Liquidated Damages - When Is the Claimant Entitled to Prejudgment Interest?
| Publication year | 2004 |
| Pages | 25-26 |
73 J. Kan. Bar Assn. 5, 14-20, 25-26 (2004). Liquidated Damages - When is the Claimant Entitled to Prejudgment Interest?
73 J. Kan. Bar Assn. 5, 14-20, 25-26 (2004)
No one likes the idea of being deprived of money that rightfully belongs to them. When we bring suit in hope of recovering those funds wrongfully withheld, we also expect to receive interest to compensate us for the time that money was out of our control. Interest that accrues on the money from the due date until a final judgment is rendered is commonly known as prejudgment interest.(fn1)
The evolution of awarding prejudgment interest
The practice of awarding prejudgment interest evolved over time. Early English courts considered the assessment of any type of interest usurious and unlawful due to theological and legal prohibitions.(fn2) This posture eventually gave way as business grew and trade increased. In 1625, the legal writer Hugo Grotius endorsed the permitting of interest on practical grounds in De Jure Belli et Pacis.(fn3) Protestant leader John Calvin proclaimed that the true definition of usury prohibited by canonical law was the practice of charging oppressive interest, distinguishing usury from reasonably necessary interest.(fn4) In the mid-1700s, it began to be acceptable for courts to award interest on liquidated, or stipulated, damages.(fn5)
Common law courts viewed prejudgment interest as a penalty assessed to punish a defendant who unjustly delayed payment on an ascertainable sum owed to a plaintiff.(fn6) A distinction developed between cases where the damages were unliquidated or undeterminable until the verdict or judgment and cases where the damages were certain and liquidated.(fn7) Courts believed that it was unjust to penalize a defendant by assessing prejudgment interest where the amount owing was unknown.(fn8) Conversely, when the amount of the obligation was certain, courts reasoned that the defendant had the opportunity to halt the accrual of interest by settling the plaintiff's claim.(fn9) The equitable theory of unjust enrichment was also applied at times in breach of fiduciary duty cases to justify an award of prejudgment interest.(fn10)
Under current law, courts tend to regard prejudgment interest as a means of compensation to the claimant rather than as a penalty to the defendant.(fn11) Today this is the preferred rationale, particularly due to inflation and the claimant's general loss of use of the money.
General rules in Kansas
Kansas follows the traditional approach, which recognizes a distinction between liquidated and unliquidated damages. In general, Kansas only allows prejudgment interest on liquidated claims.(fn12) A claim becomes liquidated when the amount due and the date on which it is due are "fixed and certain or when the same become definitely ascertainable by mathematical calculation."(fn13) Obviously, controversy will surround a claim for damages and interest. Nevertheless, a good faith controversy regarding the defendant's liability for the money does not preclude a prejudgment interest award.(fn14)
Prejudgment interest is generally not permitted in tort cases because damages are usually too uncertain to liquidate before the trial court's final judgment. Through the application of equitable principles, however, plaintiffs may recover prejudgment interest in tort cases involving breach of fiduciary duties, conversion or fraud.(fn15) Further, prejudgment interest is not allowed on judgments based on quantum meruit because the amount due is not liquidated until a trial court calculates it.(fn16)
As for contract cases, prejudgment interest is typically available from the date the performance was due. Damages are considered liquidated as of the date of the breach. In commercial transaction cases where a seller retains the purchase price after a buyer revokes, prejudgment interest may be computed from the date of the revocation of the contract.(fn17) Courts may also award prejudgment interest as consequential damages pursuant to K.S.A. 84-2-715 where a buyer presents evidence showing the seller knew or had reason to know at the time of contracting that it was necessary for the buyer to borrow funds in order to complete the purchase.(fn18)
Failure to designate a claim of prejudgment interest in the pretrial conference order will not act as an absolute bar for such an award.(fn19) It would appear advisable, however, to include a claim for prejudgment interest in the initial pleading, the specification of damages, responses to discovery, and with other items claimed as damages in the pretrial conference order.
