Viatech International, Inc. v. Sporn

Filed 9/29/17; Modified and Certified for Publication 10/30/17 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
VITATECH INTERNATIONAL, INC.,
Plaintiff and Respondent, G053477
v. (Super. Ct. No. 30-2011-00459259)
ALAN R. SPORN et al., OPINION
Defendants and Appellants.
Appeal from an order of the Superior Court of Orange County, Sheila Fell,
Judge. Reversed and remanded. Motion for judicial notice. Granted.
Friedman Stroffe & Gerard, Andrew R. Nelson and Sasan K. Behnood for
Defendants and Appellants.
Steponovich & Associates and Michael J. Steponovich, Jr., for Plaintiff and
Respondent.
* * *
Seeking more than $166,000 in damages, plaintiff Vitatech International,
Inc. (Vitatech) filed this breach of contract lawsuit against defendants National
Marketing, Inc., CortiSlim International, formerly known as National Marketing, Inc.,
CortiSlim International, LLC, and Alan R. Sporn (collectively, Defendants). On the eve
of trial, the parties settled for a one-time payment of $75,000. As part of the settlement,
Defendants stipulated to entry of judgment against them “in the full prayer of the
Complaint,” but Vitatech agreed to “forbear” from filing the stipulation and to accept the
$75,000 “as full Settlement of its claims against Defendants” if they paid by the
designated date. When Defendants failed to pay, Vitatech filed the stipulation and the
trial court entered judgment against Defendants for more than $300,000, which included
compensatory damages, prejudgment interest, attorney fees, and costs.
Sporn and appellant CortiSlim International, Inc. (collectively, Appellants)
moved to vacate the judgment, arguing it was an unenforceable penalty and liquidated
damages provision under Civil Code section 1671, subdivision (b) (section 1671(b)). The
trial court denied the motion because it found the judgment’s higher amount was not a
penalty or liquidated damages provision subject to section 1671(b). Rather, the court
concluded the reduced amount Vitatech agreed to accept was merely a discount if
Defendants paid their debt as agreed.
We reverse and remand for the trial court to grant the motion and enter a
new judgment for the $75,000 settlement amount, plus trial court costs. Under
well-established precedent, including this court’s decision in Greentree Financial Group,
Inc. v. Execute Sports, Inc. (2008) 163 Cal. App. 4th 495 (Greentree), the stipulated
judgment for more than four times the amount Vitatech agreed to accept as full settlement
of its claims is an unenforceable penalty because it bears no reasonable relationship to the
range of damages the parties could have anticipated would result from Defendants’
failure timely to pay the settlement amount. Contrary to Vitatech’s argument, the
stipulation for entry of judgment is not merely a permissible discount provision because
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the stipulation compromises disputed claims and resolves pending litigation. Although
Defendants stipulated to entry of judgment if they did not timely pay, they never admitted
liability on the underlying claims or the amount of damages allegedly caused by the
breach of the underlying contract.
We also reject Vitatech’s contention CortiSlim International, Inc. lacks
standing to appeal the trial court’s order because Vitatech did not name it as a defendant
and the judgment did not award any relief against it. Vitatech ignores that its complaint
included allegations that CortiSlim International, Inc. was liable for Defendants’ debts,
CortiSlim International, Inc. answered the complaint and fully participated in the
litigation without objection, and Vitatech focused its postjudgment collection efforts on
CortiSlim International, Inc.’s potential liability for Defendants’ debts.
I
FACTS AND PROCEDURAL HISTORY
Vitatech and National Marketing, Inc. entered into a contract for Vitatech to
manufacture certain products for National Marketing, Inc. In March 2011, Vitatech filed
this lawsuit against Defendants alleging National Marketing, Inc. failed to pay the
invoices for the products it purchased. The operative first amended complaint did not
name CortiSlim International, Inc., as a defendant, but it alleged CortiSlim International,
Inc. and CortiSlim International, LLC were continuations of National Marketing, Inc.
Vitatech named Sporn as a defendant based on a personal guaranty he signed and also
alleged Sporn is the alter ego of all entity defendants. The Complaint sought
$166,372.14 in compensatory damages, plus attorney fees and costs, based on claims for
(1) breach of contract; (2) breach of oral contract; (3) breach of implied in fact contract;
(4) open book account; (5) account stated; and (6) breach of guaranty.
In August 2011, CortiSlim International, LLC and CortiSlim International,
Inc. filed an answer asserting numerous affirmative defenses, including that the
underlying contract was unenforceable, Vitatech breached the underlying contract, and
3
Vitatech improperly manufactured and labeled its products. In February 2012, Sporn and
National Marketing, Inc. filed an answer alleging many of the same affirmative defenses.
In September 2014, the parties agreed to settle this lawsuit. According to
Vitatech’s president, Defendants agreed to pay Vitatech $75,000 on or before
June 5, 2015, and the parties entered into a stipulation for entry of judgment that
authorized Vitatech to have the court enter judgment against Defendants for the full
amount alleged in the complaint if they failed to make the settlement payment. Upon
timely receipt of the settlement payment, Vitatech agreed to dismiss its complaint with
prejudice.
The only written agreement setting forth the terms of the parties’ settlement
was a stipulation that provided “judgment shall be entered against Defendants Alan R.
