The U.S. District Court for the Western District of Texas recently clarified the applicable rate for the calculation of prejudgment interest under the Texas Securities Act (TSA). In FDIC v. Deutsche Bank Securities Inc., the FDIC, acting as receiver for Guaranty Bank, brought claims against the defendant bank under the TSA stemming from the sale of residential mortgage-backed securities prior to the financial crisis. While discovery was ongoing, the defendant moved for partial summary judgment seeking a determination regarding the calculation of potential damages, including prejudgment interest.
In ruling on the summary judgment motion, the court noted that while the TSA states that a buyer can recover “consideration paid for the security plus interest thereon at the legal rate,” the term “legal rate” is not defined in the TSA. Relying on other sources, including the Texas Constitution and Section 302.002 of the Texas Finance Code, the court held that the applicable legal rate of prejudgment interest was 6%. In advance of trial, and after the case was reassigned to a different district judge, the defendant moved for reconsideration of the court’s opinion regarding the applicable prejudgment interest rate, arguing that the applicable rate was the coupon rate specified in the securities’ certificates. The FDIC opposed, arguing that Section 302.002 of the Texas Finance Code sets the rate at 6% per year, as was initially determined by the court.
In an amended order granting the motion for reconsideration, the court held first that the coupon rate did not apply because the certificates at issue were not contracts that obligated the defendant to pay a set interest rate. The court then rejected the FDIC’s assertion that Section 302.002 of the Texas Finance Code governed, because that Section of the Finance Code only applies to contracts that establish a debtor-creditor relationship. Instead, the court held that where there is no relevant contract specifying an interest rate, Section 304.003 of the Texas Finance Code (which also applies to breach of contract claims where no rate is specified in the contract) supplies the proper prejudgment interest rate under the TSA. Section 304.003 states that such interest rate is the prime rate published by the Federal Reserve on the date of computation, with a floor of 5% and a cap of 15%.
If widely adopted, and given the substantial impact that prejudgment interest can have on a final damages award, defendants facing claims under the TSA should heed trends in the Federal Reserve prime rate when analyzing their potential exposure.