Flood Control Dist. Of Maricopa County v. Paloma Investment Ltd. Partnership, 713 Ariz. Adv. Rep. 31 (App. Div. I, May 26, 2015) (J. Thompson)

INTEREST ON JUDGMENTS IS GOVERNED BY THE INTEREST RATE IN PLACE WHEN THE JUDGMENT IS ENTERED AND PARTIAL PAYMENT ON JUDGMENT APPLIES TO INTEREST BEFORE PRINCIPAL

Owners of the Gillespie Dam [Dam Owners] in Maricopa County and the Maricopa County Flood District [District] were sued by a group of farmers [Farmers] whose property was flooded when the dam failed. The Dam Owners and District cross-claimed against each other claiming the other caused the dam failure and the Dam Owners also sought an adjudication it was entitled to indemnity from the District. The Dam Owners and Farmers entered into a Damron/Morris agreement whereby the Dam Owners paid the Farmers $3.3 million and consented to a $14.75 million judgment agreeing further to assign their indemnity claim against the District. In exchange the Farmers agreed not to execute upon the judgment against the Dam Owners over the $3.3 million paid.

Thereafter the Farmers prevailed upon the indemnity claim against the District and the trial court found the $14.75 million judgment reasonable. Following this determination an amended judgment for $11.45 million was entered to allow for the $3.3 million already paid along with costs and fees for an additional $8.4 million. The District then attempted to make a partial payment on the judgement stating the payment was against principal first and then interest. The Farmers objected taking the position they were entitled to apply the total amount of the partial payment against interest. The trial court agreed. The District then claimed the interest amount should be calculated based upon the current statute. The trial court disagreed finding the 10% interest rate required by the statute at the time the judgments were entered applied. The Arizona Court of Appeals affirmed.

Both judgments in question were entered before July 20, 2011 when the interest rate on judgments in Arizona changed from 10% per annum to:

the lesser of ten per cent per annum or at a rate per annum that is equal to one per cent plus the

prime rate as published by the board of governors of the federal reserve system in statistical release

H.15 or any publication that may supersede it on the date that the judgment is entered. Ariz. Rev. Stat. §44-1201(B)

This amendment to the statute further provided that “The judgment shall state the applicable interest rate and it shall not change after it is entered [and the new interest rate shall apply to ] all judgments that are entered on or after the effective date of this act." Based upon this the court of appeals found the 10% interest provided in the statute before the July 20, 2011 amendment applied to both judgments.

Finally, the court adopted the “American Rule” with respect to an involuntary partial payment on a debt which gives the creditor the right to apply all of a partial payment to interest without regard to an express attempt by the debtor to apply it to principal first. The payments at issue here are involuntary because they are mandated by court order.

[A]llocating payments first to interest encourages debtors to pay the full balance

due when both principal and interest are owing. . . . If payment were applied first to

principal, then a creditor could be left with a non-interest bearing balance of accumulated

interest and the debtor would have no incentive for speedy payment. By

encouraging full payment, the rule ensures that the creditor is compensated for the loss

of use of the principal.