84 Cal.App.5th 72
Cal. Ct. App.2022Background:
- Twenty consolidated medical-malpractice actions were resolved by a global settlement: defendants agreed to pay $575,000 in two installments ($250,000 by April 30, 2019; $325,000 by July 31, 2019).
- The settlement included liquidated damages for late payment: $50,000 per month (prorated at $1,644/day), capped at $1,500,000.
- The agreement was negotiated by counsel over multiple drafts; plaintiffs understood many claims lacked insurance coverage and the parties estimated trial recoveries at $1,500,000 total.
- Defendants failed to make the installment payments after the agreement was fully executed; plaintiffs moved to enforce the settlement and the liquidated-damages clause.
- The trial court found defendants failed to prove the liquidated-damages clause was unreasonable under Civil Code § 1671(b) and entered judgment for $1,393,084 (settlement plus accrued liquidated damages).
- Defendants appealed, arguing the clause was an unenforceable penalty; the Court of Appeal affirmed.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of liquidated-damages clause under Civ. Code § 1671(b) | Clause is valid: negotiated by counsel, intended to incentivize prompt payment, capped at parties' estimate of trial recovery ($1.5M) | Clause is an unreasonable penalty for failure to pay money; amount bears no reasonable relationship to actual damages from late payment | Affirmed: defendants failed to show clause unreasonable; court must consider all circumstances at contract formation (representation, bargaining, risk of noncollection, negotiated cap) |
| Relevance of underlying-case value when assessing reasonableness | Underlying trial-value (the $1.5M estimate) is a proper circumstance to consider because parties bargained to avoid the risks of trial and noncollection | Only damages flowing from breach of the settlement itself should be considered; underlying claim value is irrelevant | Held: court may consider underlying-case value and all circumstances when evaluating reasonableness under § 1671(b); Greentree and Vitatech are distinguishable |
Key Cases Cited
- Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal.4th 970 (Sup. Ct. 1998) (late-charge treated as liquidated damages and invalid when not a reasonable estimate of probable loss)
- Greentree Fin. Group, Inc. v. Execute Sports, Inc., 163 Cal.App.4th 495 (Cal. Ct. App. 2008) (stipulated judgment enforcing settlement payment reduced where amount bore no reasonable relationship to anticipated damages)
- Vitatech Internat., Inc. v. Sporn, 16 Cal.App.5th 796 (Cal. Ct. App. 2017) (settlement-stipulation judgment voided when pre-set recovery greatly exceeded damages likely from breach)
- Creditors Adjustment Bureau, Inc. v. Imani, 82 Cal.App.5th 131 (Cal. Ct. App. 2022) (court may consider underlying-contract recovery when assessing reasonableness of remedy for settlement default)
- McGuire v. More-Gas Investments, LLC, 220 Cal.App.4th 512 (Cal. Ct. App. 2013) (definition and enforceability principles for liquidated damages clauses)