Docket No. 104659.
Argued March 5, 1997 (Calendar No. 14).
Decided June 3, 1997.
Sommers, Schwartz, Silver Schwartz, P.C. (by Robert H. Darling and Richard D. Toth), for the plaintiff.
Gault Davison, P.C. (by Edward B. Davison), for the defendant.
Mark Granzotto for Michigan Trial Lawyers Association.
Plunkett Cooney, P.C. (by Robert G. Kamenec), for Michigan Defense Trial Counsel, Inc.
Siemion, Huckabay, Bodary, Padilla, Morganti Bowerman, P.C. (by Raymond W. Morganti), for PICOM Insurance Company and Michigan Physicians Mutual Liability Company.
We granted leave in this case to decide whether reduction of future damages to present cash value under MCL 600.6306; MSA 27A.6306 is to be calculated using compound or simple interest. We reverse the decision of the Court of Appeals and hold that simple interest is appropriate under the statute.
FACTS AND PROCEDURAL HISTORY
Plaintiff Michael Nation, an independent contractor employed by the W. D. E. Electric Company, was engaged in electrical work at the C. J. Link Lumber Company on June 24, 1992, when he fell from a ladder. He sued defendants C. J. Link, Ecolo-Tech, Inc., and W. D. E. Electric Company in the Genesee Circuit Court on various tort theories for the injuries he sustained in the fall. The jury found plaintiff sixty-five percent at fault, but awarded damages against one defendant, W. D. E. Electric, for its comparative negligence as follows: $15,000 for past lost earning capacity and medical expenses, $2,700 for past pain and suffering, $6,372 for future medical expenses, and $1,000 a year for future pain and suffering until the year 2034. The jury applied annual compound interest of five percent to the $1,000 award. It did not award damages for future lost earning capacity.
C. J. Link had contracted with W. D. E. for the installation of a dust-collection system.
The trial court, at defendant's request, reduced plaintiff's future damages to a present cash value of $42,000, using compound interest. The court rejected plaintiff's request that simple interest be employed to arrive at a present cash value of $60,611.31. The plaintiff appealed on various grounds, including whether the court used the proper method to reduce the award of future damages. The Court of Appeals affirmed, 213 Mich. App. 694; 540 N.W.2d 788 (1995), and we granted leave "limited to whether MCL 600.6306; MSA 27A.6306 requires interest compounding to reduce a jury award to present cash value." 453 Mich. 915 (1996).
Simple interest reduces damages arithmetically by dividing damages in the first year by 1.05, in the second by 1.10, in the third by 1.15, etc. Compound interest reduces damages exponentially each year by dividing the first year by 1.05, but then multiplying the denominator in each year by an additional five percent, so that the denominator in year two is 1.1025, in year three is 1.157625, etc. In effect, the compound method adds accrued interest to the principal before charging the applicable rate of interest to the adjusted principal. We do not dispute here that compound interest is the standard generally employed in the business and financial world today.
Section 6306 provides in relevant part:
(1) After a verdict rendered by a trier of fact in favor of a plaintiff, an order of judgment shall be entered by the court . . . against each defendant . . . in the following order and in the following judgment amounts:
* * *
(c) All future economic damages, less medical and other health care costs, and less collateral source payments . . . reduced to gross present cash value.
(d) All future medical and other health care costs reduced to gross present cash value.
* * *
(2) As used in this section, "gross present cash value" means the total amount of future damages reduced to present value at a rate of 5% per year for each year in which those damages accrue. . . .
Before 1986, under the common law, the obligation to perform the reduction of future damages to present cash value in personal injury actions was the obligation of the jury. SJI2d 53.03 instructed the jury to perform the calculation using simple interest. Under the tort reform legislation passed in 1986, § 6306 transferred the obligation to perform the calculation to the trial judge. We decline the invitation to hold that this transfer abrogated the method in place under the common-law scheme. The Legislature did not explicitly require the use of compound interest as it did in the context of judgment interest. Moreover, the Legislature contemporaneously rejected a bill seeking to require just that.
See House Bill 5176.
The common law has long favored simple interest and disfavored compound interest, which it has characterized as "interest on accrued interest." See, e.g., Schwartz v. Piper Aircraft Corp, 90 Mich. App. 324, 327; 282 N.W.2d 3 (1979). The Court of Appeals aptly there observed:
[T]hose courts which have dealt with similar problems have uniformly rejected compound interest except where specifically authorized by statute or in cases where compounding of interest was granted as a penalty for some misconduct on the part of a defendant. [ Id. at 326.]
