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23 ELR 10424 | Environmental Law Reporter | copyright © 1993 | All rights reserved Prejudgment Interest on Superfund Costs: CERCLA's Running MeterThomas H. Birdsall and Dan SalahEditors' Summary: CERCLA § 107(a) authorizes EPA and private-party plaintiffs to recover prejudgment interest on outstanding costs related to CERCLA's response actions. This interest can amount to millions of dollars, and may be the single largest cost item at a site. Despite this, surprisingly little attention has been paid to prejudgment interest and how it is calculated. The authors, whose practice includes reviewing government-sponsored prejudgment interest claims and preparing such claims in private cost recovery actions, provide an introduction to calculating prejudgment interest under CERCLA and the issues that can arise in making this calculation in government and private cost recovery actions. They first examine how prejudgment interest rates are determined and suggest that the appropriate rate for both government and private actions may be the risk-free return on U.S. Treasury bills in which Superfund monies are invested. They next examine the calculation of prejudgment interest and enumerate the variables that must be known before this calculation can be made. The authors evaluate EPA's proposed amendment to the cost recovery provisions of the NCP that would require EPA to provide the amounts and dates on which interest is calculated and the amounts and total interest charges for a site. They then discuss how the time period for the accrual of prejudgment interest is determined, and analyze EPA's proposed amendment to the NCP that would define one of two alternative dates that CERCLA specifies for the commencement of the accrual period. The authors argue that the amendment would make a legislative change by regulatory means and that conforming the amendment to the statutory requirement may encourage EPA to provide specific information on its cost claims as soon as possible. Finally, they provide sample calculations of prejudgment interest and conclude that the magnitude of these amounts makes it advisable for both plaintiffs and defendants to devote more attention to the calculation, documentation, and evaluation of such claims. Thomas H. Birdsall is a director, and Dan Salah is an associate in the San Francisco, California, office of Putnam, Hayes & Bartlett, Inc., an economic and management consulting firm. Both have reviewed government-sponsored prejudgment interest claims and prepared such claims in private cost recovery actions. Mr. Birdsall's practice focuses on economic and financial analysis of environmental issues, including cost recovery, cost allocation, natural resource damages, and economic benefits from noncompliance with environmental requirements. Mr. Salah focuses his practice on economic and financial analysis of liability and damage issues arising in business litigation. This Article reflects the views of the authors. One of the best kept secrets of the Superfund1 program is that claims for prejudgment interest can be very large — they can even become the single largest cost item at a site. In one recently settled case, the prejudgment interest claim exceeded $24 million;2 in another, $19 million.3 In each case, these claims accounted for close to one-third of the total past cost claims plus interest. In addition, the government is not always the claimant; one of these cases was a private cost recovery action.4 The statutory authority to claim prejudgment interest on [23 ELR 10425] past Superfund expenditures is well-established, as is the economic rationale for such claims. Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),5 as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA),6 gives the U.S. Environmental Protection Agency (EPA) and other parties the authority to recover prejudgment interest on outstanding costs related to response actions taken under CERCLA.7 The economic rationale for awarding prejudgment interest is that the plaintiffs are entitled to fair compensation for the time value of money spent on behalf of the defendant(s). This rationale is also well-established in other types of civil litigation.8 Despite the potentially large dollar amounts at stake and the clear statutory authority for claiming them, surprisingly little attention has been paid to prejudgment interest and how it is calculated. Although conceptually straightforward, the calculation of prejudgment interest can be somewhat complicated. In fact, plaintiffs have made mistakes in their calculations, which have resulted in overstatements or understatements of their valid claims. Both plaintiffs and defendants in cost recovery actions also tend to overlook the large amounts of prejudgment interest