entire original liability of $85,000 due. The agreement also specified that that provision
did not constitute an unlawful "penalty" or "forfeiture."
When Schweitzer was late on a payment, Purcell sought and was granted a default
judgment in the amount of $58,829.35. Schweitzer thereafter brought a motion to set
aside the default judgment, asserting the default judgment was the result of an unlawful
penalty. The court set aside the default judgment, finding that it constituted an
unenforceable penalty because the amount of the judgment bore no reasonable
relationship to the amount of damages Purcell would actually suffer as a result of
Schweitzer's breach.
Purcell appeals, asserting the court erred in setting aside the judgment because (1)
Schweitzer waived his right to challenge the judgment on any grounds; and (2) the
judgment did not constitute an unenforceable penalty because it fairly represented the
amount of his damages. We affirm.1
1 Schweitzer asserts that the appeal should be dismissed because Purcell failed to comply with California Rules of Court, rule 8.204(a)(2)(B) by failing to explain why the appealed from order is appealable. However, Purcell has cured that defect in his reply 2
FACTUAL AND PROCEDURAL BACKGROUND
A. The Original Lawsuit and Settlement
In September 2009 Purcell brought a lawsuit against Schweitzer and others to
recover the money he loaned them. In March 2010 Schweitzer signed a settlement
agreement with Purcell. Pursuant to that agreement, Schweitzer agreed to pay Purcell the
sum of $38,000, along with interest on the unpaid principal at the rate of 8.5 percent in
installments over 24 months. Monthly payments by Schweitzer then began on April 1,
2010, with a balloon payment of all remaining principal and accrued interest due on April
1, 2012. Schweitzer was to make an initial payment of $20,000, with the monthly
payments of $750 occurring thereafter. The payments Schweitzer made under the
payment plan ranged from $750 to $1,332.58.
The settlement agreement also provided that all payments by Schweitzer were due
on the first day of each month and considered late if not actually received by the fifth
calendar day of the month. Moreover, the settlement agreement provided that in the
event of such a breach, a judgment for the full amount of Schweitzer's original liability of
$85,000 could be entered against him. The stipulation for entry of judgment attached to
the settlement agreement further provided that the $85,000 "is an agreed upon amount of
monies actually owed, jointly and severally, by the Defendant [Schweitzer] to the
Plaintiff [Purcell] and is neither a penalty nor is it a forfeiture." (Italics added.) That
section also provided that the $85,000 took into consideration "the economics associated
brief explaining that an order setting aside a judgment is appealable under Code of Civil Procedure section 904.1, subdivision (a)(2). 3
with proceeding further with this matter, including but not limited to: [¶] (1) A fully
performed settlement; [¶] (2) Limiting the continuing attorneys' fees and costs relating to
litigation; [¶] (3)Limiting attorneys' fees and costs relating to post-judgment procedures,
including without limitation debtor examinations, debtor and asset searches, levies, writs,
assignments and sister-state judgments; [¶] (4) Elimination of uncertainties relating to
collection of a Judgment in contrast to a full, voluntary payment and performance by
Defendant; and [¶] (5) Support for the public policy of judicial economy."
Finally, the agreement provided that Schweitzer waived any right to an appeal and
any right to contest or otherwise set aside the judgment whether pursuant to Civil Code2
section 3275 "or otherwise."
B. The Second Default Judgment
In October 2011 Schweitzer failed for the first time to make a monthly payment on
time, paying it on October 11 instead of October 5. Purcell accepted that payment, even
though it was late.
Nevertheless, Purcell applied for entry of judgment, and judgment was thereafter
entered on October 17, 2011, in the amount of $58,829.35, with $58,101.85 of that
amount identified as consisting of "punitive damages."
Thereafter, Schweitzer continued to make payments pursuant to the stipulated
payment plan, making monthly payments in November and December 2011. The
December payment was the last payment due.
2 All further undesignated statutory references are to the Civil Code. 4
According to Schweitzer, he was informed by Purcell's attorney in August 2012
that there was a balance remaining on the payment plan of $67.42. Purcell denies that he
or his attorney ever said the balance due was $67.42. Rather, Purcell states that the
balance was $1,776.58 and supports this contention by pointing out that Schweitzer paid
that amount in August 2012. Payment of that balance was accepted by Purcell. Thus, as
of August 2012, the settlement had been paid in full.
