Tuesday, August 04, 2020

Graylee v. Castro (Cal. Ct. App. - Aug. 4, 2020)

I like the fact that the Court of Appeal decided to publish this opinion today.  Because it helps make clear what lawyers have to do to circumvent the rule articulated therein.

It involves a pretty common situation, in mediations and elsewhere.  Two sides are litigating against each other and they ultimately want to strike a deal that compels one side -- typically the defendant -- to do something as a means of resolving the case.  Maybe the defendant (allegedly) owes $50,000 but plaintiff is willing to settle for $20,000 if he gets paid within a week.  Maybe (as here) the defendant (allegedly) owes $27,000 in overdue rent but the plaintiff is willing to waive the back rent if defendant simply gets out of the house within a week.  So the parties stipulate to a judgment -- typically, for the full amount of money requested in the complaint -- but agree that the plaintiff won't file it if the defendant does what's required by the settlement agreement; e.g., move out of the house or pay the $20,000 settlement figure within a week.

These types of settlements work.  They offer something to both sides.  It's a way to strike a deal between parties that don't trust each other; typically, for good reason (e.g., they've already breached a prior promise to pay).  The settlement provides a carrot and a stick; the carrot's the discounted settlement amount, and the stick is the stipulated judgment if the defendant doesn't do what's required by the agreement.

Today's opinion removes the stick.

Justice Moore holds that, in most cases, the "stick" (the stipulated judgment) will be an invalid "liquidated damages" provision.  The Court of Appeal's theory is that the amount of the loss -- e.g., the stipulated judgment amount -- will almost never measure the damages that flow from the failure to pay (or the delay in paying) the discounted settlement amount.  So even if the defendant fails to make, say, the $20,000 settlement amount as promised, that only harms the plaintiff to the tune of $20,000 and change; anything above that -- in particular, the $50,000 stipulated judgment -- is an unenforceable "penalty."

And, of course, that's precisely what it is.  A penalty.  And deliberately so.  It's designed to coerce the parties into doing what they promised.  But so are (invalid) liquidated damages.  Hence the holding of the Court of Appeal.

So does this mean no more provisions like these?

Nope.  It just means you've got to "paper" the transaction in a particular way.

To reach the result it wants, the Court of Appeal has to distinguish appellate cases that have gone the other way and that have upheld similar types of "coercive" settlement agreements.  And it does so by saying that in those cases, the defendant "admitted" that it was liable for the full amount.  So, Justice Moore says, those weren't really "penalties" -- instead, they were full-on compromises, thus valid.

One might reasonably respond:  "But doesn't stipulating to a (conditional) judgment for the full amount claimed basically admit that you're responsible for that amount?"  Justice Moore says:  "No."  That's not enough.  You've got to actually say so.  Explicit's good enough; implicit isn't.

Okay.  We can do that.

So, from here on out, when you enter into a conditional judgment, just make sure that there's a line in there that says "Defendant hereby agrees that it's in fact liable for $X (the full amount), and that said amount is in fact due and owing, and agrees to a stipulated judgment in that amount in the event it does not satisfy the conditions set forth herein."   Maybe repeat that first clause in a much of different ways just to make sure.

Do those words actually matter?  Not really.  Defendant's already willing to stipulate to the judgment amount.  What's the big deal about saying -- accurately or not -- that they "admit" that they're liable?  As long as defendant pays what's owed by the settlement agreement, the "admission" means nothing.  By contrast, if defendant doesn't pay, the "admission" doesn't harm them any more than the stipulated judgment.  It's just words.

So that's what you do.  It's like the old days in England:  Just make sure you write down the correct "magic words" and you're able to accomplish your objectives.  But absent those magic words, the deal runs afoul of the law.

So remember those magic words.  Important.

Admittedly, this particular case does seem a situation in which there really is a "penalty" at stake.  The settlement deal says that the defendant will get out of the house by 3:00 p.m. on a given day, lest the stipulated judgment amount ($27,000) be filed, and it sounds like the defendant got out of the house at something like 3:15 p.m. that day.  That's technically a breach, hence the prompt filing of the stipulated judgment amount -- presumably by a landlord none-too-pleased at having been stiffed for the $27,000 in the first place.

Yes, that amount was (probably) due.  But, yes, it also sounds like a stupid penalty for being 15 minutes late.  Hence why the Court of Appeal wants to end up the way it does.

But, remember, yet again:  Magic words would have made the amount not an unenforceable penalty.  So long as the defendant had expressly admitted in the settlement agreement that he owed the $27,000, then it'd be a true "compromise" and hence valid.  But not if there are no such magic words.

An important lesson for litigators (and mediators) everywhere.