See also 47 CJS, Interest Usury, § 6(c), p 31 ("The law does not favor compound interest or interest on interest. . . . As a general rule, in the absence of contract therefor . . . or of [a] statute authorizing it, compound interest is not allowed to be computed on a debt").
For nearly eighty years before the enactment of § 6306, Michigan approved the use of simple interest to reduce damages to present value. Rivers v. Bay City Traction Electric Co, 164 Mich. 696; 128 N.W. 254 (1910). SJI2d 53.03, still applicable to damage awards in cases not covered by § 6306, reflects the state of the common law under Rivers before the enactment of § 6306. A dispute arises now, however, with regard to the meaning of § 6306 because the Legislature did not explicitly specify which method should be employed by the court in reducing future damage awards to present value.
RJA, chap 63 concerns personal injury verdicts and damages.
In resolving disputed interpretations of statutory language, it is the function of a reviewing court to effectuate the legislative intent. Hiltz v. Phil's Quality Market, 417 Mich. 335, 343; 337 N.W.2d 237 (1983). If the language used is clear, then the Legislature must have intended the meaning it has plainly expressed, and the statute must be enforced as written. Id. Section 6306 is silent with regard to the kind of interest rate to be employed. However, the Legislature is deemed to act with an understanding of common law in existence before the legislation was enacted. Nummer v. Treasury Dep't, 448 Mich. 534, 544; 533 N.W.2d 250 (1995); Garwols v. Bankers Trust Co, 251 Mich. 420, 424-425; 232 N.W. 239 (1930). Moreover, "statutes in derogation of the common law must be strictly construed, and will not be extended by implication to abrogate established rules of common law." Rusinek v. Schultz, Snyder Steele Lumber Co, 411 Mich. 502, 508; 309 N.W.2d 163 (1981). In other words, "[w]here there is doubt regarding the meaning of such a statute, it is to be `given the effect which makes the least rather than the most change in the common law.'" Energetics, Ltd v. Whitmill, 442 Mich. 38, 51; 497 N.W.2d 497 (1993). "This Court will presume that the Legislature of this state is familiar with the principles of statutory construction." People v. Hall, 391 Mich. 175, 190; 215 N.W.2d 166 (1974).
These principles of statutory construction alone are ample authority for the conclusion that simple interest was intended by the Legislature when reenacting § 6306 in 1986. The Legislature did not expressly provide for compound interest, instead making it clear only that the responsibility for making the calculation was being transferred from the jury to the trial judge. The tort reform legislation of 1986 was a comprehensive effort involving numerous compromises. It strains common sense to surmise that the Legislature was unaware of the interest-calculation question and simply overlooked the common-law scheme for reducing judgments to present cash value using simple interest. We therefore presume the Legislature intended to maintain the status quo when it changed the statute without expressly providing that compound interest would be required. To conclude otherwise would violate the clear dictates of well-established rules of statutory interpretation.
Extrinsic evidence in the form of legislative history supports our conclusion. First, the Legislature enacted § 6306 as part of 1986 PA 178. That same act also amended parts of MCL 600.6013(5); MSA 27A.6013(5) and MCL 600.6455; MSA 27A.6455, both of which provide for calculation of the interest on judgments using compound interest. Section 6013(6) provides in pertinent part:
The Legislature renumbered and reenacted subsections (5)-(10) as subsections (6)-(11).
[F]or complaints filed on or after January 1, 1987, interest on a money judgment recovered in a civil action shall be calculated at 6-month intervals from the date of filing the complaint at a rate of interest that is equal to 1% plus the average interest rate paid at auctions of 5-year United States treasury notes during the 6 months immediately preceding July 1 and January 1, as certified by the state treasurer, and compounded annually, pursuant to this section. [Emphasis added.]
Before being "extensively revised" in 1980, Gage v. Ford Motor Co, 423 Mich. 250, 253; 377 N.W.2d 709 (1985), § 6013 was silent regarding whether simple or compound interest applied. Acknowledging the common-law preference for simple interest that was dispositive in Schwartz, Gage, supra at 259, this Court held that the Legislature's silence in this regard demonstrated "that the Legislature did not intend to provide for compounding of [judgment] interest before June 1, 1980," the effective date of the statute. Id. at 258. Rather, Justice BRICKLEY, speaking for a unanimous Court, concluded that "[t]he analyses of the bill, as well as the wording of the amended statute, clearly indicate[d] the intent that before June 1, 1980, interest was to continue to be computed in the former manner — six percent interest without compounding." Id. at 258. In reaching this conclusion, we reasoned, "It was clear to the Legislature when it embarked on this amendment that the six percent interest had been construed to be simple interest, Schwartz, supra, and it made no attempt to change it retroactively." Gage, supra at 259. We find this reasoning to be compelling here.