Sporn, an individual; CortiSlim International formerly known as National Marketing,
Inc.; National Marketing, Inc. and CortiSlim International, LLC, in favor of [Vitatech], in
the full prayer of the Complaint on file herein; [¶] . . . [but Vitatech] will forbear from
the filing hereof and will accept, as full settlement of its claims against Defendants Alan
R. Sporn, an individual; CortiSlim International formerly known as National Marketing,
Inc.; National Marketing, Inc. and CortiSlim International, LLC, the principal sum of
Seventy-Five Thousand Dollars ($75,000.00), payable in one (1) payment on or before
June 5, 2015.” Although the stipulation did not provide for entry of judgment against
CortiSlim International, Inc., that entity signed the stipulation along with Sporn,
CortiSlim International, formerly known as National Marketing, Inc., and National
Marketing, Inc. CortiSlim International, LLC did not sign the stipulation.
Defendants failed to make the settlement payment and Vitatech asked the
trial court to enter judgment based on the stipulation. Vitatech sought a judgment for
$303,620.12, comprised of $166,372.14 in compensatory damages, $104,427.01 in
prejudgment interest, $28,315.00 in attorney fees, and $4,505.97 in costs. In July 2015,
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the court entered judgment against Defendants in the amount requested. The judgment
did not name CortiSlim International, Inc.
In November 2015, Appellants moved to vacate the judgment under
Code of Civil Procedure section 473, subdivision (d) (section 473(d)). They argued the
judgment was void because it constituted an unlawful penalty in violation of
section 1671(b)’s prohibition against liquidated damages provisions that bear no
reasonable relationship to the damages likely to be caused by the breach of contract.
Vitatech opposed the motion, arguing the judgment is not a penalty or illegal liquidated
damages provision because Defendants judicially admitted and stipulated to their liability
in the full amount of the prayer for relief alleged in the complaint and the stipulated
judgment merely enforces that acknowledgement. The $75,000 settlement amount,
Vitatech contends, was merely a discount of the agreed-upon liability to encourage
prompt and timely payment.
The trial court agreed with Vitatech and denied the motion, ruling that
“Defendants were served with [Vitatech’s] declarations re breach of the Stipulation and
Request for Entry of Judgment prior to the Judgment being entered. The Stipulated
Judgment was for the amount of the debt alleged in the Complaint. The reduced amount
agreed by the parties represented a discount if the debt was paid as agreed. The amount
of the judgment did not represent a penalty; the lower amount represented a discount to
Defendants. [¶] Defendants have not shown extrinsic fraud or mistake. Nor have
Defendants shown a meritorious defense, satisfactory excuse, or diligence. Defendants
have not shown special circumstances to justify setting the Judgment aside. Further, the
Judgment is not void or voidable.” This appeal followed.
5
II
DISCUSSION
A. CortiSlim International, Inc. Has Standing to Appeal
Vitatech contends CortiSlim International, Inc. lacks standing to appeal
because CortiSlim International, Inc. was not a party of record in the trial court, the
stipulation for entry of judgment did not refer to it, and the court did not enter the
1
judgment against it. We disagree.
“Any party aggrieved” by an order or judgment has standing to appeal.
(Code Civ. Proc., § 902.) The test for determining appellate standing is twofold. The
party seeking to appeal must (1) be a party of record in the trial court, and (2) be
aggrieved by the order or judgment from which the appeal is taken. (In re Marriage of
Burwell (2013) 221 Cal. App. 4th 1, 13 (Burwell).) A party is aggrieved for appellate
standing purposes if the party’s “‘“‘rights or interests are injuriously affected by the
judgment [or order].’”’” (People ex rel. Allstate Ins. Co. v. Dahan (2016) 3 Cal.App.5th
372, 376.) “The appellant’s ‘interest “‘must be immediate, pecuniary, and substantial and
not nominal or a remote consequence of the judgment [or order].’”’” (Ibid.) Standing is
a jurisdictional requirement (Sabi v. Sterling (2010) 183 Cal. App. 4th 916, 947), but we
must liberally construe standing and resolve all doubts about it in favor of the right to
appeal (Burwell, at p. 14; In re L. Y. L. (2002) 101 Cal. App. 4th 942, 948).
Here, CortiSlim International, Inc. was a party of record in the trial court.
Although the complaint did not name CortiSlim International, Inc. as a defendant, it
included several allegations about the company. For example, the complaint alleged
Sporn was the president of CortiSlim International, Inc. when he ordered and purchased
the products on CortiSlim International, Inc.’s behalf. The complaint further alleged
1
We also note Vitatech failed to properly challenge CortiSlim International,
Inc.’s standing to appeal. A party seeking to dismiss an opponent’s appeal based on a
lack of appellate standing must file a separate motion to dismiss in the appellate court.
(Halliburton Energy Services, Inc. v. Department of Transportation (2013)
220 Cal. App. 4th 87, 106; Jocer Enterprises, Inc. v. Price (2010) 183 Cal. App. 4th 559,
565; American Alternative Energy Partners II v. Windridge, Inc. (1996) 42 Cal. App. 4th
551, 557-558.) Vitatech improperly raised the issue in its brief rather than file a separate
motion.
