B-219881.4 October 20, 1987
B-219881.4: Oct 20, 1987
Willard: This is in response to your letter of October 5. The judgment was affirmed on appeal. The mandate of affirmance was issued on June 10. Was paid on February 6. It was never in dispute that the plaintiff was entitled to some interest on the judgment. The first issue was whether the applicable rate of interest should be the statutory 4 percent rate in effect prior to the October 1. The second issue was whether interest should run to the date of the mandate of affirmance or to November 28. This is the rate our respective staffs had determined to be the applicable rate under the Ninth Circuit's remand. To which we understand the government was prepared to stipulate. (2) The order directs that interests on the June 1982 judgment be paid for the period January 14.
B-219881.4 October 20, 1987
The Honorable Richard K. Willard Assistant Attorney General Civil Division Department of Justice
ATTN: Robert E. Kopp, Esq. Director, Appellate Staff
Re: Duncan Campbell v. United States, Civil No. 85-0932 (D. Hawaii)
Dear Mr. Willard:
This is in response to your letter of October 5, 1987, seeking our comments on whether the district court's September 21, 1987 order in the above-captioned case should be appealed. We recommend appeal.
To recapitulate briefly, the plaintiff received a judgment on June 17, 1982, in an action under the Federal Tort Claims Act, in the amount of $2,407,034.41. The judgment was affirmed on appeal, and the mandate of affirmance was issued on June 10, 1983. The judgment, without interest, was paid on February 6, 1984.
It was never in dispute that the plaintiff was entitled to some interest on the judgment. However, two issues arose. The first issue was whether the applicable rate of interest should be the statutory 4 percent rate in effect prior to the October 1, 1982 effective date of the Federal Courts Improvement Act, or a higher rate determined under 28 U.S.C. Sec. 1961(a), as amended by that Act. The second issue was whether interest should run to the date of the mandate of affirmance or to November 28, 1983, the date the district court denied the government's Rule 60(b) motion for relief.
On November 29, 1985, the district court awarded interest through November 28, 1983, and also ruled that the applicable rate should be 4 percent. The November 1985 judgment also said "compounded annually at 4 percent until paid." The plaintiff appealed. The Court of Appeals for the Ninth Circuit declined to follow the cases on which the government had relied, /1/ and held that the rate determined under the amended 28 U.S.C. Sec. 1961 should apply. The Court of Appeals reversed the district court's November 1985 decision, and remanded the case "for determination of the appropriate T-bill rate that should be applied to Campbell's judgment." Campbell v. United States, 809 F. 2d 563, 577 (9th Cir. 1987).
The Ninth Circuit's opinion contains no discussion of the issue of compounding the interest, the only mention of compounding appearing in 809 F. 2d at 567, n.3.
The remand resulted in the district court's September 21, 1987 order. The order contains three elements:
(1) The order directs that the June 1982 judgment bear interest at the rate of 13.61 percent. This is the rate our respective staffs had determined to be the applicable rate under the Ninth Circuit's remand, and to which we understand the government was prepared to stipulate.
(2) The order directs that interests on the June 1982 judgment be paid for the period January 14, 1983 /2/ through November 28, 1983, in the total amount of $286,312.07. Again, we understand that the government was prepared to stipulate to this figure.
(3) The third element of the order, which is the part we believe is erroneous, provides:
"IT IS FURTHER ORDERED that the total amount of interest due shall be compounded annually at 13.61 percent pursuant to 28 U.S.C. Sec. 1962(b), and that Defendant shall pay to Plaintiff the total amount of $419,845.36 as of November 28, 1986. For each day after November 28, 1986 that the interest remains unpaid, interest shall accrue at the rate of $156.56 per day. For each day after November 28, 1987 that the interest remains unpaid, interest shall accrue at the rate of $177.86 per day until paid. Interest shall thereafter be compounded on each subsequent annual anniversay of November 28 at the rate of 13.61 percent per annum."
(We assume the refernce to Sec. 1962 (b) was a typographical error, and that Sec. 1961(b) was intended.)
The provision for annual compounding is clearly inconsistent with the governing statutes. Section 1961 (b) of 28 U.S.C. provides as follows:
"Interest shall be computed daily to the date of payment except as provided in section 2516(b) of this title and section 1304(b) of title 31, and shall be compounded annually."
