Am.'s Collectibles Network, Inc. v. Sterling Commerce (Am.), Inc.

AMERICA'S COLLECTIBLES NETWORK, INC., DBA JEWELRY TELEVISION, Plaintiff-Appellee, v. STERLING COMMERCE (AMERICA), INC.;INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendants-Appellants.

No. 19-5625

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

July 24, 2020

NOT RECOMMENDED FOR PUBLICATION

File Name: 20a0430n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE

BEFORE: BOGGS, CLAY, and GIBBONS, Circuit Judges.

JULIA SMITH GIBBONS, Circuit Judge. Sterling Commerce (America) Inc. ("Sterling") appeals the district court's amended judgment awarding America's Collectibles Network, Inc., d/b/a Jewelry Television ("JTV"), prejudgment interest at a rate of 5.4% per year for the period beginning when JTV filed its complaint to the date the court entered its original judgment. Because the district court failed to award an equitable rate of prejudgment interest in accordance with Tennessee law, we reverse the award of prejudgment interest and remand to the district court with instructions to determine an equitable rate of prejudgment interest in accordance with this opinion.

I.

More than ten years ago, JTV "hired Sterling to replace and upgrade the software used to operate its computer system." Am.'s Collectibles Network v. Sterling Commerce (Am.), 767 F. App'x 584, 585 (6th Cir. 2019).¹ But Sterling delivered a defective software system, and the project failed. JTV's initial 2009 complaint alleged, among other claims, that Sterling made intentional and negligent misrepresentations about its software; made fraudulent promises to induce JTV to enter the agreements; breached the contract; and breached its express and implied warranties.

In 2017, JTV and Sterling went to trial on JTV's claims of fraud in the inducement, promissory fraud, negligent misrepresentation, breach of contract, and breach of express warranties. Both the parties and the district court were responsible for the intervening eight-year delay. The jury ultimately returned a verdict for JTV on its fraudulent inducement, negligent misrepresentation, and breach of contract claims.

After the jury returned its verdict, and after briefing by the parties, the district court awarded JTV prejudgment interest, pursuant to Tennessee Code § 47-14-123, at a rate of 1.22% per year. The rate of 1.22% per year was also the postjudgment interest rate provided by federal law. Am.'s Collectibles Network, 767 F. App'x at 587. JTV filed a motion to alter or amend the judgment under Federal Rule of Civil Procedure 59(e), seeking to amend the prejudgment interest rate to 5.4%. The district court denied the motion, because the evidence presented by JTV was not newly discovered, as it was available to JTV before the court entered the judgment when JTV was arguing for an award of prejudgment interest at a rate of 10%. JTV appealed the district court's award of prejudgment interest in addition to other claims of error by the district court. JTV argued that the district court's imposition of the federal postjudgment interest rate as the rate for the prejudgment interest award, without consideration of any case-specific factors, constituted an abuse of discretion. JTV further argued that even in the order denying the motion to alter or amendjudgment, the district court inadequately considered the factors required by Tennessee law in evaluating an award of prejudgment interest.

A panel of this court agreed, finding that the selection of the federal postjudgment interest rate as the prejudgment interest rate "without much explanation [was] mechanical," and that "treating a single factor as dispositive in the interest assessment is suspect." Am.'s Collectibles Network, 767 F. App'x at 587. Because the district court did not "make[] a specific calculation assessing interest," and instead "relied on only its discretion," the panel remanded for further proceedings. Id. at 588.

On remand, the district court, without additional briefing by the parties, issued an amended opinion awarding prejudgment interest at a rate of 5.4% per year. The district court's opinion focused its analysis of equitable factors in awarding prejudgment interest on whether the district court's delay was an appropriate reason to reduce the prejudgment interest award. After discussing the litigation delays, the district court stated:

The remedial goal of a prejudgment-interest award is to put the plaintiff in the position it would have occupied absent the defendant's wrongdoing, i.e., to compensate JTV for the loss of use of $13,000,000 over the eight years it took to secure a jury verdict in its favor. Reducing the prejudgment interest rate because of the [c]ourt's delays works against this goal. Conversely, requiring Sterling to pay prejudgment interest for the entirety of the eight years this case was pending prior to the judgment—no matter what prejudgment interest rate is applied—is inequitable, given the [c]ourt's role in the delay.

