ATTORNEYS FOR APPELLANT
: ATTORNEY FOR APPELLEE:
RICHARD LORENZ BARBARA WEBB CLEMENTS
Hickam & Lorenz Stewart & Irwin, P.C.
Cloverdale, Indiana Indianapolis, Indiana
ROBERT C. PRICE
Price & Runnells
COURT OF APPEALS OF INDIANA
PHYLLIS GADDIS, )
vs. ) No. 67A01-0309-CV-347
STARDUST HILLS OWNERS )
ASSOCIATION, INC., )
APPEAL FROM THE PUTNAM SUPERIOR COURT
The Honorable Robert J. Lowe, Presiding
Cause No. 67D01-0208-SC-931
March 4, 2004
OPINION - FOR PUBLICATION
Appellant-defendant Phyllis Gaddis appeals the small claims judgment entered against her and in
favor of appellee-plaintiff Stardust Hills Owners Association, Inc. (Association), a non-profit Indiana corporation.
Specifically, Gaddis contends that the delinquent fee charged for late payment of
membership dues constitutes usurious interest, and, in the alternative, that the delinquent fee
is an unenforceable penalty.
See footnote Finding that the delinquent fee is neither usurious
interest nor a penalty, we affirm.
According to the Associations bylaws, every homeowner in the Putnam County subdivision known
as Stardust Hills must be a member of the Association, and he must
pay annual dues. The Association assesses $200 per year of dues for
the maintenance of common areas and other community services. There is a
ten-day grace period for payment, after which the amount of the unpaid annual
obligation shall bear a delinquent fee at a rate of $2.00 per day
from the date of said delinquency. Appellants App. p. 125. The
rules and regulations of the Association further provide that [t]he Association will take
legal action to place a lien on each and every property for which
payment is not made by the designated time, and [a]ny Member . .
. who defaults in payment of an obligation due to the Association will
be responsible for all attorney fees and any other reasonable costs of collection
incurred by the Association in the collection of such amounts, all without relief
from valuation or appraisal laws. Appellants App. p. 125.
Gaddis owned one lot in Stardust Hills in her own name, and apparently
held joint title with her husband to another lot in the neighborhood.
Gaddis did not pay on time the annual dues on the lot that
she owned in her name only. Twenty-one days and forty-two dollars in
delinquent fees after the payment was due, Gaddis signed an agreement with the
Association that she would pay her dues in installments on the first of
each month. The contract also stated, If I fail to pay the
balance within 10 days, I will be subject to late charges and if
I still do not pay, the matter will be filed in small claims
court, and all court costs will be added to my balance. Appellants
App. p. 5. At the time she signed the contract, Gaddis also
paid $100 of her annual dues. Gaddis failed to make any of
the scheduled payments, and, after the first installment was due, the Association resumed
charging the per diem late fee on June 12, 2002.
On August 2, 2002, the Association filed a small claim action against Phyllis
for non-payment of her annual dues. The trial was held on April
4, 2003, and the trial court entered judgment against Gaddis finding, that Plaintiff
has met its burden of proof and [the court] enters judgment in its
favor and against Defendant in the amount of $58.00 plus $42.00 court costs
for a total judgment of $100.00. Defendants counterclaim is denied. The
Clerk of the Court is ordered to remit to Plaintiff the sum of
$142.00 held in trust.
See footnote Gaddis now appeals.
DISCUSSION AND DECISION
I. Usurious Interest
Gaddis first contends that the delinquent fee at issue is usurious interest.
Specifically, she contends that the Association essentially charges one percent interest per day
in perpetuity for unpaid dues, which is against public policy and is in
excess of the statutorily allowed interest rate for loans.
Initially, we note that judgments in small claims actions are subject to review
as prescribed by relevant Indiana rules and statutes. Wehry v. Daniels, 784
N.E2d 532, 534 (Ind. Ct. App. 2003) (quoting S.C.R. 11(A)). When reviewing
claims tried by the bench without a jury, we will not set aside
the judgment unless clearly erroneous, and due regard shall be given to the
opportunity of the trial court to judge the credibility of the witnesses.