that may be accruing every month until a settlement or judgment is reached. For example, past costs of $20 million today are accruing prejudgment interest at a rate of approximately $58,000 per month — $1,900 per day, or $698,000 per year. (Three years ago, when interest rates were much higher, the monthly accrual was over $140,000.) Continuing to accrue costs of this magnitude should be a deliberate decision. In fact, defendants may want to explore methods for stopping or reducing the accrual of interest even if they are not yet ready to settle the entire case. The magnitude of prejudgment interest depends significantly on when it starts accruing and when it stops. If adopted, EPA's proposed amendment to the cost recovery provisions of the national contingency plan (NCP) would allow EPA to begin accruing prejudgment interest from earlier dates than are currently permitted, resulting in even larger claims for prejudgment interest.9 This Article provides an introduction to the calculation of prejudgment interest under CERCLA and the issues that can arise in both government and private actions. The Article focuses on three topics: (1) prejudgment interest rates; (2) the calculation of prejudgment interest; and (3) the time period for accruing prejudgment interest. That guidance on each topic is described first. The federal government's guidance and how it has been implemented are then evaluated, highlighting some of the government's mistakes as well as the shortcomings of EPA's proposed amendment to the NCP. Finally, the Article offers guidelines for estimating the magnitude of prejudgment interest in specific cases, and for determining the impact of prejudgment interest on the decision to settle or continue litigating CERCLA's actions. EPA's Guidance on Interest Rates CERCLA §§ 106(b)(2)(A) 10 and 107(a) provide that the outstanding balance of amounts recoverable under §§ 106 and 107 accrue interest at the same rate as interest on investments of the Hazardous Substance Superfund.11 The U.S. Department of the Treasury (the Treasury) invests Superfund monies in 52-week U.S. Treasury MK bills (MK bills) that mature in early September each year. These one-year MK bills are owned exclusively by different agencies of the federal government. When EPA needs funds from Superfund, MK bills are sold. When money is added to the Superfund account, MK bills are purchased. The rate used to assess interest on Superfund costs during a given fiscal year is the yield on MK bills at the time of the Treasury's annual purchase on August 27th.12 The annual rate is determined each October by the Treasury, which provides the rate to EPA's Office of the Comptroller.13 The MK bill rate is intended to compensate the government for the time value of its funds, assuming that if the money had not been spent on cleanup activities, it would have been invested in MK bills. The annual interest rates for Superfund costs during the past 13 fiscal years are shown in Figure 1. Evaluation of EPA's Guidance on Interest Rates The MK bill rate is consistent with CERCLA's requirements and EPA's guidance documents, and it is also the interest rate used by the federal government in several § 107 actions. Compounded annually, the MK bill rate approximates the rate of interest EPA would have earned but for the cost of response actions. This begs the question of what prejudgment interest rate is appropriate for private parties bringing cost recovery or contribution actions. Private parties bringing cost recovery (§ 107) actions seem required to use the [23 ELR 10426] MK bill rate since they, like EPA, are invoking the authority of § 107. But CERCLA's rationale of using the government's opportunity cost of funds would suggest that the plaintiff's opportunity cost of capital may be the appropriate rate for private-party actions. At first it might seem reasonable to compensate the private plaintiff for returns it was unable to earn because it paid the defendant's share of cleanup costs, but modern finance theory and at least three authoritative articles argue otherwise. In a 1990 article, Franklin M. Fisher and R. Craig Romaine argue that "prejudgment interest should be awarded at the risk-free rate."14 This argument is based on the notion that the plaintiffs' opportunity cost of capital includes a return commensurate with the plaintiffs' average level of risk. The plaintiffs, however, do not face an average level of risk in these cases. In fact, since prejudgment interest is not even addressed until the issues of liability and cost recovery have been decided, no risk is involved. Fisher and Romaine also argue that the risk-free rate should be adjusted for appropriate tax treatment. Thus, for private plaintiffs in cost recovery suits Fisher and Romaine argue that the after-tax return