California Banker March/April 2023

Caution to Lenders – New Pitfalls to Imposing Default Interest and Late Fees on Defaulted Loans By Nicolette A. Cohen 1 , Associate, Buchalter’s Commercial Finance Group

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Honchariws defaulted under the loan by missing their monthly payment in the amount of $39,667. The default triggered an automatic imposition of (1) a one-time late payment fee ($3,967), which was 10 percent of the missed monthly payment, and (2) default interest of 9.99 percent per annum over the note rate, charged against the unpaid loan balance (collectively, the “Late Fee Provisions”). The Honchariws filed a demand for arbitration alleging, among other things, that the Late Fee Provisions were an unlawful penalty in violation of Section 1671 of the California Civil Code. FJM Private Mortgage Fund, LLC, prevailed in the arbitration. The Honchariws then filed a petition to vacate the arbitration award on the basis

n Sept. 29, 2022, the California Court of Appeal First Appellate District, in Honchariw v. FJM Pri vate Mortgage Fund, LLC , held a private lender’s imposition of late charges and default interest constituted an unlawful penalty in contravention of the public policy set forth in California Civil Code Section 1671, reversing the trial court’s finding. The California Supreme Court denied review, leaving the appellate deci sion in place as the current law in California. In 2018 Nicholas and Sharon Honchariw obtained a $5.6 million bridge loan with FJM Private Mortgage Fund, LLC, a private lender, secured by a first deed of trust on commercial real property. On Sept. 1, 2019, the

1 Special thanks to Robert Willner and Robert S. McWhorter for their assistance with this article.

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