## Facts

- In 2006, a lender made a commercial loan of about $28.6 million to affiliated borrowers to acquire four properties, secured by a deed of trust.
- The promissory note required interest-only payments until maturity, when the full principal balance became due as a final “balloon” payment.
- The maturity date was extended to September 8, 2012, but the parties did not agree to a further extension.
- The note imposed a late charge if “any installment” (including the final installment at maturity) was not timely received, equal to the lesser of 5% of the unpaid sum or the maximum permitted by law, stated to cover processing expenses and loss of use.
- The note and deed of trust also provided for regular interest, default interest after default, and collection costs including attorney’s fees and foreclosure-related fees.
- The borrowers did not pay the balloon amount at maturity; the lender declared a default and later assigned the loan and deed of trust to an assignee, which initiated a trustee’s sale.
- The assignee demanded a payoff exceeding $30 million, including a late fee of roughly $1.392 million (5% of the unpaid balloon principal).
- The borrowers refinanced and paid the principal and undisputed amounts, and deposited the disputed sums (including the late fee) with the court while litigating enforceability.

## Issues

1. Whether a flat 5% late fee assessed on a delinquent final balloon payment constitutes enforceable liquidated damages or an unenforceable penalty under Arizona law.

## Decision

- The court of appeals reversed the trial court’s partial summary judgment for the lender’s assignee.
- It held the 5% late fee on the balloon payment was an unenforceable penalty rather than a valid liquidated-damages provision.
- It directed entry of partial summary judgment for the borrowers on the late-fee issue and awarded appellate attorneys’ fees and costs to the borrowers.

## Legal Principles

- A liquidated-damages clause is enforceable only if it reasonably forecasts anticipated damages from breach and is compensatory rather than punitive; a clause functioning primarily as punishment is unenforceable.
- In assessing reasonableness, the court considers the nature of the breach and the types of losses the clause purports to cover, including whether those losses are already addressed by other contract remedies.
- A large, flat-percentage charge triggered by any delay in a single balloon payment—especially where the contract already provides for regular interest, default interest, and collection costs—may be unreasonable because it can duplicate compensation for loss of use and collection expenses.
- Absent unusual circumstances, imposing a flat 5% late fee on a balloon payment in a conventional fixed-interest commercial loan is not enforceable as liquidated damages.

## Conclusion

The court of appeals concluded that the note’s 5% late charge on the unpaid balloon principal did not reasonably approximate anticipated damages and instead operated as a punitive, duplicative charge beyond the contract’s interest and collection-cost remedies, making it an unenforceable penalty.


Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 239 Ariz. 132, 366 P.3d 1022 (Ct. App. 2016)