Court Opinion

ID: 9462290
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:37:23.336428+00
Date Added: 2024-06-11T17:37:31.484496
License: Public Domain

WISDOM, Circuit Judge
(specially concurring):
I concur in the result reached in Part III of the majority opinion, that is, to eliminate the award to Freeport Sulphur of the interest it lost through its premature expenditure of funds for the useful life extension of the dock. With deference to my brothers, I reach that result by different reasoning.
Pansuiza’s primary objection to this portion of the damages award is that prospective interest should not be taken into account unless other criteria that are no more speculative and at least as important are considered.1 Pansuiza argues, for example, that Freeport has received a windfall because, although it was awarded prospective interest until 1996, it was permitted to replace the dock at the much lower 1971 prices. It concludes, therefore, that if inflation is not taken into account, prospective interest should not be awarded.
This issue is closely analogous to the issue in personal injury cases whether it is proper to reduce the award for loss of future earnings to present value if the estimate of those earnings is not adjusted for inflation. According to the district court’s formulation, Freeport should be required to spend (i. e. to have deducted from its total expenditures for damages purposes) in 1971 only the present value ($4,331.58) of the hypothetical payment for the useful life extension of the dock ($24,064.38) 25 years hence.2 The theory is that if the collision had not occurred and if Freeport had invested $4,331.58 in 1971, that investment would increase to the $24,-064.38 cost of the useful life extension by 1996, the date on which such an expenditure would have to have been made if there had been no collision. Similarly, in the personal injury case, the estimate of lost future earnings is reduced to its present value on the theory that, if the present award is invested at prevailing interest rates, it will accumulate to the equivalent of the lost future earnings at the times they would have been received.
The majority rule as to calculation of damages for loss of future benefits requires the reduction of the projected benefits to present, value, but prohibits the consideration of inflation. See, e. g., *309Sleeman v. Chesapeake & Ohio Railway Co., 6 Cir. 1969, 414 F.2d 305, 307. This approach, however, has been severely criticized.3 The solution proposed by most of the critics is that adopted by the Alaska Supreme Court in Beaulieu v. Elliott, 1967, 434 P.2d 665. Beaulieu, a personal injury action for damages sustained in an auto accident, held that the loss of future earnings should not be discounted to present value because “inflation . . . offsets the interest that could be earned on ‘safe’ investments”. 434 P.2d at 671. This solution is the logical successor to our argument in Johnson v. Penrod Drilling Co., 5 Cir. 1975, 510 F.2d 234 (en banc), that,
if future inflation does cause higher wages, experience predictably demonstrates that higher interest rates on investments which have always accompanied inflation will also occur and this factor will mitigate the failure to include an inflationary surcharge in wage rate calculations.
510 F.2d at 236. In the present case, the inflation-produced increase in future interest rates above the discount rate used by the district court would mitigate the windfall to Freeport that would result from our failure to consider the extent to .which inflation would increase the 1996 cost of the dock improvements. The refusal to make a present value reduction, however, would almost fully offset the windfall to Freeport.4
The inflation-produced increase in interest will “mitigate”, rather than “offset”, any inflation-caused increase in the cost of the dock improvements, because the market interest rate used to discount by the district court includes, apart from its “real interest” component, an element to compensate for the effect of inflation. For example, if the price of capital (the “real rate of interest”) is 3 percent per year and investors expect the value of the dollar to depreciate at the rate of 6 percent per year, the market rate of interest will be about 9 percent.5 The upshot is that, although the cost of the dock improvements will increase to the full extent of inflation through 1996, Freeport’s prospective interest on its investment will increase only to the extent of the increase in the investors’ forecast of inflation.
Because a more complete offset will operate — resulting in a more accurate *310measure of damages — if Freeport is awarded no compensation for its premature expenditure of funds, I agree with the Court’s holding that there should be no reduction to present value in the computation of the deduction of the cost of the improvements from Freeport’s recovery for repair expenses. If the rate of inflation equals the rate of interest Freeport is able to earn on its investments through 1996, the offset will be total and the compensation to Freeport will be complete.
