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It's The Law: Statutory Interest Accrues On Debts Where No Other Interest Is Specified

Question: I have had a hard time collecting from one of my customers. Now, it looks like I will have to take him to court. It seems like I should be able to get interest on the money he owes me. Can I?

Answer: If your contract with the customer contains a provision addressing interest, that provision will likely be controlling. Many contracts do not have a provision for interest on unpaid balances, particularly oral contracts. I will assume that your contract does not have an interest provision.

Absent a controlling contract interest provision, Florida statutes provide that interest is still due. Section 687.01 Florida Statutes provides that in all cases where interest shall accrue without a special contract for the rate thereof, the rate is the rate provided in Section 55.03. That statute sets the rate when you have a contract or become entitled to payment on some other basis; you are entitled to interest from the date you should have been paid until you are actually paid. If a lawsuit is involved, that interest is known as pre-judgment interest.

The courts have agreed that pre-judgment interest is a matter of policy to be determined by the legislature and that judges have no discretion but must apply the statutory interest rate to debts at the time the interest accrues. Until July 1, 1982, the statutory rate of interest was 6%. It was then raised to 12% until January 1, 1995.

In 1994, the legislature decided that the interest rate should change with the times. It amended Section 55.03 to provide that on December 1 of each year, Florida's Chief Financial Officer will set the rate of interest for the following year by averaging the discount rate of the Federal Reserve Bank of New York for the preceding year, then adding 500 basis points. The interest rate determined by the Chief Financial Officer has ranged between 6% and 11%, depending on the year. It is currently 6%.

If the debt has been unpaid for a number of years, the interest rate applicable to each year is applied to the debt. Interest is not compounded, which means you do not get interest on unpaid interest (except for the interest on a judgment after it is entered.)

Once a judgment is entered, the judgment also accrues interest at the statutory rate. Unlike prejudgment interest, the judgment interest rate remains the same as it was at time the judgment was entered until the judgment is paid.

The exception to post-judgment interest is when a contract provides that the interest rate in a contract is to apply both before and after judgment. In that event, the interest will bear interest at the rate set in the contract.

Although courts have held that the legislature establishes the rate of interest, they have also found that it would be inequitable to charge interest under certain circumstances. Courts have refused to impose pre-judgment interest where delay between injury and judgment is the fault of the prevailing party. In other cases, courts have refused to award pre-judgment interest where one party failed to minimize his damages or where the loser has an offset claim against the winner.

The recent case of In Re: The Celotex Corporation is a good example of when a court might refuse to impose pre-judgment interest. In that case, the bankruptcy court confirmed a plan creating a fund to pay asbestos-related claims. The fund was not big enough to pay all anticipated claims so the fund was designed to pay asbestos claimants a fraction of the value of their allowed claims.

Six colleges filed claims for asbestos-related property damage and the claims were approved by the administrator of the trust. The colleges then demanded prepayment interest. When the plan administrator refused to pay, the colleges went to court.

The bankruptcy court denied the colleges' request for interest. Two appeals followed and both agreed. The courts explained that the fund was not unlimited and, in fact, would pay all claims on a reduced basis formula. If interest was allowed, the fund would be reduced even further, to the detriment of other claimants.

You should discuss your case with an experienced attorney. The attorney will be able to review and explain the possible recovery of pre-judgment interest. The attorney may also help you prepare contract language for future use that would provide for mandatory interest, which could even be at a rate higher than that provided by statute. Your situation is one where legal fees now could pay big dividends later.

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