DOBSON BAY CLUB II DD, LLC, a Delaware limited liability company; DOBSON BAY CLUB III KD, LLC, a Delaware limited liability company; DOBSON BAY CLUB IV KG, LLC, a Delaware limited liability company; and DARBY AZ PORTFOLIO, LLC, a Delaware limited liability Company, Plaintiffs/Appellants
LA SONRISA DE SIENA, LLC, an Arizona limited liability company, Defendant/Appellee
Appeal from the Superior Court in Maricopa County. No. CV2013-000989. The Honorable John Christian Rea, Judge.
Lewis Roca Rothgerber LLP, Phoenix, By Brian J. Pollock, Jared L. Sutton, Counsel for Plaintiffs/Appellants.
Schern Richardson Finter Decker, PLC, Mesa, By Michael A. Schern, Mark A. Hanson, Counsel for Defendant/Appellee.
Judge Michael J. Brown delivered the opinion of the Court, in which Presiding Judge Peter B. Swann and Judge Kenton D. Jones joined.
Michael J. Brown, Judge:
[¶1] Dobson Bay Club II DD, LLC, et al. (" Dobson Bay" ) appeals the trial court's entry of partial summary judgment in favor of La Sonrisa De Siena, LLC (" La Sonrisa" ) on Dobson Bay's claim for declaratory relief concerning the enforceability of a late fee provision in a promissory note. The sole issue before us is whether the court erred in concluding La Sonrisa is entitled to recover a $1.4 million late fee on Dobson Bay's delinquent balloon payment as liquidated damages. For the following reasons, we hold that the late fee constitutes a penalty and is therefore unenforceable.
[¶2] In 2006, Dobson Bay entered into a loan agreement with Canadian Imperial Bank of Commerce (" Canadian Imperial" ). As set forth in the agreement, Canadian Imperial loaned Dobson Bay $28.6 million, with a maturity date of September 8, 2009. The loan funded Dobson Bay's acquisition of four commercial properties located in Maricopa
County and was secured by a deed of trust, assignment of leases and security agreement. As outlined in Article II of the promissory note, Dobson Bay was permitted to tender interest-only installment payments, with the " entire outstanding principal amount" due on the maturity date. Article IV of the promissory note included a late-fee provision, which stated:
If any installment payable under this Note (including the final installment due on the Maturity Date) is not received by Lender prior to the calendar day after the same is due (without regard to any applicable cure and/or notice period), Borrower shall pay to Lender upon demand an amount equal to the lesser of (a) five percent (5%) of such unpaid sum or (b) the maximum amount permitted by applicable law to defray the expenses incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment, and such amount shall be secured by the Loan Documents.
The promissory note also provided that in the event of default, Dobson Bay would pay default interest plus costs of collection including reasonable attorneys' fees. The deed of trust further stated that if a foreclosure proceeding were initiated, Dobson Bay would pay attorneys' fees, trustee's fees, and costs related to the foreclosure.
[¶3] In 2009, Dobson Bay and Canadian Imperial negotiated an extension of the loan, with a new maturity date of September 8, 2012. During the summer of 2012, Dobson Bay and Canadian Imperial began to negotiate another loan extension, but failed to reach an agreement. On October 22, Canadian Imperial sent Dobson Bay a notice of default. On November 28, Canadian Imperial informed Dobson Bay it had assigned the promissory note and deed of trust to La Sonrisa. La Sonrisa then commenced a foreclosure proceeding by recording a notice of trustee's sale. La Sonrisa provided Dobson Bay a loan payoff statement reflecting a principal balance due of $27,778,698.07, plus regular interest, default interest, a late fee of $1,392,784.90 ...