6
CortiSlim International, Inc. was “simply a continuation of National Marketing, Inc. and
is a new name but with essentially the same stockholders and officers.” CortiSlim
International, Inc. responded to these allegations by filing an answer to the complaint and
fully participating in the litigation without any objection by Vitatech. Indeed, CortiSlim
International, Inc. was one of the parties who brought the motion to vacate, and Vitatech
did not challenge CortiSlim International, Inc.’s standing to do so in the trial court.
Citing In re Joseph G. (2000) 83 Cal. App. 4th 712, 714-716, Vitatech
argues CortiSlim International, Inc. is not a party of record with standing to appeal
simply because its name appears in some of the documents filed in the trial court.
CortiSlim International, Inc.’s involvement in this lawsuit, however, goes well beyond
that. As explained above, it filed an answer, participated in the litigation, and filed the
motion to vacate that is the subject of this appeal. Vitatech fails to explain how
CortiSlim International, Inc. is not a party of record when these facts are considered.
CortiSlim International, Inc. also is an aggrieved party because it was one
of the parties that brought the motion to vacate, and therefore necessarily was aggrieved
by the order denying it. Moreover, CortiSlim International, Inc. was aggrieved by the
judgment the motion sought to set aside. Vitatech points out neither the stipulation for
entry of judgment nor the judgment expressly granted any relief against CortiSlim
International, Inc. But CortiSlim International, Inc. signed the stipulation, the complaint
included the foregoing allegations regarding its potential liability, and Vitatech has
continued to pursue CortiSlim International, Inc. in postjudgment collection proceedings.
For example, in seeking an order to conduct Sporn’s judgment debtor examination,
Vitatech’s counsel filed a declaration requesting information about CortiSlim
International, Inc., because counsel suspected the judgment debtors transferred their
7
2
assets to CortiSlim International, Inc. without adequate consideration. These facts show
that CortiSlim International, Inc. has a substantial pecuniary interest affected by the
judgment.
Finally, on a practical level, we note that Vitatech’s challenge to CortiSlim
International, Inc.’s appellate standing would not end this appeal even if we agreed that
corporation lacked standing. Sporn also is an appellant and Vitatech does not dispute his
3
standing to appeal from the trial court’s order denying the motion to vacate.
B. The Trial Court Erred in Denying the Motion to Vacate
1. Governing Legal Principles on Liquidated Damages Provisions
“California law has . . . long recognized that a provision for liquidation of
damages for contractual breach . . . can under some circumstances be designed as, and
operate as, a contractual forfeiture. To prevent such operation, our laws place limits on
liquidated damages clauses. Under the 1872 Civil Code, a provision by which damages
for a breach of contract were determined in anticipation of breach was enforceable only if
determining actual damages was impracticable or extremely difficult. (1872 Civ. Code,
§§ 1670, 1671.) As amended in 1977, the code continues to apply that strict standard to
liquidated damages clauses in certain contracts (consumer goods and services, and leases
of residential real property (§ 1671, subds. (c), (d)), but somewhat liberalizes the rule as
to other contracts: ‘[A] provision in a contract liquidating the damages for breach of the
contract is valid unless the party seeking to invalidate the provision establishes that the
2
We grant Vitatech’s motion to judicially notice this declaration and several
governmental filings and listings relating to CortiSlim International, Inc., CortiSlim
International, LLC, and National Marketing, Inc. Appellants did not oppose the motion.
3
Vitatech also argues the judgment is not appealable because it is a
stipulated judgment. But Appellants are appealing from the order denying the motion to
vacate the judgment, and not from the entry of the stipulated judgment.
8
provision was unreasonable under the circumstances existing at the time the contract was
made.’ (§ 1671, subd. (b).)” (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal. 4th
970, 976-977 (Ridgley); see Krechuniak v. Noorzoy (2017) 11 Cal.App.5th 713, 720
(Krechuniak).)
“A liquidated damages clause will generally be considered unreasonable,
and hence unenforceable under section 1671(b), 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.’” (Ridgley, supra,
17 Cal.4th at p. 977.) “‘The validity of the liquidated damages provision depends upon
its reasonableness at the time the contract was made and not as it appears in retrospect.
Accordingly, the amount of damages actually suffered has no bearing on the validity of
the liquidated damages provision.’” (Krechuniak, supra, 11 Cal.App.5th at p. 721.)
“‘A penalty provision operates to compel performance of an act [citation]
and usually becomes effective only in the event of default [citation] upon which a
forfeiture is compelled without regard to the damages sustained by the party aggrieved by
the breach [citation]. 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.’” (Ridgley, supra, 17 Cal.4th at p. 977.)
“In short, ‘[a]n amount disproportionate to the anticipated damages is
termed a “penalty.” A contractual provision imposing a “penalty” is ineffective, and the
wronged party can collect only the actual damages sustained.’” (Ridgley, supra,
17 Cal.4th at p. 977; see Purcell v. Schweitzer (2014) 224 Cal. App. 4th 969, 974 (Purcell)
[“‘Absent a relationship between the liquidated damages and the damages the parties
9
anticipated would result from a breach, a liquidated damages clause will be construed as
an unenforceable penalty’”].)
