Vol 59 – Calculating Judgment Arrearages
A legal note from Marshal Willick about how to correctly calculate arrears, interest, and penalties when there has already been a prior reduction of arrears to judgment.
Just as there is more than one way to skin a cat, there is more than one way to calculate an arrearage – and it can make a big difference in the total owed. For many years, Nevada lawyers have relied on little but logic and the words of the controlling statutes, but now there is some guidance from the Nevada Supreme Court, which should lead to a change in how such calculations are done. Lawyers who represent both those who are owed money, and those who owe it, must be up on the matter to competently represent their clients’ interests.
I. THE STATUTES AND THE MATH
Calculating arrearages for failure to pay spousal support or child support has always been a challenge for Nevada attorneys. The statutory interest rate can change every 6 months – it is determined as the prime rate at Nevada’s largest bank plus 2 percent on January 1 and July 1 of each year. See NRS 99.040(1) (as to contracts); NRS 17.130(2) (judgments).
For all but the shortest and simplest time periods, the calculation requires knowing what that rate was during all periods the payments were delinquent and altering the math for each different interest rate throughout the period post-judgment arrearages are owed.
Additionally, if the arrearage is in child support, there is also a mandatory 10% per annum penalty for any payment or portion thereof that has been overdue for at least one month. See NRS 125B.095. Medical expenses incurred on behalf of a child are a form of child support, and when the obligor parent does not contribute, those sums are also subject to both statutory interest and the 10% penalty. NRS 125B.085; see https://www.willicklawgroup.com/interest-penalties/.
It would, of course, be a disservice to the obligee of child support for counsel to fail to claim the mandatory attorney’s fees for any action that reduced an arrearage to judgment. See NRS 125B.140; Edgington v. Edgington, 119 Nev. 577, 80 P.3d 1282 (2003); legal note Vol. 28 – Attorney’s Fees and Burden Shifting, posted at https://www.willicklawgroup.com/full-list-of-newsletters/. Any award of fees would also be subject to statutory interest, but not to the penalty.
In a very short period of time, such calculations typically exceed the capability of most attorneys to perform by hand, leading some attorneys to not calculate interest and penalties at all, to the disadvantage of their clients and their own malpractice risk.
Subscribers to the MLAW Penalties and Interest Calculator, of course, avoid the major headache of trying to spreadsheet these calculations. See https://www.willicklawgroup.com/marshal-law-arrearage-calculation-program/. But there are choices to be made as to how to do the calculation, regardless of the means used.
II. ANSWERED AND UNANSWERED QUESTIONS
Certain questions have never been answered. For example, in an appeal a few years ago, we asked for a definitive ruling stating that the Nevada Welfare method of calculating penalties (they impose an up-front 10% penalty the day an arrearage comes into being, and then ignore it forever thereafter) violates the face of the statute, and logic, but the Nevada Supreme Court declined to address the question. See Vaile v. Porsboll, 128 Nev. ___, 268 P. 3d 1272 (Adv. Opn. No. 3, Jan. 26, 2012); Willick, Why the Nevada Welfare Division is Calculating Interest and Penalties Incorrectly, and How It Injures Nevada Litigants, 23 Nev. Fam. L. Rep., Winter, 2010, at 19, posted at https://www.willicklawgroup.com/published-works/.
However, one recent decision from the Court has finally answered (at least impliedly) a different question that has been problematic for many years – how to treat sums that have been reduced to judgment, when additional time passes, additional arrears accrue, and there is a later hearing when those same arrears remain unpaid. See Torres v. Goodyear Tire & Rubber Co., 30 Nev. ___, 317 P.3d 828 (Adv. Opn. No. 3, Jan. 30, 2014) (personal injury action; in the absence of a statute or agreement that authorizes otherwise, compound interest is never allowed).
For over 20 years, based on prior decisions defining “judgments,” it appeared that there was a way to lawfully compound interest under the statutes, since interest is calculated on each payment from its due date under a prior judgment or order until reduced to a new judgment, at which time the entire sum of a judgment begins accruing interest under the interest rate then in effect. See A Matter of Interest: Collection of Full Arrearages on Nevada Judgments, Tonopah Showcase, 2001 (State Bar of Nevada); XIV Advocate, Sept., 1990, at 6 (Nev. Trial Law. A. Pub’n), posted at https://www.willicklawgroup.com/published-works/.
Starting a later calculation with a foundation of all sums previously reduced to judgment effectively constitutes a kind of “compounding,” since interest is subsequently charged on amounts that had previously accrued as interest, but were converted into the principal sum of a judgment. In the 24 years since it was suggested that this methodology was correct, there has not been a peep of contradiction in any statute, case, court rule, or commentary.
However, there is some possibility that this practice – which has been used for decades without challenge – might now be considered to run afoul of Torres, in which the Court was called on to interpret NRS 17.130. The Court found that the statute “does not authorize” an award of compound interest, reiterating the holding that compound interest is only permitted when provided by an agreement or authorized by a statute.
That flat pronouncement did not explicitly address whether it does (or should) apply to sums “converted” from interest to principal by way of reduction to judgment, although at least one court in another State has made exactly that finding under that State’s interest statute. See In re Chase, ___ P.3d ___ (Or. No. S061222, Feb. 13, 2014) (under a statute distinguishing pre- and post-judgment interest, accrued interest on child support sums are not to be included in a judgment on which further interest accrues).