The relevant portion of 31 U.S.C. Sec. 1304(b) permits post-judgment interest only from the date of filing with GAO to the mandate of affirmance (in this particular case, as determined in the prior proceedings, the denial of the government's Rule 60(b) motion). These dates, as reflected in the second element of the September 1987 order, are January 14, 1983, and November 28, 1983, respectively.
We submit that the provision in 28 U.S.C. Sec. 1961(b) for annual compounding can apply to judgments against the United States only when the period between the beginning and ending dates prescribed by 31 U.S.C. Sec. 1304(b) found in the very same sentence. Since the relevant time period in the subject case was less than 1 year, there is no occassion to apply the compounding provision.
In addititon, the concept of compounding interest by its very definition relates to to the period of time during which the principal itself remains unpaid. For example, one court has defined compound interest as--
"'interest upon interest,' that is, interest upon the principal sum is calculated when the interest is due and then added to principal, the principal sum being thus enlarged and the applicable rate being applied to the new principal sum until the date interest is next due, when the process is repeated."
City of Austin v. Porter, 623 S.W. 2d 672, 674 n.2 (Tex. Civ. App. 1981). To illustrate, given a principal of $1,000 and an interest rate of 10 percent, interest for the first year will be $100. If the principal remains unpaid at the end of the first year, the first year's interest is added to the principal, and the rate is applied to the "new" principal for the second year. Using our example, the 10 percent rate would be applied for the second year tothe new principal of $1,100. Interest -- by definition compensation for delay in receiving payment -- is never authorized beyond the time that the principal itself is paid. In this case, the principal was paid on February 6, 1984.
Available legislative history demonstrates that this is precisely what was intended. The Senate version of the bill which became the Federal Courts Improvement Act of 1982 included a provision for pre-judgement interest. The Senate Judiciary Committee explained the provisions as follows:
"For instance, a plaintiff who is unlawfully deprived of the use of $20,000 in 1976 and who does not receive a judgment until 1979, could have obtained $4,500 in those three years by investing the money at seven percent compounded interest."
S. Rep. No. 97-275, 97th Cong., 1st Sess. 11-12, 30 (1981). While the provision for pre-judgment interest was deleted later in the legislative process, the example used by the Senate committee illustrates how compound interest was intended to poerate. The basic premise is an amount of $20,000 that is unpaid for 3 years:
Year 1: Principal of $20,000 x .07 = $1,400 interest. Year 2: New principal of $21,400 x .07 = $1,498. Year 3: New principal of $22,898 x .07 = $1,602.86. Total principal plus compounded interest for 3 years = $24,500.86.
Interest is never compounded against interest alone; it is compounded against principal, and only for the period that the principal remains unpaid.
What the district court appears to have done in its September 1987 order is to treat the interest found payable on the June 1982 judgment -- $286,312.07 -- as a new principal, and to then direct the payment of interest on that "new principal" at the rate of 13.61 percent compounded annually from November 28, 1983, until paid. To the extent this purports to reflect interest payable on the June 1982 judgment in accordance with 28 U.S.C. Sec. 1961(b), it is, as discussed above, in our opinion plainly erroneous.
Even if the district court's November 1985 judgment could be considered a separate judgment for interest purposes, interest could not run on that judgment under the governing statutes because it was the plaintiff and not the government who appealed that judgment, and in any event the 13.61 percent rate would have no relevance to a November 1985 judgment.
In sum, it is our view that the plaintiff is entitled to $286,312.07, representing interest on the June 1982 judgment at the rate of 13.61 percent from January 14, 1983 to November 28, 1983, /3/ and to no more. The September 1987 order would increase the government's interest liability by an additional amount of nearly $200,000. In our opinion, this is not authorized by the governing statutes, nor is it mandated by the Ninth Circuit's decision at 809 F. 2d 563. Accordingly, we recommend appeal.
If we can provide any further assistance, please feel free to contract Mr. Robert Centola of this Office at 275-5644.
ROBERT H. HUNTER Assistant General Counsel
1. Primarily Brooks v. United States, 757 F. 2d 734 (5th Cir. 1985) and Litton Systems, Inc. v. American Tel. & Tel. Co., 746 F. 2d 168 (2d Cir. 1984).
2. This is the date the plaintiff filed the June 1982 judgment with GAO, as required by 31 U.S.C. Sec. 1304(b).
3. Use of November 28, 1983 as the ending date for interest computation is also arguably incorrect in view of hte precise language of 31 U.S.C. Sec. 1304(b). However, it may no longer be possible to raise this issue.