Law School Case Brief
Dobson Bay Club II DD, Ltd. Liab. Co. v. La Sonrisa de Siena, Ltd. Liab. Co. - 242 Ariz. 108, 393 P.3d 449 (2017)
A liquidated damages provision is enforceable, but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. This test requires courts to consider (1) the anticipated or actual loss caused by the breach, and (2) the difficulty of proof of loss. Whether a fixed amount is a penalty turns on the relative strengths of these factors. If the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude is allowed in that approximation. If, to take an extreme case, it is clear that no loss at all has occurred, a provision fixing a substantial sum as damages is unenforceable.
In 2006, Canadian Imperial Bank of Commerce loaned Dobson Bay Club II DD, LLC and related entities (Dobson Bay) $28.6 million. The loan was secured by a deed of trust encumbering those properties. In case of delay in payment, Dobson Bay was required to pay default interest and collection costs, including reasonable attorney fees, and a 5% late fee assessed on the payment amount. If Canadian Imperial Bank foreclosed the deed of trust, Dobson Bay was also obligated to pay costs, trustee's fees, and reasonable attorney fees. The maturity date passed, and Dobson Bay failed to make the balloon payment. La Sonrisa de Siena, LLC (Sonrisa) bought the note and deed of trust from Canadian Imperial Bank and promptly noticed a trustee's sale of the secured properties. It contended that Dobson Bay owed more than $30 million, including a nearly $1.4 million late fee. Litigation ensued. The parties filed cross-motions for partial summary judgment on whether the late fee provision in the note was an enforceable liquidated damages provision or, instead, an unenforceable penalty. The superior court granted partial summary judgment for Sonrisa, ruling that the late fee was enforceable as liquidated damages. The court of appeals reversed, holding "as a matter of law, that absent unusual circumstances the imposition of a flat 5% late-fee on a balloon payment for a conventional, fixed-interest rate loan is not enforceable as liquidated damages.
Was the imposition of a flat 5% late-fee on a balloon payment for a conventional-fixed-interest rate loan enforceable as liquidated damages?
The Arizona Supreme Court held that a liquidated damages contract provision that assessed a late fee of five percent of the principal ($1.4 million) on a final loan balloon payment constituted an unenforceable penalty because it did not reasonably forecast anticipated damages likely to result from an untimely payment; it either duplicated other fees triggered by a default or was grossly disproportionate to any remaining sums needed to compensate for anticipated losses. Moreover, it did not reasonably approximate the actual costs of processing the late payment or the loss of use of that payment; and the note holder would have had no difficulty proving its loss, if any. Hence, the judgment of the intermediate appellate court was affirmed.
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