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Design Trend Int'l Interiors, Ltd. v. Cathay Enters., Inc.

United States District Court, D. Arizona

March 16, 2015

Design Trend International Interiors, Ltd., an Arizona corporation, Appellant,
v.
Cathay Enterprises, Inc., an Arizona corporation, Appellee

For Design Trend International Interiors Limited, an Arizona Corporation, Appellant: Tyler Quinn Swensen, LEAD ATTORNEY, Dennis Ira Wilenchik, Wilenchik & Bartness PC, Phoenix, AZ.

For Cathay Enterprises Incorporated, an Arizona Corporation, Appellee: Devin Sreecharana, LEAD ATTORNEY, Daniel P Collins, Philip G May, May Potenza Baran & Gillespie PC, Phoenix, AZ.

ORDER

Neil V. Wake, United States District Judge.

Before the court are questions of prejudgment interest and attorneys' fees. Plaintiff/Appellant Design Trend International Interiors, Ltd. (" Design Trend" ) was previously awarded damages of $169,025.22, with prejudgment interest at the Arizona statutory rate of 10% and postjudgment interest at the federal statutory rate of 0.26%. (Doc. 93.) Attorneys' fees were awarded in the amount requested of $382,966.44, plus taxable costs of $10,203.93. Design Trend Int'l Interiors, Ltd. v. Cathay Enters., No. CV 10-01079-PHX-NVW, at *17, 2012 WL 727257, at *7 (D. Ariz. Mar. 6, 2012).

Judgment was originally entered on March 29, 2011, but the court concluded on reconsideration that it had erred in overlooking prejudgment interest and that Defendant/Appellee Cathay Enterprises, Inc. (" Cathay" ) was entitled to additional findings on some claimed offsets that the Bankruptcy Court had not addressed. In light of the nearly ten years this dispute had already been in litigation, this court withdrew the reference of the adversary proceeding to make those additional findings here. (Doc. 69 at 8.) The March 29, 2011 judgment was vacated in light of the need to change the award, and a corrected judgment was entered on March 6, 2012. (Doc. 93.) The corrected judgment was backdated to the date of the original judgment, March 29, 2011, so no party would suffer from the fortuity that the original judgment was vacated and replaced. (Doc. 92, 93.) But this court did not explain its reason for making the second judgment nunc pro tunc.

The Court of Appeals affirmed the principal damage award but reversed and remanded the calculations of prejudgment interest and attorneys' fees. This court " erred in using the equitable remedy of nunc pro tunc to backdate its order for the purpose of calculating prejudgment interest." (Doc. 113-1 at 4.) In accordance with the mandate of the Court of Appeals, this court now addresses the rate of prejudgment interest to apply up to the date of a final judgment, not the nunc pro tunc date of the original judgment. Under Arizona statute, Design Trend is entitled to interest at 10% per annum on that liquidated obligation until judgment.

Because the Court of Appeals reversed and remanded the judgment of March 6, 2012, the question arises whether the prejudgment interest rate stops on the date of that former final judgment or continues until entry of a new final judgment on remand. The Bankruptcy Court recently shed light on this question when it ruled, at Cathay's urging, that the March 6, 2012 judgment is not final in any part and nothing may yet be paid under it. Consistent with that decision and with principles of judgment interest independent of that ruling, in the specific circumstances of this case it is more equitable for the prejudgment interest rate to continue until entry of a final judgment on remand.

The Court of Appeals also remanded for " further explanation and, if necessary, recalculation" of the award of attorneys' fees because this court " did not give enough information to determine whether the attorneys' fees award was reasonable" and failed to indicate that it " excluded fees that could be attributed to work performed during the bankruptcy proceedings unrelated to the contract dispute." (Doc. 113-1 at 4-5.) This court now addresses in more detail why it awards attorneys' fees in its discretion under state law and why all the attorneys' fees directly incurred in the bankruptcy case are intertwined with the contract claim and therefore awardable.

Judgment will be entered in favor of Design Trend against Cathay in the amounts of: $169,025.22 for damages; $199,218.22 for prejudgment interest at the rate of 10% per annum from June 5, 2003, until March 16, 2015; $381,936.14 for attorneys' fees; $10,203.93 for taxable costs; and postjudgment interest on all those amounts at the federal rate of 0.25% from March 16, 2015, until paid.

The award for attorneys' fees and taxable costs exceeds the damages and interest, but that is to be expected when a dogged defense through fourteen years of litigation ends in adjudication on the merits, not capitulation. The prejudgment simple interest at 10% per annum equates to only 6.83% compound interest. The effective interest rate on the cost to Design Trend is much lower, probably under 4%, because there is no prejudgment interest on the attorneys' fees and taxable costs incurred over many years. In this commercial dispute between sophisticated parties, these are modest and foreseeable consequences of playing hard and losing.

