Interest under sec. 807.01(4) can’t be stacked

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Hon. Paul G. Lundsten

Interest accruing pursuant to contract cannot be stacked with interest pursuant to sec. 807.01(4), the Wisconsin Court of Appeals held on Aug. 21.
Galaxy Gaming and Racing Limited Partnership was engaged in litigation with the City of Hudson over a casino, and retained the law firm of DeWitt Ross & Stevens, S.C.

The retainer letter, signed by the president of Galaxy, provided: “[Y]ou will be billed for disbursements and other expenses incurred on behalf of [Galaxy] Partnership (for example, long distance telephone charges, photocopying, facsimile charges, travel expenses, court reporter fees and other similar disbursements or expenses). You will receive a statement for services rendered and expenses incurred on a monthly basis. The statements are payable upon receipt. We reserve the right to charge interest at the rate of 18 percent per annum (1 1/2 percent per month) on all statements not paid within 20 days after their date.”

Because Galaxy Partnership had no assets or means of earning income until the casino project became a reality, the retainer letter required that a guaranty of payment be provided. The guaranty, signed by the same person as the retainer letter, but in his capacity as president of Galaxy’s parent corporation, Southwest Florida Enterprises, Inc., provided, “The undersigned, for valuable consideration and the willingness of … DeWitt, Ross & Stevens, S.C. to represent [Galaxy] Partnership, all of which inures to my benefit, hereby personally guaranties the timely and full payment of all statements for services rendered and disbursements/expenses incurred on behalf of [Galaxy] Partnership. In the event of a failure of [Galaxy] Partnership to pay the monthly statements as they fall due, the undersigned agrees that the law firms may, in the first instance, look to the undersigned for payment without having to exercise or exhaust any remedies against [Galaxy] Partnership.”

In the fall of 1996, Galaxy began to fall behind in its payments to DeWitt. On Nov. 24, 1997, when the outstanding balance was over $129,000, DeWitt wrote Galaxy and demanded that the amount owed be paid in full by Dec. 1, 1997, or DeWitt would charge interest at 18 percent on the balance.

Shortly thereafter, Galaxy made a payment of $50,000. Although the monthly statements did not include an interest charge, a separate letter with an attached invoice showed an interest charge of $7,863.40 for 1997.

Over the next two years, DeWitt repeatedly asked for payment of the balance, and sporadic payments were made. When payments were made, DeWitt first applied the payments to the accrued interest and then applied any remaining amount to the outstanding principal.

Ultimately, DeWitt sent a final bill for $352,172.59 as of July 31, 2000, including $69,209.44 in interest. No payment was made, and DeWitt sued. In its answer to the complaint, Galaxy admitted owing principal, but denied owing the interest.

Galaxy moved for a protective order, requesting that depositions be delayed until it had the opportunity to review discovery materials. In response, DeWitt moved to compel discovery. Dane County Circuit Court Judge Maryann Sumi decided the motions, and imposed costs of $100 on Galaxy.

Southwest was later added as a party, and filed for substitution of judge. Judge Sumi denied the motion as untimely, a decision affirmed by the chief judge for the district.

On July 8, 2001, Dewitt offered to settle its claims for payment of $370,000 within 15 days of acceptance of the offer. The defendants declined the offer.

On motion for summary judgment, the court concluded that DeWitt could apply payments first against accrued interest if it chose to do so, and that Southwest’s obligation under the guaranty included liability for interest payments. However, the circuit court ruled that DeWitt could not recover interest on the unpaid balance prior to Nov. 24, 1997, the date DeWitt informed the defendants that it would begin assessing interest. Accordingly, the circuit court denied that part of DeWitt’s summary judgment motion seeking interest retroactive to Jan. 1, 1997.

The court entered judgment against the defendants in the amount of $407,498.79, plus postjudgment interest of 12 percent pursuant to sec. 815.05(8), commencing Jan. 1, 2002. Because the judgment obtained by DeWitt exceeded the offer of settlement, the court awarded DeWitt double costs pursuant to sec. 807.01(3), but declined to award sec. 807.01(4) interest on top of the 18 percent contractual interest that DeWitt was already entitled to during the same time period. Finally, the court declined to award costs for a transcript of a videotaped deposition.

