On appeal from the Superior Court of New Jersey, Law Division, Union County.
Michels, Pressler and Trautwein. The opinion of the court was delivered by Michels, P.J.A.D.
Defendant Jersey Shore Bank (bank) appeals from a judgment of the Law Division that awarded plaintiff Irving Tobin (Tobin) damages in the sum of $24,648 together with interest at the prevailing prime rate for the period from February 9, 1980 to April 28, 1982 for the unlawful conversion of funds from an account maintained in his name "in trust for Pernfish, Inc." The trial judge held that in the circumstances here present the bank did not have a right of set-off against this account even though it was comprised of funds to which its debtor, Pernfish, Inc., was equitably entitled.*fn1
We are entirely satisfied from our study of the record that the judgment of the trial court is based on findings of fact that are adequately supported by evidence and that, with the single exception relating to the amount of prejudgment interest awarded discussed hereinafter, all of the issues of law raised are clearly without merit. R. 2:11-3(e)(1)(A) and (E). Accordingly, that portion of the judgment awarding damages to Tobin is affirmed substantially for the reasons expressed by Judge Brody in his oral opinion of April 27, 1982.*fn2
We turn therefore to the bank's claim that the trial judge abused his discretion by awarding prejudgment interest at the prime rate.
The record reveals that Tobin calculated the interest on $24,648.64 from February 9, 1980 to April 28, 1982, using the daily Citibank prime rate but without compounding, at $9,565.48. This sum was added to the judgment. The prime rate during this period ranged from 11.1% to 21.5%. The bank, in support of its motion to amend the judgment by reducing the interest awarded, submitted an affidavit to show its gross rate of return on interest-earning assets in 1981 was 12.51%, and its net rate of return was 6.56%. The bank represented that FDIC regulations force it to keep some assets on nonincome-producing reserve, and to lend some money at less than prevailing interest rates.
It is clear that in a case of this kind, the trial court is vested with broad discretion to allow prejudgment interest in accordance with equitable principles. See, e.g., Manning Engineering, Inc. v. Hudson Cty. Park Comm'n, 71 N.J. 145, 159 (1976), vacated on other grounds 74 N.J. 113 (1977); Bak-A-Lum Corp. v. Alcoa Building Prod., 69 N.J. 123, 131 (1976); Corallo v. Essex Cty. Welfare Bd., 140 N.J. Super. 414, 417 (App.Div.1976). In Deerhurst Estates v. Meadow Homes, Inc., 64 N.J. Super. 134, 154-155 (App.Div.1960), certif. den. 34 N.J. 66 (1961), we emphasized that "interest does not run as a matter of right on a liquidated demand; rather the trial judge is given broad discretion to allow interest in accordance with the principles of equity."
Here the bank does not challenge the propriety of awarding prejudgment interest. It simply contends that the rate of interest allowed was excessive. Thus, the issue is whether
prejudgment interest should be awarded (1) at the rate the creditor, Tobin, would have had to pay to borrow the amount of money wrongfully detained by the debtor bank (i.e., the prime lending rate); (2) at the rate actually received by the debtor while wrongfully in possession of the money (here about 6.5%) or (3) at the rate the creditor could have received had the money been turned over to him on his demand (in this case, the passbook savings rate). The answer depends on an understanding of the nature and purpose of prejudgment interest.
The nature of interest was discussed extensively in Consolidated Police, etc., Pension Fund Comm'n v. Passaic, 23 N.J. 645 (1957). There, the Supreme Court emphasized that interest is a form of damages to compensate the creditor for the wrongful detention of money, explaining:
It is fundamental in our law that "interest is no part of a debt unless so stipulated in the contract; that, usually, it is of statutory origin, and is awarded as damages for the detention of a debt." Warren Bros. Co. v. Hartford Accident & Indemnity Co., 102 N.J.L. 616 (E. & A. 1926), Parker, J. See North Hudson R. Co. v. Booraem, 28 N.J. Eq. 593 (E. & A. 1877). And interest may be penal in its nature. Town of Belvidere v. Warren R.R. Co., 34 N.J.L. 193 (Sup.Ct. 1870), Beasley, C.J., dismissed on a procedural ground, 35 N.J.L. 584 (E. & A. 1871); In re Edge's Will, 115 N.J. Eq. 408 (E. & A. 1934); Wilentz v. Hendrickson, 133 N.J. Eq. 447 (Ch. 1943), affirmed 135 N.J. Eq. 244 (E. & A. 1944). "Interest" is an "exaction for past due obligations and in essence is a penalty or in the nature of a penalty." Burlington County v. Martin, 128 N.J.L. 203 (Sup.Ct. 1942), affirmed 129 N.J.L. 92 (E. & A. 1942). Interest does not inhere in a tax as a legal incident. City of Camden v. Allen, 26 N.J.L. 398 (Sup.Ct. 1857). "Interest when allowed is in contemplation of law, damages for the illegal detention of a legitimate claim or indebtedness." Fidelity Mutual Life Insurance Co. v. Wilkes Barre & Hazelton R. Co., 98 N.J.L. 507 (E. & A. 1923). It is the "computation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention, * * *." Hiatt v. Brown [ Brown v. Hiatts ], 15 Wall. 177, 21 L. Ed. 128 (1873). In ...