These two cases, Vitatech Int’l, Inc. v. Sporn, 16 Cal. App. 5th 796, 224 Cal. Rptr. 3d 691 (2017); and Krechuniak v. Noorzoy, 11 Cal. App. 5th 713, 217 Cal. Rptr. 3d 740 (2017), one from the Fourth District, Div. 3 and the other from the Sixth District come to opposite conclusions.
For several years the California Courts of Appeal have been hostile to settlement agreements that provide that a defendant will pay a certain sum by a certain date, but if the defendant defaults, a stipulated judgment for a much larger amount will be entered. Foremost among the recent decisions on this topic is Greentree Financial Group, Inc. v. Execute Sports, Inc., 163 Cal.App.4th 495, 78 Cal.Rptr.3d 24 (2008), decided by the 4th 3rd. Vitatech follows the analysis and conclusions drawn in Greentree. Whereas, Krechuniak distinguishes relevant facts and comes to the opposite result, but without disputing the vitality of much of the Greentree decision.
The appellate court in Vitatech reversed the trial court’s entry of a stipulated judgment in favor of the Plaintiff for four times the amount the Plaintiff had agreed to accept if timely payment was made. The appellate court determined that the difference between the stipulated judgment and the timely payment amount represented a penalty in violation of Civil Code Section 1671(b). The appellate court in Vitatech came to this conclusion as a matter of law based on undisputed facts. The court in Krechuniak held that Section 1671(b) requires the court to determine the reasonableness of the purported liquidated damages provision before it can decide if it is a void penalty. Because the defendant failed to submit evidence regarding reasonableness (and even admitted that the settlement agreement was “valid and binding”), and the burden of proof was on the defendant to show unreasonableness, the defendant had forfeited the argument. Therefore, the stipulated judgment was affirmed.
An interesting aspect of the Vitatech decision was its procedural posture. After the stipulated judgment was entered, the defendant did not appeal. Rather, defendant sought to have the judgment vacated under CCP Section 473(a). The judgment creditor argued that Section 473(a) only allows for vacating void judgments as opposed to voidable judgments. A judgment is void if the trial court had no jurisdiction to enter it. The appellate court states the rather extraordinary conclusion that a judgment on a void contract (such as a contract with a penalty provision) is a void judgment.
The court in Vitatech should have at least allowed the plaintiff to prove up its actual damages. Instead, it remanded for the lower court to enter judgment for the lower settlement amount. That was never what the parties agreed to.
Analysis: The appellate courts that follow Greentree may think they are doing the defendants a favor by voiding their stipulated judgments, and perhaps for these particular parties they are. However, their rulings are making it ever more difficult for a defendant to squeeze out a discount for prompt payment when liability is relatively certain.
Another disturbing thing about this line of cases is their apparent ignorance of Title 4 of the California Civil Code (Sections 1473 – 1543) dealing with Extinction of Obligations. Here we find definitions for Accord and Satisfaction and Novation. When parties to litigation settle their litigation simply by agreeing to entry of a stipulated judgment, that is a novation (Section 1530). The stipulation is a new agreement that extinguishes the old. It is not the court’s job to look behind the stipulation to determine if it represents some subjective view of a fair outcome. Parties, particularly if they are represented by counsel, are presumed to know what they’re doing. If they want to end their litigation with an agreement that one will pay the other a sum certain, our legislature and our courts applaud them and provide benefits for doing so.
Having stipulated to judgment, the parties may also agree to an accord, which is defined as “an agreement to accept, in extinction of an obligation, something different from or less than that to which the person agreeing to accept is entitled.” Civil Code Section 1521. With an accord, the original obligation remains until the accord has been performed, i.e. satisfied.
Practice Tip: If drafted as an Accord and Satisfaction, the court should not be measuring whether the stipulated judgment represents a reasonable estimate of the amount of harm caused by failure to pay the reduced settlement amount. Rather, it should accept that because the accord was not performed, the obligation represented by the stipulated judgment has not been extinguished.
This case analysis was prepared by Christopher L. Blank, Esq., 4675 MacArthur Court, Suite 550, Newport Beach, CA 92660; (949) 250-4600; firstname.lastname@example.org. Cases, statutes or rules summarized or cited herein should not be relied upon without fully reading the case, statute or rule, and checking subsequent case history, etc.