Two factors will probably prevent the offset from being complete. First, in addition to the component of the market rate of interest that compensates for the impact of inflation, there is a “real” component that represents the payment for the use of capital.6 Second, many economists believe that there will often be a gap between the inflation component and the actual rate of inflation because future depreciation in the value of money is rarely entirely foreseen.7 “When prices are rising, the rate of interest tends to be high but not so high as it should be to compensate for the rise . .” I. Fisher, The Theory of Interest 43 (1930). Because these two factors push the market rate of interest in different directions, the compensation to Freeport will be imprecise under my approach only to the extent of that compound interest on the cost of the useful life extension that is the difference between the two factors. Even when inflation is entirely foreseen, the imprecision in Freeport’s compensation will be small, particularly when compared with the inaccuracy that would result if Free-port were awarded prospective interest, but not required to pay the inflated 1996 price of the improvements.8
The approach taken in Feldman v. Allegheny Airlines, D.Conn.1974, 382 F.Supp. 1271, 1288-98, aff’d in relevant part, 2 Cir. 1975, 524 F.2d 384, would provide more exact compensation. Feldman was a wrongful death action in which one of the major issues was the ascertainment of the present value of the decedent’s prospective earnings. Rather than forecast the impact inflation would have on these earnings, Judge Blumenfeld discounted future earnings, estimated in 1971 dollars, to present value through the use of the inflation-adjusted (“real”) rate of interest on “risk-free” investments. Although I admire the theoretical precision of this approach, see R. Posner, Economic Analysis, of Law 81-82 (1972), I am also concerned with the complexities and speculation inherent in factoring the inflation component out of the market rate of interest.9 These difficulties in estimating the rate of inflation were one of the concerns compelling our decision in Johnson v. Penrod Drilling Co. that inflation *311should not be taken into account in the computation of lost future earnings. Indeed, Judge Blumenfeld indicated that, if he were not required by Connecticut law to discount future earnings to present value, he might have decided that, because of the speculation inherent in his calculations, the best approach would have been to adopt the Alaska rule that I have applied in this case.10
Nevertheless, I recognize that the rule I propose is inconsistent with some of the language in Penrod. That case, brought under the Jones Act, holds that, in calculating a damages award for the loss of future earnings, the trier of fact (1) must not take into account future inflation and (2) must reduce the estimate of lost future earnings to its present value through use of an appropriate interest rate prevailing at the time and place of the trial. The focus in Penrod was on inflation, not present value, and, to the extent that we considered present value, we determined only the proper interest rate for the district court to take into account in its disposition of the case on remand. We did not consider the impact of our prohibition of the consideration of inflation on the propriety of discounting future benefits to present value. We should not now read-those general remand instructions about present value as forcing us into a substantively indefensible position.
Moreover, my proposed adoption of the Alaska rule would go a long way toward fulfilling the policies enunciated in Pen-rod. We attempted in that opinion to achieve accurate compensation, while preventing the use by district courts of speculative factors such as future inflation, 510 F.2d at 236, 241, and attaining simplified and efficient trial procedures. 510 F.2d at 237. By prohibiting speculation about future interest rates,11 by relieving district judges of the responsibility to make present value calculations, and by providing more complete compensation than the consider-present-value-ignore-inflation rule, the offset approach would effectively promote these Penrod policies.
In addition, I believe that the literal holding of Penrod is inapplicable to the present ease. Penrod is a Jones Act case. The Jones Act incorporates the provisions of the F.E.L.A. The Sixth Circuit has noted that, in F.E.L.A. cases, Chesapeake and Ohio Railway v. Kelly, 1916, 241 U.S. 485, 36 S.Ct. 630, 60 L.Ed. *3121117, requires the discounting of lost future earnings to present value. Sleeman v. Chesapeake and Ohio Railway Co., 414 F.2d at 307. This narrow holding of Kelly, though perhaps justified in 1916, has now lost all support, in part because courts do not take inflation into account in calculating damages awards.12 I would disapprove of the Kelly rationale and confine that case to the F.E.L.A. context in which it arose.13 Penrod also arose in that context (because the Jones Act incorporates the F.E.L.A.) and we were therefore compelled by the Supreme Court precedent to require a discounting to present value. Our recognition of this point is evident in our introduction to the discussion of Kelly in the Penrod case:
The United States Supreme Court addressed itself to the problem of reducing to present value lost future earnings under the Federal Employers Liability Act, which is incorporated by reference into the Jones Act, in [Kelly l
