Prejudgment interest in construction defect litigation - Florida's loss theory on liquidated damages post-Bosem and why every construction lawyer should be familiar with it.

• Author: Pena, Maritza

IMAGINE this--You have just finished trial on a five week construction defect suit. You are tired, but happy with the result. Your client, the developer of a $250 million uber-luxury residential tower, "won." The plaintiff condominium association that sued five years ago was only awarded $15 million in damages-instead of the $50 million they were seeking. After five years of contested litigation, you feel vindicated. The Chief Financial Officer (CFO) for your client is thrilled. He is taking you out for drinks tonight. Your client's Owner Controlled Insurance Policy only afforded $ 15 million in coverage, and the CFO was worried that if the verdict exceeded the available insurance, it would bankrupt them. There aren't that many construction contracts for $250 million uber-luxury towers anymore. You have a grin on your face of pure relief that the verdict was within limits.... But it does not last long. Within an hour of your "win," opposing counsel emails you a motion to add prejudgment interest on the award. Counsel is arguing that the interest dates back to turnover nearly a decade ago. You quickly realize that your client may actually owe millions of dollars--millions of dollars they do not have.

For a construction lawyer, a plaintiff's claim for prejudgment interest on liquidated damages can often be one of the most significant parts of the case. If you are representing a general contractor, developer, subcontractor, or carrier who insures any of them, and a condominium association is claiming construction defect damages dating back to the date of turnover as far as a decade prior to suit, the association's claim for prejudgment interest against your client cannot be an afterthought. In those instances, the association's claim often amounts to millions of dollars and can even overshadow the costs to repair the alleged defective work of the construction players involved.

Florida is unique in its interpretation of what constitutes "liquidated damages" for purposes of determining whether prejudgment interest should be awarded. In what can be described as the country's minority view, the Florida Supreme Court confirmed in Bosem v. Musa Holdings, Inc., (1) and its progeny that an association does not necessarily need to show "out of pocket" expenditures for repairing alleged defective work in order to get prejudgment interest at the end of a case. The association can forgo performing repairs, file suit, and a jury's verdict can retroactively set liquidated damages as of a chosen date of loss years prior to the Complaint ever being filed. Once a date of loss and amount of damages is set by the trier of fact, prejudgment interest becomes a matter of right.

This article provides a brief discussion of the law in Florida post-Bosem and explains how it differs from other States in the country that do require, for now, "out of pocket" expenditures or set damages. (2) This article contends that the argument to be inferred from Bosem following the 2008 real estate bubble--that a cash-strapped, but wrongfully-damaged construction plaintiff should not be penalized by a requirement that the damages be "liquidated" in the traditional sense--provides a template for arguments that will be raised across the country.

1. Florida's Loss Theory

   Although prejudgment interest is awarded as a matter of right in forty-two (42) of fifty-one (51) jurisdictions, including Florida, (3) Florida adopts the "loss theory" and prohibits discretion in the award of prejudgment interest. As confirmed by the Florida Supreme Court in Bosem, the distinction between liquidated damages, or "out of pocket" expenditures, and unliquidated damages is irrelevant to the determination of whether prejudgment interest is available. (4) The "loss" is the wrongful deprivation of the plaintiff's property. "Out of pocket" expenditures need not exist. If a jury's verdict or a trier of fact's findings has the effect of fixing damages as of a prior date, prejudgment interest must be awarded as of that prior date.

   Under the "loss theory" of recovery for pecuniary damages, the loss itself is a wrongful deprivation by the defendant of the plaintiff's property. Under this theory, "out of pocket" expenses are not a prerequisite to an award of prejudgment interest. The plaintiff is to be made whole from the date of loss once a finder of fact has determined the amount of damages and defendant's liability for those damages. (5)

   In Bosem, the plaintiff physician and his professional association (6) brought an action for injunctive relief, fraud, false advertising and compensatory damages against Musa Holdings, Inc. d/b/a Eyeglass World and others (7) for Musa's alleged unauthorized use of Dr. Bosem's image or likeness in violation of the Lanham Act. (8) Dr. Bosem argued that Musa's unauthorized use of his image resulted in lost profits because he was forced to reduce the price of his Lasik eye surgery procedure in order to retain patients who had seen advertisements in which Musa claimed Dr. Bosem would perform the same surgery for less at its centers. (9)