In Schwartz, supra, the Court of Appeals addressed whether § 6013 provided for simple or compound interest on a money judgment. Like the statute now before us, § 6013 was silent with respect to the kind of interest to be employed, and the Court concluded simple interest was appropriate because of the common-law preference. Id. at 326.
Assuming the Legislature was aware of the common law as it previously existed, which disfavored compound interest in the context of interest on judgments, as well as in the context of reduction to present cash value, it could have explicitly abrogated the common-law rule for reduction as it had for § 6013. Given that § 6306 evidences no such decision by the Legislature, and in light of our reasoning in Gage, we decline to depart from the established rule.
We reject defendant's assertion that the contrary conclusion is required if the statutes are read in pari materia.
Second, the Legislature contemporaneously rejected House Bill 5176 in favor of the bill that became 1986 PA 178. That bill would have expressly provided under subsection 6305(2) that "[f]uture damages must be reduced to present value by applying a discount factor of 3%, compounded annually." We are not inclined to second-guess the process attending the legislative choice made in reaching agreement on the language contained in § 6306. Our province is to give effect to the statute as enacted in the context of the common-law scheme in place at that time. In light of the Legislature's rejection of an explicit provision requiring compound interest, we presume the Legislature's silence evidences an intent that courts continue to use simple interest.
"We are aided in discovering legislative intent in enacting any statute by examining the proposed legislation it considered and rejected, contrasted with the provisions as finally adopted." Miller v. State Farm Mut Automobile Ins Co, 410 Mich. 538, 566; 302 N.W.2d 537 (1981).
Thus, we defer to the legislative choice and reject the dissent's preference for changing the common law because compound interest may result in a more precise calculation.
Finally, we reject the decision of the United States Court of Appeals for the Sixth Circuit in Kirchgessner v. United States, 958 F.2d 158 (CA 6, 1992), on which both defendant and the Court of Appeals relied. We find the opinion in that Federal Tort Claims Act case unpersuasive because it fails to rely on Michigan authority and because its underlying rationale is incorrect.
Citing no Michigan or other authority to support its decision, the Sixth Circuit departed from the normal practice of employing simple interest in Michigan because "the difficulty and potential for juror confusion, have been statutorily removed." Id. at 162. While it is true that the common law under Rivers, supra, viewed five percent simple interest as a rule of convenience, id. at 709, we disagree with the Sixth Circuit's conclusion that the convenience sought had to do solely with the jury's inability to grasp the complexities of compound interest. Rather, the convenience rationale underlying Rivers relates to the inability of courts to precisely arrive at a mathematical figure that represents the value money received today will have at some future date. For the sake of convenience, the system takes its best guess at what will be necessary today to compensate the plaintiff for damages expected in the future. It is not a scientific exercise requiring actuarial precision, but is "an effort to ascertain and apply a rule which can be conveniently applied to the facts and result in substantial right. . . ." Id. Although defendant argues that this provides plaintiff a windfall, calculation of five percent compound interest is not only well within the competence of the trial court, it is also within the competency of a jury provided with a calculator. The question what is a reasonable method for reducing future damages to present value is a policy judgment based on an assessment of economic indicators. The statute does not indicate that the Legislature has resolved this question in favor of compound interest. Until the Legislature sees fit to more clearly say otherwise, continued application of simple interest is the prudent way to proceed.
The Sixth Circuit has chosen a different path, using modern-day actuarial principles that employ compound interest. United States Steel Corp v. Lamp, 436 F.2d 1256, 1280, n 11 (CA 6, 1970). Thus, Kirchgessner is consistent with the course taken in federal courts, where "the determination of the discount rate . . . rests within the sound discretion of the District Court." Lamp at 1280, n 11. We refuse to take such an approach because the Legislature has specifically provided the applicable discount rate without evidencing any intent to alter the common-law procedure.
Moreover, we find the Kirchgessner court's assertion that the discount in later years will be greater than five percent confusing because the converse might as easily be said of compound interest.
