On September 22, 2023, Justice Crane of the New York County Commercial Division issued a decision in Penn Hotel Jr. LLC v. JCMC W. 34 Mezz II LLC, 2023 NY Slip Op. 33315(U), holding that questions of fact precluded dismissal of a claim that a liquidated damages provision was an unenforceable penalty, explaining:
Defendant Chetrit moves, pursuant to CPLR 3211 (a) (7), to dismiss the first and second causes of action to the extent they purport to seek damages in excess of the amount Borrower owes under the Junior Mezz Loan Agreement Plaintiff opposes the motion. He argues that the liquidated damages provision in the Completion Guaranty is an unenforceable penalty.
. . .
Whether a contractual provision represents an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances. The party that seeks to avoid liquidated damages bears the burden of showing that the alleged liquidated damages are an unenforceable penalty.
Additionally, the Court of Appeals has held 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 fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.
The contract must be interpreted as of the date of its making, not the date of the breach. Permissible liquidated damages are compensable and are an estimate of the extent of the injury that would be sustained as a result of breach of the agreement. The Court of Appeals has acknowledged that New York Courts favor freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation.
Nevertheless, on this pre-answer motion to dismiss under only CPLR 3211 (a) (7), Chetrit fails to meet his burden of demonstrating either that the damages that would result from a default under the Junior Mezz Loan Documents were readily ascertainable at the time of the breach, or that the alleged liquidated damages [the Project Completion Amount of $106,367,012]
(Internal quotations and citations omitted).
are grossly disproportionate to the probable actual damages. On this motion, defendant bears the burden of proof. Here, at this pre-answer stage, defendant has not offered any evidence that is probative of whether the liquidated damages are grossly disproportionate. Instead, he submits just his attorney’s memoranda. Plaintiff’s liquidated damages claim [ first cause of action] and specific performance claim [ second cause of action] action] do not, on their face, fail to state a cause of action. Accordingly, the court denies the motion.