Relates to offers to compromise the computation of interest in personal injury actions and the rate of interest

This measure would: (1) authorize payment of prejudgment interest in personal injury actions, and (2) change the legal rate of interest and make the interest rate for all actions uniform.

I. Payment of prejudgment interest in personal injury actions. This measure would amend CPLR 3221 to provide that where an offer to compromise is proffered in any action by a party against whom a claim is asserted, but is not accepted by the claimant, if the claimant fails to obtain a more favorable judgment, the claimant's recovery of interest as well as costs shall be limited to the period preceding the offer. The amendment of CPLR 3221 is designed to encourage parties to settle claims at an early stage by potentially affecting the amount of interest as well as costs recoverable upon judgment.

This measure also would amend subdivisions (a) and (b) of CPLR 5001, relating to prejudgment interest, to provide for the prejudgment accrual of interest in a personal injury action. CPLR 5001(a) designates the types of actions in which prejudgment interest now is accruable, and CPLR 5001(b) fixes the date from which interest accrues in those actions. This measure would add personal injury actions to those which are now included in subdivision (a). It also would specify in subdivision (b) that such interest shall commence to run one year from the date of the commencement of the action to the date of verdict, report or decision, exclusively on special and general damages incurred to the date of such verdict, report or decision. Both subdivisions (a) and (b) of CPLR 5001 would be restructured to achieve greater order and cohesiveness.

The amendment to CPLR 3221 gives an incentive to plaintiffs to settle or proceed expeditiously to trial; the amendment to CPLR 5001 gives the same incentive to defendants.

This measure, based on considerations of equity and effective case disposition, reflects a growing national trend. At least 27 states, as opposed to five in 1965, now require an award of prejudgment interest in personal injury and wrongful death actions. New York's EPTL §5-4.3 already provides for such interest in a wrongful death action. This measure, by selecting one year from the date the action is commenced as the point at which interest begins to accrue, is designed to strike a balance of equities between plaintiff and defendant while fostering disposition. Such balance discourages undue delay by a plaintiff who might be tempted to seek accumulation of

interest from an earlier accrual date, and discourages excessive reticence in settling by a defendant who might be prompted to delay settlement if the accrual date were later. Interest would be computed on awards only, since settlements are concluded with interest in mind, and the imposition of additional interest where settlements are achieved would be inequitable.

The measure would allow for prejudgment interest for compensatory damages already incurred. Prejudgment interest would not accrue for punitive or future damages.

II. Legal rate of interest. This measure would amend CPLR 5004 to replace the current interest rate -- which is set at a fixed 9% per annum -- with a variable rate that would be the rate of return on one-year Treasury bills plus 3%. The measure also would amend section 5004 to override all other interest provisions in New York law and to make the interest rate for all actions uniform.

This measure would alter the rate of interest in those instances in which the parties have not agreed on a different rate. However, in contrast to the current statute, which defers to other statutes that set different rates for different entities, the amended statute would govern all municipal and non-municipal entities. Indeed, the desire for uniformity is one reason for the proposed change.

There are three principal reasons for the proposed amendment. First, we believe that an unchanging, fixed rate is both illogical and unfair. A fixed rate does not reflect the changing economic reality of the cost of money. Many states have abandoned fixed rates in favor of variable interest rates. Such is also the norm in the federal courts, where 28 U.S.C. .1961 ties the interest rate to the one-year Treasury bill rate. We believe that a variable rate is inherently fairer to both plaintiffs and defendants.

Second, we believe it inappropriate to have widely varying rates for different payors. Currently, some municipal defendants, including New York City, and the State have rates that "shall not exceed" 9%. Some, like the Water Authority of Southeastern Nassau County, have rates that "shall not exceed six per centum per annum." Some municipal defendants, like the Metropolitan Transportation Authority and the New York City Transit Authority, have rates capped at 4% or 3% per annum.

Third, a uniform, easily calculated rate will avoid unnecessary and wasteful litigation. As matters now stand, where the applicable statute provides for a municipal rate that "shall not exceed 9%," the parties are forced to litigate what is appropriate on a case-by-case basis. See Denio v. State, 7 N.Y.3d 159 (2006).

Some states that have variable interest rates use a rate tied to prime lending rates. Other states follow various Treasury bill rates. The "one-year United States Treasury bill rate" in the proposed statute is the same exact rate, word for word, as is currently used in federal courts under 28 U.S.C. § 1961. The difference is that we propose an addition of 3%.

The reason for the 3% addition is that the federal rate is very low as compared to (1) the real cost of money (including, most notably, the prime rate that a bank would charge a "blue chip" corporate borrower); (2) the interest rates (both fixed or variable) in all or virtually every other state; and (3) our current, statutorily fixed rate of 9%. The other states that already use the federal rate as a base include an addition that ranges from a low of 2% to a high of 6%.

The federal rate exceeded 5% at different points during 2006, but dropped below 1% in December, 2008. The rate has dropped below 2% at various times this decade. We believes that this recent history underscores the need for the 3% additur. Yet, even with the 3% additur, enactment of this measure would currently effect a significant decrease in the legal interest rate as compared to the cunent 9% fixed rate.

Under the measure, the rate in any particular action would be 3% higher than the published one-year Treasury rate for the week preceding entry of judgment in that action. That rate would remain in place throughout the course of the post-judgment proceedings and would also govem the assessment of pre-judgment interest in those actions in which pre-judgment interest is awarded. This one-rate-per-action feature strikes a balance between the competing goals of accuracy and simplicity.

Curently, CPLR 5001 dictates that pre-verdict interest "shall" be recovered upon awards in certain actions. CPLR 5002 states that interest "shall" be awarded from date of verdict until date of judgment upon any sum awarded. CPLR 5003 dictates that every judgment "shall" bear interest from date of entry. Yet, at least with respect to nonmunicipal defendants, there is one rate of interest regardless of whether interest is assessed pre-verdict or post-verdict: the legal rate of interest specified in CPLR 5004.

In contract actions, the parties may agree among themselves as to the (nonusurious) interest rate that will govern in the event that damages must be paid, at least with regard to pre-judgment interest and arguably with regard to post-judgment interest as well. This measure would not change the existing law with regard to contract rates of interest in any respect.

This measure would take effect January first next after it shall have become a law.

2009 Legislative History: OCA 2009-40