Westbrook v. Fairchild

7 Cal. App. 4th 889, 9 Cal. Rptr. 2d 277, 92 Cal. Daily Op. Serv. 5641, 92 Daily Journal DAR 8742, 1992 Cal. App. LEXIS 817

• Court: California Court of Appeal
• Decided: June 24, 1992
• Docket: E007576
• Status: Published

Opinions

Opinion

HOLLENHORST, J.

I

This case concerns the propriety of a trial court award of prejudgment and postjudgment interest to plaintiff Robert Westbrook in an action arising out of an alleged breach of a contract to make a will.

At trial, four causes of action were submitted to the jury: (1) constructive fraud; (2) fraudulent misrepresentation; (3) breach of the implied covenant of good faith and fair dealing; and (4) bad faith breach of contract. The jury answered special interrogatories by finding that defendant Peter Fairchild had committed constructive fraud and had breached the implied covenant of good faith and fair dealing. The jury awarded plaintiff $500,000 in compensatory damages and $200,000 in punitive damages.

Following the trial, Mr. Fairchild filed motions for a new trial and for judgment notwithstanding the jury’s verdict. The trial court granted both motions on grounds of: (1) instructional error; (2) insufficiency of the evidence; and (3) excessive damages. Mr. Westbrook appealed.

In an opinion filed May 12, 1989, this court held that the trial court erred in granting the motions. This court examined the claims of instructional error and found none. We further found substantial evidence of Mr. Fairchild’s breach of the implied covenant of good faith and fair dealing when Mr. Fairchild revoked a will he had made in favor of Mr. Westbrook, despite an agreement by Mr. Fairchild that he would make, and not revoke, such a will. We therefore reversed the granting of the motions and directed the trial court to reinstate the jury’s verdict in favor of Mr. Westbrook.

Following remand, defendant Fairchild filed a motion for an order settling the form of the judgment. In that motion, he argued that the trial court should not award any prejudgment interest. Mr. Westbrook responded by seeking prejudgment compound interest. The trial court followed our instructions by reinstating the jury verdict. It also signed an amended judgment awarding compound interest.

With regard to the jury’s award of compensatory damages of $500,000, the relevant portion of the amended judgment states: “Plaintiff Robert Machris Westbrook have and recover from Defendant Peter F. Fairchild the sum of $500,000.00, together with compound interest thereon commencing December 31,1969, at the rate of seven percent (7%) per annum until January 1, 1983, and thereafter at the rate of ten percent (10%) per annum until the full amount of the judgment plus interest and costs is paid.” (Italics added.)

With regard to the jury’s award of punitive damages of $200,000, the relevant portion of the amended judgment states that Mr. Westbrook shall recover from Mr. Fairchild “punitive damages in the sum of $200,000.00 together with compound interest thereon at the rate of ten percent (10%) per annum from the date of the verdict (February 6, 1987) until paid.” (Italics added.) The amended judgment was filed and entered on October 30', 1989.

Mr. Fairchild appeals the amended judgment. He argues that Mr. West-brook was not entitled to prejudgment interest, and that the trial court erred in awarding such interest. He further argues that the trial court erred in granting compound interest from the date of the verdict until paid.

II

Prejudgment Interest

*

III

Postjudgment Interest—Compounding of Interest From the Date of the Amended Judgment

Mr. Westbrook next contends that the trial court has discretion to award compound postjudgment interest in cases of fraud by a fiduciary. He relies on Baker v. Pratt (1986) 176 Cal.App.3d 370 [222 Cal.Rptr. 253]: “When a trustee wilfully converts trust property to his own use, he is liable for interest, even though it may not have been prayed for in the complaint. The circumstances of the case determine whether the interest awarded is simple or compound. In cases of mere negligence, no more than single [szc] interest is ever added to the loss or damage resulting therefrom, but if the trustee is guilty of some positive misconduct or wilful violation of duty, the court may award compound interest.” (Id., at pp. 383-384.)

As noted above, we find Baker inapplicable because the discussion preceding this quotation makes it clear that the appellate court held that the trial court’s discretion to compound interest arises from Civil Code section 3288, which gives the trial court discretion when it is the trier of fact. The issue in both the trial court and the appellate court was prejudgment, not postjudgment, interest.