510 F.2d at 239. The other case relied upon for the present value remand order in Penrod is also an F.E.L.A. case, Blue v. Western Railway of Alabama, 5 Cir. 1972, 469 F.2d 487. I argue not that this narrow view of Kelly and Penrod is mandated on the face of those opinions, but that by viewing those cases in a narrow light this Court would be able to achieve a superior substantive result in cases not squarely controlled by them.
The majority attempts to reach the same result that I have by showing that there is no factual basis for Judge Rubin’s award of prospective interest. Its most persuasive argument on this point is that Freeport Sulphur may not have suffered any loss through its premature payment of $24,064.38 because it simply invested this in a different type of capital, the useful life extension of the dock. It contends that there is no reason to believe that Freeport Sulphur could not obtain a rate of return on the new investment that would be comparable to the interest it could have obtained by investing the money in an alternative type of capital from 1971 to 1996. I am not persuaded that this argument is economically sound. The dock is an integral part of Freeport Sulphur’s business, and it is therefore doubtful that Freeport Sulphur could “turn a ready profit from the accident by selling the damaged property immediately after reconstruction and payment of the award”. The only other possible way to obtain a reasonable return on the enhanced value of the dock would be through the rates Freeport Sulphur charges. It is my understanding, however, that Freeport Sulphur does not obtain rents for use of *313the dock, but that the only rates it charges are for the sale of sulphur. Both because the price of sulphur may be regulated by the government and, in any event, because the plaintiff may not be able profitably to increase the price of sulphur above the profit-maximizing rate it charged before the collision, Free-port Sulphur will probably not be able to recoup its investment in the useful life extension until the period 1996 to 2006.
Perhaps the point of dispute between the majority and me is as to what is needed to carry the burden of proof on the question of damages for prospective interest. The practicalities dictate to me that, by being compelled to spend about $24,000 on a capital improvement that would probably not generate revenues for twenty-five years, Freeport Sulphur suffered a financial loss (assuming we ignore the impact of inflation on the earnings Freeport could have obtained during those twenty-five years). Adding to this practical approach the facts that Judge Rubin declared at trial that he was considering awarding damages for prospective interest and that his request for evidence bearing on that issue went unanswered by the defendant (the plaintiff responded with present value calculations), I do not think that this Court is justified in overturning his award on the ground that “there is no support in the record for the conclusion that loss occurred as a result of premature extension costs”. Indeed, we do not require any greater factual basis for the award of prejudgment interest or, in F.E.L.A. cases, for the reduction of the plaintiff’s lost future earnings damages by the amount of interest he could obtain by investing his lump sum judgment during the period of lost wages.
Part III of the majority opinion seems to rest on two foundations. One, which I have discussed above, is the asserted lack of a factual basis for Judge Rubin’s conclusion that Freeport Sulphur was injured by its premature expenditure of funds. Second, the majority argues that Judge Rubin’s award must be reversed on the basis of the universally applied rule that denies the plaintiff recovery for expenditures that enhance the value of his property. I do not believe that this rule alone dictates reversal. Free-port Sulphur is not seeking recovery for the cost of the enhancement of its property, the useful life extension. The damages it seeks are wholly separate, i.e., compensation for the interest it has foregone by being compelled by the destruction of its property to invest $24,-064.38 in dock construction twenty-five years before this would have been necessary had it not been for the collision. The crucial point is that Freeport Sulphur does not seek compensation for the cost of enhancing the value of its property. According to Judge Rubin’s calculations, Freeport Sulphur would in effect be charged for the full cost of the ten-year useful life extension.
To conclude, it is my view that the two foundations of Part III of the majority opinion will not support reversal of the district court’s award of prospective interest. I do agree with the majority, however, that Freeport Sulphur should not be compensated for its premature expenditure. I suggest that the reason the plaintiff deserves no compensation is that the prospective interest it could have earned on the $24,064.38 will be wholly offset by the degree to which inflation will increase the cost of the useful life extension by 1996.
Before BROWN, Chief Judge, WISDOM, GEWIN, THORNBERRY, COLEMAN, GOLDBERG, AINSWORTH, GODBOLD, DYER, MORGAN, CLARK, RONEY, GEE and TJOFLAT, Circuit Judges.
BY THE COURT:
A majority of the Judges in active service, on the Court’s own motion, having determined to have this cause reheard en banc,
IT IS ORDERED that this cause shall be reheard by the Court en banc with oral argument on a date hereafter to be fixed. The Clerk will specify a briefing schedule for the filing of supplemental briefs.