on risk-free investments should be used to calculate prejudgment interest. A 1990 article by Robert F. Lanzillotti and Amanda K. Esquibel also argues that the risk-free rate should be used to calculate prejudgment interest.15 In a 1982 article, James M. Patell, Roman L. Weil, and Mark A. Wolfson support the use of the defendants' debt rate to calculate prejudgment interest. Their argument is similar to Fisher and Romaine's, but the authors add the "nonzero probability of default by the defendant" to the risk-free rate to arrive at the appropriate prejudgment interest rate (i.e., the defendants' debt rate).16 For many large corporations, this debt rate is close to the risk-free rate. In addition, the probability of default is likely to be zero or near zero at the time prejudgment interest is awarded unless the defendants are in financial distress and the dollars at stake are large relative to their ability to pay. Further support for using the risk-free rate in calculating prejudgment interest in private cost recovery actions is provided by Judge A. David Mazzone in his 1990 decision in the landmark Polaroid Corp. v. Eastman Kodak Co.17 patent infringement case. In that decision, Judge Mazzone states: After consideration of all the factors and having in mind that the goal to be achieved is fair and adequate compensation, I conclude that an award of prejudgment interest should be based on the Treasury bill rate for the period [from the first date of infringement until the date of the judgment], compounded annually.18 In sum, EPA's use of the MK bill rate is required under CERCLA § 107 and, in any case, is not totally inconsistent with modern finance theory since the rate on these bills approximates the risk-free rate. For private plaintiffs bringing cost recovery or contribution actions, the after-tax, risk-free rate of interest is typically considered to be consistent with modern finance theory. It is interesting to note that in some private-party § 107 actions the one-year Treasury bill rate has been used to calculate prejudgment interest despite § 107's requirement that the MK bill rate be used. Figure 2 compares the MK bill rate, the three-month Treasury bill rate, and the prime rate over the last 10 years (all on a pre-tax basis for these purposes). The three-month Treasury bill rate is used here as a surrogate for the risk-free rate, and the prime rate is used as a surrogate for a defendant's debt rate. The graph shows the MK bill rate fixed for one-year periods beginning October 1 of each year shown, just as it is applied in the CERCLA context.19 As expected, the prime rate is consistently higher than the other two rates, while the MK bill rate is close to the Treasury bill rate at the beginning of each fiscal year. Because it is fixed for a one-year period, the MK bill rate will vary in relation to other rates during the year. On the other hand, the difference between the prime rate and the three-month Treasury rate will remain relatively constant. Calculation of Prejudgment Interest EPA's Guidance on Calculating Interest The actual calculation of prejudgment interest consistent with EPA's guidance is relatively simple.20 The following five variables must be known: 1. the initial date on which interest begins to accrue; 2. the total costs incurred through the initial date; 3. the costs incurred each month thereafter; 4. the interest rates for each applicable fiscal year; and 5. the ending date for accrual of interest. Interest is calculated monthly by EPA and compounded annually. The monthly interest expense is the product of the total costs to date and one-twelfth of the annual interest rate. For example, if total costs to date are $100,000, then monthly interest during fiscal year 1992 would be $100,000 times 1/12 times 5.70 percent, or $475. At the end of each fiscal year (September 30), the total interest accrued for the year is added to the total costs to date. This amount is then carried forward and used in future interest calculations. The result is that interest is compounded annually just as it is on the one-year MK bills in which the monies would otherwise be invested. EPA simplifies the prejudgment interest calculation by assuming that all costs are incurred on the last day of the month in which they are actually incurred. For further detail, Appendix A contains an example of a prejudgment interest calculation. EPA's proposed amendment to the cost recovery provisions of the NCP would require EPA to provide "(A) [t]he amounts and the dates upon which interest is calculated; and (B) [t]he amounts and the total interest charges for the site."21 EPA has also included a proposed "prejudgment interest calculation report" in the docket for the proposed amendment.22 Exactly what EPA would provide in this report is unclear, but