   The trial court granted the plaintiff's motion for partial summary judgment, and after a bench trial on damages, found that Dr. Bosem and his professional association sustained lost profits in the amount of $93,306 and that the period of infringement was from July 2000 to December 2001. (10) In addressing whether the plaintiffs would be entitled to prejudgment interest, the trial court reviewed Air Ambulance Professionals, Inc. v. Thin Air (11) and Argonaut Ins. Co. v. May Plumbing Co. (12) The trial court acknowledged the conflicting principles between Air Ambulance, where the Fourth District held that only liquidated damages claims generate prejudgment interest, and Argonaut, a construction defect case, where the Supreme Court had previously concluded that Florida followed the "loss theory," where the "loss" was considered the wrongful deprivation of plaintiff's property and plaintiffs were entided to be made whole from the date of loss once the finder of fact had determined the amount of damages. The trial court reasoned that Argonaut remained good law and the Bosem plaintiffs were entitled to interest on the $93,306 lost profits dating back to the period of infringement. (13)

   Both parties appealed and cross-appealed and ultimately the Fourth District reversed the award on prejudgment interest, citing to its previous ruling in Air Ambulance and rejecting the idea that Florida had adopted the "loss theory" in Argonaut. Dr. Bosem sought review to the Supreme Court. The Court quashed the Fourth District's decision, rejected the reasoning in Air Ambulance, and clarified once and for all that Florida, per Argonaut and its progeny, (14) ascribed to the "loss theory." Neither the merit of the defense nor the certainty of the amount of loss could affect the award of prejudgment interest. Instead, "the loss itself is a wrongful deprivation by the defendants of the plaintiff's property," and the plaintiff is to be "made whole from the date of the loss once a finder of fact has determined the amount of damages and defendant's liability" for those damages. (15) The Court reasoned:

   As we explained in Argonaut, "The distinction between liquidated and unliquidated damages is closely linked to [the now obsolete] 'penalty theory' of prejudgment interest." Argonaut, 474 So.2d at 215. Because "loss theory forecloses discretion in the award of prejudgment interest," Argonaut, 474 So.2d at 215, it is irrelevant that the trial court described the damages in the present case as unliquidated. Here, Bosem requested purely pecuniary damages of lost profits of at least $300,000, of which he was awarded under $100,000 for the unauthorized used of his likeness. Accordingly, even before the trial court calculated the amount of damages, the amount was ascertainable and not speculative. (16)

   The trial court's finding that there were under $100,000 in lost profits was enough "liquidated damages" to entitle the Bosem plaintiffs, as a matter of law, to prejudgment interest at the statutory rate from the date of loss, which, in this case, was the July 2000 to December 2001 period of infringement. (17)

   Although Bosem was a lost profits case unrelated to construction, Argonaut, on which the Bosem Court relied, contained a fact pattern typical in construction suits. In that case, Argonaut Insurance Company (AIC) paid nearly $250,000 to the owners of the Colony Club Apartments for damages from a fire caused by the negligence of a May Plumbing Company employee. (18) AIC sued May and its carriers for subrogation. AIC was awarded just over $187,000 after the unit owners at Colony Club Apartments were found to be 25% comparatively negligent for the fire. (19) The trial court awarded prejudgment interest on the judgment, but the Fourth District Court of Appeal reversed, holding that the comparative negligence allotted to the unit owners made the award uncertain and, therefore, "unliquidated." The Fourth District quoted the First District Court of Appeal in McCoy v. Rudd: (20)

   [W]here the judgment is for damages, interest may not be added to the principal award unless there can be a conclusive determination of an exact amount due and a date from which interest can be computed. (21) The Fourth District's ruling was reviewed by the Supreme Court. The Argonaut Court concluded that the First District no longer embraced the reasoning in McCoy, but instead had adopted the "better rule" set forth in Bergen Brunswig Corporation v. State, Department of Health and Rehabilitative Services, (22) which...