In the

United States Court of Appeals

For the Seventh Circuit

No. 00-2704

Checkers Eight Limited Partnership, et al.,

Plaintiffs-Appellees,

v.

La-Van Hawkins, et al.,

Defendants-Appellants.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 95 C 7708--John F. Grady, Judge.

Argued January 24, 2001--Decided February 20, 2001

 Before Flaum, Chief Judge, and Evans and Williams,

Circuit Judges.

 Flaum, Chief Judge. Defendants La-Van Hawkins and

his associated corporations appeal the amount of

damages entered under an agreed order. They claim

that a provision requiring them to pay an

additional $150,000 if their scheduled payments

under the order were tardy is an unenforceable

penalty clause. The defendants also argue that

plaintiffs Checkers Eight Limited Partnership

("Checkers") and associated persons,

partnerships, and corporations waived strict

compliance with the payment schedule. For the

reasons stated herein, we reverse and remand. 

I. Background

 The facts underlying this lengthy commercial

litigation are complicated and generally not

relevant to the legal issues presented in this

case and so will receive only a concise summary.

In 1995, Checkers, Thomas W. Lonergan, James T.

Lonergan, Thomas W. Lonergan Trust No. 1, and

Tower Food Services, Inc. (the general partner of

Checkers) filed suit against La-Van Hawkins,

Hawkins Two, Inc., Hawkins Four, Inc., Hawkins

Five, Inc., and Hawkins Eight, Inc. Count I of

the amended complaint alleged that the defendants

owed money to Checkers under a partnership

agreement signed by each of the defendants, and

Count II alleged that payments from the
defendants were owed to another partnership. The

plaintiffs sought $350,747.68 on Count I and

$214,597.58 on Count II. The basis of federal

jurisdiction was (and is) diversity, since the

plaintiffs and the limited partners of Checkers

were either citizens of or were incorporated and

had their primary places of business in Illinois,

New York, or Ohio, while the original defendants

were either citizens of or were incorporated and

had their primary places of business in Georgia.

 The litigation developed with the plaintiffs

filing motions for summary judgment. In a June 3,

1997 opinion, the court denied one of these

motions but found as substantially uncontroverted

facts under Fed.R.Civ.P. 56(d) that the

defendants owed at least $181,303.68 on Count I

and at least $200,162.58 on Count II. In

September, 1997, after being granted leave by the

court, the defendants filed a counterclaim

seeking reimbursement for expenses the defendants

allegedly paid on behalf of the partnerships. The

counterclaim stated only that the defendants

sought more than $50,000 in damages, but the

defendants’ documented expenses totaled

$1,153,484.85. 

 In February, 1999, the parties settled the case

and had the district court enter an order

memorializing their resolution. This order

dismissed the defendants’ counterclaim with

prejudice and provided that if the defendants

paid the plaintiffs a total of $250,000 in a

timely manner the complaint would be dismissed

with prejudice as well. This $250,000 was to be

paid in an initial lump sum and then monthly

installments, with the installment amounts due

near the end of each month from March, 1999 to

January, 2000. The order also stated that if the

payments were not made in a timely manner,

judgment for $400,000 minus any settlement

payments would be entered against the defendants

who were parties to the original partnership

dispute as well as other associated entities,/1

which collectively form the defendants in this

case.

 The defendants were tardy making some of the

payments. The payment of the first late sum,

which was due on May 28, 1999 according to the

agreed order, was delayed with the permission of

the plaintiffs until June 4. However, the

defendants did not obtain explicit permission

from the plaintiffs for the remaining late

payments, the next of which was the September 30

payment, which was made one day late on October

1. The sum due October 30 was not produced until

November 9, with the plaintiffs filing a motion

for entry of judgment on November 5, which was

withdrawn when they received the payment. The
monies due on December 31 were also late and the

plaintiffs filed a motion to enter judgment for

$400,000 in their favor on January 7, 2000. The

defendants made this payment on January 11 and

paid the last sum on January 20, which was eleven

days early. At that point, the defendants had

paid $250,000. However, the plaintiffs did not

withdraw their motion for entry of judgment under

the agreed order and the district court held a

hearing. After listening to argument from both

sides, the court granted the motion and ordered

the defendants to pay an additional $150,000.

II. Discussion

 The defendants argue that the extra $150,000

they were required to produce for not making

timely payments is an unenforceable penalty

clause. They claim that this sum has no relation

to the damages caused by the late payments and

that these damages are easily estimated by using

prevailing interest rates. They further contend

that the only purpose of this provision of the

order was to secure performance of the contract

and that the amount is insensitive to the gravity

of their breach. The plaintiffs claim that the

provision in question is a perfectly acceptable

liquidated damages clause.

