The opinion of the court was delivered by: GESELL
This is an action for balance due on a promissory note and for a declaratory judgment. The parties have stipulated the facts and various agreements and correspondence between them were received by consent.
The note was executed on June 26, 1963, for the principal sum of $39,642.20, with interest at six percent. The pertinent provisions of the note read as follows:
"Said principal and interest payable in monthly installments of FIVE HUNDRED FIFTY Dollars ($550.00), with the privilege of making larger payments in any amount, commencing July 1st, 1963, and thereafter on the 1st day of each and every month until paid; each installment, when so paid, to be applied: first, to the payment of the interest on the amount of principal remaining unpaid, and the balance thereof credited to the principal. It being understood and agreed that the first six (6) monthly installments are to be paid in cash by maker, and thereafter by payee deducting the amount of such monthly installment from the monthly rental due to maker by payee under a certain Agreement of Lease dated March 22, 1963, relative Lot 852 in Square 107 improved by premises known as 1835 K Street, N.W. in the District of Columbia; provided, however, that in the event of default under the aforementioned Agreement of Lease, the balance then remaining unpaid on this promissory note at date of such default shall be deemed as canceled and paid in full.
"And it is expressly agreed that if default be made in the payment of any one of the aforesaid installments when and as the same shall become due and payable, within the first six monthly installments, then and in that event, the unpaid balance of the aforesaid principal sum and accrued interest shall at the option of the holder hereof at once become and be due and payable, and in such event the maker, and endorsers, if any, waive presentment for payment, protest for non-payment and notice of dishonor, and maker, and endorser, if any, agree to pay all costs of collection, including reasonable attorney's fees."
The bare outline of the transactions, of which the note is an integral part, appears clearly from the stipulated facts. In brief, plaintiff sought the opportunity to develop defendant's property at 1835 K. Street, N.W. He had in mind either remodeling the existing structure or razing it and constructing a new office building. The existing structure was rented at the time to others and defendant was receiving rental payments. There was a first trust on the existing structure. Plaintiff sought a ninety-nine-year non-subordinated ground lease. Plaintiff was anxious to remove the first trust as a necessary condition precedent to obtaining a construction loan so that he might go forward with remodeling or new construction. A detailed lease dated March 22, 1963, consisting of some 30 pages, was negotiated between the parties. Paragraph 5 of the lease contained a provision under which plaintiff agreed to advance to defendant a sum sufficient to pay off the full balance outstanding on the existing first trust. The lease also set out the terms of the note here in issue and expressly stated:
"In the event, however, of a default under this lease by tenant as provided hereinafter, in addition to any other rights and remedies which landlord may possess with respect to such default, the entire balance of this advance remaining uncompleted at the date of such default and the promissory note evidencing the same shall be regarded and treated as cancelled and paid in full."
Plaintiff's payments under the lease were in default and after adequate notice without waiving other rights she might have, defendant, as landlord under the lease, declared the note cancelled and paid in full on January 5, 1965. No payments were made on the note after payment made and due on November 25, 1964, for the month of December, leaving a balance due of $32,802.83. Plaintiff asks a judgment with interest from January 1, 1965, and a declaratory judgment as to future payments due.
It is plaintiff's contention that by preserving her other rights defendant's forfeit of the balance due constituted a penalty or fine inasmuch as the amount forfeited was not a just or reasonable estimate of the injury or damages caused by the harm. It is further argued that the parties never intended the provision to be one for liquidated damages since the term "liquidated damages" was never used and that since the right to cancel was available even in the case of a trivial breach without regard to the amount still owing, the provision is in reality "an in terrorem device to secure compliance by plaintiff."
The standard to be applied in determining whether the provision was a provision for liquidated damages and thus to be enforced or a penalty and hence void is set out in Davy et al. v. Crawford, et al., 79 U.S.App.D.C. 375, 147 F.2d 574 (1945). There a unanimous Court stated the rule as follows:
"This court has held that the parties to a contract may agree in advance to a sum certain which shall be forfeited as liquidated damages for breach of the contract without reference to the actual damages found at the time of the breach. But if such an agreement is for a penalty it is void. In order to determine whether or not the provision should be construed as a penalty the contract must be construed as a whole as of the date of its execution. If under the circumstances and expectations of the parties existing at the time of execution it appears that the provision is a reasonable protection against uncertain future litigation the provision will be enforced even though no actual damages were proved as of the date of the breach. If, on the other hand, it appears that the stipulation is designed to make the default of the party against whom it runs more profitable to the other party than performance would be, it will be void as a penalty. Thus, damages stipulated in advance should not be more than those which at the time of the execution of the contract can be reasonably expected from its future breach, and agreements to pay fixed sums plainly without reasonable relation to any probable damage which may follow a breach will not be enforced." 79 U.S.App.D.C. at 376, 147 F.2d at 575.
In order to apply the rule thus laid down it is necessary to review certain additional facts relating to the execution of the note and the course of the dealings between the parties.
One threshold consideration may be promptly eliminated. There was no overreaching. The parties were well represented by counsel. Plaintiff's real estate agent and an experienced attorney negotiated the transaction with defendant's husband, who acted as her agent, and defendant's attorney. There is no possibility that plaintiff entered into the commitment inadvertently. It should also be noted that neither the defendant nor any of the defendant's agents in any way requested, suggested or required that the cancellation clause be inserted. The cancellation clause was proposed on behalf of the plaintiff and accepted by defendant. Plaintiff is ...