Here, the issue is whether the trial court had the discretionary power to award postjudgment interest of 10 percent compounded, when Civil Code section 3288 is inapplicable because the trial court is not the trier of fact.

We conclude that: (1) The Constitution and statutes limit postjudgment interest to 10 percent simple interest; (2) there is no statutory authority to compound interest; (3) a contrary interpretation would nullify the legislative purpose underlying the judgment renewal statute; and (4) there is no general equitable power to disregard the constitutional and statutory limitations.

Article XV, section 1, subdivision (2) of the California Constitution, added June 8, 1976, provides that “The rate of interest upon a judgment rendered in any court of this state shall be set by the Legislature at not more than 10 percent per annum. Such rate may be variable and based upon interest rates charged by federal agencies or economic indicators, or both. []f] In the absence of the setting of such rate by the Legislature, the rate of interest on any judgment rendered in any court of the state shall be 7 percent per annum. U] The provisions of this section shall supersede all provisions of this Constitution and laws enacted thereunder in conflict therewith.” This section is a limitation on the power of the Legislature to set postjudgment interest rates.⁴ It sets a ceiling that the Legislature cannot exceed. (Morris v. Department of Real Estate (1988) 203 Cal.App.3d 1109, 1112 [250 Cal.Rptr. 432].)

At the time the Constitution was amended in 1976, 7 percent simple interest approximated market rates. Accordingly, the Legislature did not act to set a higher fixed rate, or a variable rate. By 1980, the market rate had risen to approximately 12 percent. Accordingly, the California Law Revision Commission recommended enactment of a statute that would increase the rate to 10 percent, the maximum allowable under the Constitutional provision. The commission’s comments are pertinent when considering the purpose of the provision: “Postjudgment interest serves two important functions —it compensates the judgment creditor for the loss of use of the money until the judgment is paid and it acts as an incentive for the judgment debtor to pay the judgment promptly. These functions are served when the rate of interest on judgments approximates the prevailing interest rate in the money market. The judgment creditor is compensated at a rate that would be obtainable were the judgment satisfied and the funds available for investment; the judgment debtor has no incentive to delay payment since it would not be advantageous to invest the money elsewhere." (Recommendation Relating to Interest Rate on Judgments, 15 Cal. Law Revision Com. Rep. 7 (1980) p. 11.) After discussing the possible alternatives, the commission recommended setting the interest rate on judgments at the maximum rate of 10 percent, but reserving the right of the Legislature to change the rate prospectively. The commission argued that a rate of 10 percent was accurate because it was unlikely that the market rate would drop below 10 percent in the future. This alternative was adopted as Code of Civil Procedure section 685.010. The market rates referred to are simple interest rates, and, by approximating those rates, we think that the commission intended to recommend a simple interest rate of 10 percent.

Code of Civil Procedure section 685.010, subdivision (a) states: “Interest accrues at the rate of 10 percent per annum on the principal amount of a money judgment remaining unsatisfied.” There is no statutory authorization for a higher rate, and the general rule is that there is no compounding of interest in the absence of specific statutory authority. “Interest may not be computed on accrued interest unless by special statutory provision or by stipulation of the parties . . . .” (Estate of Sharp (1971) 18 Cal.App.3d 565, 585 [95 Cal.Rptr. 816], citing State of California v. Day (1946) 76 Cal.App.2d 536, 554 [173 P.2d 399].) Day held that “The legal rate of interest in this state is seven per centum. (Cal. Const, art. XX, § 22.) The general rule is that interest may not be computed on accrued interest unless by special statutory provision, or by stipulation of the parties, and in the latter event the amount may not be fixed in conflict with statutory provisions.” (Id., at p. 554; Lilli Ann Corp. v. City and County of San Francisco (1977) 70 Cal.App.3d 162,198-199 [138 Cal.Rptr. 759].)

In Mendez v. Kurten (1985) 170 Cal.App.3d 481 [215 Cal.Rptr. 924], respondent argued that interest on interest could be given by combining awards under Code of Civil Procedure section 685.010 and Civil Code section 3291. The court held that neither section violates the constitutional prohibition because “neither of those sections, whether applied separately or conjunctively, permits recovery of more than 10 percent simple interest on a judgment from the date of a judgment’s entry until its satisfaction.” (Id., at p. 487, italics added.)