“A liquidated damages provision is not invalid merely because it is
intended to encourage a party to perform, so long as it represents a reasonable attempt to
anticipate the losses to be suffered. [Citation.] A court will interpret a liquidated
damages clause according to its substance, and if it is otherwise valid, will uphold it even
if the parties have referred to it as a penalty.” (Weber, Lipshie & Co. v. Christian (1997)
52 Cal. App. 4th 645, 656 (Weber); see Ridgley, supra, 17 Cal.4th at p. 979 [“‘We have
consistently ignored form and sought out the substance of arrangements which purport to
legitimate penalties and forfeitures’”]; Greentree, supra, 163 Cal.App.4th at p. 499.)
Based on section 1671(b)’s presumption that liquidated damage provisions
in nonconsumer contracts are valid, the party challenging the provision bears the burden
to show the provision was unreasonable under the circumstances existing when the
parties entered into the contract. (Krechuniak, supra, 11 Cal.App.5th at p. 721; see
Weber, supra, 52 Cal.App.4th at p. 654.)
2. Appellants Properly Sought to Vacate the Judgment Under Section 473(d)
Vitatech contends the trial court lacked authority to grant Appellants’
motion because they improperly brought it under section 473(d). According to Vitatech,
the stipulated judgment’s alleged violation of section 1671(b) at most rendered the
judgment voidable, but section 473(d) only authorizes a court to vacate a void judgment.
Vitatech misconstrues the legal impact of a contract provision violating section 1671(b)’s
prohibition on unlawful penalties.
A court’s statutory authority to vacate a judgment or order under
section 473(d) is limited to void judgments and orders. (Cruz v. Fagor America, Inc.
(2007) 146 Cal. App. 4th 488, 495-496.) And as Vitatech points out, our Supreme Court
has repeatedly observed that jurisdictional errors in rendering a judgment or order
10
generally fall into two categories: “A court can lack fundamental authority over the
subject matter, question presented, or party, making its judgment void, or it can merely
act in excess of its jurisdiction or defined power, rendering the judgment voidable.”
(In re Marriage of Goddard (2004) 33 Cal. 4th 49, 56.) Here, Vitatech contends the
court’s judgment in its favor is at most voidable because no one disputes the trial court
had fundamental authority over the subject matter, the questions presented, and the
parties.
Vitatech, however, fails to recognize that a liquidated damages provision
lacking a reasonable relationship to the range of damages the parties reasonably could
have anticipated is unenforceable and void as against public policy. (Civ. Code, § 1599
[“Where a contract has several distinct objects, of which one at least is lawful, and one at
least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the
rest”]; Sybron Corp. v. Clark Hosp. Supply Corp. (1978) 76 Cal. App. 3d 896, 900
(Sybron) [“Under California law liquidated damages not reasonably related to actual
damages are unenforceable and void as penalties”].) “[A] court cannot validly enter a
judgment or order which is void even if the parties agree to it.” (Plaza Hollister Ltd.
Partnership v. County of San Benito (1999) 72 Cal. App. 4th 1, 13.)
Accordingly, a stipulated judgment that includes an unlawful liquidated
damages provision is void and may be vacated under section 473(d). Any other rule
effectively would insulate such provisions from challenge and render the prohibition
against them meaningless.
3. Standard of Review
The central question presented is whether the stipulation for entry of
judgment is a permissible liquidated damages provision or a void and unenforceable
penalty under section 1671(b). Several cases have assumed this is a question of law
subject to de novo review. (Jade Fashion & Co. Inc. v. Harkham Industries, Inc. (2014)
11
229 Cal. App. 4th 635, 646 (Jade Fashion); Purcell, supra, 224 Cal.App.4th at p. 974;
McGuire v. More-Gas Investments, LLC (2013) 220 Cal. App. 4th 512, 523; Greentree,
supra, 163 Cal.App.4th at p. 499; Harbor Island Holdings v. Kim (2003) 107 Cal. App. 4th
790, 794.) Recently, however, one court carefully examined the nature of this inquiry
and concluded this issue may depend on factual determinations more appropriately
reviewed under the substantial evidence standard, and it becomes a question of law only
when undisputed facts support a single reasonable conclusion. (Krechuniak, supra,
11 Cal.App.5th at pp. 722-725.)
The Krechuniak court explained: “In determining the reasonableness of a
provision for liquidated damages, ‘the court should place itself in the position of the
parties at the time the contract was made and should consider the nature of the breaches
that might occur and any consequences that were reasonably foreseeable.’ [Citation.]
The California Supreme Court has recognized that it is essentially a factual question
whether the parties reasonably estimated foreseeable damages under the prevailing
circumstances [citations] that becomes a question of law when the facts are undisputed
and susceptible of only one reasonable interpretation.” (Krechuniak, supra,
11 Cal.App.5th at pp. 722-723.)
Neither side identified any disputed facts relating to their stipulation for
entry of judgment, and therefore we review de novo the question whether the stipulation
is a void and unenforceable penalty or a permissible liquidated damages provision.
4. The Stipulated Judgment Is an Unenforceable Penalty
Appellants contend the trial court erred in denying their motion to vacate
the stipulated judgment as void. According to Appellants, the stipulated judgment was
void as a matter of law because no reasonable relationship exists between the damages
that could have been anticipated based on their failure to pay the $75,000 settlement
amount and the stipulated judgment for more than $300,000. We agree.
