Second Circuit, on First Impression, Holds that Application of Federal Post-Judgment Interest Rate (Currently .25%) to District Court Judgment Docketed in State Court is Constitutional

In Cappiello v. ICD Publications, Inc., the Second Circuit held that the Erie doctrine does not require that post-judgment interest on a federal judgment docketed in state court accrue at the rate provided under state law. Instead, interest on such a judgment must accrue at the rate provided by federal law.

After securing a judgment against ICD Publications, Inc. from the United States District Court for the Eastern District of New York, Cappiello filed the judgment in the Suffolk County Supreme Court and sought execution by the local sheriff, which was stayed pending an appeal. Following affirmance by the Second Circuit, ICD tendered the amount of the judgment plus post-judgment interest at .25 percent calculated pursuant to 28 U.S.C. § 1961. Cappiello rejected the tender, claiming that interest was due at the 9 percent New York state rate pursuant to CPLR 5004.

Affirming the District Court, the Second Circuit upheld the application of the federal rate and rejected the argument that the federal rate could not constitutionally be applied under Erie R.R. Co. v. Tompkins, stating:

[W]e now hold that, under § 1961, federal district courts must apply the federal rate of post-judgment interest to judgments rendered in diversity actions, even when those judgments have been docketed in state court, and that such application does not violate the Constitution.

But, the Court of Appeals noted that the case did not present the issue of whether Section 1961 preempts state law such that a state court asked to enforce a federal judgment would be required to apply the federal rate of post-judgment interest rather than the rate prescribed by state law. Accordingly, the door may be open to a federal judgment creditor to commence an enforcement action in a New York state court and seek the higher state rate of post-judgment interest in that forum.

Anthony A. Dean is Counsel to the Gibbons Business & Commercial Litigation Department.