 We begin by making explicit a few assumptions

relied on by the parties. The first of these is

that state law, rather than federal, applies to

the construction of agreed orders entered by a

federal court sitting in diversity. In their

briefs, both parties cite only Illinois law and

Seventh Circuit and Illinois district court cases

interpreting Illinois law. Most of the circuits

that have considered the issue have held that

questions of the validity or interpretation of an

agreed order resolving state law claims are

governed by state law, see, e.g., Bamerilease

Capital Corp. v. Nearburg, 958 F.2d 150, 152 (6th

Cir. 1992); Alumax Mill Prods., Inc. v. Congress

Fin. Corp., 912 F.2d 996, 1007 (8th Cir. 1990);

White Farm Equip. Co. v. Kupcho, 792 F.2d 526,

529 (5th Cir. 1986). Thus, we will assume with

the parties that state law applies, though we

need not make a definitive ruling on this

question since the issue is not contested. The

second assumption is that Illinois law, rather

than the law of some other state, applies. Since

the parties cite only cases interpreting Illinois

law, we will assume that Illinois law governs

their dispute. See Coleman v. Ramada Hotel

Operating Co., 933 F.2d 470, 473 (7th Cir. 1991).

The third premise is that Illinois applies its

penalty clause jurisprudence to consensual orders

approved by courts. The plaintiffs implicitly

assume this in their briefs by arguing only that

the provision of the agreed order at issue in
this case does not constitute a penalty clause,

but at oral argument questioned whether part of

a court order could ever be considered a penalty.

Even if we were to consider the plaintiffs’ late

argument that under Illinois law no part of a

settlement agreement approved by a court can be

a penalty,/2 they cite no case law to that

effect and we previously have found that under

Illinois law portions of court-approved

agreements can constitute unenforceable

penalties. See South Suburban Hous. Ctr. v.

Berry, 186 F.3d 851, 856 (7th Cir. 1999).

 Having established these preliminary points, we

now move to the merits of the penalty clause

argument. In interpreting contract provisions

that specify damages, Illinois law draws a

distinction between liquidated damages, which are

enforceable, and penalties, which are not. See

Lake River Corp. v. Carborundum Co., 769 F.2d

1284, 1289 (7th Cir. 1985). A clause is a

liquidated damages provision if: (1) the actual

damages from a breach are difficult to measure at

the time the contract was made; and (2) the

specified amount of damages is reasonable in

light of the anticipated or actual loss caused by

the breach. See American Nat’l Bank & Trust Co.

of Chicago v. Regional Transp. Auth., 125 F.3d

420, 440 (7th Cir. 1997); Lake River, 769 F.2d at

1289-90. In addition, when the sole purpose of

the clause is to secure performance of the

contract, the provision is an unenforceable

penalty. See American Nat’l Bank & Trust, 125

F.3d at 440; MedPlus Neck & Back Pain Ctr., S.C.

v. Noffsinger, 726 N.E.2d 687, 693 (Ill. App.

2000). If the amount of damages is invariant to

the gravity of the breach, the clause is probably

not a reasonable attempt to estimate actual

damages and thus is likely a penalty. See Raffel

v. Medallion Kitchens of Minn., Inc., 139 F.3d

1142, 1146 (7th Cir. 1998); Lake River, 769 F.2d

at 1290. Whether a provision is a penalty clause

is an issue of law that we review de novo. See

American Nat’l Bank & Trust, 125 F.3d at 439.

 Given these legal principles, the provision of

the parties’ agreed order requiring the

defendants to pay an additional $150,000 if the

installments are not paid in a timely fashion is

an unenforceable penalty clause. Absent

exceptional circumstances, actual damages caused

by monetary payments being late are not difficult

to measure because interest rates can be used to

estimate the time value of money. See Lawyers

Title Ins. Corp. v. Dearborn Title Corp., 118

F.3d 1157, 1161 (7th Cir. 1997); United Order of

Am. Bricklayers & Stone Masons Union No. 21 v.

Thorleif Larsen & Son, Inc., 519 F.2d 331, 335

(7th Cir. 1975). The interest that would have

accrued on the late payments of the defendants is
minimal, probably less than one hundred dollars.

The amount of $150,000 is unreasonable and

excessive compared to the actual damages as

estimated by using interest rates. The amount of

damages under the agreed order also is

insensitive to the magnitude of the defendants’

breach. Regardless of whether the defendants were

a day late in making the last payment or had

refused to perform at all, they would have been

required to pay $150,000 to the plaintiffs.

Finally, the extra $150,000 in damages appears to

have no purpose other than ensuring that the

defendants made the installment payments on time.

Each factor considered by the Illinois courts

points to the conclusion that the provision in

the agreed order is a penalty./3

 The plaintiffs’ principal argument is that

requiring the defendants to pay a total of

$400,000 adequately measures the damages caused

to the plaintiffs because of the defendants’

breach of the timeliness requirement of the

agreed order. They base this contention on the

district court’s findings in its June 3, 1997

order that the defendants owed at least

$381,466.26 and the possibility that the

defendants could have been liable for as much as

$565,345.26. The plaintiffs’ argument is

unpersuasive. The amount of $400,000 might have

been a reasonable estimate of the damages caused

by the alleged breach of the partnership

agreement, though this is neither certain/4 nor

pertinent. The issue before this court is not

what remedy would adequately compensate the

plaintiffs for the alleged breach of the

partnership agreement, but rather what remedy is

reasonable for the breach of the agreed order.