All parties appealed, and, in a decision by Judge Paul G. Lundsten, the court of appeals affirmed on all issues except the denial of transcript costs, and when interest began to accrue. Judge David G. Deininger joined the decision in its entirety, and Judge Charles P. Dykman dissented from that part of the decision denying stacking of sec. 807.01(4) interest with the contractual interest.

Guaranty

The court first held that Southwest is liable under the guaranty for interest charges owed by Galaxy.

Southwest argued that, because the guaranty does not mention interest, but instead refers to “the timely and full payment of all statements for services rendered and disbursements/expenses incurred on behalf of the Partnership,” DeWitt’s recovery from Southwest is limited to principal only.

However, the court concluded that the guarantee of “timely and full payment” unambiguously guarantees payment for interest charges. Otherwise, the guarantee of “timely and full payment” would be rendered meaningless.

Principal

The court then concluded that DeWitt is not required to apply payments to the principal before paying off the interest portion of the bill. The defendants argued that, because of the fiduciary nature of the attorney-client relationship, DeWitt was required to inform them that it could direct payment to either interest or principal.

The court found no reason to depart from the general rule that partial payments are to be first applied to interest, and that an exception for attorneys “would undercut the very purpose of interest, that is, to compensate a party for the time value of money.”

Settlement Offer

The court then held that the settlement offer by DeWitt was valid, even though it contained a payment deadline.

The court concluded, “Nothing in Wis. Stat. sec. 807.01(3) precludes a party from submitting an offer of settlement that contains a payment deadline. As pointed out by DeWitt, the statute provides that an offer may be made ‘for the sum, or property, or to the effect therein specified.’ Wis. Stat. sec. 807.01(3). As long as the offer permits the party ten days to respond, as DeWitt’s offer does, we find no language in the statute that prohibits conditioning settlement upon the actual receipt of the money by a date certain.”

The court acknowledged that a deadline for making payment could be a factor in
determining that an offer is unreasonable, but rejected the defendants’ argument that a payment deadline makes an offer per se unreasonable.

Substitution

The court also rejected the defendants’ argument that Southwest should have been able to substitute judges, even though Southwest was not added as a party until after DeWitt’s motion to compel discovery.

Pursuant to sec. 801.58(1), a request for substitution must be filed “preceding the hearing of any preliminary contested matters.”

The court determined that the motion to compel discovery qualified as a “preliminary contested matter[],” reasoning, “By asking that the depositions be suspended, Galaxy Partnership sought to narrow the scope of discovery. Thus, the hearing addressed a substantive issue that affected the presentation of the case.”

Second, the court determined that Galaxy and Southwest were parties “united in interest” and therefore, are deemed a single party, even though they are separate entities, and Galaxy admitted liability for interest, while Southwest denied such liability.

The court found that Galaxy and Southwest are represented by the same attorney, have the same president, and that Galaxy is wholly owned by Southwest. Given those common factors, the court held they were united in interest, and therefore, because Galaxy participated in a preliminary contested matter, Southwest’s motion for substitution was properly denied.

Interest

The court then held that the circuit court erroneously held that interest did not begin to accrue until Dec. 1, 1997, the date on which the letter from DeWitt demanded payment in full.

The court reasoned, “It is undisputed that the terms of the retainer letter required payment upon receipt of the monthly statements, and specified that interest would accrue if payment was not received within twenty days of receipt. Under the general rule set forth in [Estreen v. Bluhm, 79 Wis.2d 142, 158-159, 255 N.W.2d 473 (1977)], the interest due on late payments had begun to run before Dec. 1, 1997, because ‘the creditor is entitled to interest from the time payment was due by the terms of the contract.’ Id. When DeWitt opted to invoke the interest charge on overdue accounts, it acted within the bounds of the retainer letter and Estreen in seeking interest going back to Jan. 1, 1997.”

Videotape Costs

The court also reversed the circuit court’s decision to deny DeWitt’s costs spent on a stenographic transcript of the video deposition of Galaxy and Southwest’s president.

