AISHA A. KRECHUNIAK, as Trustee, etc., Cross-complainant and Respondent, v. ZIA JAMAL NOORZOY, Cross-defendant and Appellant.
No. H042740
Sixth Dist.
May 12, 2017
11 Cal. App. 5th 713
Strong Appellate Law, Jeanine G. Strong; Dougherty & Guenther and Ralph P. Guenther for Cross-Defendant and Appellant.
Law Office of Bruce Funk, Bruce C. Funk and Laura S. Liccardo for Cross-Complainant and Respondent.
OPINION
WALSH, J.*—
I. INTRODUCTION
This appeal challenges an order enforcing an agreement between two siblings, Aisha A. Krechuniak (Sister)1 and her brother Zia Jamal Noorzoy
We will affirm the judgment after concluding that Brother has forfeited his fact-based contention. In doing so we hold that the determination of whether a contract provision is an illegal penalty or an enforceable liquidated damage clause is a question to be determined by the trial court and, on review, appellate deference to the trial court‘s factual findings is required unless the facts are undisputed and susceptible of only one reasonable conclusion.
II. THE FACTS
A. The Lawsuits
According to Sister‘s cross-complaint filed August 31, 2010, Sister owned realty at 952 Sand Dunes Road in Pebble Beach, California (sometimes “the subject property“) in 2005.3 Brother was a licensed real estate agent working for Alain Pinel and was also a land developer. In July 2005, Brother and Sister entered a written contract under which Brother would develop Sister‘s property through funding from investors and then sell the developed property, with Brother and Sister to split the profits remaining after paying off investors and after paying $1.5 million to Sister, reflecting her equity in 2005, and $30,000 to Brother as a management fee.
In January 2006, Brother entered a separate “investor rights agreement” with Andrew Dieden and Jeffrey Dieden. Each agreed to contribute $100,000 towards development of the subject property, estimated to be completed by the end of 2006 at a cost of $700,000 and with a net profit of $810,000 after sale of the property.4
In September 2007, Brother obtained $300,000 from investors to complete the development and pay off the IndyMac loan. The money was not used for those purposes.
In November 2008, Sister agreed to relinquish ownership of another Pebble Beach property at 2889 17 Mile Drive (the second property), co-owned with Brother and another relative, so that Brother could obtain a loan of $400,000 secured by that property. Brother was to use the proceeds of that loan to develop the subject property and to make mortgage payments.
Sister was unaware that Brother had defaulted on the loans and was receiving mortgage default notices. Because he did not make the mortgage payments on the subject property, it was sold at foreclosure. Sister also incurred a $400,000 debt on the second property.
The investors sued Brother for loss of their investments through foreclosure on the subject property. In her cross-complaint, Sister sought actual damages in excess of $1.7 million and punitive damages for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, negligent and intentional misrepresentation, and intentional infliction of emotional distress.
According to a statement by Brother‘s attorney in opposition to enforcing the settlement, Brother and his wife filed for bankruptcy on November 10, 2011. On April 4, 2012, the federal bankruptcy court granted Sister relief from the automatic stay to pursue her state causes of action for “Breach of Fiduciary Duty, Conversion, Fraud, and Intentional Infliction of Emotional Distress,” but not her other causes of action.
B. The Memorandum of Settlement
With trial set for November 17, 2014, mediation on November 6, 2014, resulted in a self-titled “MEMORANDUM FOR SETTLEMENT” signed by each party and by a representative of Brother‘s employer, Pinel, that stated:
“1. This MEMORANDUM OF SETTLEMENT is, and is intended to be, fully binding and enforceable as to each party notwithstanding that a more formal agreement is to be prepared. Any disputes in the formal agreement
shall be brought to Richard M. Silver, who absent agreement, shall have binding authority to resolve. “2. [Brother] shall pay to [Sister] the total sum of $600,000.00 payable as follows:
“a. $100,000.00 no later than December 31, 2014;
“b. [Brother agreed to pay the balance with 10 percent of his net real estate commissions beginning in April 2015. His employer promised to prepare and forward to Brother‘s counsel checks reflecting 10 percent of Brother‘s commission payments to be endorsed by Brother to Sister.]
