The California appellate decision in Honchariw v. FJM Private Mortgage Fund sent shockwaves through the private lending industry when it was issued in September 2022. The ruling fundamentally altered how lenders may assess default interest on outstanding loan balances, and its implications continue to affect loan structuring, servicing, and enforcement across the state and beyond. Every private lender operating in California should understand this case, its practical effects, and the strategies available to mitigate its impact.
Background of the Case
The dispute originated from a business-purpose loan made by FJM Private Mortgage Fund to the borrower, Honchariw, who is himself an attorney and a frequent litigant. When Honchariw defaulted on his payment obligations, an arbitration proceeding followed. The lender prevailed at arbitration and again at the trial court level when the borrower challenged the arbitration award.
Honchariw then appealed to the California First District Court of Appeal, which issued a published opinion on September 29, 2022, that contained a holding many in the lending community found deeply troubling.
The Court’s Ruling and Its Significance
The appellate court held that a lender may not charge default interest against the entire principal balance of a loan unless the borrower has triggered a maturity default, meaning the loan term itself has expired. For any default occurring before maturity, such as missed monthly installments, the court ruled that default interest may only be assessed against the specific amounts that are past due, not against the full outstanding loan balance.
Scope of the Decision
This restriction applies regardless of several factors that lenders might assume would limit its reach:
- Loan purpose — The holding covers both business-purpose and consumer-purpose loans
- Collateral type — It applies whether the property securing the loan is commercial, residential, or vacant land
- Loan documentation — Even if the promissory note or deed of trust expressly permits default interest on the full principal balance, the court concluded such provisions are unenforceable for pre-maturity defaults
The breadth of this ruling is what makes it particularly consequential. Default interest on the full principal balance has historically served as one of the most effective motivators for borrowers to cure defaults promptly. Stripping that tool from lenders fundamentally changes the risk calculus on every loan originated in California.
Practical Impact on Private Lenders
The Honchariw decision creates several operational challenges for private lending operations:
Reduced Default Deterrence
Without the ability to charge default interest on the full principal balance, borrowers face significantly diminished financial consequences for missing payments prior to loan maturity. This can encourage strategic defaults or delayed payments, particularly in market environments where borrowers are under cash flow pressure.
Loan Servicing Adjustments
Servicers must update their systems and procedures to calculate default interest only on past-due installment amounts rather than the full outstanding balance. Retroactive adjustments may also be necessary for loans currently in default.
Litigation Exposure
Borrowers and their attorneys can now cite this published opinion to challenge any default interest charges assessed on the principal balance. This creates potential liability for lenders who continue to apply traditional default interest provisions without modification.
Strategic Options for Lenders
Private lenders facing this new legal landscape have several paths forward:
1. Conservative approach — Voluntarily limit default interest charges to past-due installment amounts only, eliminating litigation risk on this issue entirely 2. Negotiated approach — Continue applying default interest provisions as written but be prepared to negotiate reductions if a borrower raises the Honchariw decision as a defense 3. Aggressive approach — Maintain current practices and defend any resulting litigation on the grounds that the decision will ultimately be overturned through judicial review or legislative action
Each approach carries different risk profiles, and the right choice depends on the individual lender’s risk tolerance, portfolio size, and litigation budget.
Ongoing Legal Developments
Geraci LLP has been at the forefront of the industry response to the Honchariw decision. The firm has been actively engaged in advocacy efforts, including pursuing appellate remedies and working toward legislative solutions that would restore the ability of lenders to charge default interest on the principal balance for pre-maturity defaults.
Lenders should also monitor developments in California case law, as subsequent decisions may narrow or expand the scope of the Honchariw holding. Additionally, legislative proposals aimed at clarifying default interest rights could emerge in future sessions of the California legislature.
Recommended Loan Document Modifications
While the legal landscape remains in flux, lenders should work with qualified counsel to review and update their loan documents. Key areas for revision include:
- Default interest provisions that clearly distinguish between maturity and pre-maturity default scenarios
- Late charge structures that maximize permissible charges on delinquent installments
- Acceleration clauses that, when triggered, convert a pre-maturity default into a maturity event
- Supplemental fee provisions that provide alternative financial deterrents to borrower default
Contact Geraci LLP
Geraci LLP attorneys are actively representing private lenders navigating the implications of the Honchariw decision. Whether you need updated loan documents, defense in default interest litigation, or guidance on portfolio-wide compliance adjustments, our team has the expertise to protect your interests. Reach out at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