neither the draft version of it nor the amendment explicitly requires EPA to provide a line-by-line summary of its calculation of prejudgment interest. EPA has provided such a summary for at least one major site. Evaluation of EPA's Guidance on Calculation of Interest EPA's method for calculating prejudgment interest is simple and similar to methods used in general civil litigation. While monthly compounding of interest is used often, EPA's annual compounding of interest is consistent with the one-year MK bills used to determine the interest rate. Also, the simplicity of EPA's method makes it easy to check the accuracy of EPA's claims for prejudgment interest. Private plaintiffs using the after-tax, risk-free rate of interest can use monthly compounding of interest since those rates are available on a monthly basis. Reviews of EPA's or other plaintiffs' calculations of prejudgment interest can reveal two types of problems: (1) arithmetic errors; and (2) assumptions in grey areas that may or may not be supported by the facts or reasonable judgments. Simple arithmetic errors can have a significant impact on the total prejudgment interest claim. For example, misplacing the decimal point in a cost figure or interest rate can throw a calculation off by a factor of 10. While these types of errors are easily corrected, they can be time-consuming to locate. It is often useful to replicate the entire calculation, since both sides are unlikely to make the same error independently. An audit of the costs claimed and the dates on which they occurred is also recommended. Despite fairly clear guidance, grey areas still occur in individual cases. For example, in one case an audit done during the remediation resulted in the disallowance of significant costs. EPA subtracted these costs from the claim, but left the associated prejudgment interest which had accrued prior to the audit in the claim. EPA argued that it was out-of-pocket for those costs prior to the audit disallowance, and therefore should be reimbursed for the time value of money. The defendants argued that all prejudgment interest associated with the disallowed costs should be subtracted from the claim, since the audit showed that those costs should never have been incurred. EPA maintained the position that interest associated with the disallowed costs would qualify as a component of "all costs" under CERCLA, but agreed to remove it from the claim to facilitate a settlement. To identify and resolve these types of disputes quickly and cost effectively, EPA and private plaintiffs should provide defendants with an itemized financial spreadsheet. The spreadsheet should detail the five variables listed above along with the calculated prejudgment interest. Such a spreadsheet would be more detailed than EPA's proposed "prejudgment interest calculation report," which is included in the docket for EPA's proposed amendment. The summary would be simple and cost less to provide since EPA (and private plaintiffs) typically prepares such a spreadsheet in order to calculate prejudgment interest.23 Without such a summary, potentially responsible parties (PRPs) will not be able to review fully EPA's (and private plaintiffs') claims, including, for example, whether EPA used the proper interest rates, complied with its own guidance for calculating interest, included prejudgment interest on costs disallowed as a result of an audit, and used the proper accrual date. An alternative approach would be for EPA to develop a standard spreadsheet or computer program for use in all cases nationwide. Such a program would only require the user to input the monthly expenditures at a site and the beginning and ending dates for the accrual of interest. The rest of the inputs, including the prejudgment interest rates and the calculations, would be automated, with the program reporting the total prejudgment interest as of a specified date. EPA has developed such a program (the BEN Model) for calculating the economic benefits of noncompliance in civil penalty matters, although with mixed results.24 Reviewing a Prejudgment Interest Claim The following checklist, based on reviews of several claims, summarizes some major questions to address during the prejudgment interest calculation and review process. This checklist is not intended to be comprehensive. A thorough understanding of the calculation method and the particular circumstances of a given site is needed to insure that all potential errors and issues have been resolved. [23 ELR 10428]