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In Greentree, we applied the foregoing principles regarding liquidated
damages to reverse a stipulated judgment on facts similar to this case. There, the plaintiff
sued the defendant for breach of contract, alleging the defendant failed to pay the plaintiff
$45,000 for financial services. The parties reached a settlement they memorialized in a
stipulation for entry of judgment, which provided the defendant would pay the plaintiff
$20,000 in two installments, and if the defendant failed to make either payment the
plaintiff could enter judgment against the defendant for the full amount sought in the
plaintiff’s complaint, including interest and attorney fees. (Greentree, supra,
163 Cal.App.4th at p. 498.) The stipulation also stated that “‘[e]ach party disclaims any
admission of wrongdoing, fault, liability, or violation of law.’” (Id. at p. 500.) The
defendant failed to make the initial payment and the plaintiff asked the trial court to enter
judgment against the defendant for more than $61,000, consisting of $45,000 in damages
for breach of the financial services contract, $14,000 in prejudgment interest, and $2,000
in attorney fees and costs. Over the defendant’s objection the judgment was excessive,
the trial court entered the requested judgment. (Id. at p. 498.)
We reversed because “[the parties] did not attempt to anticipate the
damages that might flow from a breach of the stipulation. Rather, they simply selected
the amount [the plaintiff] had claimed as damages in the underlying lawsuit, plus
prejudgment interest, attorney fees, and costs. But the appellate record contains nothing
showing [the plaintiff’s] chances of complete success on the merits of its case . . . . [¶]
Also, the $61,232.50 amount in the judgment bears 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.” (Greentree, supra, 163 Cal.App.4th at pp. 499-500.)
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We further explained, “the judgment would have been enforceable if it had
been designed to encourage [the defendant] to make its settlement payments on time, and
to compensate [the plaintiff] for its loss of use of the money plus its reasonable costs in
pursuing the payment,” but the judgment for $61,000 went well beyond compensating the
plaintiff for the defendant failing to pay the $20,000 settlement amount and instead
impermissibly punished the defendant for its failure to pay. (Greentree, supra,
163 Cal.App.4th at p. 500; see Purcell, supra, 224 Cal.App.4th at pp. 975-976 [stipulated
judgment for nearly $60,000 constituted illegal penalty for breach of settlement
agreement requiring payment of $38,000]; Sybron, supra, 76 Cal.App.3d at pp. 899, 903
[stipulated judgment for $100,000 constituted illegal penalty for failure to make timely
installment payment on $72,000 settlement].)
The Greentree plaintiff argued the amount specified in the judgment was
reasonably related to the damages the plaintiff suffered based on the defendant’s breach
of the underlying financial services agreement. We rejected that argument because the
relevant breach was the breach of the settlement stipulation, not the breach of the
underlying financial services agreement. The trial court entered the judgment because
the defendant breached the settlement stipulation, not because the defendant breached the
underlying financial services agreement. By entering into the settlement stipulation, the
plaintiff substituted the defendant’s undisputed obligation to pay $20,000 for the disputed
claim based on the financial services agreement, the uncertainty of what, if anything, the
trier of fact might award on that claim, and the outlay of time and money required to try
the claim. Accordingly, any judgment based on the settlement stipulation had to be
reasonably related to the anticipated damages caused by breach of the stipulation, not
breach of the underlying financial services agreement. (Greentree, supra,
163 Cal.App.4th at pp. 499-500.)
Here, Vitatech sued Appellants for breach of contract, alleging Appellants
failed to pay $166,372.14 for various products Vitatech manufactured for them.
14
Appellants answered the complaint, denied liability, and asserted a variety of affirmative
defenses, including that the underlying contract was unenforceable, Vitatech breached the
underlying contract, and Vitatech improperly manufactured and labeled its products. On
the eve of trial, and after several trial continuances, the parties agreed to a settlement,
with Appellants stipulating to entry of judgment “in the full prayer of the Complaint” and
Vitatech agreeing to “forbear from the filing [of the stipulation for entry of judgment and
to] accept, as full settlement of its claims . . . the principal sum of Seventy-Five Thousand
Dollars ($75,000), payable in one (1) payment on or before June 5, 2015.”
The parties’ stipulation for entry of judgment does not use the phrase
liquidated damages, but its legal effect is the same as a liquidated damages provision.
(Ridgley, supra, 17 Cal.4th at p. 979; Greentree, supra, 163 Cal.App.4th at p. 499;
Weber, supra, 52 Cal.App.4th at p. 656.) The stipulation predetermines the amount of
damages Vitatech is entitled to receive if Appellants breached the stipulation by failing
timely to pay the settlement amount. The provision establishing the amount of the
stipulated judgment therefore is unenforceable unless that amount bears a reasonable
relationship to the amount of damages the parties could have anticipated Vitatech would
suffer if Appellants breached their obligation to pay the settlement amount. (Ridgley, at
p. 977.) Indeed, the amount of the judgment must reasonably relate to the damages likely
to arise from the breach of the stipulation, not the alleged breach of the underlying
contract, because it is the breach of the stipulation that allows Vitatech to enter judgment
against Appellants. (Greentree, at pp. 499-500.)
