Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC

Dobson Bay Club II DD, LLC (Dobson Bay) (plaintiff) defaulted on a nearly $29 million bank loan from Canadian Imperial. The loan-repayment terms were for interest-only payments for the life of the loan. At the end, the principle was to be repaid all at once—a balloon payment. Any late loan payment—including the final one—incurred a 5-percent late fee on that payment. The late fee was to defray the expenses incurred by the lender in processing a late payment and to compensate the lender for the loss of the use of the late payment. Following the default, Canadian Imperial assigned its rights to La Sonrisa De Siena, LLC (La Sonrisa) (defendant). La Sonrisa then sought foreclosure on property securing the loan. Dobson Bay obtained new financing and paid the outstanding loan balance to La Sonrisa, which sought the $1.4 million late fee. Dobson Bay filed a declaratory-judgment action regarding the enforceability of the late-fee provision. La Sonrisa’s expert, Mitchel Medigovich, opined that expenses arose from not receiving the payments on time and getting a delinquent borrower to pay. Medigovich explained other consequences such as being unable to reinvest the money, reputational harm to the lender, and that a large untimely balloon payment could cause capital reserves to fall below regulatory requirements. The trial court granted partial summary judgment in favor of La Sonrisa. Dobson Bay appealed.