For the reasons stated above, we hold that future damages under § 6306 are to be reduced to present cash value using the same simple interest that has been employed under the common law for at least eighty years in Michigan. We reverse the decision of the Court of Appeals and vacate the trial court's judgment as it pertains to future damages. We remand the case to the trial court for entry of a judgment consistent with this opinion.
MALLETT, C.J., and CAVANAGH and KELLY, JJ., concurred with BOYLE, J.
The Court holds today that a judgment for future damages must be reduced to present cash value by the use of simple interest. In my view, the Court errs by adhering to an antiquated common-law doctrine that unfairly penalizes defendants by overstating their financial liability. While restraint is a judicial virtue, where the Court has the justification and the authority to change the common law, it should not hesitate to do so if justice will be better served. Because the use of simple interest lacks the precision to accurately reflect the time value of money, and consequently overcompensates the plaintiff by overstating the present value of the judgment, I respectfully dissent.
MCL 600.6306(1)(e); MSA 27A.6306(1)(e) provides that the trial court shall reduce gross future noneconomic damages to present cash value. This reduction is computed at five percent per year. The question that the statute leaves unanswered, and which is before us today, is whether that reduction should be accomplished through the use of simple or compound interest.
"As used in this section, `gross present cash value' means the total amount of future damages reduced to present value at a rate of 5% per year for each year in which those damages accrue. . . ." MCL 600.6306(2); MSA 27A.6306(2).
Neither party in this case disputes the need to reduce, or discount, a judgment for future damages to a present value. Money has earning power and can accumulate interest over time. For this reason, a dollar today is worth more than a dollar some time in the future. The purpose of discounting awards of future damages to a present value is to reflect that earning power. Consequently, the use of simple interest to discount a future payment produces an imprecise result because the underlying assumption — that during the period before the payment is due the money could be earning simple interest — is faulty. Even the most staid investments, such as passbook savings accounts and certificates of deposit, pay interest on a compound basis.
"[I]nterest on interest may seem a detail, but is not . . . ." The use of simple interest to discount a future payment is imprecise because money invested during the period before the payment is due earns compound interest. This inaccuracy would be less troubling if it fell equally on both parties. It does not, however, because the use of simple interest always understates the earning power of money, and thus overstates the defendant's liability because it fails to fully discount the future payment. The additional liability imposed by an imprecise calculation falls entirely on a defendant who must pay a judgment.
In re Chicago, M, St P P R Co, 791 F.2d 524, 529 (CA 7, 1986).
Although the amounts involved in this case were relatively small, they sufficiently demonstrate this principle. The jury awarded the plaintiff damages for pain and suffering at a rate of $1,000 a year for forty-two years. Recognizing that inflation would diminish the value of the award each year, the jury increased the annual award by five percent, compounded annually. The total amount of the payments was $135,218.68. Discounted to present value using five percent simple interest, the judgment would be $60,611.31. Discounted to present value using five percent interest, compounded annually, the judgment would be $42,000. The difference between the two judgments is $18,611.31, or thirty-one percent. Thus, the difference between simple and compound interest is not a mere detail in this case, but an increase in the defendant's liability of thirty-one percent. Using the simple interest approach advocated by the majority, the defendant would have to pay an additional thirty-one percent on his judgment. It goes without saying that the Court's decision will affect every personal injury award for future damages.
By increasing the judgment by five percent compounded annually to account for inflation, and then reducing it by five percent compounded annually to account for the time value of money, the result is that the present value is the equivalent of $1,000 a year for forty-two years, presently payable and undiscounted.
No principled reason exists to give the plaintiff an additional thirty-one percent, when the plaintiff has the opportunity to earn compound interest on that judgment through the use of common, everyday investments such as certificates of deposit or passbook savings accounts.
The common-law rule requiring simple interest can be traced to Rivers v. Bay City Traction Electric Co. In Rivers, the plaintiff was awarded damages equal to the expected lifetime earnings of her husband, who had been killed in a railroad accident. The Court was presented with how to reduce the decedent's total lifetime earnings to a present lump-sum value. Recognizing that it would be inequitable to simply award the plaintiff the total amount of the future wages, the Court concluded that the future damages should be reduced to a present value at a rate of five percent interest.
164 Mich. 696; 128 N.W. 254 (1910).
Although the Rivers Court explained its holding in terms of simple interest, i.e., divide the first year's lost wages by 1.05, the second year's by 1.10, etc., the Court also approved of the use of compound interest.
