This case was assigned to me by the Small Claims administrator as an “inquest”, a one sided trial in which only the plaintiff (who I will here call “Leo”) and not the defendant, (who I will here call “Jimmy”) showed up.
I have found over many years as an arbitrator that many interesting legal issues can come up in inquests (which usually results in a judgment by default).
This is one of those issues.
Leo, a young Wall Street trader, told me that he had heard over many lunches the sad sweet song of Jimmy, his friend, a cook at a lunch place near his office, and decided to lend Jimmy $2,500 (in cash), to be paid back in three months.
Leo first had Jimmy sign a paper, which Leo called a “loan repayment agreement”, calling for repayment of the loan in three monthly installments, plus a “default payment” of $500 if the loan is not paid on time.
The loan was not repaid, and Leo is now asking for a judgment against Jimmy in the sum of $2,500 plus the flat sum of $500 because the loan was not repaid in time.
I had to decide as a legal matter whether a default payment in a loan agreement, stated as in the promissory note at $500, a specific dollar amount, constituted legal “interest” or an illegal penalty.
Under the circumstances, and in your opinion, is the $500 interest or a penalty?
To see my decision, click on the link below – Decision