EPA's Guidance on Prejudgment Interest Accrual Period CERCLA § 107(a) states that "interest shall accrue from the later of (i) the date payment of a specified amount is demanded in writing, or (ii) the date of the expenditure concerned."25 An EPA policy announcement on September 30, 1987, added the following regarding the written demand for payment: EPA Regional Program Offices and Regional Counsels should ensure that any demand letter, consent decree, Agency order or other official notice of amounts due states clearly the amount due, the schedule of payments, if applicable, and the rate of interest assessed on amounts due.26 Although § 107 explicitly states that a "specified amount" must be demanded in writing before any interest can begin accruing on past costs and EPA guidance reinforces this statement, in settlement negotiations both EPA and the U.S. Department of Justice (DOJ) have argued that a specific dollar amount need not be requested. EPA's proposed amendment to the NCP seeks, through regulation, to establish a new basis for accruing interest. According to EPA: The proposed rule would … clarify the date of written demand as the earlier of the date of mailing of a special notice letter, demand letter, or other correspondence which demands past costs and which may include an estimate of future costs. Alternately, the date of written demand is the date of filing of a section 107(a) cost recovery action in federal district court by the Department of Justice. Special notice letters are issued by EPA pursuant to CERCLA section 122(e). They inform responsible parties of their potential liability for response costs ….27 Neither special notice letters nor court pleadings are required to include a "specified amount" as dictated by CERCLA. If, in fact, they do not include a "specified amount," then the accrual of interest would not appear to be triggered under a strict reading of CERCLA. In the preamble to the proposed amendment to the NCP, EPA asserts that its authority to recover prejudgment interest pre-dates SARA.28 A cited district court case agrees with EPA that SARA's prejudgment interest provision may be applied retroactively to costs incurred prior to SARA.29 EPA's proposed amendment will be evaluated below. In a recent case, DOJ and EPA also asserted that any request for reimbursement, even if it does not include a specified amount of past costs, satisfies CERCLA's requirements for the commencement of accrual.30 In fact, EPA and DOJ suggested that the initial notification of PRPs is enough to trigger it. DOJ also argued that filing a complaint is sufficient to satisfy the prerequisites for accruing interest on costs previously and subsequently expended and in support cited United States v. Hardage.31 Finally, DOJ asserted that in United States v. Bell Petroleum Services, Inc.32 the court found that prejudgment interest was recoverable, even if the government makes "no demand" for payment. EPA's guidance and practice have been consistent on the accrual of interest for costs incurred after the date payment is first demanded. As stated in an EPA policy announcement, "the date of expenditure may be assumed to be the last day of the month in which the disbursement for that expenditure occurred.33 This eliminates the need to calculate interest for any fraction of a month. It also clarifies "the date of the expenditure concerned" as used in CERCLA, by distinguishing between the date a cost is incurred (billing date) and the date of disbursement for that cost (payment date). In many cases there can be a significant time lag between the two. EPA's proposed amendment to the NCP also seeks to clarify the "date of expenditure."34 Evaluation of EPA's Guidance on Prejudgment Interest Time Period EPA has not offered any explanations for its apparent desire to eliminate a very clear statutory requirement that interest shall accrue no earlier than "the date payment of a specified amount is demanded in writing,"35 one that current EPA guidance reinforces.36 EPA should not be allowed to make what is essentially a legislative change through regulatory means. In addition, complying with the statutory requirement may encourage EPA to provide specific information [23 ELR 10429] on its cost claims as soon as possible. This will, in turn, permit PRPs to evaluate these claims sooner, and settle them sooner. When EPA makes a cost claim without providing much, if any, supporting documentation regarding the nature, details, or timing of the claimed costs, PRPs often feel that they are being asked to write a blank check. In one case, the PRPs waited over three years for the DOJ and EPA to provide documentation for a claim which exceeded $50 million. The PRPs agreed to pay the majority of the cost claim within 60 days of receiving the requested documentation. Similarly, earlier PRP evaluations may uncover costs or practices that are unnecessary or not cost-effective. Addressing them sooner can, therefore, save society money. Finally, complying with the statutory requirement will make it easier for EPA to certify its prejudgment interest claims