Prejudgment interest can be a substantial amount in construction defects cases—especially if it is a large commercial construction defects case or a community association construction defects case. In these types of cases, it is often a number of years before damage from the construction defects manifests, and it is not uncommon for the construction defects litigation to take more than five years to be resolved by the Court. Taking the aforementioned into consideration, it can often be ten years or more between the time the Certificate of Occupancy is issued and a judgment is rendered in the trial. Although the date when prejudgment interest accrues is the subject of this blog, ten years or more in prejudgment interest can often be more than half of the actual damages sought in this case. Historically, owners have waived these large prejudgment interest awards in favor of settlement. Although every case is unique and every situation is different, waiving prejudgment interest leaves significant money on the table. This blog will discuss some of the basics of prejudgment interest.
What is prejudgment interest?
Prejudgment interest is essentially used to make a plaintiff “whole” again after being deprived of the use of the “principal loss amount” of the plaintiff’s claim. Becker Holding Corp. v. Becker, 78 F.3d 514, 516 (11th Cir. 1996). It reimburses a plaintiff from the time of loss to the time the final judgment is entered. Id. Liquidated damages are when “the proper amount to be awarded can be determined with exactness from the cause of action as pleaded,” such as by mathematical computation or definitive rules of law. Rich v. Spivey, 922 So. 2d 326, 327 (Fla. 1st DCA 2006). However, damages are unliquidated when “the ascertainment of their exact sum requires the taking of testimony to ascertain facts upon which to base a value judgment.” Id. Damages can become liquidated when a jury verdict establishes the amount of damages, and then once a verdict acts to liquidate the damages as of a certain date, prejudgment interest becomes a matter of right. See Bosem v. Musa Holdings, Inc., 46 So. 3d 42, 43 (Fla. 2010). “Prejudgment interest compensates the plaintiff for the loss of use of the amount awarded, and thus interest accrues from the date the money was due until the date of judgment.” Regions Bank v. Maroone Chevrolet, L.L.C., 118 So.3d 251, 257 (Fla. 3d DCA 2013). “The computation of prejudgment interest is a purely ministerial duty and is not affected by the merit of the defense or the certainty of the amount of loss.” Wood v. Unknown Personal Rep. of Estate of Samuel E. Burnette, 56 So.3d 74, 76 (Fla. 2d DCA 2011).
How is prejudgment interest calculated?
While courts will enforce a prejudgment interest rate that is provided for in a contract, the rate that applies to a case with no previously agreed upon rate is determined by statute. Florida’s Chief Financial Officer is in charge of setting the judgment interest rate on a quarterly basis. Pursuant to Florida Statute § 55.03:
On December 1, March 1, June 1, and September 1 of each year, the Chief Financial Officer shall set the rate of interest that shall be payable on judgments or decrees for the calendar quarter beginning January 1 and adjust the rate quarterly on April 1, July 1, and October 1 by averaging the discount rate of the Federal Reserve Bank of New York for the preceding 12 months, then adding 400 basis points to the averaged federal discount rate. Fla. Stat. § 55.03.
Currently, the interest rate set for January 2016 is 4.75% per annum. See Division of Accounting and Auditing. Although this rate has remained invariable since 2011, historically it has been as high as 12%. See Historical Judgment Interest Rates. Sections 215.422(3)(b), 337.141(3) and 687.01 of the Florida Statutes require the use of this rate for “the payment of interest for late payments to vendors; for late payments on construction or maintenance contracts administered by the Department of Transportation; and for cases where a rate of interest is not specified in a contract.” Thus, for a party to avoid the possible fluctuation of this statutory interest rate, the party may want to include a set prejudgment interest rate within the terms of the contract. The prejudgment interest rate is the rate which is effective at the time of entitlement. IberiaBank v. Coconut 41, LLC, 984 F. Supp. 2d 1283, 1300 (M.D. Fla. 2013). The statutory interest rates from 2000 through 2015 are as follows:
2015 4.75% 2007 11.00%
2014 4.75% 2006 9.00%
2013 4.75% 2005 7.00%
2012 4.75% 2004 7.00%
2011 6.00% 2003 6.00%
2010 6.00% 2002 9.00%
2009 8.00% 2001 11.00%
2008 11.00% 2000 10.00%
From what date should prejudgment interest begin?
Florida courts tend to follow the “loss theory” as to prejudgment interest because “interest is merely another element of pecuniary damages.” Berloni S.p.A. v. Della Casa, LLC, 972 So. 2d 1007, 1011 (Fla. 4th DCA 2008). Under the “loss theory,” neither the “merit of the defense nor the certainty of the amount of loss affects the award of prejudgment interest.” Id. at 1012. Instead, the “loss itself” is a “wrongful deprivation” of the plaintiff’s property by the defendant. Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212, 215 (Fla. 1985). Therefore, if the breach of a contract to pay a certain amount of money is caused by “good faith controversy as to the amount due under the terms of a contract,” when a verdict liquidates the damages “the plaintiff is entitled to prejudgment interest on the amount found to be due” and from the date the debt was due. Berloni, 972 So. 2d at 1012. However, when the due date is in dispute and the court cannot determine the date of loss, the court may decide to award interest from the date the lawsuit was filed. Id.
However, determination of the date of loss is not as simple in a construction defects case as it is in a breach of contract case. In a construction defects case, there are likely many construction defects and determination of when the construction defect accrued may not be simple. However, in construction defects cases, the defects are generally present when construction is completed. As such, some courts have held that the date of turnover in a community association construction defects case is the proper date from which prejudgment interest should accrue. Pine Ridge at Haverhill Condo. Ass’n, Inc. v. Hovnanian of Palm Beach II, Inc., 629 So. 2d 151 (Fla. 4th DCA 1993).
It would make sense that the issuance of a certificate of occupancy would also be an appropriate case. However, at least one case has held that the failure to establish an actual date of loss results in the forfeiture of prejudgment interest. Albanese Popkin Hughes Cove, Inc. v. Scharlin, 141 So.3d 743, 746-47 (Fla. 3d DCA 2014). Albanese conflicts with several other cases that state that at a minimal prejudgment interest is always appropriate from the filing of the lawsuit forward. Berloni S.p.A. v. Della Casa, LLC, 972 So. 2d 1007, 1011 (Fla. 4th DCA 2008); Wood v. Unkown Per. Rep. of the Estate of Burnette, 56 So.3d 74, 76 (Fla. 2d DCA 2011) (reversing utilization of date of filing because there was evidence in the record which determined the actual date payment was due); Arizona Chemical Co., LLC v. Mohawk Industries, Inc., 2016 3879252 (Fla. 1st DCA 2016); Specialized Transportation of Tampa Bay, Inc. v. Nestle Waters North America, Inc., 356 Fed. Appx. 221, 231 (11th Cir. 2009); Hawkins v. Condominium Owners Ass’n of Sand Cay, Inc., 2012 WL 4761357 (M.D. Fla. 2012).
Prejudgment interest is a factor of damages that is often overlooked when negotiating a claim. However, it is not uncommon for the prejudgment interest component of damages in complex construction defects cases to be half again the actual damages. By the time the significant negotiation of a construction defects claim begins, it is often more than five years after the certificate of occupancy is issued. Depending on the year, the prejudgment interest accrued in five years may be 30 percent or more of the claim. Thus, those who are contemplating the filing of a construction defects claim would be wise to seek legal counsel regarding the calculation of prejudgment interest.