Parties can agree to post-judgment interest rate different from rate used by statute

Law Reporter, May 2003

Horizon Holdings, L.L.C. v. Genmar Holdings, Inc., _____ F. Supp. 2d _____, No. 01-2193-JWL, 2003 WL 355664 (D. Kan. Feb. 11, 2003).

A U.S. district court held a federal statute that prescribes a formula for calculating post-judgment interest does not bar parties to a contract from setting their own interest rate in the event of default. However, the court also held, a party may waive its right to invoke that clause if it does not provide notice prior to trial that it will seek post-judgment interest at the agreed-upon rate.

Here, a jury awarded damages to plaintiffs in a breach of contract case. The judgment entered by the court included interest based on the formula prescribed by 28 U.S.C. [sec] 1961, which uses the current interest rate on U.S. Treasury bills to set the appropriate rate. Plaintiffs moved to amend the judgment, arguing that a higher rate of interest was specified in the purchase agreement itself. Defendants countered that the formula listed in the federal law is mandatory.

The court found that although 28 U.S.C. [sec] 1961 uses seemingly mandatory language, three federal appellate courts that have addressed this issue have found parties to a contract are free to set a different rate. The most sensible reading of the statute, the court said, is that Congress intended its approach to be mandatory in the sense that a trial court or other third party, such as an arbitrator, has no discretion to award a different rate of interest or to decline to award post-judgment interest. There is no sound reason, the court continued, why Congress would have intended that parties themselves could not agree to a different rate.

But the court accepted defendants' argument that plaintiffs waived the right to use the contractual rate by failing to include that rate in the pretrial order. Had plaintiffs done so, defendants could have sought to raise factual arguments in opposition to the claim; for example, defendants could have asserted that the interest rate provision was altered by plaintiffs after the contract was signed. Had defendants so asserted, then they would have been entitled to have the jury resolve that dispute. The court concluded that defendants were entitled to notice that plaintiffs intended to seek post-judgment interest at the contractual rate, which would have permitted defendants to ascertain the total potential exposure that they might face if the jury, as they did, returned a verdict in favor of plaintiffs. By not providing such notice, plaintiffs waived their right to use the contractual rate, the court concluded.