Colorado State Senate took a long overdue step to update a 40-year-old statute to reflect today's economic reality when it passed Senate Bill 184 today.
Sponsored by Senate President Bill Cadman and Majority Leader Mark Scheffel, the bill would set interest rates on litigation judgments at 2% above the rate set by the Kansas City Federal Reserve Bank.
State law requires interest be paid on judgments to compensate the plaintiff for the time value of money that was lost. Colorado Supreme Court has repeatedly ruled that judgment interest is not intended to further punish the person who was at fault but to fairly compensate the person who was wronged.
The law goes back to the 1970s when inflation jumped from 3.6% in 1973 to 12.2% in 1974, fell below 9% for about three years and then leaped back into double digits from 1979 to 1981, peaking at 14.8%.
However, for the last 20 years, the Consumer Price Index (which measures inflation) has remained at less than 6%. In fact, CPI has been 3% or less for 181 of those 240 months. Yet Colorado's statutory interest rate remains the same.
This is fair to both plaintiffs and defendants in civil lawsuits.
Under the existing 9% rate, plaintiffs and their attorneys (who typically get one-third to 40% of the judgment) have an incentive to drag out proceedings when they have a legitimate claim and when real-world interest rates are low. When real-world rates are above 9%, as was the case regularly in the 1970s and early-1980s, defendants can make more interest by keeping their in the bank than they will be required to pay when judgment day finally arrives.
As the bill moves to the House, it is sponsored by Rep. Yeulin Willett and is scheduled for a hearing on Monday at 1:30 p.m. in the State, Veterans and Military Affairs Committee.