C. Motion To Set Aside Default Judgment
Schweitzer thereafter brought a motion to set aside the second default judgment.
In that motion Schweitzer asserted that the stipulation and subsequently entered judgment
represented an unlawful penalty for his breach of the settlement agreement.
Purcell opposed that motion, arguing the parties' agreement anticipated strict
compliance by Schweitzer and materially differed from other installment agreements
inasmuch as Schweitzer had expressly agreed that if he defaulted, the full amount would
be due and was not a penalty or a forfeiture. Purcell further asserted that the parties also
agreed that the full amount of the judgment was the actual amount of Purcell's damages,
that Schweitzer expressly waived his right to challenge that amount by moving to set
aside or appealing the judgment, and that such a waiver was fully enforceable and should
be enforced by the court.
D. Court's Order
The court granted the motion to set aside the default judgment, finding the
damages sought by Purcell bore no rational relationship to the damages Purcell would
5
actually suffer as a result of Schweitzer's breach. The court further found Schweitzer's
waiver was unenforceable as against public policy.
DISCUSSION
I. STANDARD OF REVIEW
Because we are presented with a question of law on undisputed facts, our review is
de novo. (Harbor Island Holdings v. Kim (2003) 107 Cal.App.4th 790, 794.)
II. ANALYSIS
"[A] provision in a contract liquidating the damages for the breach of the contract
is valid unless the party seeking to invalidate the provision establishes that the provision
was unreasonable under the circumstances existing at the time the contract was made."
(§ 1671, subd. (b), italics added.)
However, a liquidated damages clause becomes an unenforceable penalty "if it
bears no reasonable relationship to the range of actual damages that the parties could
have anticipated would flow from a breach." (Ridgley v. Topa Thrift & Loan Assn.
(1998) 17 Cal.4th 970, 977.) "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.'" (Ibid.) "Absent a relationship between the liquidated
damages and the damages the parties anticipated would result from a breach, a liquidated
damages clause will be construed as an unenforceable penalty. " (Morris v. Redwood
Greentree Financial Group. Inc. v. Execute Sports, Inc. (2008) 163 Cal.App.4th
495 (Greentree), is instructive. The plaintiff brought an action for breach of contract
6
against the defendant, alleging the defendant failed to pay $45,000 due under the
contract. The parties settled the action, which was memorialized in a stipulation for entry
of judgment. The stipulation provided defendant would pay a total of $20,000 in two
installments, but if defendant defaulted, plaintiff was entitled to have judgment entered
against defendant for the full amount prayed for in the complaint. After defendant
defaulted on the first installment payment of $15,000, plaintiff succeeded in having a
judgment entered for $61,232, consisting of $45,000 in damages, $13,912 in prejudgment
interest, $2,000 in attorney fees, and $320 in costs. (Id. at p. 498.)
In reversing and directing the trial court to reduce the judgment to $20,000, the
Court of Appeal concluded the stipulated judgment amount constituted an unenforceable
penalty under section 1671. (Greentree, supra, 163 Cal.App.4th at pp. 500-501.)
The Greentree court further explained that under section 1671, subdivision (b), a
liquidated damages clause constitutes an unenforceable penalty "'if it bears no reasonable
relationship to the range of actual damages that the parties could have anticipated would
flow from a 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." [Citation.] In the absence of such relationship, a contractual
clause purporting to predetermine damages "must be construed as a penalty."'"
(Greentree, supra, 163 Cal.App.4th at p. 499.)
Further, the relevant breach to be analyzed "is the breach of the stipulation, not the
breach of the underlying contract." (Greentree, supra, 163 Cal.App.4th at p. 499.) In
Greentree, the stipulation provided for payment of $20,000. But rather than attempting
7
to anticipate the possible damages resulting from breach of the stipulation, the parties had
designated the full amount claimed as damages in the underlying lawsuit. The Court of
Appeal concluded the $61,232 judgment bore "no reasonable relationship to the range of
actual damages the parties could have anticipated from a breach of the stipulation to settle
the dispute for $20,000. '[D]amages for the withholding of money are easily
determinable—i.e., interest at prevailing rates . . . .' [Citation.] The amount of the
judgment, however, was more than triple the amount for which the parties agreed to settle
the case." (Id. at p. 500.)