The only exception to the rule that interest on interest (i.e. compound interest) may not be recovered is in situations in which interest is included in a judgment which then bears interest at the legal rate. (45 Am.Jur.2d, Interest and Usury, § 78, p. 71.) One common situation occurs when a judgment is renewed. At that time, accrued interest is included in the new judgment, and the new judgment bears interest at the legal rate.

The renewal sections were also added in 1982 as a result of Law Revision Commission recommendations. (Recommendation Relating to Enforcement of Judgments Law, 16 Cal. Law Revision Com. Rep. 1001 (1982) pp. 1032-1034.) Specifically, Code of Civil Procedure section 683.110 was enacted to provide for renewal, but to prevent renewal more often than every five years.

The commission explained its recommendation as follows: “By preventing the renewal of a judgment more often than once every five years, subdivision (b) of Section 683.110 prevents the judgment creditor from renewing a judgment more frequently merely to compound the interest on the judgment. Renewal has the effect of compounding the interest on the judgment, since interest accrues on the total amount of the judgment as renewed [citations] and the judgment as renewed includes accrued interest on the date of filing the application for renewal.” (Cal. Law Revision Com. com., Deering’s Ann. Code Civ. Proc., § 683.110 (1982) p. 161.)

By adopting this section, the Legislature apparently considered it desirable to limit the compounding effect of interest on a judgment to once every five years. By allowing compounding over some unspecified lesser period, which could be as often as daily, the trial court has interpreted Code of Civil Procedure section 685.010 in such a way as to nullify the legislative purpose behind Code of Civil Procedure section 683.110.

This is improper. In Big Bear Properties, Inc. v. Gherman (1979) 95 Cal.App.3d 908 [157 Cal.Rptr. 443], the debtor argued that allowing interest on the portion of the judgment which contained interest was an impermissible compounding of interest. The court stated: “ ‘Although compound interest generally is not allowable on a judgment, it is established that a judgment bears interest on the whole amount from its date even though the amount is in part made up of interest. . . . As a consequence, compound interest may in effect be recovered on a judgment whereby the aggregate amount of principal and interest is turned into a new principal. . . (Id., at p. 913, italics added.)

Another common situation in which interest on interest is allowed is when prejudgment interest is incorporated in a judgment which then bears interest. (Cal. Rules of Court, rule 875.) Here, there is already a significant compounding effect because two years of prejudgment interest was incorporated into the judgment. Mr. Westbrook seeks to obtain additional compound interest by having the interest on the judgment also compounded. There is no constitutional or statutory authorization for the award he seeks. Since we are modifying the October 30, 1989, amended judgment, the new amount of that judgment bears postjudgment simple interest of 10 percent from that date. (Snapp v. State Farm Fire & Cas. Co. (1964) 60 Cal.2d 816, 818-819 [36 Cal.Rptr. 612, 388 P.2d 884].)

The dissent reviews historical materials to find that the repeal of a statute, Civil Code section 1920, in 1918 somehow prevented the voters from enacting any future constitutional provision that would prohibit compounding postjudgment interest. We find the history of the usury law to be unhelpful in discussing the question of postjudgment interest under the 1976 constitutional amendment and the 1982 enactment of Code of Civil Procedure section 685.010. If we considered historical materials relating to the usury law, we would find that that section 2 of the Usury Law prohibits compound interest except by the clear agreement of the parties. (Deering’s Ann. Uncod. Measures 1919-1 (1973 ed.) p. 40; Ninety Five Ten v. Crain (1991) 231 Cal.App.3d 36, 39-40 [282 Cal.Rptr. 141].) The Usury Law generally limits interest to simple interest, not compound interest. (McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1978) 21 Cal. 3d 365, 366 [146 Cal.Rptr. 371, 578 P.2d 1375, 18 A.L.R.4th 1050]; McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1983) 33 Cal.3d 816 [191 Cal.Rptr. 458, 662 P.2d 916]; Fuller v. White (1948) 33 Cal.2d 236, 240 [201 P.2d 16]; First American Title Ins. & Trust Co. v. Cook (1970) 12 Cal.App.3d 592, 597 [90 Cal.Rptr. 645]; Robertson v. Dodson (1942) 54 Cal.App.2d 661, 664-665 [129 P2d 726]; Warren, Regulation of Cal. Housing Financing: A Forgotten Consumer (1961) 8 UCLA L.Rev. 555, 562; Project, Legislative Regulation of Retail Installment Financing (1960) 7 UCLA L.Rev. 618, 649.) As Robertson states: “[T]he compounding of interest has never been looked upon with favor in this state.” (Robertson, supra, 54 Cal.App.2d 661, 665.) If interest is compounded by specific agreement, it is usurious if it exceeds the maximum allowable rate. (Penzner v. Foster (1959) 170 Cal.App.2d 106, 109 [338 P.2d 533].)

