Whether a provision of a contract for the payment of a sum upon a breach is rendered unenforceable by reason of its being a penalty depends upon the circumstances of each case. Where actual damages are difficult to ascertain, and where the sum agreed upon by the parties at the time of the execution of the contract represents a reasonable estimate of the actual damages, such a contract will be enforced. But where the actual damages are easily ascertainable, and the stipulated sum is unreasonably and grossly disproportionate to the real damages from a breach, or is unconscionably excessive, the court will award the aggrieved party no more than his actual damages.
Debtors used a loan from creditor to acquire a nightclub and associated real and personal property. Creditor duly perfected its mortgages and security agreements, debtors defaulted, and creditor foreclosed. The court allowed creditor's claim for principal, interest at the contract rate, late charges, insurance premiums, and appraisal fees, and ordered it to file an application for attorney fees.
Should the court allow the claim of the creditor of accelerated interest upon default on debt?
The Court recognizes that it is customary to disallow the penalty interest provision in its entirety. In view of the compelling rationale of the Ruskin line of cases and the solvency of the Debtors' estate, the Court would, if possible, reform the note to provide for a reasonable rate of interest upon default as Wedgestone suggests the Court do in the alternative. However, the Court is unable to conclude that reforming the note in the manner proposed by Wedgestone would be tenable in law or equity. Thus, The court refused to award the accelerated interest rate upon default as outrageous but did allow a claim for principal, interest at the contractual rate, late charges, insurance premiums, appraisal fees, and directed creditor to file for attorney fees.