• Connecticut Appellate Court
  • AC 35466
  • Jun 03 2014 (Date Decided)
  • Alvord, J.

A contract provision calling for the imposition of a penalty for the breach of the contract is contrary to public policy and invalid, but a liquidated damages provision that fixes the amount of damages to be paid in the event of a breach is enforceable if it satisfies certain conditions. Bridgeport Portfolio, LLC executed a multifamily, open-ended mortgage in favor of Arbor Commercial Funding, LLC, on four commercial properties to secure payment of a $7,780,000 promissory note. Wilfredo Santos allegedly executed a guaranty for the transaction. Arbor assigned the note, mortgage and loan documents to Federal National Mortgage Association. Federal brought this foreclosure action against Bridgeport Portfolio and Santos alleging defaults in payments. The court granted the plaintiff’s motion for summary judgment as to liability and rendered a judgment of strict foreclosure. The defendants appealed claiming that the court erred by including both default interest and a prepayment premium in its calculation of the mortgage debt. Disagreeing, the Appellate Court affirmed the judgment. The plaintiff’s argument was rejected that Santos’ appeal should be dismissed because he was not aggrieved by the strict foreclosure judgment. Clearly Santos had a real interest in the strict foreclosure judgment because the court determined that both default interest and the prepayment premium were to be included in the outstanding debt. If found liable as guarantor, the deficiency assessed against him will include the disputed amounts. The defendants’ claim was rejected that the court should not have enforced both provisions because the combination resulted in a penalty rather than reasonable liquidated damages and was against public policy. Under the circumstances, the liquidated damages provisions were entitled to the presumption of validity as bargained for terms in the contract. That presumption was rebuttable. The defendants failed in their attempt to challenge those provisions because they failed to present any evidence that the default interest and prepayment premium damages were greatly disproportionate to the actual losses sustained by the plaintiff from the default. The prepayment provision expressly provided that other terms were more favorable to the defendants because of its inclusion. The certainty of the remedies provided by both provisions affected the loan’s pricing. If deemed unenforceable, the Appellate Court would be providing the defendants with a better contract than they were able to negotiate for themselves.

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