either in settlement negotiations or at trial. EPA's assertion in the preamble to the proposed NCP amendment that it had the authority to collect prejudgment interest prior to SARA may also be misplaced in a regulatory setting. This may be a moot point, however, since the courts appear to have decided that Congress intended to apply the prejudgment interest provision of SARA retroactively.37 Given the statutory criteria for beginning the accrual of interest, both government and private plaintiffs in § 107's (or § 113's) actions are well-advised to issue to PRPs or defendants a written demand for a specified amount of past costs as soon as possible. For costs incurred after the initial written demand is issued, accurate records must be kept to document the date expenses are incurred and, more importantly, the date those expenditures are paid. Maintaining these records will take time. However, recreating these records after the fact will take even longer and is subject to error. Government and private plaintiffs are also advised to periodically update PRPs or defendants on costs incurred after the initial written demand is issued. Such updates protect the plaintiffs' interests and, by keeping the defendants well-informed, may promote settlements. An issue not addressed in either CERCLA or existing EPA guidance is when the accrual of prejudgment interest should stop. In general, it should stop when the defendants reimburse the plaintiffs for past costs. However, defendants may have a legitimate argument for stopping or suspending the accrual of interest if the plaintiffs are primarily responsible for delays in the cost recovery process; forinstance, if the plaintiffs unnecessarily delay providing documentation of past costs or if a cost recovery action is stayed by the plaintiffs. The validity of such arguments will depend on the facts of each case. Estimating and Evaluating Prejudgment Interest The two tables below are intended to help readers approximate prejudgment interest in specific cases without having to perform lengthy computations. The first table can be used to estimate total prejudgment interest accrued at a particular site based on an average cleanup cost per year and the number of years the cleanup effort has been underway. The second table indicates the current annual, monthly, and daily accrual of prejudgment interest based on total prior costs incurred. The columns in Table 1 show the average annual expenditures incurred for cleanup costs in million-dollar increments. Within each year the expenditures are assumed to be spread evenly throughout the year. The left column shows the number of years over which each expenditure level is assumed to have taken place. For example, total prejudgment interest for a site which averaged $3 million per year in cleanup costs over the last five fiscal years (October 1, 1987 - September 30, 1992) would amount to $2,935,070.38 Clearly, the actual amount of prejudgment interest accrued for a particular site will depend on the amount, timing, and notification of expenditures at that site, but the following table should help in determining the general magnitude of prejudgment interest.
The left column in Table 2 indicates the total costs assumed to have been incurred to date. This includes prejudgment interest accrued prior to the beginning of fiscal year 1993 (October 1, 1992). The top row shows the accrual period. For example, the table shows that prejudgment interest would accrue at a rate of $29,083 per month during fiscal year 1993 for a site at which a total of $10 million had previously been expended.
Whether to settle or litigate a CERCLA cost recovery claim is a complex and unique decision for each individual defendant. The question is further complicated when a steering committee of PRPs is involved, as is often the case. Nonetheless, the prejudgment interest expense is one of the potentially significant factors. Absent a claim for prejudgment interest, the settlement decision considers the expected cost of litigation, the probability that the litigation will be successful in reducing or eliminating a defendant's liability, and the potential cost recovery awards. The failure to claim prejudgment interest is equivalent to a zero prejudgment interest rate. Since this is, of course, below the rate that either government or private plaintiffs can claim, failing to claim prejudgment interest amounts to a subsidy to defendants (assuming the plaintiffs have a valid cost recovery claim) — that is, there is an economic benefit associated with delaying payment of any valid claims since those claims do not increase over time to reflect the time value of money. As a result, all else equal, the lack of a prejudgment interest claim will reduce a defendant's incentive to settle. By contrast, a