Thursday, August 6, 2020
Agreement to Pay Full Amount Claimed Was Unenforceable Penalty—C.A.
Absent Acknowledgement That Sum Was Actually Owed, Opinion Says, Defendant’s Stipulation That Judgment Be Entered If a Condition Were Not Met Was an Invalid Attempt at Liquidating Damages
By a MetNews Staff Writer
Tenants who settled an unlawful detainer action by agreeing that a judgment would be entered against them for $28,970 in past due rent, attorney fees and costs unless they moved out by 3 p.m. on a specified date—and moved out shortly after that time—have been relieved of a judgment for the agreed-upon amount because, as the Court of Appeal saw it, it entailed an unenforceable penalty.
Acting Presiding Justice Eileen Moore wrote the opinion for the Fourth District’s Div. Three. Her opinion was filed July 13 and certified for publication on Tuesday.
The reversal of a judgment granted to landlord Fred Graylee by Orange Superior Court Judge Sherri L. Honer was grounded on Civil Code §1671(b). It provides, with exceptions that are not applicable, 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.”
A payment of $28,970 as a penalty for moving out a short time after the agreed-upon hour is unreasonable, Moore reasoned.
“Nothing in the record shows the parties made any effort to reasonably anticipate the amount of damages that might flow from the tenants’ breach of the stipulation,” she said. “And we see no meaningful relationship between the $28,970 judgment and the tenants’ failure to move out by 3:00 p.m.”
Div. Three Precedents
How much the defendants, tenants John and Rosa Castro, actually owed was not the issue, Moore specified. Citing her division’s 2017 decision in Vitatech International, Inc. v. Sporn, authored by Justice Richard M. Aronson, she said (adding italics and bracketed matter to the language she quoted):
“In the context of a stipulated judgment, ‘the amount of the judgment must reasonably relate to the damages likely to arise from the breach of the stipulation, not the alleged breach of the underlying contract, because it is the breach of the stipulation that allows [the plaintiff] to enter judgment against [the defendant].’ ”
Aronson’s opinion cites the 2008 decision in Greentree Financial Group, Inc. v. Execute Sports, Inc., which also emanated from the Fourth District’s Div. Three.
“Thus, we analyze the damages flowing from the breach of the stipulation itself, not any damages that may have arisen from the tenants’ alleged breach of the underlying lease agreement.”
Second District Decision
The jurist acknowledged that the Court of Appeal for this district, in the 2014 case of Jade Fashion & Co., Inc. v. Harkham Industries, found enforceable the forfeiture of a $17,500 discount which a creditor had granted to a debtor on the condition of making timely weekly payments, pursuant to a schedule. Payments were made, but five of them were late, by a matter of days.
There, Justice Laurie Zelon declared that the discount “was not liquidated damages for a breach of contract, nor was it an additional payment over and above any debt that was owed” but was “part” of the total debt that was admittedly owed.
In Greentree and Vitatech, Moore said, the debt was disputed; in Jade, she noted, it was acknowledged. She termed this difference in facts the “crucial distinction.”
She did not address the discussion in Jade (which predated Vitatech) so far as it differentiates the immediate fact situation in her case from that in Greentree and two other specified cases in which it was found that a penalty was involved.
In those three cases, Zelon said in Jade, “the parties agreed to settle a pending lawsuit for a stipulated amount that was less than the damages alleged in the plaintiff’s complaint; if the defendant breached the settlement agreement, it then would be required to pay a fixed amount of additional damages, which was disproportionately higher than the settlement amount.”
In the Castros’s appeal, the amount set in the settlement agreement, in the event the premises were not timely vacated, was in conformity with what was sought in the complaint.
The stipulation in the present case recites “that a money judgment be granted in favor [of] plaintiff(s)” based on “$27,170.00 Rent & Damages, $1,200 Attorney fees, $600.00 Costs.” Moore wrote:
“There was no express admission by the tenants in the stipulation that they owed any unpaid rent. Nor was the $27,170 in unpaid rent set forth in the stipulation a tacit admission by tenant that they owed this amount. Instead, it was provided to show how the $28,970 judgment was calculated.”
“That the amount of unpaid rent in the stipulation matches the amount alleged in the complaint is unconvincing by itself.”
The matter was remanded for a redetermination of the obligations of the parties.
The case is Graylee v. Castro, 2020 S.O.S. 3595.
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