Time to Update Lawsuit Interest Rates

Friday, April 15, 2016

You’ve heard the dubious advisors that claim to help you invest your money without risking any downturn in the market. Well in Colorado, there’s a legally-sanctioned way to make 9% interest year-after-year, regardless of what happens in the market: File a lawsuit.

Of course, the lawsuit must make a legitimate claim, but under Colorado law, judgments on lawsuits are guaranteed 9% annual interest from the day the lawsuit is filed until the judgment is rendered.

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.

Just this week, Colorado Senate President Bill Cadman and Majority Leader Mark Scheffel introduced Senate Bill 184, which would make interest rates on lawsuits reflect the real world. According to the bill, interest would follow the market, “floating” at 2% above the rate charged by the Kansas City Federal Reserve.

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.

It’s time for lawmakers to remove gamesmanship from the courtroom and to restore common sense by passing SB 184.

 

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