We have been contacted by many of you concerning the impact of a recent decision by the California Appeals Court on your ability to lawfully charge default interest. Keep reading for an overview, how the opinion affects you, and Geraci’s response.
Read the full Honchariw v. FJM published opinion:
What is the case?
On September 29, 2022, the California 1st District Court of Appeals issued a decision in Honchariw v. FJM Private Mortgage Fund. FJM is a private lender which made a business purpose loan to Honchariw (an attorney and serial plaintiff). The borrower defaulted on his payment obligations. An arbitration for the balance owed ensued, where Honchariw lost on a variety of grounds. Honchariw appealed the Arbitration Award first to a CA State Trial Court (where the lender again won, and Honchariw again lost), then to the California Appeals Court resulting in this decision. The written decision (which has been published) is attached.
Why does it matter to the private lending community?
The unusual holding of this case provides no lender may charge default interest against the principal balance of any loan unless the default is a maturity default. This means the lender is only able to charge an installment late charge and default interest against amounts presently in default (i.e. unpaid installments) and not against the entire principal balance. The prohibition applies regardless of loan purpose (i.e. business and consumer purpose loans) and collateral type (i.e. commercial, residential, and vacant land). The decision, if it holds, will create an absurd lending environment in California where a common motivation for a borrower to pay is stripped from lenders.
What is Geraci’s position concerning the Honchariw v. FJM Private Mortgage Fund opinion? What are we doing about it?
We believe the case incorrectly analyzes California Supreme Court precedent on this issue. It should ultimately be overturned. We are pleased (and proud) the lender in the FJM v. Honchariw case has asked us to substitute in as counsel and handle the appeal going forward. We’ve already asked the Appeals Court to rehear this case. If the request is denied, we will apply to have FJM v. Honchariw ‘depublished.’ We will also seek to have it considered by the California Supreme Court.
In the weeks ahead we will provide industry guidance related to advocacy efforts toward legislative changes to invalidate this case and recommendations for loan document changes in the interim.
What should you do in the interim?
Until this case is overturned, plaintiffs will use this case to justify its refusal to pay default interest for un-matured loans.
As a lender, we believe you have three options:
- Voluntarily not charge default interest on the principal loan balance out of caution. This cautious approach was recently taken by a major loan servicer in the private lending industry on advice of other counsel.
- Continue to charge default interest and negotiate amounts down should a borrower threaten litigation. A borrower may still make claims post loan payoff for any default interest charged to them.
- Ignore this case, fight potential litigation on the ground this case will be overturned. We believe more litigation that stems from this matter will increase the pace toward California Supreme Court resolution.
Should you be involved in litigation related to default interest, we are happy to help. Our law firm is currently representing others similarly situated. We have the expertise to manage this issue. Please reach out below with questions or requests for representation.