LOUIS H. POLLAK, District Judge.
Disposition of this motion for prejudgment interest will hopefully mark the final chapter in the long and unhappy relationship between Charles Peterson, a Nebraska farmer, and Crown Financial Corporation ("Crown"), a Pennsylvania corporation engaged in the business of financing installment sales. The relationship, chronicled more fully in prior opinions of this court and the Court of Appeals,
began in December of 1969, when the parties entered into the first of what would become a series of five loan agreements. For each of these agreements, Peterson executed a promissory note, with interest on each note calculated at 2 1/2 percent above the prime rate.
A flurry of complicated transactions surrounded the issuance of the fourth and fifth such notes in late December of 1972. When the papers settled, Peterson had paid $499,658.85 of interest due on the fourth note, and the note was returned to him marked "cancelled." Peterson apparently understood that the $368,875.62 in interest remaining due on that fourth note had been forgiven. He learned that Crown assumed otherwise in December of 1975, when notified by Crown that he was in default in that amount. Crown refused to release Peterson's shares of stock that it held as collateral until Peterson paid the disputed sum in full. Peterson paid the money on December 29, 1975, but did so "under duress, involuntarily, and under protest." This lawsuit, seeking a return of the money, followed. 476 F. Supp. 1155, 1156-57; 661 F.2d 287, 288-89.
In an opinion and order dated July 20, 1979, I determined that, as a matter of law, the intentional cancellation of the fourth note forgave the interest that remained outstanding.
Accordingly, summary judgment for the plaintiff was granted. 476 F. Supp. at 1161. In a later ruling, I determined that Peterson was entitled to prejudgment interest from the date the disputed payment was made until the date summary judgment was granted. I also ruled that, despite plaintiff's cogent arguments that prejudgment interest should be awarded at money-market rates, as a federal judge sitting in diversity, I was constrained by Pennsylvania common and statutory law to limit the rate of prejudgment interest to six percent. 498 F. Supp. at 1179-80.
Both parties appealed aspects of my rulings. The Court of Appeals for the Third Circuit affirmed the determination that the $368,875.62 was forgiven by Crown's cancellation of Peterson's note, and that the money was therefore wrongfully held by Crown. The Court disagreed, however, with my view that I could not authorize prejudgment interest at a rate in excess of six percent. Speaking through Judge Adams, the Court of Appeals characterized the case as sounding in restitution rather than contract, and held that under Pennsylvania precedents, "the district court has discretion to award damages in the nature of prejudgment interest in an amount greater than six percent." 661 F.2d at 290. It remanded the case "for reconsideration of the prejudgment interest award." Id.
To carry out the mandate of the Court of Appeals, three issues need to be resolved. First, what is the equitable rate of prejudgment interest? Second, what is the date of judgment, signifying the end of prejudgment interest and the beginning of postjudgment interest, limited by law to six percent? Finally, should the prejudgment interest award be computed simply or on a compound basis?
The question of an equitable rate of interest was the subject of a discussion in one of my earlier opinions which bears repeating here:
What remains to be determined is the rate at which the interest due is to be computed. Plaintiff argues for "money-market rates." During the period in which Crown has wrongfully retained his money, plaintiff has been forced to borrow, paying interest ranging from 8.5% to 12.25%. And while plaintiff has had to borrow, Crown has had the use of the money to make further loans at rates presumably in the neighborhood of the 2 1/2 points above prime which Crown charged plaintiff for the loan which is the root of this litigation. Plaintiff also emphasizes that from January of 1976 to the present -- the period during which he has been deprived of his money -- the purchasing power of the dollar has decreased more than 29%. Unless a rate of interest is assessed which is steep enough to force Crown to disgorge any profit it has made by the use of plaintiff's money, and to compensate plaintiff for the costs he encountered as a result of Crown's action, Crown will have profited from its wrongful act and plaintiff will remain, despite a judgment on the merits, a substantial loser in the controversy.