Id. (quoting T.R. 52(A)). In determining whether a judgment is clearly erroneous,
we neither reweigh the evidence nor assess the credibility of witnesses. Id.
Rather, we look to the evidence that supports the judgment and the
reasonable inferences to be drawn therefrom. Id.
A judgment in favor of a party having the burden of proof will
be affirmed if the evidence was such that a reasonable trier of fact
could conclude that the elements of the partys claim were established by a
preponderance of the evidence. Id. This deferential standard of review is
especially important in small claims actions where trials are informal, with the sole
objective of dispensing speedy justice between the parties according to the rules of
substantive law. Id. (quoting S.C.R. 8(A)).
We note that the Articles of Incorporation and Bylaws of a non-profit corporation
constitute a contract between the corporation and its members and among the members
themselves. Lynn v. Windridge Co-Owners Assoc., Inc., 743 N.E.2d 305, 313 (Ind.
Ct. App. 2001). A party who fails to make payments as required
by a contract is guilty of a breach thereof. Henthorne v. Legacy
Healthcare, Inc., 764 N.E.2d 751, 758 (Ind. Ct. App. 2002).
Gaddis argues that the delinquent fee is against public policy because the obligors
on these debts can lose their homes for the sake of the payment
of outrageous interest rates. Appellants Br. p. 13. Contrary to Gaddiss
assertion, the rules and regulations do not provide the Association with an automatic
security interest in the home of each member of the Association. They
merely inform the homeowners that the Association has the right to seek a
lien against their home through the judicial process. Moreover, there is no
indication in the record that Gaddis or any homeowner in Stardust Hills was
in danger of losing his or her home over a potential $200 lien
for unpaid dues. Thus, Gaddis has failed to demonstrate how the delinquent
fee contravenes public policy.
We addressed the issue of a one percent per day late fee in
Gershin v. Demming, 685 N.E.2d 1125 (Ind. Ct. App. 1997). In that
case, a landlord charged a late fee of 1% of monthly rent due,
per day, including Saturday and Sunday for unpaid rent. Id. at 1130-31.
The tenants in that case argued that this punished them with an
interest rate of 365 percent per year on unpaid rent, noting that such
a rate far exceeds the maximum allowable rate for consumer credit transactions under
the Uniform Consumer Credit Code. See Ind. Code § 24-4.5-2-201. In
upholding the late fee, we noted:
the late fee is intended to compensate Landlord for the administrative expense and
inconvenience associated with untimely rent, including late payment notices and additional bookkeeping, and
for the loss of use of rental income. Landlords in residential leases
typically have mortgage payments, real estate taxes, insurance, maintenance and other expenses required
to maintain the leased property. Delinquent rent not only results in a
loss of use, measured as interest, but also interrupts normal cash flow and
may affect a landlords ability to meet its operating expenses. The severity
of this interruption is a function of both the amount of rent owed
and the duration that rent remains past due. The greater the amount
of late rent and the longer the rent remains past due, the greater
the adverse impact on the landlords business. . . . While here
the total of $975.00 in late fees might seem high, it represents 75
days of late rent. This accumulation of late fees occurred only because the
tenants repudiated the lease and committed an anticipatory breach. We cannot say
under the circumstances of this case that such a fee is grossly disproportionate
to Landlords loss resulting from 75 days of delinquent rent or that the
fee is an unenforceable penalty as a matter of law. Thus, we
hold that the per diem late fee provision to the end of the
lease term is not unreasonable.
Gershin, 685 N.E.2d at 1131.
The reasoning of the Gershin court is equally applicable here, where the late
fee is charged for late payment of annual dues that pay for the
maintenance of common areas and other community services. The Association was required
to incur the additional expenses of late payment notices, creating a contract for
installment payments of Gaddiss dues, and attorney and court fees in attempting to
enforce their agreement. The late payment and its consequential effects may interrupt
the ability of the Association to pay for the maintenance of the common
area and to provide other community services. As in Gershin, the total
of the late fees may seem highseventy-one percent of the annual duesbut the
accumulation of the late fees only occurred because Gaddis breached not one, but
two contractual obligations to pay her annual dues.