Since Torres is not precisely on point, and every State’s laws are a bit different, a further holding in the area might be required to be sure whether or not interest can accrue on sums, including prior interest, that have already been reduced to judgment. However, those wishing to be safe can read Torres as a prohibition on that practice, at least until any later guidance is given.
III. WHY YOU SHOULD CARE – THE NUMBERS CAN BE HUGE
An example from a recent hearing illustrates the difference.
In 2012, a child support, medical arrears, and attorney’s fees arrearage was reduced to judgment in a total amount of $192,880. The obligor made minimal payments over the next two years.
When the case returned to court in 2014, the dollar amount reduced to judgment in 2012 was entered as the base sum due, as of the date of the 2012 hearing; interest and penalties were calculated from that date forward. In essence, interest and penalties were being calculated on not only the principal that (still) remained unpaid, but also on the unpaid interest and penalty components of that judgment. The resulting sum due was $250,717.00.
The family court judge was concerned that the phrasing of the penalties statute did not permit this form of calculation – that the required application of penalties to “the installment” did not allow reduced-to-judgment penalties and interest to be included in future calculations. Looking over the entirety of the calculations, and examining the interest holding in Torres, led us to re-calculate all sums involved.
If only the prior principal sums were used as the base sum due – carrying forward, but not including as principal the sums reduced to judgment in the earlier round of proceedings – the total sum due was $179,960.18. (Some minuscule payments had been made over the prior two years.) This is a difference of more than 28%, based on identical facts.
IV. WHAT TO DO AND HOW TO DO IT
Examining all of the law in this area, we have determined that going forward, unless further guidance is given by the Nevada Supreme Court on the subject, this office will not enter the reduced-to-judgment sums including prior penalties and interest as the “principal” for later calculations of arrears, and we recommend that no one else do so.
The MLAW Calculator will always only apply simple interest to a judgment arrearage. However, if you go to court and obtain a reduction to judgment of arrearages that include interest and penalties, you must insure that when you write the resulting order, you recite in that judgment the breakdown components of principal, interest, and penalties to avoid inadvertently compounding the interest and penalties calculations. Additionally, you must separate out the child support principal from any other judgment – such as attorney’s fees – to ensure penalties are not later calculated on the non-child support judgment.
This way, the principal amount can be entered into the calculator in future calculations as of the date of reduction to judgment, and subsequent interest and penalty amounts will be correct from the date of judgment forward. The previous interest and penalty amounts can then be added to the current interest and penalty figures for the total amount due. Doing the calculations this way will avoid assertions of violation of either the penalties statute or the Torres holding.
Entering an order with the three components specifically enumerated will make it far easier for the client, successor counsel, or the court (the Clark County family courts now have the MLAW program as well) to accurately compute “current” arrearages as of any given moment. It will also save counsel from the additional work of having to do the computations all the way back to the original order once there has been a reduction to judgment.
V. WHY YOU HAVE TO KNOW THIS STUFF
A comprehensive redraft of the Eighth Judicial District Court Rules governing practice and procedure in Family Court (EDCR 5) has been completed and is now under review by the judges. The proposed rules require that any request for arrearages in periodic payments “be accompanied by a separately-filed schedule showing the date and amount of each payment due, and the date and amount of any payments received. The schedule shall include a calculation of interest, any applicable penalties, and an explanation of how those sums were calculated . . . .”
While use of the MLAW Penalties and Interest Calculator makes it simple to do such a calculation, and shows on its face the dates and amounts due and paid, it does not immediately state how the inputs for the calculation were done.
Part of the purpose of this legal note is to give filing counsel an easy short-hand way to explain calculations if performed according to the guidance set out here: “The calculation of principal, interest, and penalties in the attached summary does not compound any sum, in accordance with Torres v. Goodyear Tire & Rubber Co., 30 Nev. ___, 317 P.3d 828 (Adv. Opn. No. 3, Jan. 30, 2014), as detailed in legal note Vol. 59, Calculating Judgment Arrearages, posted at https://www.willicklawgroup.com/full-list-of-newsletters/.”
Of course, given the lack of precise on-point direction from the Nevada Supreme Court on the matter discussed here, there is still room for attorneys to calculate arrears in some other fashion. Counsel representing obligors should verify that the calculations submitted by obligee counsel follow the above guidance – or should consider challenging them on the basis of the authorities cited above.
Knowing how to compute arrearages is required by every attorney practicing in Family Court; the proposed new rules will require counsel to certify that they did those calculations in accordance with applicable law. Attorneys in other practice areas, of course, should also correctly calculate statutory interest where appropriate.
It’s been suggested that anyone with the temerity to slog through these technicalities should be rewarded for their perseverance. I agree. From now until November 30, 2014, anyone mentioning Legal Note vol. 59 will get the “Ely discount” of $25 for initial sign-ups for the MLAW programs.
VI. QUOTES OF THE ISSUE
“The most powerful force in the universe is compound interest.”
– Albert Einstein (1879-1955)
“Interest on debts grow without rain.”
– Yiddish Proverb
“I don’t believe in princerple, But O, I du in interest.”
– James Russell Lowell, The Pious Editor’s Creed (1860)
For the archives of previous legal notes, go to https://www.willicklawgroup.com/newsletters.
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