## Facts

- In 2006, a lender loaned $28.6 million to related commercial borrowers to purchase four Arizona commercial properties, secured by a deed of trust.
- The loan was interest-only until maturity, when the entire principal became due as a final “balloon” payment; the maturity date was extended to September 2012.
- The note imposed multiple consequences for delayed payment: regular interest, default interest, collection costs (including reasonable attorneys’ fees), and a 5% late fee on the payment amount, plus foreclosure-related costs if a trustee’s sale occurred.
- The borrowers failed to make the balloon payment at the extended maturity date after the parties could not agree on another extension.
- After default, a third party purchased the note and deed of trust, noticed a trustee’s sale, and asserted the borrowers owed more than $30 million, including a late fee of nearly $1.4 million.
- The borrowers refinanced, paid the outstanding principal and undisputed interest, and deposited disputed amounts (including the late fee) with the court.
- On cross-motions for partial summary judgment, the superior court upheld the late fee as enforceable liquidated damages.
- The court of appeals reversed under a near-categorical rule disfavoring flat 5% late fees on balloon payments for conventional fixed-rate loans.
- The Arizona Supreme Court granted review, vacated the court of appeals’ opinion, reversed the superior court’s ruling enforcing the late fee, and remanded.

## Issues

1. Whether a flat 5% late fee on an overdue final balloon payment in a large commercial real-estate loan is enforceable liquidated damages or an unenforceable penalty under Arizona law.
2. Whether enforceability should be determined by a case-specific liquidated-damages analysis rather than a categorical rule regarding balloon-payment late fees.

## Decision

- The Arizona Supreme Court held the nearly $1.4 million late fee on the balloon payment was an unenforceable penalty.
- The court vacated the court of appeals’ categorical approach, holding enforceability must be assessed case-by-case.
- The court reversed the superior court’s partial summary judgment that had enforced the late fee and remanded for further proceedings.

## Legal Principles

- A liquidated damages clause is enforceable only if the predetermined amount is intended to compensate for anticipated loss rather than to penalize breach.
- Enforceability depends on whether (1) anticipated harm from breach is incapable or very difficult to estimate at contracting and (2) the amount is a reasonable forecast of just compensation, considered against actual damages as a check.
- When a contract already provides default interest, collection costs, and other default remedies, an additional flat fee tied only to the payment amount may overcompensate and indicate a punitive purpose.
- Courts should not apply a blanket rule to balloon-payment late fees; the penalty-versus-compensation inquiry is fact-dependent.

## Conclusion

The Arizona Supreme Court concluded that a flat 5% late fee assessed on a loan’s final balloon payment—on top of default interest and other default-related charges—was unreasonable and functioned as a penalty, making it unenforceable under Arizona liquidated-damages law.


Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242 Ariz. 108, 393 P.3d 449 (Ariz. 2017)