As published in the Los Angeles Daily Journal:
Default rate interest provisions are standard language in business loan agreements. Default interest constitutes an additional amount to be paid upon default and is viewed, under California law, as a liquidated damages provision. See Cal. Bank Trust v. Shilo Inn, 2012 U.S. Dist. LEXIS 163134, *7 (D. Ore. 2012). Whether an amount to be paid upon default is to be treated as valid liquidated damages or as an unenforceable penalty is a question of law. Lenders and borrowers generally presume that contractual default rate interest is enforceable. However, such provisions are simply included in loan agreements as a matter of course and generally do not reflect any effort by the parties to estimate potential damages in the event of default. Under those circumstances, California law would render the default rate unenforceable.