With variations depending upon the interest rate, and upon whether simple or compound interest may be received, it is, so far as we are informed, the rule in common use for determining the sum of money required to secure a given annuity for any number of years, and the present worth of a sum payable in the future. [Emphasis added.]
Id. at 710.
Thus, even in 1910, the Court contemplated the use of compound interest in the context of reducing future judgments to a present value. The Rivers opinion appears to indicate that if the plaintiff was earning compound interest on her investment, the judgment could be discounted using a compounded interest rate. At that time, the Court rejected the defendant's argument that the plaintiff could earn compound interest, citing risks and contingencies. Because the Rivers case predated the Federal Deposit Insurance Corporation, depositing money in a bank in 1910 certainly entailed a minor risk of default. Today, however, bank deposits are insured up to $100,000 an account, thus removing any real risk. Consequently, the prospect of earning compound interest is no longer contingent or risky.
As I understand the majority, the primary objection to using compound interest is not that simple interest is more equitable, but that the Legislature, by not disrupting the existing common-law scheme, intended to maintain the "status quo."
When this Court is interpreting a statute, its singular role is to give effect to the intent of the Legislature. But where this Court is interpreting the common law, its function is different. The Michigan Constitution provides that the common law remains in force until "changed, amended or repealed." "Amendment" and "repeal" allude to legislative acts, while "change" contemplates judicial change. The constitutional authority of this Court to change the common law is unquestioned, and when faced with judge-made law, this Court "has not disregarded its corrective responsibility in the proper case." As we noted in People v. Aaron,
"[I]t is for this Court to decide whether a common-law rule shall be retained unless the Legislature states a rule that is inconsistent with or precludes a change in the common-law rule."
Obviously, the Legislature has not stated a rule that is inconsistent with the adoption of compound interest because it has never explicitly stated a preference for either compound or simple interest in the area of future damages.
Although People v. Aaron was a criminal case, the situation then before the Court is analogous to the present case. In Aaron, the Court addressed the status of the common-law felony-murder rule. Although the Legislature had criminalized the crime of murder, "murder" was not defined in the statute. The Court referred to the common law to define murder. Therefore, by criminalizing "murder," the Legislature had indicated its awareness, and apparent acceptance, of the common-law doctrine of felony murder. So, as in the present case, the Court was faced with a statute that left certain definitions to the common law. In Aaron, it was the definition of "murder," and in this case, it is the definition of "interest." Finding the felony-murder doctrine unjust, this Court resolved to "exercise our role in the development of the common law by abrogating the common-law felony-murder rule." Accordingly, the Court exercised its inherent authority to amend the common law to reflect modern perceptions of justice, despite the Legislature's apparent acceptance of the existing common-law rule.
Aaron, supra at 723.
MCL 750.317; MSA 28.549 ("All other kinds of murder shall be murder of the second [2nd] degree").
Aaron, supra at 715.
Id. at 733.
Placek v. Sterling Heights, n 10 supra (comparative negligence); Womack v. Buchhorn, 384 Mich. 718; 187 N.W.2d 218 (1971) (negligently inflicted prenatal injury); Felgner v Anderson, 375 Mich. 23; 133 N.W.2d 136 (1965) (assumption of risk); Parker v. Port Huron Hosp, 361 Mich. 1; 105 N.W.2d 1 (1960) (charitable immunity); Montgomery v. Stephan, 359 Mich. 33; 101 N.W.2d 227 (1960) (common-law disability prohibiting a wife from suing for the loss of her husband's consortium); Spence v. Three Rivers Builders Masonry Supply, Inc, 353 Mich. 120; 90 N.W.2d 873 (1958) (privity requirement in actions for breach of an implied warranty); Bricker v. Green, 313 Mich. 218; 21 N.W.2d 105 (1946) (doctrine of imputed negligence).
In Placek v. Sterling Heights, the Court acknowledged that in some situations we may be in a better position than the Legislature to propose a change in the common law. Because this case involves the computation of the present value of future judgments, it is a matter of practice and procedure in the courts, which makes it particularly within the domain of this Court.
N 10 supra at 657-660.
Const 1963, art 6, § 5.
Because the rule of Rivers, supra, overstates the defendant's liability by understating the earning power of money, and because this Court is authorized to change the common law, I would affirm the decision of the Court of Appeals.
RILEY and WEAVER, JJ., concurred with BRICKLEY, J.