Section 885.42(1) provides, “[a]ny deposition may be recorded by audiovisual videotape without a stenographic transcript. Any party to the action may arrange at the party’s expense to have a simultaneous stenographic record made.”

The court rejected the argument that the language “at the party’s expense” precludes inclusion of the expense when imposing costs.

The court reasoned, “the transcript of Havenick’s deposition was necessary for DeWitt’s summary judgment motion because of the requirement in Wis. Stat. sec. 802.08 for supporting papers. Thus, this is not a situation where the transcripts were obtained solely for the convenience of counsel. If that were the case, costs would not be ‘necessary’ as required by sec. 814.04(2). For these reasons, we conclude that the circuit court’s decision was made pursuant to an erroneous view of the law and, therefore, the denial of costs for the transcript of Havenick’s videotape deposition was in error.”

Concurrent Interest

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Finally, the court held that it was proper for the trial court to refuse to stack the 18 percent interest of the contract, with the 12 percent interest allowed under sec. 807.01(4) for the time after the defendants rejected the settlement offer, relying on Erickson v. Gundersen, 183 Wis. 2d 106, 515 N.W.2d 293 (Ct. App. 1994), and Upthegrove Hardware, Inc. v. Pennsylvania Lumbermans Ins. Co., 152 Wis. 2d 7, 447 N.W.2d 367 (Ct. App. 1989).

In those cases, the court of appeals held that a party could not receive additional interest concurrent with sec. 807.01(4) interest. Erickson involved common law prejudgment interest, and Upthegrove involved 12 percent statutory interest on a belatedly paid insurance claim.

In both cases, the court of appeals classified sec. 807.01(4) interest as “non-punitive,” and absent a punitive purpose behind the statute, stacking was not permissible.

The court acknowledged that, in other cases, it has classified sec. 807.01(4) interest as punitive. However, unlike Erickson and Upthegrove, those cases did not arise in the context of stacking interest.

Accordingly, the court stated, “To the extent DeWitt questions the legal underpinnings and analysis of Upthegrove and Erickson, we believe those questions are best directed to the supreme court. Although we are free to criticize our prior holdings, and to invite their review, we must nonetheless follow them (cite omitted).”

The court added, however, that, even if it were not bound by prior precedent, it would not permit stacking, calling the combined 30 percent interest rate that would result “excessive.”

The court concluded that such a rate, rather than providing an incentive to accept a reasonable offer of settlement, would “effectively force[] the offeree to accept even an unreasonable offer.”

The court added, “an offeree may in good faith believe that a particular offer of settlement is unreasonable, and may have potentially meritorious defenses to advance, but, faced with the prospect of having to pay interest at the rate of over 30 percent for the months (or even years) which may intervene between the offer and judgment, the offeree may believe he or she has no choice but to capitulate.”

Nevertheless, the court determined that DeWitt was entitled to 18 percent interest throughout, rather than dropping to 12 percent after the settlement offer was rejected. The court found it would be absurd to reduce the interest because of the settlement offer, because it would undermine the purpose of sec. 807.01(4) — creating incentives on parties to make and accept reasonable settlement offers.

The Dissent

Judge Dykman dissented from the holding that contractual interest and sec. 807.01(4) interest could not run concurrently, stating that the result of the majority decision “is that litigants who have agreed to pay interest on their delinquent accounts will be free to use delaying tactics and refuse reasonable offers of settlement without the sanction that sec. 807.01(4) provides.”

Dykman reasoned, “the question is whether an admittedly valid contract provision and an admittedly valid statute can both serve their proper purposes. There is no reason why a creditor cannot require a debtor to pay interest on a delinquent account and still avoid trial delay by using Wis. Stat. sec. 807.01(4), a statute designed for that purpose. There is no reason why a debtor faced with paying interest on a delinquent account should be immunized from paying a penalty for delay. There is no reason why pretrial settlements in these cases should be discouraged. … I would permit DeWitt to receive the interest that its contract contemplated and the penalty that sec. 807.01(4) extracts for delay and unreasonable refusal to settle a case before trial.”

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David Ziemer can be reached by email.