Fee Provision in Note Unenforceable Penalty

On February 19, 2015, Justice Sherwood of the New York County Commercial Division issued a decision in Maina v. Rapid Funding NYC, LLC, 2015 NY Slip Op. 30244(U), denying a motion for fees because it sought to impose a penalty.

In Maina, the defendant was granted summary judgment on a note. However, the court denied the defendant's motion for attorney's fees of 20% of the face value of the note (as provided by the note), finding that there was "no evidence to support the reasonableness of the" fees, rendering the 20% fee amount in the note an unenforceable penalty. The defendant moved again for summary judgment for its fees, which the court again denied, explaining:

In deciding the prior summary judgment motion, the Court held that the provision at issue providing for the plaintiffs payment of defendants' attorneys' fees constituted an unenforceable penalty. Indeed, a provision for the payment of an arbitrary amount as an attorney's fee is in the nature of a penalty and therefore unenforceable. The provision for payment of fees itself did not provide for recovery of reasonable attorneys fees; rather, the provision provided for payment of an arbitrary percentage of the amount of the Joan then outstanding. Accordingly, the Court declined to enforce the provision and denied the summary judgment motion to the extent it sought attorneys' fees. The Court's order was not an invitation to the defendants to file a new summary judgment motion and to submit evidence of the reasonableness of their fees. Once the offending fee provision is struck as an unenforceable penalty, the instant application must fail.

In support of the argument that Rapid Funding's counsel is entitled to seek attorneys' fees from Maina despite the court's prior denial of their application, defendants rely nearly exclusively on Korea First Bank v K. Y. Lee. In that case, the United States District Court for the Southern District of New York vacated an award of attorneys' fees on the grounds that the contractual provision providing for them in a fixed percentage was unenforceable as a matter of law. However, the court permitted the plaintiff [to] attempt to establish the reasonable amount of their fees in a subsequent motion. The case is distinguishable from the instant case in several ways.

[T]he Korea Bank court determined that an award of attorneys' fees was proper insofar as the actual fee arrangement was disclosed and the fees were determined to be reasonable. In that case, it was not clear whether the contractual fee provision at issue served as a penalty rather than a good faith attempt to pre-estimate damages or as to be unconscionable. In the instant case, the court has already held that the contractual fee provision represents an unenforceable penalty. Accordingly, no purpose would be served by permitting successive summary judgment motions on this issue. Moreover, Korea Bank relied on Equitable Lumber Corp. v IPA Land Dev. Corp.. The fee provision in that case provided that the seller would be entitled to reasonable attorneys' fees and that 30 percent would be a reasonable fee in the event it turned the matter over for collection. Accordingly, the Equitable Lumber court remanded for a determination of factual issues as to whether the 30 percent figure operated as a penalty, an issue already determined in this case. Additionally, the fee provision at issue here does not provide for reasonable
fees as an alternative to the set percentage.

(Internal quotations and citations omitted) (emphasis added).