Many of our clients are small businesses who operate using credit agreements. These agreements make it easy for both parties to operate on an ongoing basis without having to continuously renegotiate terms. The customer can simply order the necessary supplies and pay on the basis of the negotiated terms. Unfortunately, customers can take advantage of the credit extended to them and run up big bills very quickly.
One of the services Jacobs & Rozich, LLC provides is commercial collections for when these arrangements go sour. Most credit agreements contain terms that allow for interest to accrue on unpaid balances. These interest rates are usually anywhere from single digits to the high-teens. Until recently many Connecticut courts would alter the contractual interest rate when entering judgment against a defaulting client.
They were doing so based on Conn. Gen. Stat. § 37-3a which provides that post-judgment interest is discretionary and is capped at 10%. Many Connecticut courts read this to mean that 10% was the most interest they could order after judgment but that they could award interest at a lower rate or even no post-judgment interest as they saw fit.
Sikorsky v. Butts
This changed in 2015 with the case of Sikorsky Financial Credit Union, Inc. v. Butts, 315 Conn. 433, 108 A.3d 228 (Conn. 2015). In Sikorsky, the Supreme Court mandated a new reading of Connecticut’s post-judgment interest statutes by making a distinction between interest which is paid in as compensation for a loan (governed by Conn. Gen. Stat. § 37-1) and interest which is awarded as damages on a judgment (governed by Conn. Gen. Stat. § 37-3a). The Supreme Court reasoned that “an award of prejudgment and post-judgment interest on a loan that carries post-maturity interest is not discretionary; it is an integral part of enforcing the parties’ bargain.”
The upshot of Sikorsky is that if parties make an agreement for post-maturity interest (that is interest to be paid after the loan is due in full) at a specific rate then that rate continues to apply even after judgment. The only situation where Connecticut courts will have discretion in awarding post-judgment interest is when the loan in question specifically excludes post-maturity interest. When the contract is silent the Supreme Court has indicated that the agreement of the parties should be honored. The Sikorsky ruling is a big shift from the long standing practice in the Connecticut courts which considered post-judgment interest discretionary in most cases.
Implications for Debt Collection
The ruling has implications for both creditors and debtors. For creditors it means that their contractual interest rates will continue to apply even after judgment. If these rates are higher than the 10% cap of Conn. Gen. Stat. §37-3a that means their judgment is going to be worth more than it would have prior to Sikorsky and debtors may be more inclined to quickly pay down judgments as double digit interest accrues. For debtors it means that the effect of high interest loans will continue to snowball even after judgment. This may increase pressure to pay off judgments or to settle before trial as debtors might be able to negotiate a better post-judgment interest rate than the one in the contract.
It will be interesting to watch how Sikorsky affects collections cases as a whole. It is very possible that since debtors know they may be on the hook for substantial post-judgment interest if they lose at trial they may be more willing to settle just to avoid that risk. Conversely, since creditors know they can keep their contractual interest rate after judgment they may be less inclined to settle knowing they will retain a high interest after trial.