Opinion ID: 148187
Heading Depth: 1
Heading Rank: 12

Heading: The Rate of Prejudgment Interest

Text: The combined effect of the District Court's Phase I and Phase II rulings was to leave Travelers entitled to $8,226,817 in damages from INA. The Court then turned to the issue of prejudgment interest, specifically whether such interest was to be calculated according to the New York rate of 9%, N.Y. C.P.L.R. § 5004, or the Pennsylvania rate of 6%, 41 Pa. Stat. § 202. The Court concluded thateven though the parties agreed New York law governed the reinsurance certificates that formed the basis of INA's liability to TravelersPennsylvania law governed the calculation of prejudgment interest on the damages awarded to Travelers. That is because, according to the District Court, the law governing the calculation of prejudgment interest in Pennsylvania contract actions is procedural, rather than substantive, for choice-of-law purposes. We disagree with this characterization. The District Court based its conclusion on Yohannon v. Keene Corp., 924 F.2d 1255 (3d Cir.1991), a case that concerned Pennsylvania Rule of Civil Procedure 238, which governs delay damages [35] in actions for bodily injury, death[,] or property damage. Pa. R. Civ. P. 238(a)(1). More specifically, in Yohannon we addressed whether a federal court sitting in diversity in Pennsylvania must apply Rule 238 to tort damages even where (as here) the parties have stipulated that the law of another state governs their dispute. Yohannon, 924 F.2d at 1264. In answering yes to this question, we stressed that the Pennsylvania Supreme Court has repeatedly held that Rule 238 falls within the Court's authority to make rules of procedure governing the administration of Pennsylvania's court system. Id. at 1265-66. From that, we predicted that the Court would also characterize Rule 238 as procedural for choice-of-law purposes. Id. at 1267. We thus held that a district court exercising diversity jurisdiction in Pennsylvania must apply Rule 238 to the calculation of prejudgment interest in tort cases, since a district court is bound by the choice-of-law rules of the state in which it sits. Id. at 1266-67 ( citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941)). Travelers challenges the application of Yohannon to our case on two grounds. First, it argues that it was unnecessary for the District Court to perform any choice-of-law analysis at all, as the parties' agreement that New York law applies to the reinsurance contracts ought to control. This arguments rests on a misunderstanding of choice-of-law principles. Travelers is correct that, with respect to the substantive law that governs their dispute, the first question to be answered [under both Pennsylvania law and the Restatement of Conflict of Laws] is whether the parties explicitly or implicitly have chosen the relevant law. Assicurazioni Generali, S.P.A. v. Clover, 195 F.3d 161, 164 (3d Cir.1999). However, [i]n conflicts cases involving procedural matters, Pennsylvania will apply its own procedural laws when it is serving as the forum state. Commonwealth v. Sanchez, 552 Pa. 570, 716 A.2d 1221, 1223 (1998). Thus, ifas the District Court heldthe calculation of prejudgment interest in contract actions falls under Pennsylvania's procedural law, that fully resolves the choice-of-law question, regardless of the parties' stipulations. Travelers' second argument is that the District Court erred in extending Yohannon 's holding from Rule 238 to the calculation of prejudgment interest in contract actions. To address this challenge, we must decide whether our prior prediction that the Supreme Court of Pennsylvania would consider Rule 238 procedural for choice-of-law purposes in tort actions requires us to predict that it would also characterize the rules governing the calculation of prejudgment interest in contract actions as procedural in nature. The key to our conclusion in Yohannon was the Pennsylvania Supreme Court's steadfast ... position that Rule 238 is procedural and not substantive. 924 F.2d at 1266. The analysis in Yohannon drew primarily on Laudenberger v. Port Authority of Allegheny County, 496 Pa. 52, 436 A.2d 147 (1981), where the Pennsylvania Supreme Courtover strong dissents and concurrences arguing that Rule 238 is unconstitutional, Yohannon, 924 F.2d at 1266concluded that Rule 238 falls within its authority to `prescribe general rules governing practice, procedure and the conduct of all courts ... if such rules ... neither abridge, enlarge, nor modify the substantive rights of any litigant[.]' [36] 436 A.2d at 149 ( quoting Pa. Const. art. V, § 10(c)) (first alteration in original). Because the Supreme Court ha[d] never deviated from this position, we concluded that it would apply Rule 238 uniformly to a determination of pre-judgment interest without regard to its usual rules on choice of law. Yohannon, 924 F.2d at 1266-67. By contrast, prejudgment interest in contract actions is called for by statute rather than by rule. See 41 Pa. Stat. § 202. The Pennsylvania Commonwealth Court had previously concluded that Rule 238 delay damages are available for any claim for property damages, regardless whether it is in contract or tort. See Loeffler v. Moutaintop Area Joint Sanitary Auth., 101 Pa.Cmwlth. 