Moreover, the rules and regulations of the Association state that any Member who
defaults in payment of an obligation due to the Association will be responsible
for all attorney fees and any other reasonable costs of collection, and Gaddiss
contract for installment payments of her dues required her to pay court costs
if litigation became necessary. Appellants App. p. 5, 125. The expense
of the litigation and this appeal has clearly cost the Association more than
the delinquent fees charged to Gaddis. Under these circumstances, we cannot say
that the delinquent fee charged here is usurious interest.
Gaddis next contends that the delinquent fee is an unenforceable penalty. Specifically,
she argues that the fee was a penalty because the Associations actual loss
was disproportionate to the amount of the late fees.
Initially, we note that as a general rule, issues not raised before the
small claims court are not preserved for appeal. Hochstedler v. St. Joseph County
Solid Waste Mgmt. Dist., 770 N.E.2d 910, 917 (Ind. Ct. App. 2002).
As the trial court observed in its findings of fact, Gaddis did not
raise the defense that the late fee was an impermissible penalty. Appellants
App. p. 9. Thus, she did not preserve this issue for appeal.
That said, we note that Gaddis would be unable to show that this
late fee was an unenforceable penalty even if the issue had been properly
preserved. The question whether a liquidated damages clause is valid, or whether
it constitutes an unenforceable penalty, is a pure question of law for the
court. Gershin, 685 N.E.2d at 1128. Moreover, we observe that [a]
typical liquidated damages provision provides for the forfeiture of a stated sum of
money upon breach without proof of damages. Id. at 1127. In
determining whether a stipulated sum payable on a breach of contract constitutes liquidated
damages or a penalty, the facts, the intention of the parties and the
reasonableness of the stipulation under the circumstances of the case are all to
be considered. Id. at 1128. If the sum sought by a
liquidated damages clause is grossly disproportionate to the loss that may result from
a breach of contract, we should treat the sum as a penalty rather
than liquidated damages. Rogers v. Lockard, 767 N.E.2d 982, 991 (Ind. Ct.
The provision at issue here, which provides for a flat rate of two
dollars per day when the annual dues are not paid on time, regardless
of proof of damages, clearly fits within the definition of liquidated damages.
Gaddis asserts, without citation to any authority, that the Associations actual loss from
the late payment can be gauged by what interest rate it might receive
by placing the money in an interest-bearing account. She therefore contends that
the fee of two dollars per day is so obviously disproportionate to this
amount, the failure of the court to declare it a penalty was a
blatantly obvious error. Appellants Br. p. 18. However, as we observed
above, the costs of enforcing the payment of the annual dues can be
high and are directly related to the two dollar per day fee.
Thus, the sum sought by this liquidated damages clause is not grossly disproportionate
to the loss that may result from a breach of contract.
In light of the above, we find that the two dollar per day
delinquent fee is not usurious interest. Moreover, we find that Gaddis waived
the argument that the delinquent fee is an unenforceable penalty, and that the
fee could not be considered a penalty even if the argument were properly
The judgment of the trial court is affirmed.
NAJAM, J., and MAY, J., concur.
Gaddiss brief does not contain a statement of the issues. These
are the issues as we understand them based on the arguments presented in
Gaddiss brief. We remind counsel that Appellate Rule 46(A)(4) requires a statement
of the issues that concisely and particularly describe[s] each issue presented for review.
Footnote: Although the entry of the judgment may appear somewhat confusing in light
of the claim and the evidence presented at trial, we surmise from the
record that the $142 held in trust represented the remaining $100 that Gaddis
had not paid of the original annual dues plus $42 from the first
period in which she accrued late fees. Further, it is our understanding
that the $58 dollars represented the accrued late fees from the second period
in which she failed to make her scheduled monthly payments, and the $42
represent the court costs that she agreed to pay pursuant to the contract.
In sum, Stardust was awarded $242.