Nothing in the stipulation or appellate record establishes a reasonable
relationship between Appellants’ failure to pay the $75,000 settlement amount and the
$303,000 judgment. As in Greentree, the parties made no effort to anticipate the
damages that might flow from Appellants’ failure to pay the settlement amount. Instead,
the parties simply selected the amount Vitatech had sought as damages in the underlying
lawsuit. The record, however, lacks any evidence suggesting Vitatech was likely to
15
recover all of the damages it sought if it proceeded to trial. Moreover, we cannot
conceive of any meaningful relationship between Appellants’ failure to pay the amount
Vitatech agreed to accept in settlement of its disputed claims and a judgment that is more
than four times that amount. Greentree and the other cases cited above therefore compel
the conclusion the stipulation for entry of judgment illegally penalizes Appellants for
failing to pay the settlement amount, rather than compensating Vitatech for the
4
reasonably anticipated damages caused by that failure. (Greentree, supra,
163 Cal.App.4th at pp. 499-500; see Purcell, supra, 224 Cal.App.4th at pp. 975-976;
Sybron, supra, 76 Cal.App.3d at pp. 899, 903.)
Vitatech contends Greentree is distinguishable because the stipulation in
Greentree included language “‘disclaiming ‘any admission of wrongdoing, fault, [or]
liability,’” but here Appellants judicially admitted liability and stipulated to judgment in
the full amount sought in the complaint. We disagree because Vitatech misconstrues the
stipulation for entry of judgment.
Although the stipulation here does not include a disclaimer of any
admission of liability like the stipulation in Greentree, it also does not include an
admission of liability on the underlying claims. As explained above, Appellants
stipulated to entry of judgment “in the full prayer of the Complaint” if they failed timely
to pay the $75,000 Vitatech agreed to accept “as full settlement of its claims.” This
language does not constitute an admission of liability for breach of the underlying
contract nor does it constitute an admission of the amount of damages that breach caused.
Rather, this language is nothing more than an agreement to settle a disputed claim for less
4
Although we apply the de novo standard in reviewing the trial court’s
order, we note that we would reach the same outcome under the substantial evidence
standard because no substantial evidence supports the trial court’s conclusion the
settlement amount was a discount from an admitted liability rather than an unenforceable
liquidated damages provision.
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than the amount demanded and a penalty if Appellants fail timely to pay the settlement
amount.
Two United States District Court cases cited by Vitatech demonstrate that
the language of the stipulation for entry of judgment is not an admission of liability
sufficient to distinguish this case from Greentree. (Seamen v. Valley Health Care Med.
Group, Inc. (C.D.Cal. 2015) 2015 U.S. Dist. LEXIS 168407 (Seamen); Rose v. Enriquez
(C.D.Cal 2012) 2012 U.S. Dist. LEXIS 179711 (Rose).) In Rose, the plaintiff sued the
defendants for more than $3.6 million based on claims for extortion, fraud, racketeering,
and counterfeiting. At a mediation, the parties agreed to settle the case for
“significant[ly]” less than the plaintiff sought in the complaint, and the defendants
stipulated to entry of a $3.5 million judgment if they failed to make the settlement
payments. After the defendants missed several payments, the plaintiff asked the court to
enter the stipulated judgment and the defendants objected that the judgment was an
unenforceable penalty under section 1671(b) and Greentree. (Rose, at pp. *3-*4.)
The Rose court nonetheless entered the stipulated judgment, explaining,
“Here, in contrast [to Greentree], the Agreement memorializes evidence presented to the
Mediator by the Plaintiff as to the loss caused by Defendants’ fraud, counterfeiting, and
other wrongful acts, and also contains an express statement of Defendants’ liability.
[Citation.] This is in distinct contrast to Greentree, where no evidence was presented and
the figure for the stipulated judgment was taken from the complaint with no inquiry or
evidence and with no admission of liability. [¶] . . . Where, as here, parties mutually
agree upon the liability of one party and the resulting amount of damage caused by that
party, a stipulated judgment in the amount of those damages will not be unreasonable.”
(Rose, supra, 2012 U.S. Dist. LEXIS 179711, at pp. *5-*6; see Seamen, supra, 2015 U.S.
Dist. LEXIS 168407, at pp. *7-*8 [stipulated judgment in amount of prayer permissible
when defendant failed to pay lesser settlement amount because defendant expressly
admitted liability on underlying claims and amount of damages].)
17
Here, the stipulation for entry of judgment fails to describe any evidence
presented to a neutral third party to show the damages Appellants allegedly caused by
breaching the underlying contract. Similarly, Appellants did not expressly admit liability
for breaching the underlying contract or the amount of damages any purported breach
caused Vitatech. Instead, as in Greentree, the stipulation for entry of judgment merely
used the amount of damages Vitatech alleged in the complaint with no inquiry or
evidence to support it. Granted, the stipulation in Greentree included an express
disclaimer of any admission of liability that is not present in this case, but the absence of
that disclaimer is not sufficient to distinguish this case from Greentree when there also is
no express admission of liability. (C.f. Purcell, supra, 224 Cal.App.4th at pp. 971-973.
[finding stipulated judgment in original amount of alleged liability was unenforceable
penalty even though stipulation did not include disclaimer of any admission of liability].)
Citing Jade Fashion, Vitatech also contends none of the foregoing cases
apply to the stipulation for entry of judgment because the stipulation does not include a
liquidated damages provision. Rather, the stipulation merely provides a discount on an
admitted obligation based on Appellants’ timely payment. This contention also fails
because it again misconstrues the stipulation for entry of judgment.