Purcell attempts to distinguish the Greentree case on the basis that the Court of
Appeal there was not confronted with a situation where the defendant provided an
"express waiver" of any challenges to the stipulated judgment "on any basis." He also
asserts that the parties agreed that the amount of the stipulated judgment reflected the
economics of proceeding further with the matter.
However, "the public policy expressed in Civil Code sections 1670 and 1671 may
not be circumvented by words used in a contract; that whether or not a particular clause is
a penalty or forfeiture or a bona fide provision for liquidated damages depends upon the
actual facts existing at the time the contract is executed and whether or not, in fact, it was
then impracticable or extremely difficult to fix actual damages and that the parties did in
fact then make a good faith and reasonable effort to do so; that a litigant seeking the
benefits of a clause purporting to fix liquidated damages must plead and prove that the
clause is valid under the facts which then existed. The applicability of Civil Code section
1671 depends upon the actual facts not the words which may have been used in the
8
contract." (Cook v. King Manor and Convalescent Hospital (1974) 40 Cal.App.3d 782,
792, italics added.)
Here, the stipulation that allowed for entry of judgment in the amount of almost
$60,000 was likewise an unenforceable penalty because the underlying settlement was for
$38,000. The stipulation bore no reasonable relationship to the damages that it could be
expected that Purcell would suffer as a result of a breach by Schweitzer. This is shown
by the payment plan itself, which provided that Schweitzer would make payments of
$750 per month. Indeed, Purcell suffered no damages at all because judgment was
entered on October 17, after payment was accepted on October 11.
Purcell's contention that the $85,000 amount reflected the economics associated
with "proceeding further" with the lawsuit is also unavailing. That provision in the
settlement agreement bore no reasonable relationship to damages he would be expected
to actually suffer as a result of a breach, such as the late payment that occurred in this
case. There is nothing in the record to support the fact that obtaining a judgment and
instituting postjudgment procedures would cost $85,000. Moreover, Purcell entered a
default judgment for alleged "punitive damages," not for costs associated with pursuing
the lawsuit.
The language in the stipulation seeking to tie the $85,000 to the economics of
proceeding further with the matter was an obvious attempt to circumvent the public
policy expressed in section 1761. However, as discussed, ante, that public policy may
not be circumvented by words used in a contract. (Cook v. King Manor and
Convalescent Hospital, supra, 40 Cal.App.3d at p. 792.)
9
Finally, the judgment was improperly entered as "punitive damages." Punitive
damages are not recoverable in breach of contract actions. (Myers Building Industries,
Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 960.)
DISPOSITION
The order setting aside the default judgment is affirmed. Respondent shall recover
his costs on appeal.
NARES, Acting P. J.
WE CONCUR:
HALLER, J.
McDONALD, J.
10
Filed 3/17/14
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
LENNOX A. PURCELL, D063435
Plaintiff and Appellant,
v. (Super. Ct. No. 37-2009-00059423- CU-BC-NC) MICHAEL SCHWEITZER,
Defendant and Respondent.
The opinion filed February 24, 2014, is ordered certified for publication.
Soden & Steinberger, Robert J. Steinberger, Jason W. Cobberly; Boudreau
Williams and Jon R. Williams for Plaintiff and Appellant.
The Perry Law Firm, Michael R. Perry, Larry M. Roberts and Michelle A.
Hoskinson for Defendant and Respondent.
NARES, Acting P. J.
Copies to: All parties
AI Brief
AI-generated · verify before citing
Holding. A stipulated judgment amount that significantly exceeds the settlement amount and bears no reasonable relationship to actual damages constitutes an unenforceable penalty, regardless of contractual language attempting to waive challenges or characterize the amount as non-penal.
Issues
Whether a stipulated judgment amount that exceeds the settlement amount constitutes an unenforceable penalty under Civil Code section 1671.
Whether contractual waivers of the right to challenge a stipulated judgment are enforceable when the judgment constitutes an unlawful penalty.
Disposition. Affirmed
Quotations verified verbatim against the opinion
“the public policy expressed in Civil Code sections 1670 and 1671 may not be circumvented by words used in a contract”
“the stipulation that allowed for entry of judgment in the amount of almost $60,000 was likewise an unenforceable penalty because the underlying settlement was for $38,000.”