Liquidated Damages versus Penalties. Every homeowner in the Putnam County, Indiana, subdivision of Stardust Hills must be a member of the Stardust Hills Owners Association, Inc, and must pay annual dues of $200 for the maintenance of common areas and

Question

other community services. Under the association's rules, dues paid more than ten days late "shall bear a delinquent fee at a rate of $2.00 per day." Phyllis Gaddis owned a Stardust Hills lot on which she failed to pay the dues. Late fees began to accrue. Nearly two months later, the association filed a suit in an Indiana state court to collect the unpaid dues and the late fees. Gaddis argued in response that the delinquent fee was an unenforceable penalty. What questions should be considered in determining the status of this fee? Should the association's rule regarding assessment of the fee be enforced? Explain.

Answer 1

Liquidated damages v. penalties
The court entered a judgment against Gaddis for the amount of the unpaid dues, plus $58 in late fees. Gaddis appealed to a state intermediate appellate court, which affirmed the lower court's judgment. The appellate court observed, "The provision at issue here, which provides for a flat rate of two dollars per day when the annual dues are not paid on time, regardless of proof of damages, clearly fits within the definition of liquidated damages. Gaddis asserts * * * that the Association's actual loss from the late payment can be gauged by what interest rate it might receive by placing the money in an interest-bearing account. She therefore contends that the fee of two dollars per day is ‘so obviously disproportionate to this amount, the failure of the court to declare it a penalty was a blatantly obvious error.' However, * * *the costs of enforcing the payment of the annual dues can be high and are directly related to the two-dollar per day fee. Thus, the sum sought by this liquidated damages clause is not grossly disproportionate to the loss that may result from a breach of contract."