Statutory authority
The Kansas Legislature has provided statutory authority for creditors to receive interest. K.S.A. 16-201 governs prejudgment interest(fn20) and provides: "Creditors shall be allowed to receive interest at the rate of 10 percent per annum, when no other rate of interest is agreed upon, for any money after it becomes due."(fn21) If another interest rate is agreed upon by the contracting parties, the statutory rate will generally not apply. Courts have the judicial discretion to allow prejudgment interest; therefore, a court's decision to order such an award is only reversible on appeal upon a showing of abuse of discretion.(fn22) The abuse of discretion standard of review requires the appellant to show that "no reasonable person would take the view adopted by the trial court."(fn23)
Cases involving prejudgment interest
A brief overview of the prevailing types of cases involving awards of prejudgment interest follows.
Governmental entities
The Kansas Supreme Court has held that prejudgment interest may be awarded against a governmental entity. In Bigs v. City of Wichita,(fn24) a liability was created by statute.(fn25) Private clubs and drinking establishments brought a class action suit against the City of Wichita, seeking refunds of excess liquor license fees collected by the city. The Bigs Court found that the city lacked the authority to continue charging more than the statutory liquor license fees after the Kansas Legislature enacted an amendment to the Club and Drinking Establishment Act provision governing annual license fees.(fn26) In light of the fact that the plaintiffs' claims were liquidated, the Court held that the plaintiffs were entitled to refunds along with prejudgment interest.(fn27)
Governmental entities have been ordered to pay prejudgment interest in contract cases as well. In Shapiro v. Kansas Public Employees Retirement System,(fn28) the Court held that since the Public Employees Retirement System may be sued on its contractual obligations, prejudgment interest was permitted as a proper element of damages for a breach of its contract in wrongfully withholding death benefits.(fn29)
Likewise, in Edward Kraemer & Sons, Inc. v. City of Overland Park,(fn30) the Kansas Court of Appeals allowed prejudgment interest in a dispute involving a highway construction contract. After the road reconstruction was completed, the contractor sued the cities of Overland Park and Merriam for amounts allegedly due under the contract. After noting that the cities were not immune from suit, the court specifically concluded that K.S.A. 16-201 authorized prejudgment interest against the cities.(fn31)
Prejudgment interest is also permitted in inverse condemnation cases. The interest accrues from the date of the taking until payment is made to the landowner.(fn32) In contrast, the Kansas Supreme Court has held that prejudgment interest is not available in tax refund cases unless the Legislature has specifically provided for it by statute.(fn33)
Insurance contracts
Claimants may also be entitled to prejudgment interest on monies due under insurance contracts. The Kansas Supreme Court has allowed such interest in a variety of cases involving insurance coverage disputes, including those pertaining to homeowners insurance, life insurance and auto insurance.
In Freidman v. Alliance Ins. Co., Inc.,(fn34) the claimant was a college student at the University of Texas at Austin, but his parents' home in Wichita was determined to be the claimant's residence. Seven days after graduation, Friedman moved his college furnishings in a U-Haul trailer to Alabama, in the hope of starting a new job. That night, while staying at a motel, his belongings were stolen from the trailer. Friedman's father filed a claim under his homeowner's policy with Alliance Insurance Company, but it was denied.(fn35)
The Court concluded that Friedman was still considered a resident of the Wichita residence and, therefore, was covered under the homeowner's policy.(fn36) Consequently, the Court determined that Friedman was entitled to prejudgment interest on the undisputed portion of his claim. The interest accrued from the date the claim was filed with the insurer, not the date on which the loss occurred.(fn37)
Prejudgment interest was also allowed in a bizarre case involving a claim for recovery under a life insurance policy in Harper v. Prudential Insurance Company of America.(fn38) There, the insurer issued the payment of $60,000 to the primary beneficiary, despite being notified that there was an ongoing investigation of the beneficiary's participation in the insured's murder.(fn39) After the primary beneficiary was convicted of murder, the infant child of the deceased filed a claim for the $60,000. Prudential denied the claim, but the Court found that the insurance company was not relieved from liability under the circumstances.(fn40) Prudential was ordered to pay the $60,000 as well as prejudgment interest from the date the child's claim was denied to the date of judgment.(fn41)
Prejudgment interest has been awarded in numerous Kansa cases involving...
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