514, 516 A.2d 848, 851-52 (1986). However, Pennsylvania's Supreme Court recently clarified the scope of Rule 238 and confirmed that it is limited to tort actions. See Touloumes v. E.S.C. Inc., 587 Pa. 287, 899 A.2d 343, 349 (2006) (Rule 238 delay damages are not available in a breach of contract action where the damages sought are measurable by actual property damage.) Thus, unlike the Pennsylvania Supreme Court's steadfast insistence that delay damages under Rule 238 are procedural in nature in tort actions, there is no comparable body of precedent that suggests Pennsylvania courts in contract cases would characterize the pre-existing legal right to pre-judgment interest in contract actions as procedural. Id. We thus predict that the Pennsylvania Supreme Court would conclude that prejudgment interest in contract actions is a substantive rather than a procedural matter, even were it to analyze the issue under the framework laid out in Laudenberger. In concluding that Rule 238 is procedural, the Laudenberger Court reasoned as follows: Rule 238 awards damages for delay only in cases where the defendant made no settlement offer prior to trial or where the defendant made an offer of settlement which was 25% less than the amount of the jury verdict.... In those instances where the settlement offer is not accepted and the jury verdict does not exceed the offer by 25%, the interest is only computed up to the date of the settlement offer. By tolling the running of interest, this provision demonstrates the prominent goal of fostering early settlements. Undeniably, this rule serves to compensate the plaintiff for the inability to utilize funds rightfully due him, but the basic aim of the rule is to alleviate delay in the disposition of cases, thereby lessening congestion in the courts. 436 A.2d at 151 (emphasis in original). Thus, the Court held that, while Rule 238 has the substantive effect of creating a right to compensation, its main purpose is procedural ( i.e., to govern litigation behavior), as evidenced by the fact that its format... is responsive to [the] fundamental goal of prompting meaningful negotiations in major cases so as to unclutter the courts. [37] Id. The key to Laudenberger 's holding, then, is that Rule 238 takes specific measures, beyond simply making awards of pre-judgment interest available, to provide litigants with incentives to settle cases. In other words, the position advanced in Laudenberger and extended to the choice-of-law context in Yohannon is that Rule 238 is procedural, despite having some substantive elements, because its provisions are specially structured to relieve the burden on the courts by encouraging early settlements. Pennsylvania's rules governing prejudgment interest in contract actions, on the other hand, are not similarly structured to promote early settlement (even though they may have that effect). The statute that sets the rate of prejudgment interest in contract actions41 Pa. Stat. § 202does not provide any criterion to govern its application, but simply defines the legal rate of interest as six per cent per annum. Under Pennsylvania law, eligibility for prejudgment interest in contract actions is governed by the Restatement (Second) of Contracts § 354. See Fernandez v. Levin, 519 Pa. 375, 548 A.2d 1191, 1193 (1988). Section 354 provides in pertinent part that [i]f the breach consists of a failure to pay a definite sum in money[,]... interest is recoverable from the time for performance on the amount due less all deductions to which the party in breach is entitled. Restatement (Second) of Contracts § 354(1). Thus, under Pennsylvania law, where a plaintiff prevails in a contract action pertaining to a definite sum, prejudgment interest is available as a matter of right starting from when the amount due under the contract was initially withheld. See Fernandez, 548 A.2d at 1193; Palmgreen v. Palmer's Garage, Inc., 383 Pa. 105, 117 A.2d 721, 722 (1955). And so, unlike in the case of tort damages, entitlement to prejudgment interest on contract damages does not depend on whether the defendant made a settlement offer, and, if so, how that offer compares to the amount ultimately awarded. This further suggests that the Pennsylvania Supreme Court would not consider Pennsylvania's rules governing prejudgment interest in contract actions procedural, at least not if it were to analyze the issue under the framework laid out in Laudenberger. We do not doubt that, by providing for an award of prejudgment interest as a matter of right in contract actions, Pennsylvania law encourages prompt settlement of contract disputes (at least relative to a legal regime in which such awards were not available). But there is nothing to indicate that doing so is the main goal of providing those awards. On the contrary, Pennsylvania courts have typically explained why prejudgment