Settlement Agreements: 2/4 Cal Court of Appeal Holds That Stipulated Judgment Constituted An Unenforceable Penalty

And The Court Explains How The Stipulated Judgment Could Have Been Structured So As To Be Enforceable.

        "The principal issue in this appeal is whether the stipulated judgment constitutes an unenforceable penalty." Red & White Distribution, LLC, et al. v. Osteroid Enterprises, LLC and cross-complaint, B291188 (2/4  8/9/19) (Currey, Manella, Willhite).  Here, "the parties entered into a settlement agreement providing that if R&W defaulted, the Osteroid Parties could file a stipulation for entry of judgment, with the amount of the judgment being $700,000 more than the settlement amount plus interest and attorneys' fees." The Court of Appeal concluded that the additional $700K was an unenforceable remedy under Civ. Code section 1671(b), pertaining to whether a liquidated damage clause is valid or unenforceable.

         And all this is well-established law under Ridgley v. Topa Thrift & Loan Assn., 17 Cal.4th 970 (1998) and Greentree Financial Group, Inc. v. Execute Sports, Inc., 163 Cal.App.4th 495 (2008). So why did the Court bother to publish?

        We believe it is because the trial judge declined to follow Ridgley and Greentree, believing that it could instead follow Jade Fashion & Co., Inc. v. Harkham Industires, Inc., 229 Cal.App.4th 635 (2014). And so the Court of Appeal performed its educational role by explaining that the cases are not inconsistent, and that the stipulation, had it been structured à la Jade Fashion, could have been enforceable. 

        What would an enforceable stipulation require? An agreement to discount for timely payment of an admitted debt. Thus, the outcome of Red & White Distribution could have been an enforceable stipulation if the parties had agreed or the appellate record had demonstrated that R&W admitted it owed $2.8M, and the parties had stipulated to discount the debt to $2.1M upon timely payment, absent which the full amount would have been due.

But that is not how the parties structured the settlement. 

    COMMENT: My colleague Mike Hensley represented the successful party in the Greentree appeal. Mike and I are the co-creators of another blog, California Attorney's Fees.