January 23, 2012
Today the Supreme Court resolved an unsettled issue about recoverable costs in California appeals. In its decision in Rossa v. D. L. Falk Co. (No. S183523), the court addressed whether California Rules of Court, rule 8.278(d)(1)(F), which permits a successful appellant to recover “the cost to obtain a letter of credit as collateral,” allows the recovery of “the interest expense incurred by an appellant to borrow funds to secure a letter of credit that was obtained to secure an appeal bond posted to stay enforcement of a money judgment during the pendency of the appeal.” Answering that question in the negative, the court held that “rule 8.278(d)(1)(F) does not extend to interest expenses incurred to borrow funds to provide security for a letter of credit.” (Emphasis added.)
In a prior post, and in a Daily Journal article (“Interest for Thee but Not for Me?”), I went out on a limb and predicted the opposite outcome. The 7-0 decision, authored by Chief Justice Cantil-Sakauye, shows just how wrong such predictions can be. The outcome seemed motivated by a reluctance to expand the universe of recoverable costs, which could generate future “litigation concerning the myriad ways in which the burden of providing security on appeal constitutes a ‘cost’ to the appellant.” The court also saw the interest expense for a letter of credit as fundamentally different than the cost of an appeal bond or a letter of credit (which are directly referenced in rule 8.278(d)(1)(F) as recoverable costs). A loan requires an immediate transfer of funds, whereas bonds and letters of credit do not. Thus, the interest expenses for a loan are substantially greater than the charges for a bond or letter of credit, and the court reasoned that if the Judicial Council had wanted such greater expenses to be recoverable, it would have said so more clearly.
An earlier decision, Cooper v. Westbrook Torrey Hills (2000) 81 Cal.App.4th 1294, had allowed an appellant to recover as costs the interest expenses incurred on funds the appellant borrowed to make a cash deposit in lieu of a bond. I had predicted that if the Supreme Court disapproved the recovery of interest on a letter of credit to secure an appeal bond, appellants would use letters of credit to obtain funds to post cash deposits, and then recover the interest expense under Cooper. That would strain the resources of the superior courts, which are not equipped to handle large numbers of cash deposits. The Supreme Court neatly eliminated that problem in Rossa by simply disapproving Cooper.
There now appears to be no way to recover the interest cost of borrowing money to secure a judgment on appeal—a result that seems unfair when judgment creditors earn statutory (and far above market rate) ten percent annual interest on judgments that are pending on appeal. In Rossa, the Supreme Court left the door open to correct that problem, noting that the Judicial Council may consider amending the Rules of Court “to extend the right to recover costs to interest expenses and fees incurred to borrow funds to secure a letter of credit.”