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64 Default interest is a hot button for borrowers, lenders, and the courts. Most courts inherently do not like default interest because they see it as an improper "penalty." at is the exact result reached on September 29, 2022, by the First District of the California Court of Appeals in Honchariw v. FJM Private Mortgage Fund, LLC. THE FACTS In 2018, the Honchariws took out a $5.6M bridge loan. In the event of default, the Honchariws agreed that FJM could charge both a one-time 10% late payment fee of roughly $39,000 and default interest of 9.99% on the entire loan balance. e loan documents even went so far as to explain that these charges are necessary because a default "will result in [FJM] incurring additional expense in servicing the loan, including, but not limited to, sending out notices of delinquency, computing interest, and segregating delinquent sums from the not delinquent sums on all accounting, loan and data processing records, in loss to [FJM] of the use of the money due, and in frustration to [FJM] in meeting its other financial commitments." is language appears intended as an agreement between the parties that the late charge and default interest were justified as compensation to FJM resulting from the default. ese provisions (or similar ones) are common to many non- consumer loan documents. After missing a monthly payment, FJM declared the loan in default and assessed the one-time late charge and added the default interest to the entire loan balance. e Honchariws initiated arbitration to dispute both charges. e arbitrator ruled in FJM's favor, finding that the charges were not a penalty. e Honchariws' attempt to vacate the arbitrator's award was also denied, leading to this appeal. THE DECISION In a published decision, the Court of Appeals vacated the Arbitrator's award, finding that the default interest provision was an unlawful "penalty" and, therefore, unenforceable. e decision starts by correctly determining that liquidated damage provisions are presumed valid when involving a non-consumer loan and presumed invalid when involving a consumer loan. Since this case involved a non-consumer loan, the Honchariws have the burden to prove that the default interest provision is invalid by showing that the amount of damages does not bare a "reasonably relationship" to the damage that will be caused by the default. In other words, if the default interest charge is $100,000, the borrower must prove that the lender will not incur $100,000 of additional expense or loss as a result of the default. Rather than point to any evidence presented by the Honchariws showing that the default interest was not reasonably related to FJM's loss, the court concluded that the mere fact that default interest is being charged on the entire loan balance is, in and of itself, a violation of public policy and therefore, the Honchariws had met their burden. TAKEAWAYS e court focused its decision on default By: T. Robert Finlay, Esq. CALIFORNIA COURT OF APPEALS INVALIDATES DEFAULT INTEREST PROVISION Most courts inherently do not like default interest because they see it as an improper "penalty." Here's what the First District of the California Court of Appeals recently found in Honchariw v. FJM Private Mortgage Fund, LLC. Feature