. Pansuiza also contends that the district court should not have applied “sophisticated accounting methods” without any basis in the record of factual or expert evidence. The court, however, did receive evidence as to the present worth of money, and its subsequent offer to accept further evidence or briefs on the issue of an award for lost interest went unanswered.

. See footnote 8 of the majority opinion.

. Henderson, The Consideration of Increased Productivity and the Discounting of Future Earnings to Present Value, 20 N.D.L.Rev. 306, 308-10 (1975); Henderson, Some Recent Decisions on Damages; With Special Reference to Questions of Inflation and Income Taxes, 40 Ins.Coun.J. 423, 428-32 (1973); Comment, Future Inflation as an Element of Damages in Alabama, 5 Cumb.Sam.L.Rev. 72-74 (1974); Comment; Damages for Loss of Future Income: Accounting for Inflation, 6 U.S.F.L.Rev. 311, 314-21 (1972). In approving of the Alaska rule applied in this opinion, one critic has written of the majority rule: “It is a not uncommon phenomenon for concededly impeccable legal reasoning to lead to a result which is irreconcilable to the practicalities of a developing situation. . . . Substantial difficulty arises when the product of the deductive reasoning process becomes enshrined in the common law to such an extent that the practical results are ignored.” J. Stein, Personal Injury and Death Actions 331 (1972).

. Although one circuit has rejected this offset argument in the context of personal injury and wrongful death actions, Petition of United States Steel Corp., 6 Cir. 1970, 436 F.2d 1256, 1280, cert. denied, 1971, 402 U.S. 987, 91 S.Ct. 1649, 29 L.Ed.2d 153; Sleeman v. Chesapeake & Ohio Railway Co., 6 Cir. 1969, 414 F.2d 305,. 307-08, it has been accepted by several courts applying state law. See Frankel v. United States, E.D.Pa.1970, 321 F.Supp. 1331, 1346, aff'd sub nom. Frankel v. Haym, 3 Cir. 1972, 466 F.2d 1226; Pierce v. New York Central Railroad Co., W.D.Mich.1969, 304 F.Supp. 44, 45-46; Gowdy v. United States, W.D.Mich. 1967, 271 F.Supp. 733, 752, rev’d on other grounds, 6 Cir. 1969, 412 F.2d 525, cert. denied, 1969, 396 U.S. 960, 90 S.Ct. 437, 24 L.Ed.2d 425; Resner v. Northern Pacific Railway, 161 Mont. 177, 505 P.2d 86 (1973). .

. See R. Posner, Economic Analysis of Law 81-82 (1972); Meiselman, Bond Yields and the Price Level: The Gibson Paradox Regained, in Banking and Monetáry Studies 112 (D. Carson ed. 1963); I. Fisher, The Theory of Interest 41-44 (1930); and the excellent discussion of the impact of this principle on damages calculations in Feldman v. Allegheny Airlines, Inc., D.Conn.1974, 382 F.Supp. 1271, 1288-93, affd in relevant part, 2 Cir. 1975, 524 F.2d 384.

. For a discussion of the relationship of this component to present value calculations, see Feldman v. Allegheny Airlines, Inc., 382 F. Supp. at 1292-93.

. See, e. g., Meiselman, supra note at 115, 121; I. Fisher, supra note 5, at 38 n. 2 (1930); I. Fisher, The Rate of Interest 278-79 (1907); cf. M. Friedman & J. Schwartz, A Monetary History of the United States, 1867-1960, at 91-92 n. 5 (1963).

