Updated on October 19, 2022
In Creditors Adjustment Bureau, Inc. v. Imani (2022) 82 Cal.App.5th 131, 133–134, the Court of Appeals held that in certain circumstances, stipulated damages for the breach of a stipulated judgment are neither an unenforceable penalty nor considered liquidated damages.
In that case, the Defendant originally entered a lease for commercial property for 10 years but missed rent payments and vacated the property without paying additional rent less than one year into the agreement. Creditors Adjustment Bureau, Inc., 82 Cal.App.5th at 134. In the underlying lawsuit the Defendant was sued for unpaid rent of approximately $257,000. Id.
Shortly before trial, Defendant agreed to a stipulated judgment in which he agreed to pay back a portion of the rent owed, $30,000, in 24 monthly payments. Id. If Defendant failed to make the payments, then the stipulated judgment specified that Defendant would owe the entire amount of the original liability, approximately of $251,200.13 along with other costs and fees. Id. Defendant did not dispute that the amount of rent he owed pursuant to the stipulated judgment was $251,200.13. Id.
However, Defendant did not make any payments pursuant to the stipulated judgment, and thus a second judgment was entered against Defendant for full amount of the prior stipulated judgment $251,200.13. Id. 134-135.
On appeal, Defendant argued he cannot be forced to pay $251,200.13 because such payment would be an impermissible “penalty” for the breach of the stipulated judgment because he only agreed to repay $30,000. Creditors Adjustment Bureau, Inc., 82 Cal.App.5th at 135.
The Court of appeal rejected that argument because the amount of $251,200.13 was not a penalty nor a “predetermined” amount for “liquidated damages” breach of stipulated judgment. Id. In agreeing to the stipulated judgment, Defendant agreed that actual damage for breach was $251,200.13 and that would be the proper amount that he owed for his breach. Id. at 136.
The Court drew an analogy to the case of Jade Fashion & Co., Inc. v. Harkham Industries, Inc. (2014) 229 Cal.App.4th 635, 641 [177 Cal.Rptr.3d 184, 189–190]:
There, Jade Fashion agreed to sell garments to Harkham at an agreed price. It then refused to release the garments because Harkham failed to pay for them. Before either party filed suit, Harkham admitted that it owed Jade Fashion approximately $341,000. It agreed to make weekly payments of $25,000 until the entire balance was paid in full. Jade Fashion agreed to release the garments after it received the first two payments. The parties further agreed that, if Harkham “ ‘timely make[s] each installment payment when due, [it] may deduct $17,500 from the final installment due.’ ” (Id. at p. 639, 177 Cal.Rptr.3d 184.) If any installment was late, however, Harkham “ ‘will not be entitled to the discount of $17,500 and the remaining balance due … shall be immediately due and payable.’ ” (Id. at pp. 639-640, 177 Cal.Rptr.3d 184.) Harkham made all of the required payments, but five were late. It nevertheless deducted $17,500 from its final principal payment. Jade Fashion refused to accept the final payment and sued to recover the unpaid balance.
The court of appeal held the $17,500 timely payment discount was not an unenforceable penalty or forfeiture because the agreement between Jade Fashion and Harkham “was not an agreement to settle or compromise a disputed claim. Rather, it was an agreement to forbear on the collection of a debt that was admittedly owed for goods that had been delivered so long as timely installment payments were made.” (Jade Fashion, supra, 229 Cal.App.4th at p. 648, 177 Cal.Rptr.3d 184.) The $17,500 discount “was not liquidated damages for a breach of contract, nor was it an additional payment over and above any debt that was owed.” (Id. at p. 649, 177 Cal.Rptr.3d 184.) Instead, the $17,500 was part of the original $341,000 debt and Harkham’s failure to pay that amount caused Jade Fashion actual damage.
Creditors Adjustment Bureau, Inc., 82 Cal.App.5th at 136-*137. Using the same logic as Jade Fashion, the Court of Appeal refused to reward Defendant for his breach of the stipulated judgment and concluded that a party “cannot pick and choose favorable aspects of the agreements while jettisoning the unfavorable aspects.” Id. at 133.
Since Defendant agreed he owed $251,200.13 to the Defendant as part of a judgment, his failure to hold up his end of the judgment would mean he would be liable for the entire amount. In other words, Defendant cannot benefit from his own wrongdoing for breach of the contract.
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