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Liquidated damages provisions in a commercial contract between sophisticated parties are presumptively reasonable and the party challenging the clause bears the burden of proving its unreasonableness.
This appeal involved a $ 1.5 million dollar loan made by MetLife Capital Corporation, predecessor in interest to plaintiff MetLife Capital Financial Corporation ("MetLife"), to defendant Washington Avenue Associates, L.P. ("Washington Avenue") The loan was secured by a Mortgage and Security Agreement on a commercial property in Belleville, New Jersey. Washington Avenue executed a four-year promissory note as evidence of its debt to MetLife. The promissory note provided that a late fee equal to five percent of the delinquent payment shall be payable with respect to any payment. Numerous payments on the loan were delinquent, and Washington Avenue ultimately defaulted on the final "balloon payment." Thereafter, MetLife commenced a foreclosure action against Washington Avenue. In its answer to the complaint, Washington Avenue challenged the five percent late fee and the fifteen percent default rate. MetLife moved for summary judgment, and sought to strike Washington Avenue's counterclaims as non-germane. The trial court granted MetLife's motion and concluded that the only germane counterclaims were the challenges to the late fees and default rate of interest. The Appellate Division reversed the trial court and concluded that both the five percent late fee and the default interest rate of 12.55 percent constituted unenforceable penalties. MetLife appealed.
Did the five percent late charge assessed against each delinquent payment, and the default rate of interest, constitute reasonable stipulated damages provisions?
The court held that the five percent late fee in this case was not unreasonable because the loan involved an arms-length, fully negotiated transaction between two sophisticated commercial parties, each represented by counsel. MetLife presented uncontroverted testimony that the five percent late fee was well within the normal industry standard and was intended to compensate for the administrative costs associated with servicing delinquent loan payments, and Washington presented no evidence to overcome the presumptive reasonableness of the stipulated damages clause. Thus, it held that the five percent late charge and 12.55 percent default rate set by the trial court were reasonable liquidated damages.