On September 5, 2023, Justice Doyle of the 7th Judicial District Commercial Division issued a decision in Byzfunder NY LLC v. Holy City Collision LLC, 2023 NY Slip Op. 50941(U), refusing to enforce a liquidated damages provision as an unenforceable penalty, explaining:
Defendants also challenge the default fees and attorneys’ fees sought as part of the award on summary judgment. Plaintiff alleges that it has incurred NSF fees in the sum of $100.00, a Default Fee in the sum of $2,500.00, and attorneys’ fees in the sum of $29,785.69.
With respect to the Default Fee, the Court notes that a contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount of actual damages that would be suffered upon a breach is readily ascertainable when the contract is entered, or the amount fixed as liquidated damages is conspicuously disproportionate to the foreseeable losses, the liquidated damages provision is unenforceable as a penalty. Where, however, a liquidated damages provision is found to be an unenforceable penalty, the recovery is limited to actual damages proven.
Appendix A of the Agreement sets forth the fee structure and provides, in relevant part:
C. NSF Fee (Standard) – $ 50 .00 (each)
D. Rejected ACH / Blocked ACH / Default Fee – $2,500.00 When Merchant BLOCKS Account from our Debit ACH, or when Merchant directs the bank to reject our Debit ACH, which places them in default (per contract). When Merchant changes bank Account cutting us off from our collections.The NSF Fee (nonsufficient funds) is reasonable and customary. Plaintiff is GRANTED summary judgment on the NSF Fee.
The Default Fee, however, is an unenforceable penalty. Here, the amount of damages upon a breach is readily ascertainable: it is the sum remaining due on the factoring agreement. As this liquidated damages provision is a mere penalty and bears no relation to measuring the actual loss suffered by the Plaintiff, it will not be enforced. The Court searches the record, and summary judgment is GRANTED to Defendants on the Default Fee.
(Internal quotations and citations omitted).