This latter breach, the only relevant one for

purposes of this opinion, was caused by the

tardiness of some of the defendants’ installment

payments. For the reasons explained above,

requiring the defendants to pay an additional

$150,000 is not a reasonable estimate of the

damages caused by these late payments.

 The plaintiffs also argue that courts should

respect contracts between two sophisticated

parties and not reform such agreements so as to

give one party a bargain to which the other did

not agree. This claim amounts to a generalized

assertion that contract provisions between

commercially experienced parties should never

constitute penalty clauses because the parties

are of roughly equal bargaining strength. While

we have noted similar criticisms in this

circuit’s opinions discussing Illinois penalty

clause jurisprudence, see Lawyers Title, 118 F.3d

at 1160-61, Lake River, 769 F.2d at 1288-90,

Illinois continues to invalidate damages

provisions in contracts that fail the test
outlined above even if both parties are

economically sophisticated, see, e.g., Telenois,

Inc. v. Village of Schaumburg, 628 N.E.2d 581,

584-85 (Ill. App. 1993); Grossinger Motorcorp,

Inc. v. American Nat’l Bank & Trust Co., 607

N.E.2d 1337, 1345-46 (Ill. App. 1992). The

plaintiffs’ argument would prove too much if

accepted, because then no damages clause between

commercially experienced parties could be

considered a penalty, which clearly contradicts

actual Illinois law. Since, as aforementioned, we

apply Illinois law in this case, we must reject

the plaintiffs’ argument.

III. Conclusion

 Because the damages clause is an unenforceable

penalty under Illinois law, the plaintiffs are

entitled only to the actual damages caused by the

defendants’ late payments, as measured by an

appropriate interest rate. For the reasons stated

herein, we Reverse and Remand for further proceedings

consistent with this opinion.

/1 The parties who are the defendants in the instant

dispute are La-Van Hawkins, Hawkins One, Inc.,

Hawkins Two, Inc., Hawkins Four, Inc., Hawkins

Five, Inc., Hawkins Eight, Inc., The La-Van

Hawkins Group, Inc., Windy City Construction,

Inc., Inner City Foods Company, and La-Van

Hawkins & Assoc. of Chicago, Inc. At least two of

the entities included in this group but who were

not originally defendants, namely, Inner City

Foods Company and La-Van Hawkins & Assoc. of

Chicago, Inc., are incorporated and have their

principal places of business in Illinois, and

thus are not diverse from the plaintiffs.

However, since the parties were completely

diverse when the action was commenced and these

two entities are not indispensable parties, their

subsequent addition does not deprive this court

of jurisdiction. See Freeport-McMoRan, Inc. v. K

N Energy, Inc., 498 U.S. 426 (1991).

/2 Claims raised for the first time at oral argument

are normally considered waived. See Berens v.

Ludwig, 160 F.3d 1144, 1148 (7th Cir. 1998).

/3 Because we accept the defendants’ penalty clause

argument, we need not address their contentions

regarding waiver.

/4 Despite the district court’s finding that their

claims were worth at least $381,466.26, the

plaintiffs quite possibly could have netted much
less than $400,000, or even $250,000, if they had

continued to litigate. This course would have

required the plaintiffs to expend further

resources on preparing and conducting a jury

trial and would have also exposed them to the

possibility of being found liable on the

defendants’ counterclaim. If these expenses were

sufficiently large, a reasonable estimate of the

expected value of the plaintiffs’ suit on the

date that they settled could have been $250,000

or less.

 EVANS, Circuit Judge, concurring. I can’t agree

that the court-approved settlement order, which

increased Hawkins’ obligation to $400,000 if he

failed to make timely payments, is an

unenforceable penalty clause. In fact, it seems

to me that this sort of carrot-and-stick

settlement agreement, blessed by a court in an

order, is fairly routine. Surely, Checkers and

Hawkins could have agreed to the entry of a

judgment for $400,000, dischargeable as fully

satisfied upon Hawkins paying $250,000 over 10

months. The court order here, in substance, isn’t

any different. It is wrong, I submit, to

characterize this agreement as one involving

"damages." It’s not. It involves an alternative

entitlement if certain conditions are not met.

And there is nothing wrong with that, especially

here where we are dealing with big boys who ought

to be able to freely agree on any mechanism for

resolving what the court correctly describes as

complicated and "lengthy commercial litigation."

 But that said, I join the court’s opinion

because I think Checkers, by waiting to spring

its $150,000 kicker until after it got all its

money, waived its right to insist on strict

compliance with the order’s timely payment

provisions. So the court, in my view, is correct

in rejecting Checkers’ claim (except for a

pittance of interest), although I would do so for

a different reason.