rate to 12 percent. The rate increased to an all-time high of 19 percent in 1981.
Statutory interest rates in New York are fixed at nominal amounts, usually according to the monetary environment in which the statutes were enacted (or last amended). Given the drastic changes in monetary policy, these statutory rates are anachronisms in today’s low interest world.
Interest on Judgments
CPLR §5004 (last amended in 1981) sets the statutory interest rate at 9 percent per year except where otherwise provided by statute.
Certain statutes do provide alternative rates (particularly on judgments against governmental entities). N.Y. State Fin. Law §16 provides that the interest rate on judgments against the state “shall not exceed nine per centum per annum.” (The rate was amended upwards in 1982, from 6 percent to 9 percent.) The “shall not exceed” language permits courts to apply a lower rate upon evidence warranting departure from the presumptive 9 percent rate.
In practice, courts rarely deviate from the presumptive rate. Consider Denio v. State, 7 N.Y.3d 159 (2006). The parties stipulated to structured judgment payments for a personal injury action under Article 50-B, but defendant-State argued that post-verdict and post-judgment interest should be applied at a rate less than 9 percent—and more particularly, at a rate equivalent to Treasury bond yields. The Court of Appeals applied the 9 percent rate after crediting the plaintiff’s showing that various portfolios (including portfolio comprised of 75 percent equity investment and 25 percent bond investment) yielded roughly 9 percent in recent history. In a similar vein, the Court of Claims cited “one of the most extensive bull markets in this country’s history” in justifying adherence to the statutory rates. Guido v. State, 187 Misc. 2d 647, 649 (Ct. Cl. 2000).
N.Y. Pub. Auth. Law §1212(6), by contrast, provides that interest on judgments as against NYCTA “shall not exceed three percent per annum.” The statute was originally enacted in the 1950s and, unlike N.Y. State Fin. Law §16, escaped the inflationary storms of the 1980s without upward revisions to the rate. Unsurprisingly, jurisprudence makes no reference to bull markets when determining the applicable rate of interest on judgments against NYCTA.
The structured judgment schemes in Articles 50-A and 50-B were enacted in 1985 and 1986, respectively, to reduce costs to insurers while providing for plaintiffs’ continued needs as those needs arose.
Article 50-A (governing structured judgments in medical, dental, and podiatric malpractice claims) was amended to address the windfall received by the plaintiff in Desiderio v. Ochs, 100 N.Y.2d 159 (2003) only months after the decision was rendered. Article 50-B (governing structured judgments in personal injury, property damage and wrongful death actions) remains in its original form together with issues which plagued the abrogated version Article 50-A.
The plaintiff-Desiderio was awarded damages for past pain and suffering of $1.5 million, future pain and suffering of $3 million, and medical expenses of $45.3 million. Mechanical adherence to Article 50-A, though, resulted in an award valued at $140 million. The Court of Appeals acknowledged the discrepancy between the jury’s award versus the actual payout but rejected the defendant’s plea to deviate from the mechanical operation of the statute. Instead, the Court urged the Legislature to revisit the statute while noting that such discrepancies would not result with awards of lesser amounts or shorter durations.
In addition to the amount and duration of awards, other factors operate to distort the amounts paid under Article 50-B with the amounts awarded by the trier of fact. Michael J. Wolkoff & Eric A. Hanushek, “The Economics of Structured Judgments Under CPLR Article 50-B,” 43 Buff. L. Rev. 563, 574 (1995). The two factors most pertinent to this discussion are inflation and interest rates.
At the outset, Article 50-B calculations begin with awards already adjusted for future inflation. Thus, a jury, after hearing expert testimony on the anticipated cost increases, will award damages reasonably expected to compensate for the total loss. Article 50-B makes no adjustment to discount the award to its present value. Instead, it adds an additional 4 percent interest. More precisely, Article 50-B divides awards for future damages based on the time over which the jury expected these damages to accrue (except that the future pain and suffering award cannot be accrued over more than 10 years) and pays that amount as the first year’s award. Each successive year is paid an additional 4 percent. (The present version of Article 50-A retains the 4 percent escalator for future pain and suffering awards. N.Y. C.P.L.R. 5031(c).)
Certain courts have admitted bewilderment to the purpose of the 4 percent interest rate while others have considered the possibility that the rate is a proxy for inflation or an additional interest as part of a legislative compromise. It has been roundly criticized by scholars as economically unsound.
Statutory interest rates are designed to compensate a plaintiff for lost use of funds. Conversely, discount rates are designed to discount future values by the amount which, when invested in a risk-free asset, would return the future value. In principle, New York Courts agree. In Love v. State, 78 N.Y.2d 540, 544 (1991), the Court of Appeals expressly rejected the notion that the statutory interest rates are penalties, insisting that the statutory interest rate is designed to compensate a plaintiff for lost use of funds. In practice, New York courts have developed a curious sort of jurisprudence as they grapple with the oddities in statutory interest rates.
In generally accepted accounting practice, as in the federal rules (28 U.S.C. 1961) and jurisprudence, interest and discount rates are based on the prevailing market rates of Treasuries—the only asset considered risk-free. As put by Justice Stevens, “[t]he discount rate should be based on the rate of interest that would be earned on the best and safest investments.” Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 537 (1983) (internal citations omitted). Interest and discount rates, both set at the risk-free rate, are symmetrical. The plaintiff is guaranteed compensation for lost use of funds (plus an inflation/risk premium) and the defendant reduces liabilities. Neither party receives a windfall.
New York courts, though, have expressly adopted an asymmetrical approach, permitting consideration of risk-bearing instruments when it comes to interest but not discount rates. As the Court of Appeals justified the 9 percent interest rate in Denio, it considered possible returns based on a variety of market instruments:
If a successful claimant was able to access a monetary award immediately, the claimant could invest those proceeds in a wide range of prudent investment choices, including money market funds, corporate bonds or reasonably-risked equity funds.
Denio, 7 N.Y.3d at 167 (internal citations omitted).
The implication that ordinary persons can consistently earn returns of 9 percent per year would make even the most storied investors blush. And even assuming that ordinary plaintiffs possess such great financial acumen, it hardly seems fair to award statutory interest based on recent market performance. By this logic, a judgment entered during a bear market may warrant reduction.
Risk, though, is not considered in the application of discount rates. Articles 50-A and 50-B require defendants to purchase annuity contracts with de minimis default risk, thus making the annuity rate nearly equal to the Treasury bond yield. By consideration of risk-bearing instruments in the application of interest rates but not discount rates, a plaintiff is presumed capable of earning a 9 percent annual return while a defendant is not.
Low Interest Rates Are the Norm
Low interest rates will remain the norm for the foreseeable future. As long as statutory rates exceed market rates, awards will tend to exceed their present value. And as long as a hodgepodge of statutes set widely divergent rates, certain judgment creditors (e.g., those against the State) will be given the upside (but not the downside) of risk while others (e.g., those against NYCTA) will not.
Cody Brittain is an associate in Cullen and Dykman’s construction litigation practice. He regularly represents construction contractors and real estate developers in contractual disputes and in Labor Law and personal injury matters.