claim for prejudgment interest removes the economic benefit associated with delay and, thereby, one potential reason to avoid settlement. Plaintiffs and defendants must, therefore, carefully consider the effects of prejudgment interest claims on their settle versus litigate decisions. With billions of dollars being spent on cleanups and the long delays common in resolving CERCLA's cost recovery (and contribution) claims, prejudgment interest claims in the tens of millions of dollars may become quite common. Given the clear statutory authority and economic rationale for such claims, both plaintiffs and defendants would be well-advised to ensure that prejudgment interest claims are properly calculated, documented, and evaluated before they decide whether to settle or continue litigating a cost recovery claim. EPA would also be well-advised to revise its proposed amendment to the NCP's cost recovery provisions to conform the amendment to CERCLA, EPA's own prior guidance, and sound public policy. Appendix A Example of EPA Prejudgment Interest Calculation In June 1991, EPA sends a written demand for reimbursement to PRPs at a hypothetical Superfund site. Ten million dollars has been spent on remediation and removal at the site on or before June 30, 1991. An additional $100,000 per month is spent at the site from July through December 1991, at which time all cleanup activity is complete and expenses cease. In this case, interest does not begin accruing until July 1, 1991 (i.e., the first day of the month following "the later of (i) the date payment of a specified amount is demanded in writing, or (ii) the date of the expenditure concerned"). In July 1991, (see Line 1 in Table A below) interest is accrued on the $10,000,000 expended on or before June 30, 1991 at 1/12 the interest rate for the fiscal year ending September 30, 1991 (7.99%/12 = 0.666%). All expenses incurred during July 1991 are assumed to have been incurred on July 31, 1991 and therefore no interest is accrued on these costs until August 1991 (Line 2). The same assumption is applied to all ongoing costs incurred. October 1991 (Line 4) marks the beginning of a new fiscal year for the federal government, at which time a new interest rate is applied to all outstanding debts. Also, all interest accrued in the prior fiscal year (Prejudgment Interest Lines 1-3) is added to the amount accruing interest in October to effect the annual compounding of interest. Ongoing expenses cease in December 1991 — so no change in the amount accruing interest will take place after January 1992, until the next fiscal year begins in October, at which time interest will once again be compounded and a new interest rate applied.
[SEE ILLUSTRATION IN ORIGINAL] [23 ELR 10434]
2. Third-party cost recovery and cost contribution action in United States v. Western Processing Co., C89-214M (W.D. Wash.). 3. Based on a confidential assignment from a client of the authors. 4. Third-party cost recovery and cost contribution action in United States v. Western Processing Co., C89-214M. 5. 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024. 6. Pub. L. No. 99-499, 100 Stat. 1613. 7. CERCLA § 106(b)(2)(A) also gives a private party the authority to recover prejudgment interest from the federal government on response costs if it can establish that it is not liable for those costs. 42 U.S.C. § 9606(b)(2)(A), ELR STAT. CERCLA 024. In addition, § 113(f) allows any person to seek contribution from any other person who is liable or potentially liable. 42 U.S.C. § 9613, ELR STAT. CERCLA 039. While not explicit, it can be argued that prejudgment interest is appropriately included in contribution actions. 8. While the general economic rationale for prejudgment interest is well-established, disagreements often arise between economists regarding the appropriate methods for calculating such interest. See, e.g., Franklin M. Fisher & R. Craig Romaine, Janis Joplin's Yearbook and the Theory of Damages, 5 J. ACCT., AUDITING & FIN. 146 (1990); Robert F. Lanzillotti & Amanda K. Esquibel, Measuring Damages in Commercial Litigation: Present Value of Lost Opportunities, 5 J. ACCT., AUDITING & FIN. 125 (1990); James M. Patell et al., Accumulating Damages in Litigation: the Roles of Uncertainty and Interest Rates, J. LEGAL STUD., June 1982, at 363. 9. See Recovery of Costs for CERCLA Response Actions, 57 Fed. Reg. 34742 (1992) (to be codified at 40 C.F.R. pts. 300 and 308) (proposed Aug. 6, 1992). This proposal is reviewed by Robert H. Fuhrman and David B. Hird in EPA Proposed Rule on Superfund Cost Recovery: Streamlining or Steamrolling? TOXICS L. REP., Sept. 9, 1992, at 450. 10. 42 U.S.C. § 9606(b)(2)(A), ELR STAT. CERCLA 024. 11. Section 113(f) makes no explicit reference to prejudgment interest or to the appropriate prejudgment interest rate. 42 U.S.C. § 9613(f), ELR STAT. CERCLA 039. 