Securing a Settlement and the Role of Stipulated Judgments

Introduction

As a former court research attorney and current practicing litigator, I follow legal developments that potentially impact my clients in all aspects of a civil dispute. The recently decided case of Vitatech International Inc. v. Sporn (2017) 16 Cal.App.5th 796 provides critical instruction to both attorneys and parties involved in potentially settling a case. A majority of civil disputes end in settlement. Stipulated judgments are often reached between settling parties both to enforce an underlying settlement and to encourage parties to fulfill their settlement obligations. This case instructs attorneys how to best finalize a stipulated judgment and properly protect their clients’ best interests.

Trial Court Analysis

Plaintiff Vitatech International, Inc. filed a breach of contract action against defendants National Marketing, Inc. and Sporn for unpaid invoices. The complaint sought $166,372.14 in compensatory damages, plus attorney fees and costs. In September 2014, the parties agreed to settle the lawsuit. Under the settlement terms, Defendants agreed to pay Plaintiff $75,000 by June 5, 2015. The parties also entered into a stipulated judgment. The stipulation authorized Plaintiff to have the court enter judgment against Defendants for the full amount alleged in the complaint if Defendants failed to make the settlement payment by the June 5th deadline.

Defendants failed to make the settlement payment. Consequently, Plaintiff requested that the Court enter judgment upon the stipulation for $303,620.12, comprised of $166,372.14 in compensatory damages, $104,427.01 in prejudgment interest, $28,315 in attorney fees, and

Trial Court Decision

In November 2015, Defendants moved to vacate the judgment. They argued that the judgment was void because it constituted an unlawful penalty in violation of Cal. Civ. Proc. Code section 1671(b). Section 1671(b) prohibits liquidated damages provisions for breach of a contract that bear no reasonable relationship to the damages. The trial court denied Defendants’ motion to vacate the judgment. Subsequently, Defendants appealed the trial court’s decision.

Appellate Court Analysis

California 4th District Court of Appeal addressed the central question: Whether the stipulation for entry of judgment is a permissible liquidated damages provision or a void and unenforceable penalty under Cal. Civ. Proc. Code section 1671(b).

First, the appellate court applied governing legal principles on liquidated damages provisions. Under Cal. Civ. Proc. Code section 1671(b), “[A] provision in a contract liquidating the damages of 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.” According to Defendants/Appellants, the stipulated judgment was void as a matter of law because no reasonable relationship existed 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. The Court of Appeal agreed. The appellate court emphasized that even though the parties’ stipulated judgment agreement did not use the phrase “liquidated damages,” its legal effect was the same as a liquidated damages provision. This is because the stipulation predetermined the amount of damages Plaintiff was entitled to receive if Appellants failed to pay $75,000 on time. Thus, the stipulated judgment was governed by Section 1671(b) and could only be enforceable if the judgment amount therein reasonably related to the damages likely to arise from the breach of the settlement or stipulation.

The appellate court noted that nothing appeared in the stipulation or appellate record establishing a reasonable relationship between Appellants’ failure to pay the $75,000 settlement amount and the $300,000 judgment. 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 Plaintiff alleged in the underlying complaint’s prayer. However, the prayer amount (and, thus, stipulated judgment amount) was more than four times the amount Plaintiff agreed to accept in settlement of its disputed claims. In conclusion, the appellate court ruled that the stipulation for entry of judgment illegally penalized Appellants for failing to pay the settlement amount.

Appellate Court Decision

The Court of Appeal reversed the trial court’s order denying Appellants’ motion to vacate the stipulated judgment. Also, the Court remanded the case with directions for the trial court to grant the motion and enter a new judgment in Plaintiff’s favor for $75,000.

Importance of Stipulated Judgments in a Settlement

In Vitatech, the Fourth District Court of Appeal clarified the enforceable limits of stipulated judgments. A stipulation for entry of judgment is void if it operates as an unenforceable penalty under Cal. Civ. Proc. Code section 1671(b). Without a doubt, the lesson for both practicing attorneys and parties from the Vitatech International case is how to create an enforceable stipulated judgment. In order avoid a penalty, the damages must reasonably compare to the anticipated damages from the settlement’s breach.

To ensure that a stipulated judgement is upheld, parties should set forth any facts supporting the reasonableness of the judgment amount. This may include stating the calculations or considerations used to determine the judgment amount in a separate settlement agreement or within the stipulated judgment’s terms. Parties should be aware that a significant disparity between the judgment amount and the total settlement payment will raise red flags. Therefore, parties should take careful consideration in agreeing to a judgment amount which does not award a windfall. Finally, stipulated judgments should include terms allowing for the recovery of attorney fees, costs and prejudgment interest if the stipulation needs to be enforced.

The seasoned litigators at Cummins and White LLP are careful to apply the tenets of Vitatech International to any potential settlement situation. We handle settlements routinely for clients involved in a myriad of business disputes and recommend that these settlements are secured with a stipulated judgment. Stipulated judgments must be valid to afford clients adequate protection. Sometimes, the parties overlook the drafting and preparation of a stipulated judgment after the settlement agreement is finalized. However, a lack of diligence in considering the judgment amount can have major pitfalls as the Plaintiff in Vitatech International learned. If you have any questions or concerns regarding a civil settlement or stipulated judgment, please contact us at Cummins and White LLP for more information.