Colorado's Prejudgment Interest Statute: Potential for Market Rate Interest
| Publication year | 1983 |
| Pages | 1605 |
1983, October, Pg. 1605. Colorado's Prejudgment Interest Statute: Potential for Market Rate Interest
Any Colorado attorney who is still advising clients that the maximum rate of prejudgment interest is 8 percent should carefully reconsider. In 1979, the Colorado legislature substantially amended C.R.S. 1973, § 5-12-102, which provides for the recovery of prejudgment interest.(fn1) In some cases, the statute now allows for recovery of prejudgment interest in an amount which fully recognizes the "gain or benefit" to a defendant as a result of wrongfully withholding a plaintiff's money or property. This is true even if that amount is more than the "statutory rate" of 8 percent per annum. Three appellate court decisions have discussed this amendment since its enactment.(fn2) Although somewhat confusing, they seem to indicate that the amendment should be construed liberally in favor of creditors and other claimants.
The purpose of this article is to alert the Colorado Bar to the possibilities and pitfalls of recovering prejudgment interest under Colorado's amended prejudgment interest statute. The article first discusses the common law doctrine of moratory interest, the precursor to the 1979 amendment. Next, it sets out the language of § 5-12-102 and briefly reviews its legislative history. It then follows with a number of practical problems which confront a practitioner seeking to recover, or defend against a claim for, moratory interest. Finally, it comments upon an alternative to moratory interest under the statute---the recovery of a plaintiff's borrowing costs as an element of common law damages.(fn3)
The term "moratory interest" is of recent origin and is used to describe the equitable concept of awarding prejudgment interest as a part of common-law damages.(fn4) In a handful of early decisions, trial courts in Colorado and elsewhere cited to their equitable discretion, rather than statutory authority, as the basis for awarding prejudgment interest as a component of damages.(fn5) Most courts had no label for this exercise of discretion, but a few began referring to the awards as being moratory, or arising from delay. Some courts later employed the term "moratory interest" and began to apply it to cases where prejudgment interest was not provided for by statute.(fn6) Often, their decisions ran counter to others in the same jurisdiction which held that prejudgment interest was solely a creature of statute.(fn7)
In 1975, Judge Winner of the U.S. District Court for the District of Colorado carefully reviewed Colorado case law on moratory interest and concluded that the doctrine remained viable, despite the fact that no Colorado appellate decision had discussed the theory of interest as damages for over thirty years.(fn8) In Davis Cattle Co. v. Great Western Sugar Co.,(fn9) Judge Winner held that a plaintiff could recover moratory interest under Colorado common law, even though the plaintiff's damages were unliquidated and therefore not covered by the then-applicable Colorado prejudgment interest statute.(fn10)
Judge Winner derived three principles from Colorado case law which underlay this right to recovery:
1. Even where statutory interest may not be allowed, interest by way of damages can be awarded.
2. The measure of damages is the guilty party's gain rather than the victim's loss.
Applying these principles in Davis Cattle, Judge Winner concluded that the benefit to the defendant of withholding money from the plaintiff was interest at 11.5 percent per annum because the defendant had been able to avoid otherwise necessary borrowing at that rate3. In the absence of proof as to the amount of the guilty party's gain, the statutory rate should be awarded, but if there is proof of the amount of benefit to the guilty party, that amount should be awarded as damages.(fn11)
Judge Winner's opinion was significant not only because it revived the doctrine of common law moratory interest, but also because of its conclusion that the proper measure of recovery is the benefit received by the defendant on money or property wrongfully withheld. Under Judge Winner's formulation, benefit to the defendant can be value earned, or expense or loss avoided, and it is founded on principles of unjust enrichment. Significantly, it is not measured by the plaintiff's loss (e.g., borrowing costs or loss of interest), even if such loss exceeds the defendant's gain.(fn12)
In 1979, four years after Davis Cattle, the Colorado legislature amended its prejudgment interest statute to allow for prejudgment interest on unliquidated claims. In doing so, it enacted the moratory interest concept as an alternative measure of recovery on those claims. As amended, the statute in relevant part now reads:
(1) Except as provided in § 13-21-101. C.R.S. 1973 [personal injury claims], when there is no agreement as to the rate thereof, creditors shall receive interest as follows:
a) When money or property has been wrongfully withheld, interest shall be an amount which fully recognizes the gain or benefit realized by the person withholding such money or property from the date of wrongful withholding to the date of payment or to the date judgment is entered, whichever first occurs; or, at the election of the claimant,
b) Interest shall be at the rate of eight percent per annum compounded annually for all monies or the value of all properties after they are wrongfully withheld or after they become due to the date of payment or the date judgment is entered, whichever first occurs.
