Editor’s note: This article describes a hypothetical situation.
Lawyers periodically select Bob as a neutral arbitrator. Bob knows he has only one shot as the arbitrator. Something about the functus officio doctrine that limits his ability to revisit issues once he makes his final decision. So Bob spends lots of time to ensure he “gets it right.” And if he finds in favor of the claimant, he goes out of his way to make the claimant whole.
At a recent arbitration hearing in which Bob was the arbitrator, franchisee Frank Franklin sued franchisor Frankfurters Fast Food, claiming the franchisor had not provided Franklin with promised support. Franklin claimed he lost customers due to the lack of support and that he was not able to pay down his high-interest-rate business loans. Reduced revenues and increased costs equaled a recipe for disaster. “Frankly, I do not know if I can keep my restaurant open much longer,” Franklin lamented on direct examination.
After the hearing ended, Bob concluded that franchisor Frankfurters Fast Food had breached the franchise agreement and that Franklin had lost profits. What about Franklin’s increased expenses? Bob could not figure out how to award an acceptable remedy without overcompensating Franklin. Still, an award of lost profits alone did not seem to cut the mustard.
Bob decided to be creative without being a hot dog. He knew arbitrators have broad authority to order any type of relief. Bob’s solution: He awarded money damages and “post-award interest, at the rate of 8 percent per year.” Bob figured Frankfurters Fast Food would pay the award quickly rather than attack the validity of the award and risk mounting interest costs in the interim. Unfortunately, Bob did not read Abraham J. Gafni’s article, “Are There Limits to an Arbitrator’s Award of Interest?” published in the June 18 issue of The Legal. Franklin filed a petition to confirm Bob’s arbitration award. The district court granted the petition over Frankfurters Fast Food’s objections and entered judgment in favor of Franklin. However, the judgment gave post-judgment interest to Franklin at the measly default federal rate. So much for Bob’s “post-award interest at the rate of 8 percent per year.” So much for Bob’s hope that Frankfurters Fast Food would forgo an appeal.
Did the district court impermissibly disregard Bob’s award of a higher rate of interest? Could Bob as arbitrator have achieved his goal of awarding super-post-judgment interest to Franklin?
Under federal law, 28 U.S.C. § 1961, a court must award post-judgment interest on any money judgment in a civil case. Post-judgment interest “shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average one-year constant maturity yield.” That rate is now a paltry 0.11 percent — a fraction of the “post-award interest at the rate of 8 percent per year” that Bob awarded.
Parties may contract for a different post-judgment rate. “But to do so, they must specifically contract around the general rule that a cause of action reduced to judgment merges into the judgment and the contractual interest rate therefore disappears for post-judgment purposes,” according to Tricon Energy v. Vinmar International, 2013 U.S. App. LEXIS 9110, at *18 (5th Cir. May 3, 2013). A party in an arbitration proceeding faces additional hurdles to get over the federal post-judgment interest rate.
First, there must be some basis in the underlying contract to award post-judgment interest at a rate different from the federal rate. “Language expressing an intent that a particular interest rate apply to judgments or judgment debts [must] be clear, unambiguous and unequivocal,” as in Huntsville Golf Development v. Brindley Construction, 2011 U.S. Dist. LEXIS 128395, at *51 (M.D. Tenn. Oct. 18, 2011) (citation omitted).
In Citicorp Real Estate v. Smith, 155 F.3d 1097, 1107-08 (9th Cir. 1998), for instance, the court granted super-post-judgment interest because a promissory note specifically provided for “interest at the default rate … from March 1, 1991, to the date of entry of judgment and, after judgment until collection.”
On the other hand, the parties in Jack Henry & Associates v. BSC, 753 F. Supp. 2d 665, 670 (E.D. Ky. 2010), did not contract around Section 1961 and agree to a different post-judgment interest rate; their contract provided only that “amounts outstanding after the due date are subject to an interest charge to date of payment of the lesser of 18 percent per annum or the highest legally allowable rate.” Likewise, the plaintiff in American Produce LLC v. Vargas, 2012 U.S. Dist. LEXIS 69576, at *26 (D. Colo. April 24, 2012), approved, 2012 U.S. Dist. LEXIS 69569 (D. Colo. May 18, 2012), was stuck with the federal default rate because the agreement “contain[ed] no mention of post-judgment interest and [made] no reference to 28 U.S.C. &ect;1961. … Thus, the court [did] not find that the plaintiff has demonstrated an entitlement to post-judgment finance charges at a rate of 18 percent per annum.”
Second, the parties must agree to submit the issue of post-judgment interest to arbitration. One way is to agree to arbitrate “any and all” claims, differences or controversies arising out of a specified agreement. The court in Tricon Energy concluded the parties had submitted the issue of post-judgment interest to arbitration because their arbitration agreement referred to “‘any and all differences and disputes of whatsoever nature arising out of this agreement.’” And in Newmont USA v. Insurance Co. of North America, 615 F.3d 1268, 1272 (10th Cir. 2010), the parties agreed to arbitrate the issue of post-judgment interest because they agreed to arbitrate “any dispute arising out of” their agreement.
The parties may agree to arbitrate the issue of post-judgment interest, not by words, but by conduct — or what Bob calls “waiver.” (See, e.g., Connecticut Police and Fire Union v. Slate, 2011 Conn. Super. LEXIS 2628, at *10 (Conn. Super. Oct. 14, 2011) (“the agreement to arbitrate a particular issue may be implied from the parties’ conduct, including their actual litigation of that issue”) (citing Newmont USA); Twist v. Arbusto, 2007 U.S. Dist. LEXIS 42337, at *5 (S.D. Ind. June 8, 2007) (“An agreement to arbitrate may be implied when a party participates in an arbitration proceeding without objecting to the arbitrator’s or panel’s authority to hear the matter, or, as in this case, to decide a particular issue.”).)
Third, the arbitrator must clearly and unambiguously award a nonstatutory rate of post-judgment interest. A pithy award of “post-award interest” does not do it. Nor is it enough for the arbitrator to say that interest will be added to the arbitration award from the date payment is due to the date payment is made. The arbitrator must expressly refer to “post-judgment interest.” Compare Fidelity Federal Bank FSB v. Durga Ma, 387 F.3d 1021 (9th Cir. 2004) (“interest at the statutory rate” in arbitration award did not displace federal statutory rate) with Newmont USA (interest displaced federal rate; arbitration award provided for “pre- and post-judgment interest at the rate of 1.5 percent per month”).
Bob paid no attention to these three requirements that allow an arbitrating party to get around the federal post-judgment interest rate. The franchise agreement said nothing about awarding post-judgment interest at a rate different from the federal rate. Neither Frankfurters Fast Food nor Franklin sought to recover post-judgment interest to displace the federal post-judgment interest. And Bob’s arbitration award was not sufficiently clear and unambiguous to award post-judgment interest. Maybe Bob will learn from these mistakes and insert post-judgment interest provisions in the contracts that he drafts for his clients. Stay tuned.
Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, where he practices all types of alternative dispute resolution,
both as a neutral and as counsel to parties engaged in ADR. He is a former co-chair of both the Philadelphia Bar Association’s alternative dispute resolution committee and the fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings.You can reach him at 215-851-8406 and [email protected].