“c. The balance of $500,000.00 shall be paid in no more than five years from January 1, 2015.
“d. Payment may be made sooner than the above without penalty.
“e. No interest shall accrue on the above amounts.
“3. A stipulated judgment against [Brother] in the amount of $850,000 shall be executed and held unless and until there is a default in payment. Should there be a levy or garnishment by a governmental agency that prevents payment of the 10% portion said levy or garnishment shall not be considered a default. The settlement and stipulated judgment shall be non-dischargeable in bankruptcy.
“4. PINEL agrees to structure the 10% commission payments as indicated above but assumes no liability if [Brother] refuses to make any such payment.
“5. Plaintiffs shall execute a general release with CC 1542 waivers as to [Brother] and PINEL. Once executed a dismissal with prejudice shall be filed as to PINEL and, once full payment is made, as to [Brother].
“6. This settlement is subject to approval of the bankruptcy court.
“7. This MEMORANDUM OF SETTLEMENT shall be enforceable pursuant to
CCP 664.6 . The prevailing party shall be entitled to attorney fees and costs.“8. Each party shall pay their own fees and costs except as to any prior agreement as to [Brother] and PINEL.
“9. This settlement shall be confidential.”
In furtherance of the settlement memorandum, on December 3, 2014, Sister‘s counsel sent her a “settlement agreement and release” drafted by Brother‘s counsel. The proposed settlement agreement recited as part of paragraph 3.3, “A stipulated judgment against [Brother] in the amount of $850,000 shall be executed and held unless and until there is a default in payment.” The proposed settlement agreement also included the following paragraph.
“3.4 The parties agree that the stipulated sum of said Judgment does not constitute a ‘penalty’ within the meaning of Greentree Financial Group, Inc. v. Execute Sports, Inc. (2008) 163 [Cal.App.4th] 495 [78 Cal.Rptr.3d 24] for several reasons, including but not limited to the following: The stipulated sum represents less the value of the property [sic] located at 952 Sand Dunes, Pebble Beach, CA, Assessor‘s Parcel Number 007252015, at the time [Sister] entered into her agreement with [Brother]. It does not include lost profits from the development of that property, interest on the money lost, nor the value of the property lost at 2889 17 Mile Drive, Pebble Beach, CA. Additionally, [Sister] further relinquished her right to trial during which she reasonably expected to achieve a verdict in excess of the stipulated sum. [Sister] agrees to accept substantially less in settlement as an act of kindness towards a family member in order accommodate [Brother]‘s attempt to maintain his business and home, as well as the sake of his children. Said Stipulated Judgment is designed to encourage [Brother] to make his settlement payments on time and to compensate [Sister] for the loss of use of the money, her relinquishment of valuable rights and claims for which a substantial likelihood of success exists.”
On December 23, 2014, Brother proposed several modifications of their settlement, asserting through counsel that the settlement was no longer binding on him because Sister had breached the confidentiality provision by making statements in another action. Specifically, on December 3, 2014, at a hearing in a probate case, Brother stated to the court that Sister, as executor of their mother‘s will, had her daughter drop off a box of personal property without offering an explanation of missing items due to him under the will. Sister responded that she had provided a written explanation for each item but did not wish to speak with Brother “in that there has been ongoing litigation with a piece of property and fraud is involved.” The court directed them to talk about the missing items outside the courtroom. According to Brother‘s attorney, in the courtroom hall Sister refused to discuss the estate property, saying in earshot of other attorneys and parties, ” ‘I won‘t talk with a liar and a thief.’ ”
Brother‘s counsel drafted a revised settlement agreement that did not include all these proposals. He proposed maintaining Brother‘s obligation at $600,000 while eliminating his initial payment of $100,000. The revision preserved paragraph 3.4 quoted above as paragraph 3.5 and the provision for a stipulated judgment of $850,000 to be “executed and held unless and until there is a default in payment.” The revision proposed increasingly severe financial penalties for each breach by Sister of the confidentiality provision and prohibited Sister from disparaging Brother. Sister‘s counsel informed Brother‘s counsel that the penalty provisions were unacceptable to Sister.