I. PREJUDGMENT INTEREST

A. Summary

The question presented is whether, under a 2011 amendment to Arizona Revised Statutes § 44-1201, a party owing a liquidated sum, on which 10% interest accrues until entry of judgment, partially extinguishes that accrued interest obligation by not paying it. By forcing the creditor to sue and reduce his claim to judgment, does the debtor make the lower postjudgment interest rate apply backwards to oust part of the prejudgment interest previously accrued at 10%?

The answer is no. First, the language of the 2011 amendment leaves in place the 10% prejudgment interest rate on liquidated obligations without an agreed rate. The language falls far short of compelling a partial forfeiture of past interest. Second, if the " plain language" of the amendment did favor forfeiture--which it does not--that conclusion would be perverse. Even " plain language" in a statute does not compel an absurd result. Third, under the Applicability section of the Session Laws, the amendment " applies to all loans that are entered into, all debts and obligations that are incurred and all judgments that are entered on or after the effective date of this act." 2011 Ariz. Sess. Laws 99, § 17. The liquidated obligation in this case was incurred long before the effective date of the 2011 amendment. So even if that amendment in general purports to defeat accrued interest upon later entry of a judgment, Cathay's breach-of-contract debt is excluded.

B. The 2011 Amendment of A.R.S. § 44-1201 Leaves in Place Prejudgment Interest at 10% on Liquidated Obligations with No Agreed Rate of Interest

Federal judgment creditors are entitled to interest " calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield." 28 U.S.C. § 1961(a). The federal statute is silent on how much prejudgment interest, if any, should be provided in the judgment. " Substantive state law determines the rate of prejudgment interest in diversity actions." Home Indem. Co. v. Lane Powell Moss & Miller, 43 F.3d 1322, 1332 (9th Cir. 1995) (citation omitted). This case is equivalent to a diversity case removed to federal court. (Doc. 92 at 6; In re Banks, 225 B.R. 738, 750 (Bankr. C.D. Cal. 1998) (" The removed [adversary proceeding] is equivalent to a diversity action, as it is not brought under any aspect of federal law and is in this court only due to its relationship to the [core] bankruptcy." ).) Design Trend is therefore entitled to prejudgment interest in the amount Arizona law provides for a liquidated obligation with no agreed rate of interest.

1. Statutory Text and History

Before July 20, 2011, Arizona had a simple regime for interest on judgments and interest owing without entry of a judgment. Under former A.R.S. § 44-1201, an agreed legal rate of interest governed both prejudgment and postjudgment. Otherwise, 10% was the rate on judgments and for interest owing even without entry of a judgment. The statute said:

A. Interest on any loan, indebtedness, judgment or other obligation shall be at the rate of ten per cent per annum, unless a different rate is contracted for in writing, in which event any rate of interest may be agreed to.
. . .
C. A judgment given on an agreement bearing a higher rate not in excess of the maximum permitted by law shall bear the rate of interest provided in the agreement, and it shall be specified in the judgment.

A.R.S. § 44-1201 (2003 & Supp. 2010); see also Metzler v. BCI Coca-Cola Bottling Co. of L.A., 235 Ariz. 141, 145, 329 P.3d 1043, 1047 (2014) (" [F]rom 1992 to 2011, § 44-1201 did not differentiate between judgments and other obligations, or between prejudgment and post-judgment interest on judgments." ). Judicial decisions added to the law of prejudgment interest in this sparse statute.

In 2011, the Legislature amended § 44-1201 to codify elements of case law and to make two changes (one of which, prohibition of interest on punitive damages, has no bearing on this case). For interest on any " loan, indebtedness or other obligation" except a judgment, the prior statutory language was left in place. If the parties have agreed to a rate, that rate governs; otherwise the rate is 10%. The other change was to reduce judgment interest in cases without an agreed rate, from the previous 10% to the lesser of 10% or 1% above the prime rate. This change sets a variable market rate for judgment interest, but capped at 10%, unless the parties have agreed to a different rate.

The 2011 amendment achieves this by adding some new language while leaving other language in place. The amended text of § 44-1201 is as follows (strikeout shows deletions, italics shows additions):

A. Interest on any loan, indebtedness judgment or other obligation shall be at the rate of ten per cent per annum, unless a different rate is contracted for in writing, in which event any rate of interest may be agreed to. Interest on any judgment that is based on a written agreement evidencing a loan, indebtedness or obligation that bears a rate of interest not in excess of the maximum permitted by law shall be at the rate of interest provided in the agreement and shall be specified in the judgment.
B. Unless specifically provided for in statute or a different rate is contracted for in writing, interest on any judgment shall be at the lesser of ten per cent per annum or at a rate per annum that is equal to one per cent plus the prime rate as published by the board of governors of the federal reserve system in statistical release H.15 or any publication that may supersede it on the date that the judgment is entered. The judgment shall state the applicable interest rate and it shall not change after it is entered.
. . .
D. A court shall not award either of the following :
1. Prejudgment interest for any unliquidated, future, punitive or exemplary damages that are ...

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