A bankruptcy court ruled that liquidated damages clauses in a loan agreement were unenforceable penalty clauses. The noteholders were allowed an unsecured claim of $9.6 million instead of the $13.7 million they originally sought. This case shows that courts will reject liquidated damages provisions that are excessive or not a reasonable estimate of actual damages. For subcontractors, this means penalty clauses in contracts may not hold up in court if they're disproportionate to real losses.
Liquidated damages clauses must be a reasonable pre-estimate of actual harm, not a penalty—courts will strike down excessive amounts
In bankruptcy, noteholders and creditors may recover less than claimed if their damages provisions are deemed unenforceable penalties
Review all penalty and liquidated damages language in your contracts; unreasonable clauses may be voided, leaving you with no recovery