12. The U.S. government's fiscal year begins October 1 and ends September 30. 13. Prior to 1984, the annual rates were actually based on Treasury bill rates. From 1984 forward, the rates are based on MK bills. 14. Fisher & Romaine, supra note 8, at 146. 15. Lanzillotti & Esquibel, supra note 8, at 134, 137. The authors do not address the effect of taxes on the appropriate prejudgment interest rate. 16. Patell, supra note 8, at 343. The authors do not discuss whether the defendant's debt rate should be on a pre- or post-tax basis. 17. 16 U.S.P.Q. 2d 1481, 1541 (D. Mass. 1990), amended 17 U.S.P.Q. 2d 1711 (D. Mass. 1991) (clerical errors in original calculation of award). 18. The preceding discussion of the appropriate prejudgment interest rate for private plaintiffs draws from Robert H. Fuhrman's Article, The Role of EPA's BEN Model in Establishing Civil Penalties, 21 ELR 10246, 10250 (May 1991). 19. It bears noting that the actual return earned on monies invested in the Superfund is not fixed because of intra-year transactions. All monies in the Superfund at the beginning of a fiscal year are used to purchase 52-week MK bills which, if held until maturity, will earn a return equal to the yield as calculated at the beginning of the year. However, all intra-year transactions are conducted at market rates. For example, money added in mid-year to the Superfund is used to purchase MK bills with the same maturity date as those purchased at the beginning of the fiscal year. Therefore, the nominal rate of interest on the bills does not change, but the price of the securities will change in accordance with changes in market interest rates. This means that during a year in which interest rates fall, such as 1985, the actual return on MK bills purchased mid-year would be lower (because the price is relatively higher) than the return on MK bills with the same maturity but purchased at the beginning of the fiscal year. The same is true of MK bills sold mid-year. Holding the interest rate charged on § 107 actions constant during each fiscal year is a simplifying assumption, which in most cases will not have a significant effect on the total prejudgment interest accrued. However, in a year during which interest rates rise or fall precipitously and large expenditures are incurred, it would have an impact. In such cases, it may be worth-while to examine the effect of changing market rates on the prejudgment interest calculation. 20. EPA, RESOURCES MANAGEMENT DIRECTIVE 2550-D, FINANCIAL MANAGEMENT OF THE SUPERFUND PROGRAM 12-11 to 12-12 (July 1988). 21. Recovery of Costs for CERCLA Response Actions, supra note 9, at 34754. 22. Id., at 34742. 23. Financial spreadsheets are generally used since they automate the numerous calculations and facilitate identifying and correcting any errors. Table A in Appendix A illustrates a basic spreadsheet. 24. See Fuhrman, supra note 18. 25. 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024. Interest payable under § 106(b)(2)(A) accrues from the date of expenditure. 42 U.S.C. § 9606(b)(2)(A), ELR STAT. CERCLA 024. No mention is made of the date of demand. 26. EPA, supra note 20, at 12-11 to 12-12. 27. Recovery of Costs for CERCLA Response Actions, supra note 9, at 34749. 28. Id., at 34749. 29. United States v. Northeastern Pharmaceutical & Chem. Co., 579 F. Supp. 823, 852, 14 ELR 20212, 20224 (W.D. Mo. 1984), aff'd in part, rev'd in part, 810 F.2d 726, 17 ELR 20603 (8th Cir. 1986), and cert. denied, 108 S. Ct. 146 (1987). 30. Based on a confidential assignment from a client of the authors. 31. 750 F. Supp. 1460, 1505-06, 21 ELR 20721, 20745-46 (W.D. Okla. 1990). 32. 734 F. Supp. 771, 20 ELR 21120 (W.D. Tex. 1990). 33. EPA, supra note 20, at 12-11 to 12-12. 34. Recovery of Costs for CERCLA Response Actions, supra note 9, at 34748-49. 35. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024. 36. EPA, supra note 20, at 12-11 to 12-12. 37. United States v. R.W. Meyer, Inc., 889 F.2d 1497, 1505, 20 ELR 20319, 20323-24 (6th Cir. 1989); United States v. Northeastern Pharmaceutical & Chem. Co., 810 F.2d 726, 17 ELR 20603 (8th Cir. 1986), cert. denied, 484 U.S. 848 (1987). 38. The prejudgment interest rates used are shown in Figure 1. 39. As discussed above, whether prejudgment interest can be claimed prior to the effective date of SARA, October 17, 1986, is a question of law. See supra note 37 and accompanying text. The numbers shown in Table 1, which encompass the pre-SARA period, are for informational purposes only. 40. The year periods are assumed to coincide with the federal government's fiscal years (October 1 through September 30), with all of the periods ending September 30, 1992. 23 ELR 10424 | Environmental Law Reporter | copyright © 1993 | All rights reserved |