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When, How and How Much Interest Can You Recover in a Legal Dispute?

When you are involved in a legal dispute, one area often overlooked is the right to recover interest. If your dispute has existed for a long time, the interest can add up. For example, if you are owed $1,000,000 and it takes 5 years to collect, you could obtain over $500,000 in interest!

1. Interest Generally

In California, the amount of interest available to prevailing parties typically depends on whether or not the dispute is contractual in nature (like a lease agreement, car purchase agreement, or an employment agreement). The recovery of interest is mostly governed by the California Civil Code § 3287 and § 3289. The general rule is set forth § 3287 (a) as follows: "Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor from paying the debt..." Therefore, it is important to understand when and from what date a party is able to collect prejudgment interest in a legal dispute.

2. Prevailing Parties

In order to recover interest you must be the prevailing party. Simply put, the prevailing party is the winner of the lawsuit. Even if the Plaintiff (person bringing the claim) gets far less than they originally claimed, they are still considered the prevailing party and can recover interest on their claim. However, no prevailing party exists when a complaint is settled before or during trial.

3. There are three basic areas where this issue may arise.

1. Contract (i.e., breach of contract claims) 2. Tort (i.e., fraud, negligence, breach of fiduciary duty, conversion, intentional injury, etc.) 3. Statute (i.e., a particular law that allows recovery for its violation)

4. Interest under Contract Claims (breach of lease, purchase contract, employment)

Recovering interest on a dispute based upon a contractual obligation is prescribed a different set of standards than tort or statutory obligations. Under California Civil Code § 3287(b): "Every person who is entitled under any judgment to receive damages based upon a cause of action in contract where the claim was unliquidated, may also recover interest thereon from a date prior to the entry of judgment as the court may, in its discretion, fix..." Interest is recoverable from time of breach when amount of money due is liquidated or from time it becomes liquidated. Moreno v. Jessup Buena Vista Dairy (1976) 50 Cal.App.3d 438. This means when the amount owed can be determined in a set amount or formula. A trial court has no discretion and must award prejudgment interest upon request from the first day there exists both breach of contract and a liquidated claim. North Oakland Medical Clinic v. Rogers (1998) 65 Cal.App.4th 824.

5. Interest under Tort Claims (negligence, fraud, breach of fiduciary duty, etc.)

Like statutory obligations, prejudgment interest is also recoverable on tort damages under California Civil Code § 3287(a). For example, this interest is available as a matter of law in tort actions for property damages from the date when the defendant has notice of an amount certain or capable of being made certain. Levy-Levy-Zentner Co. v. Southern Pac. Transportation Co., (1977) 74 Cal. App. 3d 762.

6. What Interest Rate Applies?

1. Tort (7%) Where interest is awarded on tort and other non-contractual claims, the rate is 7% per annum. See California Constitution, Article 15, section 1; and Children's Hospital and Medical Center v. Bonta, (2002) 97 Cal. App. 4th 740, 775. 2. Contract (Amount set in contract or 10%) Under California Civil Code § 3289(a) "Any legal rate of interest stipulated by a contract remains chargeable after a breach thereof...until the contract is superseded by a verdict or other new obligation." However, "[i]f a contract does not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10 percent per annum after breach." California Civil Code § 3289(b).

7. Conclusion

The dates are important, so when the breach of contract should be identified. Be sure to try and quantify the amount early on so you know whether it will ultimately be recoverable. That is what is meant by a "liquidated claim". If the amount cannot be figured out, then the recovery of interest is less likely. For a tort claim, the date of the injury or wrongdoing by the other party would likely be the trigger date.

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