(2) When there is no agreement as to the rate thereof, creditors shall be allowed to receive interest at the rate of eight percent per annum compounded annually for all monies after they become due on any bill, bond, promissory note, or other instrument of writing, or money due on mutual settlement of accounts from the date of such settlement and on money due on account from the date when the same became due.
(3) Interest shall be allowed as provided in Subsection (1) of this section even if the amount is unliquidated at the time of wrongful withholding or at the time when due.(fn13) (Emphasis added.)
Subsection 1(a) codifies the formula used by Judge Winner in Davis Cattle for determining the amount recoverable for moratory interest. Arguably, the plaintiff's(fn14) only limit on recovery is the gain or benefit realized by the defendant on the money or property wrongfully withheld. Subsection 1(b) provides an alternative remedy of 8 percent per annum at the plaintiff's election. It might be chosen if the plaintiff is unable to prove gain or benefit to the defendant or if that gain is less than 8 percent. Subsection 2 tracks the language of the predecessor prejudgment interest statute which had been interpreted by the courts to apply only to claims where damages were liquidated. Finally, subsection 3 makes it clear that prejudgment interest is to be allowed under subsection 1(a), even though damages are unliquidated.
Senator Ralph Cole, the principal sponsor of the 1979 amendment, explained in legislative hearings that the purpose of the amendment was to remedy "the contradictory way interest has been allowed in Colorado courts."(fn15) Under the then-existing statute, interest ran from the date the sum was due if the debt was liquidated. In contrast, if the debt was unliquidated, prejudgment interest could not be recovered by statute.(fn16) Senator Cole emphasized that his amendment "maintains the principle of moratory interest . . .," and he cited Davis Cattle's holding that the measure of recovery should be based on the benefit to the wrongdoer rather than injury to the claimant.(fn17)
Since the enactment of the 1979 amendment, three Colorado Court of Appeals decisions have construed or discussed its provisions. In Jasken v. Sheehy Construction Co.,(fn18) the Court of Appeals held that the 1979 amendment applied to all judgments entered after its effective date of July 1, 1979, even if the wrongful withholding took place earlier. In Great Western Sugar Co. v. Northern Natural Gas Co.,(fn19) the court remanded an award of interest under subsection 1 with instructions to the trial court to make specific findings of fact on the gain or benefit realized by the defendant. Finally, in Isbill Associates, Inc. v. City and County of Denver,(fn20) the court held that the phrase "money or property wrongfully withheld" was meant to be applied broadly to all claims, including claims for damaged property. The ramifications of these cases are discussed below.
The 1979 amendment appears to provide a potent tool for a wide variety of plaintiffs who seek to recover prejudgment interest at a rate greater than 8 percent. It is not, however, directed toward compensating them for their actual interest losses; its focus is instead on the defendants' gains. For that reason, the statute may provide a windfall to plaintiffs where their losses are much less than the defendants' gains. Conversely, it may also fail to compensate plaintiffs adequately where their losses exceed the defendants' gains. In either case, the statute may create difficult proof problems for plaintiffs seeking to show gain or benefit to defendants. In addition, its text contains a number of ambiguities which call into question certain plaintiffs' rights to recover moratory interest.
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