In Jade Fashion, the plaintiff was a garment manufacturer that sold a large
volume of its products to the defendant, but the defendant experienced significant cash
flow problems and fell behind in its payment obligations. The defendant did not dispute
that it owed $340,000 to the plaintiff, and worked out a payment plan to bring its account
current and allow it to receive additional shipments from the plaintiff. The written
agreement the parties signed acknowledged the precise amount of the defendant’s debt,
established a detailed payment schedule, and provided that the defendant could deduct
$17,500 from the final payment if the defendant timely made all other payments. Under
the agreement, the defendant was not entitled to the discount if even one payment was
late. (Jade Fashion, supra, 229 Cal.App.4th at pp. 638-639.) The defendant was late in
18
making several payments, but made its payments before the last one was due and
deducted the $17,500 from its final payment. Concluding the defendant was not entitled
to the discount because of the late payments, the plaintiff refused to accept the
defendant’s final payment unless the defendant also paid the $17,500. When the
defendant refused, the plaintiff sued for breach of contract and obtained a summary
judgment against the defendant. (Id. at pp. 640-641.)
On appeal, the defendant cited Greentree, Purcell, and Sybron and argued
the $17,500 discount was an unenforceable penalty because that amount bore no
relationship to the few dollars in damages the plaintiff suffered when some payments
were a few days late. Jade Fashion rejected this argument, explaining the parties in
Greentree, Purcell, and Sybron “agreed to settle a pending lawsuit for a stipulated
amount that was less than the damages alleged in the plaintiff’s complaint; if the
defendant breached the settlement agreement, it then would be required to pay a fixed
amount of additional damages, which was disproportionately higher than the settlement
amount. In contrast, the agreement [in Jade Fashion] 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.)
The Court of Appeal emphasized the parties’ agreement provided the $17,500 discount
was part of the original $340,000 debt that the defendant expressly admitted it owed, and
therefore section 1671(b) did not apply and the enforceability of the discount provision
did not turn on its relationship to any anticipated damages. (Jade Fashion, at p. 649.)
Jade Fashion does not apply here because the stipulation for entry of
judgment was an agreement to comprise a disputed claim for less than alleged in the
complaint. Unlike in Jade Fashion, Vitatech and Appellants agreed to the stipulation for
entry of judgment on the eve of trial to resolve a pending lawsuit. As explained above,
Appellants never acknowledged their liability for the underlying claims or the damages
19
Vitatech alleged in the complaint. Rather, they agreed to settle Vitatech’s claims for a
lesser amount and Appellants were required to pay additional damages if they defaulted.
This stipulation for entry of judgment therefore is governed by Greentree, not Jade
Fashion.
Finally, Vitatech argues Sybron is no longer good law because it was
decided under section 1671’s prior version, and Greentree and Purcell were wrongly
decided because they applied Ridgley in a completely different factual context. Not so.
In Greentree, we considered the impact the 1977 amendments to
section 1671 had on Sybron, and published our decision to “reaffirm that the rule set forth
in Sybron . . . continues to apply after the intervening amendment to . . . section 1671.”
(Greentree, supra, 163 Cal.App.4th at pp. 497-498.) We acknowledged the amendments
to section 1671 made liquidated damages provisions presumptively valid in nonconsumer
contracts and shifted the burden to the party challenging a provision to show it was
unreasonable. Nonetheless, we explained, “The amendment of the statute does not save a
judgment that imposes a penalty bearing no proportional relationship to the damages that
might actually flow from a breach. (Ridgley, supra, 17 Cal.4th at pp. 976-977.) Indeed,
the Supreme Court cited Sybron with approval in a case analyzing the postamendment
version of section 1671. (Ridgley, supra, 17 Cal.4th at p. 978.)” (Greentree, at p. 501,
fn. 2.)
Ridgley involved the validity of a loan provision that required the borrower
to pay a prepayment fee equal to six months of interest if the borrower sought to prepay
the loan after making late interest payments. (Ridgley, supra, 17 Cal.4th at pp. 973-974.)
The Supreme Court applied the foregoing principles regarding liquidated damages
provisions to conclude the prepayment fee was an unenforceable penalty for late payment
of interest because the amount of the fee bore no reasonable relationship to the damages
the parties anticipated the borrower’s late interest payments would cause. (Id. at
pp. 976-979.) Nothing in Ridgley limited the standards it established regarding liquidated
20
damages provisions to the context of a loan, and Greentree and Purcell properly applied
those standards to the stipulations for entry of judgment at issue in those cases. We see
no basis for Vitatech’s efforts to criticize Greentree and Purcell.
III
DISPOSITION
The order denying Appellants’ motion to vacate the stipulated judgment is
reversed and we remand with directions for the trial court to grant the motion and enter a
new judgment for $75,000 based on the parties’ stipulation for entry of judgment. The
stipulation includes no provision for attorney fees or prejudgment interest and Vitatech
directs us to no authority authorizing it to recover either of those items. Vitatech may
apply to recover its trial court costs because nothing in the stipulation for entry of
judgment relinquishes that right when Appellants failed to timely pay. (Greentree, supra,
163 Cal.App.4th at p. 502; Sybron, supra, 76 Cal.App.3d at pp. 903-904.) Appellants
shall recover their costs on appeal.
ARONSON, J.
WE CONCUR:
BEDSWORTH, ACTING P. J.
