Vitatech International, Inc. v. Sporn, 2017 WL 4876175 (Cal. Ct. App. 2018).
An agreement to settle a contract dispute that provided for a stipulated judgment if payment was not made created an unenforceable penalty because the defendant never admitted to liability on the underlying claim and the increased liability was disproportionate to the harm caused.
Seeking more than $166,000 in damages, plaintiff Vitatech International, Inc. (“Vitatech”) filed a breach of contract lawsuit against defendants National Marketing, Inc., CortiSlim International, CortiSlim International, LLC and Alan R. Sporn (collectively, “Sporn”). On the eve of trial, the parties settled for a one-time payment of $75,000. As part of the settlement, Sporn stipulated to the entry of judgment against them in accordance with the complaint, but Vitatech agreed to forbear from filing the stipulation and to accept the $75,000 “as full Settlement of its claims against Sporn” if it was paid by the designated date. When Sporn failed to pay the $75,000, Vitatech filed the stipulation and the trial court entered judgment against Sporn for more than $300,000, which included the original $166,000 amount plus compensatory damages, prejudgment interest, attorney fees and costs.
Alan R. Sporn and CortiSlim International, Inc. (collectively, the “Appellants”) moved to vacate the judgment, arguing that it was an unenforceable penalty under California Civil Code section 1671(b) (“Section 1671(b)”). The trial court denied the motion because it found that the judgment’s higher amount was not a penalty or liquidated damages provision subject to Section 1671(b). Rather, the trial court concluded that the reduced amount of $75,000 that Vitatech agreed to accept was merely a discount if Sporn paid their debt as agreed.
The Court of Appeal, in the instant case, reversed and remanded for the trial court to grant the motion and enter a new judgment for the $75,000 settlement amount plus trial court costs. It held that while the stipulation for entry of judgment did not use the phrase “liquidated damages,” its legal effect was the same as a liquidated damages provision. Moreover, although Sporn stipulated to entry of judgment if they did not timely pay the $75,000, they never admitted liability on the underlying claims or the amount of damages allegedly caused by the breach of the underlying contract. Therefore, since the stipulation compromised potentially disputed claims and resolved pending litigation, the Court of Appeal found that the stipulation for entry of judgment was not merely a permissible discount provision with respect to an agreed upon amount. Instead, it was more akin to an unenforceable penalty subject to Section 1671(b). As a result, the provision establishing the amount of the stipulated judgment was unenforceable under Section 1671(b) unless that amount bore a reasonable relationship to the amount of damages that the parties could have anticipated Vitatech would suffer if the Appellants breached their obligation to pay the settlement amount. The Court of Appeal explained that the amount of the judgment must have reasonably related to the damages that were likely to arise from the breach of the stipulation, not the alleged breach of the underlying contract, because it was the breach of the stipulation that allowed Vitatech to enter judgment against the Appellants. In conclusion, the Court of Appeal found that the stipulated judgment amount bore no reasonable relationship with the breach of the stipulation and that the underlying basis for that amount was never agreed upon by the parties or discussed in sufficient depth.
The Court of Appeal also rejected Vitatech’s contention that CortiSlim International, Inc. (“CortiSlim International”) lacked standing to appeal the trial court’s order. The Court of Appeal stated that Vitatech ignored that the complaint included allegations that CortiSlim International was liable for Sporn’s debts, that CortiSlim International answered the complaint, that CortiSlim International fully participated in the litigation without objection and that Vitatech focused its post-judgment collection efforts on CortiSlim International’s potential liability for Sporn’s debts.