## Facts

- A limited partnership owning an Indiana apartment complex sought to refinance through a mortgage banker/servicer, with permanent financing to be funded by two life insurers.
- The parties executed a loan application and mortgage loan commitment for a long-term fixed-rate loan of about $4.6 million.
- The borrower paid an inspection fee and a substantial “standby deposit” at the outset.
- The commitment made funding conditional on satisfaction of specified closing conditions, including that the property achieve at least 93% occupancy at closing.
- The agreement provided that the standby deposit would be credited at closing if the loan funded, refunded only if the lenders wrongfully refused to fund, and otherwise retained.
- By the scheduled closing date the property did not meet the 93% occupancy requirement (and other conditions also remained unmet), so the loan did not close.
- The borrower demanded return of the deposit, arguing that retention operated as an unenforceable penalty under Indiana law.
- The district court ordered return of the deposit, treating the clause as an unenforceable penalty; the lenders appealed.

## Issues

1. Whether the standby deposit was enforceable as consideration for an option-like loan commitment, permitting retention when the loan did not close due to unmet conditions.
2. Whether, if analyzed as a damages provision, retention of the deposit constituted an unenforceable penalty under Indiana law.
3. Whether the non-closing resulted from lender breach or from failure of a condition precedent, and how that characterization affected entitlement to the deposit.

## Decision

- The Seventh Circuit reversed the judgment requiring return of the standby deposit.
- The court held the deposit was not an unenforceable penalty; it functioned as consideration for the lenders’ binding commitment to lend on specified terms if conditions were met.
- Because closing conditions—especially the 93% occupancy requirement—were not satisfied, the lenders’ duty to fund never arose and there was no wrongful refusal to lend.
- Under the contract’s terms, the lenders were entitled to retain the deposit.

## Legal Principles

- A fee paid to secure a lender’s commitment to keep financing available on stated terms may be treated as consideration for an option-like arrangement rather than damages for non-closing.
- Failure of a condition precedent prevents a duty to perform from arising; it is not a breach.
- Penalty and liquidated-damages analysis generally applies to clauses operating on breach, not to nonrefundable payments functioning as consideration for a contractual right or commitment.
- Where a contract ties refundability to lender “wrongful refusal” to perform and the borrower fails to satisfy conditions precedent, the lender may retain the fee absent other contract defenses.

## Conclusion

The court enforced the standby deposit as the bargained-for price of a mortgage commitment and held that, because the loan failed to close due to unmet conditions precedent rather than lender breach, Indiana penalty doctrine did not require the deposit’s return.


Woodbridge Place Apartments v. Washington Square Capital, 965 F.2d 1429 (7th Cir. 1992)