The dissent also argues that the Constitution and the statute do not limit “a trial court’s inherent equitable power to order that interest on a judgment be compounded, so long as such power is exercised in the interest of justice, i.e., according to those guidelines, established by case law, which set forth the circumstances under which the compounding of interest is proper.” Although the dissent finds such power exists in fraud cases, State of California v. Day, supra, 76 Cal.App.2d 536, states “The compounding of interest has not been approved, legislatively or judicially, in this state in a case like the present." (Id., at p. 554.) Day was a fraud case.

We do not believe the trial court, or this court, has any such “inherent equitable power” to disregard the constitutional and statutory limitations stated above. “It has been said that interest on verdicts is purely statutory, and, being in derogation of the common law, cannot be extended beyond the statutory regulation.” (47 C.J.S., Interest, § 20, p. 32.) As that work also states: “[A]s a general rule, judgments do not bear interest as a matter of legal right, or under the common law; and, in the absence of statute, courts of chancery [i.e. equity courts] could not grant interest subsequent to the date of the decree on debts of simple contract, not bearing interest in terms. [([] At the present time, however, interest on judgments is generally allowed by virtue of constitutional or statutory provisions granting such right, even though the obligation on which a judgment is recovered was not interest-bearing in its character; but, as this right to interest is purely statutory and in derogation of the common law, it cannot be extended beyond the statutory regulations or limitations.” (Id., at § 21, subd. (a), p. 33.)

There is no “inherent equitable power” to award postjudgment compound interest. To the contrary, exercise of such a power would contradict the authorities cited above, and would result in a postjudgment interest award which exceeds the constitutional and statutory provisions for the payment of 10 percent simple interest on a judgment until satisfied or renewed. In addition, exercise of such a power would invade the province of the jury. The jury had to make its factual determinations based on the equitable causes of action pled. In doing so, it awarded the amounts it found proper to compensate plaintiff for breach of the 1968 contract to make a will. If the trial court, or this court, assumes unfettered discretion to award additional compound interest because of defendant’s perceived fraud, the effect is to retry issues already determined by the jury.

We therefore conclude that the judgment bears 10 percent simple interest from the date of entry until satisfied or renewed.

IV

Disposition

The order of the trial court granting plaintiff’s motion for interest on the amended judgment is reversed and the case is remanded to the trial court for recomputation of interest as follows: (1) since the damages were not based on a sum certain, preverdict interest shall not be awarded; (2) postverdict interest on the jury’s award of $700,000 shall be awarded at the legal rate of 10 percent per annum simple interest from February 6, 1987, to October 30, 1989; (3) the amount of postverdict interest shall be added to the jury’s award of $700,000, and the new amount will be included in the amended judgment of October 30, 1989, as modified; and (4) the total amount of the modified judgment shall bear simple interest at the legal rate of 10 percent per annum from October 30, 1989, until paid.

Dabney, Acting P. J., concurred.

See footnote, ante, page 889.

4 The dissent concedes that the Constitution and the statute refer to the maximum interest rate allowed on a judgment. Since the Constitution and the statute do not specify simple or compound interest, we think that it limits all interest to a maximum of 10 percent. Thus, any rate, simple or compound, that exceeds 10 percent is prohibited.