Unfortunately, both Tennessee and Sixth Circuit precedent suggest that reducing a prejudgment-interest award based on the [c]ourt's delays is inappropriate. See Pittington, 880 F.3d at 807; Gen. Constr. Contractors Ass'n, Inc., 107 S.W.3d at 526. But for Sterling's conduct, JTV would not have been wrongfully deprived of $13,000,000 for eight years. As a result, JTV should be compensated. JTV has submitted uncontroverted evidence that its "average annual cost of debt capital . . . expressed as an interest rate" during the pendency of this litigation was 5.4%, which is reasonably consistent with the average prime interest rate during that period of 3.36%. Because the [c]ourt does not have the flexibility to discount a prejudgment-interest award due to its own delays, the [c]ourt awards JTV prejudgment interest at a rate of 5.4%. While this award is inequitable to Sterling, given the mounting prejudgment interest attributable to the Court's delays,it does compensate JTV for the value of its loss of capital during the pendency of this litigation, prevents unjust enrichment of Sterling, and ameliorates the effects of inflation on JTV's recovery.

Am.'s Collectibles Network, Inc. v. Sterling Commerce (Am.), Inc., No. 3:09-CV-143, 2019 WL 1993543, at *3 (E.D. Tenn. May 6, 2019) (footnotes omitted). Sterling timely appealed.

II.

"[C]hallenges to the district court's award of prejudgment interest 'will not be disturbed . . . unless the record reveals a manifest and palpable abuse of discretion.'" Baptist Physician Hosp. Org., Inc. v. Humana Military Healthcare Servs., Inc., 481 F.3d 337, 354 (6th Cir. 2007) (quoting Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998)). "A trial court abuses its discretion when it applies an incorrect legal standard, reaches an illogical conclusion, bases its decision on a clearly erroneous assessment of the evidence, or employs reasoning that causes an injustice to the complaining party." Kelly v. Kelly, 445 S.W.3d 685, 692 (Tenn. 2014) (citing State v. Banks, 271 S.W.3d 90, 116 (Tenn. 2008)). "There is no dispute that in a diversity action the question of prejudgment interest must be determined under state law." L-S Indus., Inc. v. Matlack, 448 F. App'x 597, 598 (6th Cir. 2012) (quoting Daily v. Gusto Records, Inc., 14 F. App'x 579, 591 (6th Cir. 2001)).

III.

On appeal to this court, Sterling brings four challenges to the district court's award of a 5.4% prejudgment interest rate. Sterling does not contend that awarding any amount of prejudgment interest was inequitable; it only challenges the rate of prejudgment interest on appeal.² First, Sterling argues that the district court abused its discretion in applying federal-lawstandards to determine the prejudgment interest rather than using the relevant factors under Tennessee law. Second, Sterling argues that the district court abused its discretion because its award of prejudgment interest is, as expressly characterized by the district court, inequitable. Third, Sterling alleges that the district court misunderstood Tennessee law regarding consideration of court-caused delay in prejudgment interest determinations and treated this incorrect legal standard as dispositive, contrary to Tennessee law. Fourth, Sterling claims that the district court's characterization of the rate as "supported by uncontroverted evidence" is a product of factual error. Because the district court abused its discretion by awarding prejudgment interest at an inequitable rate, we reverse.

A.

Tennessee courts have discretion to award prejudgment interest under Tennessee Code § 47-14-123. That section provides that prejudgment interest: "may be awarded by courts or juries in accordance with the principles of equity at any rate not in excess of a maximum effective rate of ten percent (10%) per annum." Tenn. Code Ann. § 47-14-123 (1979). As explained by the Tennessee Supreme Court, "the purpose of awarding the interest is to fully compensate a plaintiff for the loss of the use of funds to which he or she was legally entitled, not to penalize a defendant for wrongdoing." Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998); see also Alexander v. Inman, 974 S.W.2d 689, 697-98 (Tenn. 1998).

In Myint, the Tennessee Supreme Court discussed the principles guiding courts in their determination of whether to award or deny prejudgment interest. 970 S.W.2d at 927-29. "Foremost are the principles of equity"; "the court must decide whether the award of prejudgment interest is fair, given the particular circumstances of the case." Id. at 927. "Equitable factors relevant to a court's decision include the following: (1) promptness in the commencement of aclaim, (2) unreasonable delay of the proceedings by either party, (3) abusive litigation practices by either party, (4) the certainty of the existence of an underlying obligation, (4) the certainty of the amount in dispute, and (5) prior compensation for the lost time value of the plaintiff's money." Poole v. Union Planters Bank, N.A., 337 S.W.3d 771,...