Wednesday, May 26, 2010

Post-Judgment Interest in Diversity Actions

Under New York law interest on judgments secured in state court runs at the rate of 9% per annum. CPLR § 5004. But what is the rate of interest when a judgment is secured in a diversity action in a federal court located in New York? Ordinarily, interest on a federal judgment is based on the yield on a Treasury note, 28 U.S.C. § 1961(a), a rate which these days is considerably lower than 9%.

In FCS Advisors, Inc. v. Fair Finance Co., Inc., the plaintiff brought a diversity suit in the United States District Court for the Southern District of New York and was awarded summary judgment for $1.5 million. The District Judge awarded prejudgment interest at the New York rate of 9%. He also awarded post-judgment interest at the New York rate of 9%, and not at the lower federal rate, because the parties' contract had a choice-of-law provision that the contract would be governed by New York law.

The United States Court of Appeals for the Second Circuit reversed the award of post-judgment interest at the New York rate, and directed that the federal interest rate applies. The Circuit made several points.

First, in diversity actions state law governs the award of prejudgment interest.

Second, in diversity actions the federal rate applies to post-judgment interest.

Third, parties by contract can agree in "clear, unambiguous and unequivocal language" that a different rate of post-judgment interest will apply to federal judgments.

Fourth, the standard choice-of-law provision of a contract will not alter the federal rate of post-judgment interest because it does not contain "clear, unambiguous and unequivocal language" expressing an intent that a rate other than the federal rate will apply post-judgment. The parties must be more precise. The decision can be found here.

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