Is There a Constitutional Right to 12% Interest?
Central bankers have been the bane of a saver’s return for awhile now, but Wisconsin’s court of appeals appears to have carved out a place for litigants to earn a market-beating return. In a decision issued by District II (written by Chief Judge Brown and joined by Judges Reilly and Gundrum), the court recently decided that it was unconstitutional for the legislature to change, retroactively, the rate of pre-judgment interest that applies to offers of settlement. Johnson v. Cintas Corp. No. 2, 13AP2323 (Wis. Ct. App. Jan. 14, 2015).
An “offer of settlement” is a statutory cost-shifting procedure in Wisconsin designed to encourage settlement. Under Wis. Stat. § 807.01, a party can serve an “offer of settlement” on an adverse party, and, if the offeree accepts within 10 days, the court enters judgment in the amount of the offer. The case is over. If the offeree does not accept, however, it makes that choice at its own peril, for the statute shifts litigation costs to that party if it fails to secure a judgment more favorable than the offer. When a plaintiff is the offeror, § 807.01 also tacks on pre-judgment interest, calculated based on the final amount of the judgment and running from the time of the offer until the time that the judgment is paid.
Pre-judgment interest became part of the statute in 1980 and was set at 12% annual interest—a nominal amount in the days of the Volcker Fed and its battle against stagflation, but a rate of return that Wall Streeters lust after now. That rate remained at 12% until 2011, when the legislature changed it to 1% plus the prime interest rate in effect at the time the judgment is entered.
So what happened in Johnson? In 2007, Johnson filed a negligence case in circuit court, arising from an automobile accident, and served an offer of settlement on Crandall (a defendant) for $300,000 in 2008. The parties didn’t settle, and Johnson won $400,000 after trial in 2013. (In the meantime, the case went up to the supreme court to resolve whether Johnson had obtained personal jurisdiction over (and thus a valid default judgment against) his employer, which was misnamed in the complaint. We wrote about that appeal here.) Having obtained a judgment that was larger than the settlement offer, Johnson sought the 12% interest in effect when he made the offer of settlement. By the time of trial, the interest alone was nearly $200,000. The circuit court denied his request and applied the lower interest rate under the revised statute. When Crandall appealed the jury verdict, Johnson cross-appealed on the interest issue.
The court of appeals thought that the statute created a substantive right for litigants, given their expectation that they would receive interest at 12%. If the interest rate was increased or decreased by the legislature after the fact, it would interfere with parties’ expectations in their rights. The court thus found that a retroactive application of the statute would be unconstitutional.
Of course, this issue will not recur, so Johnson‘s holding likely has little precedential value. Under the amended statute, parties can have no expectations regarding pre-judgment interest rates. If the prime rate spikes years into litigation, the interest rate when judgment is entered will be applied retroactively to the date of the offer. Changes in the rate of pre-judgment interest—the issue that troubled the court in this case—now occur automatically.