. In Feldman v. Allegheny Airlines, Inc., 382 F.Supp. at 1293-95, it was found that the average inflation-adjusted rate of interest (i. e. “real yield”) on risk-free investments since 1940 was 1.5 percent. If future inflation is wholly compensated for in the interest rates available to Freeport over the next 25 years, its damages award will therefore be inaccurate by about 1.5 per cent (compounded annually) of the cost of the useful life extension. This inaccuracy will be diminished if, as the authorities in footnote 7 have argued, investors underestimate the extent of future inflation. If prospective interest were awarded at the present market rate and inflation were not taken into account, the “inaccuracy percentage” would be the difference between the average annual rate of inflation and the average annual increase in interest rates over the next 25 years. In the past 25 years, the annual increase in interest rates on 10-15 year U.S. government bonds has averaged 0.2 percent and annual inflation has averaged 3.0 percent. See 1975 Economic Report of the President 130, 317-18.

. After determining the inflation-adjusted rate of interest, Judge Blumenfeld observed that “[n]othing is more conclusively established by the instant memorandum of decision than the difficulty of ascertaining the amount of damages due in this case . . . .” 382 F.Supp. at 1295.

. [S]ince Connecticut law requires the discounting to present value of damages for the destruction of future earning capacity, . . . [i]t is not open to this Court to decide that the ascertainment of a discount rate has become too speculative to be fair, and that the statutory mandate of awarding ‘just damages’ for wrongful death . . would be better served by dispensing with the discounting process altogether.
382 F.Supp. at 1293 n. 30.

. Prospective interest seems to me to be as speculative as future inflation. The premise of the district court’s application of the present value formula is that Freeport would have been able to invest $6,058.17 at 7 percent interest for 25 years. The investment would then accumulate to the allocable cost of the useful life extension, $33,656.48. See note 8 of the majority opinion. It may be argued that the consideration of future inflation is more speculative than that of prospective interest because Freeport could, in 1971, have invested $6,058.17 in a 25-year note-at a given interest rate. It is a fact of life that we cannot ignore, however, that investors rarely elect to have their funds tied up in safe investments for such long periods of time. See, e. g., F. Harper & F. James, The Law of Torts 1303-04 (1956).
The award of prospective interest is thus based on the speculation that prevailing interest rates and Freeport’s investment capabilities would have permitted the premise of 7 percent interest for 25 years to be fulfilled. Note, Future Inflation and the Undercompensated Plaintiff, 4 Loyola (Chi.) U.L.J. 359, 366-67 (1973). The compensation for Freeport’s “premature” expenditure is also based on the premise that Freeport would have desired in 1996 to invest in the restoration or replacement of the dock. It is wholly speculative, however, to forecast today whether Freeport’s business will require the dock in 1996 or whether Freeport will even be in existence at that time.

. See text and note at note 3 supra. Kelly reflects the experience of the last half of the nineteenth century, when the price level fell consistently and the prevailing view was that the earning power of money gave an advantage to a person receiving immediate payment. At least one economist believes that, given rising prices and incomes, the “earning power of money” is now a “myth” and that the purchasing power of money actually decreases over time. He concludes, therefore, that Kelly should not be narrowly read both to require reduction to present value and to prohibit the consideration of inflation. Henderson, The Consideration of Increased Productivity and the Discounting of Future Earnings to Present Value, supra note 3, at 308-10, Henderson, Some Recent Decisions on Damages; With Special Reference to Questions of Inflation and Income Taxes, supra note 3, at 431.
It has also been argued that, rather than setting up an inflexible formula for determining future damages, Kelly “represents the recognition of one aspect of the problem of future damages and stands as a ruling in favor of accurate compensation for the injured party”. Comment, Damages- for Loss of Future Income: Accounting for Inflation, supra note 3, at 319; accord, Comment, Future Inflation as an Element of Damages in Alabama, supra note 3, at 79; Note, Future Inflation and the Under-compensated plaintiff, supra note 11, at 367.

. The Supreme Court has only cited Kelly for its present value proposition in two other old F.E.L.A. cases: Louisville & Nashville Railroad Co. v. Holloway, 1918, 246 U.S. 525, 528, 38 S.Ct. 379, 62 L.Ed. 867, 869; Chesapeake & Ohio Railway Co. v. Gainey, 1916, 241 U.S. 494, 496, 36 S.Ct. 633, 60 L.Ed. 1124, 1125.