According to a declaration by Sister‘s counsel dated June 29, 2015, Brother did not make the $100,000 payment or sign the settlement agreement, although in April 2015 he did send a check representing 10 percent of his commission on one sale only. A supplemental declaration acknowledged receipt of other commission payments totaling $46,000. In the bankruptcy action, Brother had neither prepared nor presented a stipulation that his settlement obligation was not dischargeable.
D. The Motion To Enforce the Settlement
On June 30, 2015, Sister filed a motion to compel enforcement of the settlement under
Brother‘s oral arguments at the hearing on July 31, 2015, were consistent with his written opposition. Significantly, he did not assert that the settlement
III. THE LIQUIDATED DAMAGES STATUTE
In Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 976–977 [73 Cal.Rptr.2d 378, 953 P.2d 484] (Ridgley), the California Supreme Court explained:
“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 provision was unreasonable under the circumstances existing at the time the contract was made.’ (§ 1671, subd. (b) ....) [Fn. omitted.]”6
Hong v. Somerset Associates (1984) 161 Cal.App.3d 111, 114 [207 Cal.Rptr. 597], explained that “[i]n response to a recommendation of the California Law Revision Commission (Recommendation Relating to Liquidated Damages, 13 Cal. Law Revision Com. Rep. (1976) p. 1739), the Legislature in
What is most relevant in their explanation is that the statute was “amended to provide in subdivision (b) a new general rule favoring the enforcement of liquidated damages provisions except against a consumer in a consumer case. In a consumer case, the prior law under former
Though the pre-1978 versions of
A violation of
As the Law Revision Commission stated, demonstrating the provision is unreasonable requires consideration of existing circumstances relevant to the formation of the contract. (Cf. Christian, supra, 52 Cal.App.4th at p. 654; El Centro Mall, LLC, supra, 174 Cal.App.4th at p. 63.) A recital in the agreement that a provision is either for “penalty” or “liquidated damages” is not conclusive, as the parties’ intent should be derived from the entire agreement and its surrounding circumstances. (Pogue v. Kaweah Power & Water Co. (1903) 138 Cal. 664, 667-668; cf. Nakagawa v. Okamoto (1913) 164 Cal. 718, 723; Dyer Bros. Golden West Iron Works v. Central Iron Works (1920) 182 Cal. 588, 592 (Central Iron Works).)
IV. STANDARD OF REVIEW
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
Brother cites two cases for the proposition, “Whether a liquidated damage provision is valid, or instead constitutes an unenforceable penalty, presents a question of law that this Court reviews de novo.” One is Purcell v. Schweitzer (2014) 224 Cal.App.4th 969, which stated, “Because we are presented with a question of law on undisputed facts, our review is de novo.” (Id. at p. 974.) The other is Harbor Island Holdings v. Kim (2003) 107 Cal.App.4th 790, 794, upon which Purcell relied, which stated at page 794, “Whether an amount to be paid upon breach is to be treated as liquidated damages or as an unenforceable penalty is a question of law. (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1393.)” Kim also stated, “The validity of the deferred rent provision was a question for the judge to decide. (Beasley v. Wells Fargo Bank, supra, 235 Cal.App.3d at p. 1393.)” (Id. at p. 795.)
We believe Kim miscontrues Beasley. One of the issues in Beasley was whether a judge or jury should decide the validity of a liquidated damages provision. (Beasley v. Wells Fargo Bank, supra, 235 Cal.App.3d at p. 1393 (Beasley).) That question under California constitutional law referred back to what the common law provided in 1850. (Id. at p. 1391.) It was in that context that Beasley quoted an English decision from 1849 stating, ” ‘it is now clearly settled, that, whether the sum mentioned in an agreement to be paid for a breach, is to be treated as a penalty or as liquidated and ascertained damages, is a question of law, to be decided by the judge upon a consideration of the whole instrument.’ ” (Id. at p. 1393.) It was this passage that Kim cited for the proposition that the validity of a damages provision is a question of law.8
Kim did not discuss the following analysis in Beasley. “If validity was a matter for the judge to decide, can we decide that matter independently on appeal? . . . [T]he answer is no, but the question is more problematic.”
