Opinion ID: 1401721
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Heading: PPP Enforceability Under Iowa Law

Text: GPR next asserts the PPP is unenforceable under Iowa law because the PPP constitutes an unreasonable liquidated damages provision. The Iowa legislature has imposed restrictions on prepayment charges for agricultural land and certain family residences. The legislature has remained silent as to commercial real estate transactions. The district court noted Iowa follows the common law perfect tender in time rule, holding a borrower has no right to pay off a mortgage before the maturity date, absent a loan agreement provision allowing prepayment. See Lett v. Grummer, 300 N.W.2d 147, 150 (Iowa 1981). The Note provided GPR the right to prepay, but only if payment was tendered in full, accompanied by the PPP payment. The district court found the PPP's terms to be unambiguous and noted when commercial entities, represented by counsel, agree to contractual terms, Iowa courts will ordinarily enforce the terms. We agree.
Under Iowa law, liquidated damages are a remedy for breach of contract. See Am. Soil Processing, Inc. v. Iowa Underground Storage Tank Fund Bd., 586 N.W.2d 325, 334 (Iowa 1998). Where a party retains control over the manner of performance, alternatives are not damages provisions but rather performance alternatives. Id. (citing Superfos Inv. Ltd. v. FirstMiss Fertilizer, Inc., 821 F.Supp. 432, 434 (S.D.Miss.1993)). Here, the Note gave GPR the choice of paying according to the Note's terms or prepaying the Note in full and paying the PPP. When GPR elected to prepay, GPR was not breaching the contract but was in fact acting in accordance with an express option provided under the contract. The district court was correct in determining the PPP was not a liquidated damages provision.
A liquidated damages charge is enforceable under Iowa law if it is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. Rohlin Constr. Co. v. Hinton, 476 N.W.2d 78, 80 (Iowa 1991) (quoting Restatement (Second) of Contracts, § 356(1) (1981)). The reasonableness of a liquidated damages provision is assessed as of the time the agreement is made, id., and is a question of law for the court. City of Davenport v. Shewry Corp., 674 N.W.2d 79, 85 (Iowa 2004). While at least one court has held as unreasonable a fixed prepayment penalty, the court did so because the penalty presumed that a loss would occur, regardless of whether interest rates rose or fell. See In re A.J. Lane & Co., 113 B.R. 821, 829 (Bkrtcy.D.Mass. 1990). The Lane court suggested that [a]ny prepayment charge should be wholly or largely dependant upon ... the difference in the interest yield between the contract rate and the market rate at the time of prepayment, projected over the term of the loan and then discounted to arrive at present value. Id. The PPP did what the Lane court suggested, because the PPP did not presume a loss and was calculated based upon prevailing market rates in an attempt to calculate UCL's actual loss of earnings resulting from GPR's prepayment. The formula used and the resulting PPP charge were reasonable at the time the agreement was reached. Even if the PPP were treated as a liquidated damages provision, the PPP is enforceable because it constituted a reasonable assessment of the actual or anticipated loss caused by the breach.