Monday, August 12, 2019
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Court of Appeal:
$700,000 Penalty for Missed Payment Was Unenforceable
By a MetNews Staff Writer
A provision in an agreement that if the defendant defaulted on installment payments on a $2.1 million settlement, it would owe an additional $700,000 was unenforceable as a penalty, the Court of Appeal for this district held Friday.
Writing for Div. Four, Justice Brian S. Currey said Los Angeles Superior Court Judge Barbara A. Meiers was correct that the three defendants, referred to collectively as “R&W,” were in breach, but erred in ordering enforcement of the penalty clause.
The stipulation provided that if R&W missed any payments, it would owe $2.8 million to plaintiff Osteroid Enterprises, minus any payments it already made, plus interest and attorney fees. After R&W breached, Meiers granted an application to enforce the stipulated judgment, pursuant to Code of Civil Procedure §664.6, finding the amount owed to be $3,654,655—$2.8 million plus interest.
Currey’s Opinion
The inclusion of the $700,000 penalty, Currey said, was legally impermissible.
He pointed to Civil Code §1671(b) which says that “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.”
The jurist wrote:
“In this case, the stipulated judgment for $2.8 million bears no reasonable relationship to the range of actual damages the parties could have anticipated from a breach of the agreement to settle the dispute for $2.1 million.”
The plaintiff argued that Meiers found that the parties had agreed that $2.8 million was owed but that it would be reduced by $700,000 if R&W made prompt payments. No such finding was clearly made, Currey said, and if Meiers did intend to make such a finding, he added, it would not have been supported by any evidence.
No Express Provision
“Had the parties intended to settle for $2.8 million, but apply a discount for timely payments, they could have done so expressly,” he noted, remarking:
“The rules in this area may be subject to legitimate criticism that sophisticated parties should be free to include a substantial penalty for default. While we generally support freedom of contract, on this issue both the Legislature and our Supreme Court have spoken, however, and we are bound by their pronouncements.”
Currey related that publication of the opinion was being ordered “to remind practitioners whose clients settle a dispute involving payments over time how to incentivize prompt payment properly, and what may happen if done incorrectly.”
Remanded With Instructions
The case was remanded with instructions that the principal amount was to be reduced to $2.1 million, minus amounts paid, plus interest, and that a motion for attorney fees may be heard.
The case is Red & White Distribution v. Osteroid Enterprises, 2019 S.O.S. 3888.
Gregory Bodell of the Century City law firm of Kozberg & Bodell represented two of the defendants and Michael M. Baranov of Baranov & Wittenberg, also in Century City, acted for the third defendant. Joyce S. Mendlin and Roger M. Rosen of the Santa Monica firm of Rosenberg Mendlin & Rosen argued for the plaintiff.
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