Updated on August 25, 2023
A recent appellate court decision reiterated that the purpose of the law of contracts is to protect the reasonable expectations of the parties, including those contracts entered into as settlements.
In Creditors Adjustment Bureau, Inc. v. Imani, B316547 (Second Appellate District) (August 9, 2022), the Second Appellate District Court had to determine whether to vacate a judgement entered into against appellant for $251,200.13 after he failed to pay $30,000.00 as required pursuant to a stipulation for entry of judgment.
Creditors Adjustment Bureau, Inc. v. Imani, B316547 (Second Appellate District) (August 9, 2022) at p. 1-2. The appelant contended that the $251,200.13 was an unenforceable penalty and therefore void; however, the Second Appellate District Court disagreed and determined that that judgment was part of a reasonable settlement term. Id. at p. 5
In California, Civil Code section 1671 provides that a liquidated damages clause “is valid unless the party seeking to invalidate the provision established that the provision was unreasonable under the circumstances existing at the time the contract was made.”
A provision will be considered unreasonable “if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from breach. The amount set as liquidated damages ‘must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.’” Ridgley v. Topa Thrift & Loan Ass’n (1998) 17 Cal. 4th 970, 977.
An unenforceable penalty, by contrast, “operates to compel performance of an act and usually becomes effective only in the event of default upon which a forfeiture is compelled without regard to the damages sustained by the party aggrieved by the breach. The characteristic feature of a penalty is its lack of proportional relation to the damages which may actually flow from failure to perform under a contract. Id.
In Creditors Adjustment Bureau, Inc., the appellant leased a hair salon space from a landlord for a term of 10 years and provided a monthly base rent of $2,695, monthly common area charges of $605, and an annual increase in the base rent of 3%. Id. at p. 2. The rent payments were to begin on March 1, 2012 but in August 2012, appellant failed to pay rent. Id. at 3.
Appellant vacated the premises in December 2012, without paying any additional rent. Id. The landlord then assigned its interest to the respondent, which filed a lawsuit to collect over $400,000 in unpaid past and future rent due. Id. The landlord acted in good faith and mitigated the damages and found a new tenant for the space and reduced its damages claim to $257,546.17. Id.
The parties entered into a stipulation for entry of judgment, which required appellant to pay respondent $30,000.00. Id. If the appellant defaulted, respondent had to provide a 10-day written notice of default. Id. On the 11th day, if the default had not been cure, then judgment was to be entered in the sum of $251,200.13. Id. Appellant defaulted immediately and did not make any of the payments required by the stipulation. Id. at 4. Consequently in June 2015, judgment was entered against appellant for the stipulated amount of respondent’s actual damages, $251,200.13. Id.
The Second Appellate District Court upheld the trial court’s entry of judgment because the $251,200.13 damage provision in the stipulation for entry of judgment was not arbitrary and, instead, the actual stipulated amount of damages. Id. at 6. The Court noted that money has a value over time and the appellant had the use of the money for seven years while the respondent was deprived of the use of the money for seven years. Id. Thus, the order denying appellant’s motion to vacate the stipulated judgment as affirmed. Id.
Schorr Law, APC has experience representing both homeowners and homeowner’s associations in disputes related to the enforcement of governing documents in common interest developments. We also have extensive experience with issues unique to short term rentals and transient occupancy. To see if you qualify for a free 30-minute consultation regarding your matter, please contact us by phone, email, or send us a message through our contact form.