California Banker March/April 2023

In a loan transaction governed by California law, a lender must be prepared to show that default interest bears a reasonable relationship to the lender’s actual damages, and cannot be used to coerce payment.

Section 1671 of the California Civil Code provides, in part, that a liq uidated damages provision under a non-consumer contract is presumed valid. Notwithstanding that pre sumption, the Court of Appeal in the Honchariw case concluded that

that the arbitrator exceeded their authority by denying, in part, the violation of Section 1671. The trial court denied the petition, finding that the Honchariws failed to meet their burden of proof to show that the default interest under FJM’s loan was an illegal penalty. The Honchariws appealed.

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CaliforniaBanker | March April 2023