Dobson Bay Club II DD, LLC v. La Sonrisa De Siena, LLC
393 P.3d 449
| Ariz. | 2017Background
- In 2006 Canadian Imperial Bank of Commerce loaned Dobson Bay Club II DD, LLC $28.6M secured by four commercial properties; interest-only payments were due until a single principal "balloon" payment at maturity.
- The promissory note imposed on any late installment a fee equal to the lesser of 5% of the unpaid sum or the maximum allowed by law, plus default interest and collection costs (including attorney and trustee fees).
- Loan maturity was extended to September 2012; Dobson Bay missed the balloon payment after the parties failed to agree on a further extension.
- La Sonrisa acquired the note, sought foreclosure, and claimed a roughly $1.4M 5% late fee on the balloon payment; Dobson Bay paid undisputed amounts, deposited disputed sums in court, and litigated the late-fee’s enforceability.
- Trial court granted partial summary judgment enforcing the late fee; the court of appeals reversed; the Arizona Supreme Court granted review to decide whether the fee was an enforceable liquidated-damages provision or an unenforceable penalty.
Issues
| Issue | Plaintiff's Argument (La Sonrisa) | Defendant's Argument (Dobson Bay) | Held |
|---|---|---|---|
| Whether the 5% flat late fee on the balloon payment is an enforceable liquidated-damages clause or an unenforceable penalty | The 5% fee was a reasonable pre-estimate of lender losses from a late balloon payment and is a customary, agreed-upon commercial term | The fee is disproportionate to anticipated or actual losses because the note already provides interest, default interest, and collection-cost recovery; thus the 5% on the full principal is punitive | The fee is an unenforceable penalty under Restatement (Second) § 356(1); vacated trial court judgment and remanded for entry of partial summary judgment for Dobson Bay on the declaratory claim (late fee unenforceable) |
| Proper test for liquidated damages | Enforce parties’ allocation; avoid retrospective inquiry into actual damages | Allow consideration of both anticipated and actual loss and difficulty of proof | Adopted Restatement (Second) § 356(1): enforceable only if reasonable in light of anticipated or actual loss and difficulty of proof; courts may consider both perspectives |
| Whether anticipated losses justified a flat percentage on a final principal installment | 5% reasonably forecasts losses (including opportunity, reputational, regulatory risks) and is industry practice | Flat 5% does not account for duration or is duplicative of other contractual remedies; unlikely to predict realistic loss for short delays | The flat 5% did not reasonably forecast anticipated damages for a delayed balloon payment given other contract remedies and the fee’s static application |
| Whether difficulty of proving actual loss permits greater latitude in approving the stipulated sum | Losses (esp. opportunity cost) are hard to quantify, warranting deference to the parties’ estimate | Loss categories the fee purports to cover (processing costs, loss of use) were easily provable or already covered by interest and collection-cost clauses | Difficulty of proof here was slight for the identified categories (handling/processing and loss of use), so less latitude was due; the 5% sum was grossly disproportionate and thus a penalty |
Key Cases Cited
- Miller Cattle Co. v. Mattice, 38 Ariz. 180 (Ariz. 1931) (early Arizona precedent recognizing limits on fixed forfeitures and examining reasonableness of stipulated sums)
- Marshall v. Patzman, 81 Ariz. 367 (Ariz. 1957) (stated principle that stipulated damages may be unenforceable when unconscionable under the circumstances)
- Weatherford v. Adams, 31 Ariz. 187 (Ariz. 1926) (courts may invalidate stipulated damages grossly disproportionate to actual damages)
- Gary Outdoor Advert. Co. v. Sun Lodge, Inc., 133 Ariz. 240 (Ariz. 1982) (liquidated damages serve compensatory—not punitive—ends; non-breaching party may still recover actual damages)
- Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 239 Ariz. 132 (App. 2016) (court of appeals decision reversing trial court and holding that a flat 5% late fee on a balloon payment is generally unenforceable)
- Met-Life Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 159 N.J. 484 (N.J. 1999) (New Jersey Supreme Court upheld a 5% late fee on installment payments as reasonable—relied on by dissent and appellee to support enforceability)