Planned Pethood Plus, Inc.: Legal Case Study

Planned Pethood Plus, Inc. a veterinarian-owned clinic borrowed $389,000 from KeyBank. The interest rate was 9.3 percent for 10 years. The loan had a “prepayment penalty” clause that clearly stated that if the loan was paid off early, a specific formula would be used to asses a lump-sum payment to extinguish the obligation. It was very clear that sooner the loan was paid off, the higher the prepayment penalty would be. After one year the veterinarians decide to pay off the loan. KeyBank invoked a prepayment penalty of $40,525.92 which was equal to 10.7 percent of the balance due. The veterinarians sued, contending that the prepayment requirement was unenforceable because it was a penalty. The KeyBank countered that the amount was not a penalty but liquidated damages and the sum was reasonable. Upon going to the court the trail court agreed with the bank. The veterinarians then appealed the decision.

354, 2013). Liquation damages differ from penalties. Although a penalty also specifies a certain amount to be paid in the event of a default or breach of contract, it is designed to penalize the breaching party, not to make innocent party whole. Liquidated damages provisions usually are enforceable. In contrast, if a court finds that a provision calls for a penalty, the agreement as to the amount will not be enforced, and recovery will be limited to actual damages (Clarkson, Miller, Cross, p. 354, 2013). To determine if a particular provision is for liquidated damages or for a penalty, a court must answer two questions: 1.) When the contract was entered into, was it apparent that damages would be difficult to estimate in the event of a breach? 2.) Was the amount set as damages a reasonable estimate and excessive (Clarkson, Miller, Cross, p. 354,