interest is available as a matter of right in contract actions with reference to a specifically compensatory purposeto compensate for the fact that the breaching party has deprived the injured party of using interest accrued on money which was rightfully due and owing to the injured party. Widmer Eng'g, Inc. v. Dufalla, 837 A.2d 459, 469 (Pa.Super.Ct.2003); see also Touloumes, 899 A.2d at 348-49 (emphasizing that the compensatory purpose of Rule 238secur[ing] monies for the delay of reliefwas already recognized by the legal right to pre-judgment interest in contract actions); Palmgreen, 117 A.2d at 722 (In all cases of contract[,] interest is allowable at the legal rate from the time payment is withheld after it has become the duty of the debtor to make such payment; allowance of such interest does not depend upon discretion but is a legal right.). It is true that in Laudenberger the Court stated that Rule 238 also serves to compensate successful plaintiffs for the loss of the use of money to which they were entitled. See 436 A.2d at 151. Subsequent decisions have repeated that characterization. See, e.g., Willet v. Pa. Med. Catastrophe Loss Fund, 549 Pa. 613, 702 A.2d 850, 854 n. 7 (1997) (explaining that the purpose of [R]ule [238] is to both compensate the plaintiff for the delay in receiving funds and to encourage the prompt resolution of meritorious claims); Schrock v. Albert Einstein Med. Ctr., Daroff Div., 527 Pa. 191, 589 A.2d 1103, 1106 (1991) (same). But the theme of Laudenberger is that it is only because Rule 238 is structured to promote early settlement in the specific context of tort actions that it can be fairly characterized as procedural. Cf. Touloumes, 899 A.2d at 348 (noting that Laudenberger had emphasiz[ed] the application of Rule 238 to tort litigation in explaining the reason[s] for [its] promulgation of [the] Rule, which reflect[ed] the intention of the Court regarding the limited nature of the Rule and its inapplicability to breach of contract actions). In Schrock, one of the cases in which Rule 238's compensatory elements were emphasized, Justice McDermott was moved to concur specifically in order to reiterate this understanding of the relationship between Rule 23 8's procedural and substantive elements: I write separately to re-emphasize that the purpose of Rule 238 is to alleviate delay in the disposition of cases. The fact that successful plaintiffs will recover interest on money properly belonging to them is an undeniable byproduct of the Rule, but not its purpose.... Rule 238 is a procedural exercise of the rule-making powers of this Court, not an exercise of our substantive judicial powers. 589 A.2d at 1107 (McDermott, J., concurring) (emphases in original) (internal citations omitted). We believe that this best captures the status of Rule 238 under Pennsylvania lawthat it is procedural despite, not because of, the fact that it compensates successful parties for the loss of the use of their money. See Laudenberger, 436 A.2d at 151 (Undeniably, this rule serves to compensate the plaintiff for the inability to utilize funds rightfully due him, but the basic aim of the rule is to alleviate delay in the disposition of cases, thereby lessening congestion in the courts.). As such, we conclude that the better interpretation of Pennsylvania law on this issue is that, while Rule 238 serves a procedural purpose (combating the backlog in the courts) in a manner that incidentally affects the substantive right to be compensated for the loss of the use of one's money, the rules that govern prejudgment interest in contract actions do the reverse they serve a compensatory purpose in a manner that only incidentally affects the number of cases that go to trial. Accordingly, the rationale provided in Yohannon for characterizing Rule 238 as procedural for choice-of-law purposes does not carry over to contract actions. We thus part from the District Court's characterization of the Pennsylvania law governing the calculation of prejudgment interest in contract actions as procedural rather than substantive. We believe on that basis that the District Court should have calculated the prejudgment interest owed to Travelers according to the New York rate. INA has conceded throughout this litigation that the reinsurance contracts Travelers sued to enforce are governed by the substantive law of New York. INA has cited no reason why a Pennsylvania court, if asked to determine which substantive law applies to the calculation of prejudgment interest, would depart from the understanding of the parties. Accordingly, we conclude that New York law applies here to the calculation of prejudgment interest. See Assicurazioni, 195 F.3d at 164-65 (explaining that, where the parties have implicitly... chosen a particular law to govern their contract dispute, that law controls under Pennsylvania's choice-of-law rules in the absence of a compelling reason to the contrary). We therefore remand with instructions to modify Travelers' award of prejudgment interest by calculating it according to the higher New York rate.