Chancery Court Confirms Fluctuating Interest Rate Is Appropriate
In lengthy disputes where a judgment is entered as of a date several years in the past, prejudgment interest may constitute a more than trivial amount. In Levey v. Brownstone Asset Management, Consolidated C.A. No. 5714-VCL, the plaintiff, who prevailed at trial, sought to recover interest on the judgment amount at the constant rate of 10.25 percent from Jan. 26, 2006, forward. The defendants took the position that the interest rate should float, i.e., change whenever the Federal Reserve discount rate changed. The court agreed with the defendants and found that an award of a fluctuating rate of interest serves the dual purposes of compensating the judgment creditor for the loss of use of its capital during the pendency of the action and causes the disgorgement of the benefit the judgment debtor has enjoyed during the same period of time.
In Levey, the court awarded the plaintiff damages, plus pre- and post-judgment interest at the legal rate, compounded quarterly, from Jan. 26, 2006, forward. The parties, however, could not agree on how the legal rate of interest should be applied. The plaintiff maintained that the interest rate as of Jan. 26, 2006, was 10.25 percent and that such rate should be used to calculate both pre- and post-judgment interest until the date of payment. The defendants countered that the rate of interest should fluctuate based on changes in the Federal Reserve discount rate. The court analyzed the parties' respective positions by applying the purposes underlying an award of interest.
Initially, the court found that it "has broad discretion, subject to principles of fairness, in fixing the [interest] rate to be applied," citing Valeant Pharmaceuticals International v. Jerney, 921 A.2d 732, 756 (Del. Ch. 2007), and quoting Summa v. Trans World Airlines, 540 A.2d 403, 409 (Del. 1988). The court next found that an award of interest serves two purposes. First, it compensates the judgment creditor for the loss of use of its capital during the pendency of the action, citing Gholl v. eMachines, (Del. Ch. Nov. 24, 2004). Second, it causes the disgorgement of the benefit the judgment debtor has enjoyed during the same period of time. The court also noted that it should avoid awarding excessive interest because it "would constitute an inequitable windfall," citing Gentile v. Rossette, (Del. Ch. Sept. 10, 2010).
Applying these principles, the court found a floating, or fluctuating, rate of interest to be appropriate. Such an award, according to the court, serves the above-referenced "twin purposes" for an award of interest. In particular, it "adequately reimburses a plaintiff 'for the loss of use of its capital' by replicating the economic circumstances that existed during the litigation." Additionally, it "forces the defendant to disgorge the benefits 'enjoyed during the same period.'" In contrast, a fixed, or constant, rate of interest fails to account for variations in the Federal Reserve rate and, therefore, "risks" that the plaintiff will receive more or less than it would have during the relevant period and the defendant will either unjustifiably benefit or suffer a penalty. The court also noted that the plaintiff offered no evidence suggesting that he could have earned a 10.25 percent interest rate during the relevant period, which could create "a potential windfall for the plaintiff and penalty for the defendants," citing Gentile (declining to award a fixed interest rate where "it [was] so unlikely that the hypothetical prudent investor would have achieved a 10.5 percent rate of return over the past decade, during which the discount rate frequently stood near all-time lows and the equity markets encountered turbulence").
The Levey decision plainly holds that a fluctuating rate of interest is appropriate in calculating pre- and post-judgment interest. The decision, however, provides that the court has "broad discretion" in awarding interest and appears to allow for the consideration of a fixed rate of interest where the evidence suggests that the plaintiff may have been in a position to earn that rate while the action was pending. As such, counsel representing plaintiffs may want to determine if it is appropriate to develop a record regarding the rate of interest their clients may have been able to earn between the date of harm and the entry of judgment.