Dobson Bay Club II DD, LLC v. La Sonrisa De Siena, LLC, 239 Ariz. 132

Background

Dobson Bay borrowed $28.6 million in 2006 under a promissory note with a balloon maturity and a provision charging the lesser of 5% of an unpaid sum or the statutory maximum as a late fee; default interest, attorneys’ fees, and trustee’s fees were separately provided.
Extensions were negotiated; Dobson Bay defaulted on the 2012 balloon payment. Canadian Imperial assigned the note to La Sonrisa after default; La Sonrisa recorded a trustee’s sale and presented a payoff showing a 5% late fee of $1,392,784.90 plus interest and fees.
Dobson Bay obtained financing, paid the principal and some amounts, but disputed the enforceability of the 5% late fee; La Sonrisa refused to release the deed of trust, prompting litigation.
Both parties moved for partial summary judgment on whether the 5% late-fee clause was enforceable as liquidated damages; the trial court upheld the fee as a reasonable liquidated-damages provision and entered partial summary judgment for La Sonrisa.
The appellate court reviewed de novo and considered whether the 5% fee (imposed on a balloon payment for a conventional fixed-rate loan, and asserted by a purchaser of the note post-default) was a reasonable forecast of compensatory loss or an unenforceable penalty.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether 5% late fee on balloon payment is enforceable as liquidated damages	The 5% fee is vastly disproportionate and punitive; actual damages are easily calculable and already covered by default interest, attorneys’ fees, and trustee’s fees	The fee is a negotiated liquidated-damages term between sophisticated parties and reasonably forecasts lender losses; expert testimony supports reasonableness	The 5% fee is an unenforceable penalty as a matter of law (vacating partial summary judgment for La Sonrisa)
Whether an assignee who purchased the note post-default may claim speculative institutional harms to justify a large liquidated amount	The assignee cannot rely on speculative, hard-to-quantify institutional harms because the buyer acquired a known, post-default obligation	The assignee may still enforce the contractual liquidated amount agreed in the note	As a matter of law, La Sonrisa’s post-default acquisition made claimed harms calculable; the fee does not approximate anticipated or actual loss
Whether showing actual damages is required to enforce a liquidated-damages clause	The clause is unreasonable here; actual, easily-quantified losses show the clause is punitive	Prior Arizona cases say pre-agreed liquidated amounts need not prove actual damages	Court held that prior cases do not bar evaluating actual losses; when losses are easily quantified, the reasonableness comparison is required
Whether the expert declaration created a triable issue of fact on reasonableness	Expert claimed lenders suffer many incalculable harms, supporting the fee’s reasonableness	The expert’s opinions were irrelevant because La Sonrisa purchased the note after default when losses were known and calculable	Expert evidence insufficient to create a triable issue; summary judgment for La Sonrisa reversed and partial summary judgment for Dobson Bay directed as to liquidated damages issue

Key Cases Cited

Larson-Hegstrom & Associates v. Jeffries, 145 Ariz. 329, 701 P.2d 587 (Ariz. Ct. App. 1985) (adopts Restatement test: liquidated damages enforceable only if reasonable in light of anticipated/actual loss and proof difficulty)
Pima Sav. & Loan Ass'n v. Rampello, 168 Ariz. 297, 812 P.2d 1115 (Ariz. Ct. App. 1991) (liquidated sums may be enforceable but unreasonable amounts are penalties)
Mech. Air Eng’g Co. v. Totem Constr. Co., 166 Ariz. 191, 801 P.2d 426 (Ariz. Ct. App. 1989) (discusses purposes of liquidated damages clauses and reasonableness inquiry)
Roscoe-Gill v. Newman, 188 Ariz. 483, 937 P.2d 673 (Ariz. Ct. App. 1996) (contract terms generally control but unenforceable if they impose unreasonably large liquidated damages)
Marshall v. Patzman, 81 Ariz. 367, 306 P.2d 287 (Ariz. 1957) (forfeiture or stipulated sums may be unconscionable when no resulting loss is shown)
LaSalle Bank Nat. Ass’n v. Shepherd Mall Partners, 140 P.3d 559 (Okla. Civ. App. 2005) (5% contract fee on balloon payment held disproportionate where actual losses were readily calculable)
MetLife Cap. Fin. Corp. v. Washington Ave. Assocs., 159 N.J. 484, 732 A.2d 493 (N.J. 1999) (upheld 5% fee where institutional harms and collection infrastructure supported reasonableness)