Another court has attempted to reconcile the conflicting statements in Beasley and Kim by stating, “Based on the foregoing precedent, we conclude the ultimate question of a provision‘s invalidity as a penalty is a question of law subject to de novo review, but the factual foundation for appellate review consists of (1) the facts that are not in dispute and (2) the facts that are established by viewing the conflicting evidence in the light most favorable to the trial court‘s judgment.” (Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc. (2015) 232 Cal.App.4th 1332, 1355.)
The court in El Centro Mall, LLC, supra, 174 Cal.App.4th at page 62, without citing Beasley, read Kim more narrowly: “Where the facts are undisputed, we review the question of whether a liquidated damages clause is enforceable de novo. [Citing Kim.] Where, as here, there is a conflict in the evidence, we review the trial court‘s ruling for substantial evidence supporting it. Simply put, our reviewing power in such instances ‘begins and ends with a determination as to whether there is any substantial evidence to support [the factual findings]; [we have] no power to judge of the effect or value of the evidence, to weigh the evidence, to consider the credibility of the witnesses, or to resolve conflicts in the evidence or in the reasonable inferences that may be drawn therefrom.’ [Citation.]’ [Citation.]’ ([Citation], original italics.)”
We agree that Kim should be read narrowly. It is appropriate for an appellate court to independently review the validity of a contractual provision under
V. FORFEITURE
Sister contends that Brother is barred from asserting for the first time on appeal that the settlement agreement includes an unlawful penalty provision.
“It is the general rule that a party to an action may not, for the first time on appeal, change the theory of the cause of action. [Citations.] There are exceptions but the general rule is especially true when the theory newly presented involves controverted questions of fact or mixed questions of law and fact. If a question of law only is presented on the facts appearing in the record the change in theory may be permitted. [Citation.] But if the new theory contemplates a factual situation the consequences of which are open to controversy and were not put in issue or presented at the trial the opposing party should not be required to defend against it on appeal.” (Panopulos v. Maderis (1956) 47 Cal.2d 337, 340-341 (Panopulos).)
This general rule was applied to a liquidated damages contention in Caplan, supra, 56 Cal.2d 515, where buyers of realty had made a $15,000 down payment on property selling for $323,000. The contract of sale provided that the down payment would be returned if the sellers did something to prevent the sale, but would be retained if the buyers’ default prevented the sale. (Id. at p. 518.) Although the buyers willfully breached the contract, the trial court nevertheless awarded them restitution of most of their payments. (Ibid.) The California Supreme Court rejected for lack of evidence the sellers’ argument that they were entitled to retain the down payment because they had given separate consideration for it. (Id. at pp. 518-519.)
The buyers also argued on appeal that the contractual provision was an invalid penalty under former
When Caplan was decided, the burden was on the sellers who sought to retain the down payment to plead and prove they made a valid agreement for liquidated damages. Because the sellers did not present that argument or supporting facts to the trial court, they were barred from raising it on appeal.
Under the current statute, it was Brother‘s burden to allege and prove in the trial court that the stipulated judgment provision in the settlement memo “was unreasonable under the circumstances existing at the time the contract was made.” (
On appeal, Brother has changed his position by now attacking the stipulated judgment provision and objecting to our consideration of the settlement agreements offered by his counsel.9 Because Brother‘s “new theory contemplates a factual situation the consequences of which are open to controversy and were not put in issue or presented at the trial[,] the opposing party should not be required to defend against it on appeal.” (Panopulos, supra, 47 Cal.2d at p. 341.) Brother is precluded from arguing on appeal that the settlement memo includes an invalid penalty provision. In light of this
VI. DISPOSITION
The order enforcing the settlement is affirmed. Sister is entitled to costs on appeal.
Rushing, P. J., and Premo, J., concurred.