IKOLA, J.
21
Filed 10/30/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
VITATECH INTERNATIONAL, INC.,
Plaintiff and Respondent, G053477
v. (Super. Ct. No. 30-2011-00459259)
ALAN R. SPORN et al., ORDER MODIFYING OPINION
AND CERTIFYING OPINION FOR
Defendants and Appellants. PUBLICATION; NO CHANGE IN
JUDGMENT
It is ordered that the opinion filed in the above-entitled matter on
September 29, 2017, is hereby MODIFIED as follows:
1. On page 2, the first sentence of the second paragraph, beginning
with “Sporn and appellant CortiSlim International, Inc.,” delete the words “and liquidated
damages provision” between the words “unenforceable penalty” and “under Civil Code”
so the sentence reads:
Sporn and appellant CortiSlim International, Inc. (collectively, Appellants)
moved to vacate the judgment, arguing it was an unenforceable penalty
under Civil Code section 1671, subdivision (b) (section 1671(b)).
2. On page 3, the fifth sentence of the first paragraph in the Facts and
Procedural History section, beginning with “The Complaint sought $166,372.14,” delete
the word “Complaint” at the beginning of the sentence and replace it with the word
“complaint” so the sentence reads:
The complaint sought $166,372.14 in compensatory damages, plus attorney
fees and costs, based on claims for (1) breach of contract; (2) breach of oral
contract; (3) breach of implied in fact contract; (4) open book account;
(5) account stated; and (6) breach of guaranty.
3. On page 6, the second sentence of the first paragraph, stating “We
disagree,” delete the entire sentence and replace it with the following sentence:
We conclude CortiSlim International, Inc. has standing to appeal.
4. On page 6, the last sentence of footnote 1, beginning with “Vitatech
improperly raised,” delete the word “file” between the words “rather than” and “a
separate motion” and replace it with the word “by” so the sentence reads:
Vitatech improperly raised the issue in its brief rather than by a separate
motion.
5. On page 17, the first sentence of the first full paragraph and the
accompanying case citations, beginning with “Two United States District Court cases,”
delete the word “Two” at the beginning of the sentence and replace it with the words
“Vitatech’s reliance on two,” delete the words “cited by Vitatech demonstrate” and
replace them with the words and punctuation “is misplaced. These cases support, rather
than undermine, our conclusion,” and move the case citations to Seamen and Rose
between the two sentences created so the beginning of this paragraph reads:
Vitatech’s reliance on two United States District Court cases is misplaced.
(Seamen v. Valley Health Care Med. Group, Inc. (C.D.Cal. 2015)
2015 U.S. Dist. LEXIS 168407 (Seamen); Rose v. Enriquez (C.D.Cal 2012)
2012 U.S. Dist. LEXIS 179711 (Rose).) These cases support, rather than
2
undermine, our conclusion that the language of the stipulation for entry of
judgment is not an admission of liability sufficient to distinguish this case
from Greentree.
6. On page 17, the case citations at the end of the last paragraph that
continue on page 18, beginning with “(Rose, supra, 2012 U.S. Dist. LEXIS,” delete
“; see” between “pp. *5-*6” and “Seamen, supra” and insert “.)” and delete the
surrounding commas and the word “, supra,” following the word “Seamen” and replace
them with the words and punctuation “relied on Rose to reach a similar result. (” before
the bracket statement starting with “[stipulated judgment” so that the case citations and a
new sentence read:
(Rose, supra, 2012 U.S. Dist. LEXIS 179711, at pp. *5-*6.) Seamen relied
on Rose to reach a similar result. (2015 U.S. Dist. LEXIS 168407, at
pp. *7-*8 [stipulated judgment in amount of prayer permissible when
defendant failed to pay lesser settlement amount because defendant
expressly admitted liability on underlying claims and amount of damages].)
7. On page 18, the second sentence of the second full paragraph,
beginning with “Rather, the stipulation merely provides,” insert the words “Vitatech
argues” between the words “Rather,” and “the stipulation merely provides” so the
sentence reads:
Rather, Vitatech argues the stipulation merely provides a discount on an
admitted obligation based on Appellants’ timely payment.
8. On page 19, the first sentence of the last partial paragraph, beginning
with “Jade Fashion does not apply,” delete the word “comprise” between the words “was
an agreement to” and “a disputed claim” and replace it with the word “compromise,” and
italicize the word “disputed” so the sentence reads:
3
Jade Fashion does not apply here because the stipulation for entry of
judgment was an agreement to compromise a disputed claim for less than
alleged in the complaint.
9. On page 20, the second complete sentence of the partial paragraph at
the top of the page, beginning with “Rather, they agreed to settle,” delete the words “were
required” between the words “amount and Appellants” and “to pay additional damages”
and replace them with the word “agreed” so the sentence reads:
Rather, they agreed to settle Vitatech’s claims for a lesser amount and
Appellants agreed to pay additional damages if they defaulted.
These modifications do not change the judgment.
Richard W. Millar, Jr., Esq., of Friedman Stroffe & Gerard has requested
that we certify our opinion for publication. It appears that our opinion meets the
standards set forth in California Rules of Court, rule 8.1105(c). The request is
GRANTED.
ARONSON, ACTING P. J.
WE CONCUR:
IKOLA, J.
4