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California Supreme Court Declines to Hear Appeal in Honchariw v. FJM Private Mortgage Fund, LLC

Where does that leave us?

December 22, 2022

The California Supreme Court declined to entertain an appeal in the California First District Court of Appeal’s decision on September 29, 2020 in Honchariw v. FJM Private Mortgage Fund, LLC.  The case is now governing law. The industry will have to live with the decision for now. What is curtailed is a lender’s right to collect default interest on the entire loan amount at a fixed percentage following a pre-maturity default.

Some are suggesting a default notice and note acceleration as a work-around. Whether a court will agree that is permissible is an open question. Another better, but less than perfect alternative is revising your loan documents to charge actual damages stemming from the default after giving appropriate notice. That could include attorneys fees, credit line charges, personnel time, and other actual expenses, with a cap. After all, the Court in Honchariw quoted approvingly from the California Supreme Court when it said:

“A contractual provision imposing a ‘penalty’ is ineffective, and the wronged party can collect only the actual damages sustained.” Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 931; see also Ebbert v. Mercantile Trust Co. of California (1931) 213 Cal. 496, 499 [“[A]ny provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.”].) (Emphasis added)

Of course, even reasonable minds can differ as to the calculation of a lender’s actual damages stemming from a default so an actual damage number is going to be something that a borrower will want to negotiate or even challenge if forced to pay it. If you opt for the actual damages route, be prepared to back up the amount you claim.

Prudent legal advice comes from experience.  We have over 50 years of it.

© Doss Law, LLP.  Attorney advertising materials.  These materials have been prepared for educational purposes only and are not legal advice.  This information is not intended to create an attorney-client relationship.  Consult a knowledgeable lawyer before implementing any of the ideas in this publication.

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