Court Opinion

ID: 4424435
Source: CourtListenerOpinion
Date Created: 2019-08-09 19:02:15.375054+00
Date Added: 2024-06-11T14:51:24.338305
License: Public Domain

Filed 8/9/19
               CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                SECOND APPELLATE DISTRICT

                           DIVISION FOUR

RED & WHITE DISTRIBUTION,               B291188
LLC, et al.,
                                        (Los Angeles County
      Plaintiffs and Appellants,        Super. Ct. No.
                                        BC500304, C/W
      v.                                BC500459)
OSTEROID ENTERPRISES, LLC.,
et al.,

      Defendants and Respondents.

OSTEROID ENTERPRISES, LLC.,
et al.,

      Plaintiffs and Respondents,

      v.

RED & WHITE DISTRIBUTION,
LLC, et al.

      Defendants and Appellants

     APPEAL from a judgment of the Superior Court of Los
Angeles County, Barbara A. Meiers, Judge. Reversed in part and
remanded with directions.
     Kozberg & Bodell and Gregory Bodell for Appellants Red &
White Distribution Sacramento and Mikhail Cheban.
     Baranov & Wittenberg and Michael M. Baranov for
Appellant Red & White Distribution.
     Rosenberg Mendlin & Rosen, Joyce S. Mendlin and Roger
M. Rosen for Respondents.
     ______________________________________________

                       INTRODUCTION

       Red & White Distribution, LLC, Red & White Distribution
Sacramento LLC, and Mikhail Cheban (collectively, R&W) appeal
a judgment entered after R&W allegedly defaulted in making
payments to Osteroid Enterprise, LLC and Eric Oster
(collectively, the Osteroid Parties) under a settlement agreement.
The principal issue in this appeal is whether the stipulated
judgment constitutes an unenforceable penalty. A secondary
issue is whether the court’s finding that R&W breached the
settlement agreement is supported by substantial evidence.
       Under Civil Code1 section 1671, subdivision (b), “a
provision in a contract liquidating the damages for the 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.” A
liquidated damages clause will generally be considered
unreasonable if it “bears no reasonable relationship to the range
of actual damages that the parties could have anticipated would

1    All further statutory references are to the Civil Code unless
otherwise indicated.

                                2
flow from a breach.” (Ridgley v. Topa Thrift & Loan Assn. (1998)
17 Cal. 4th 970, 977 (Ridgley).)
       In this case, the parties entered into a settlement
agreement providing that if R&W defaulted, the Osteroid Parties
could file a stipulation for entry of judgment, with the amount of
the judgment being $700,000 more than the settlement amount,
plus interest and attorneys’ fees. We conclude the court erred in
entering the stipulated judgment because the additional $700,000
is an unenforceable penalty under section 1671. The court’s
factual determinations regarding R&W’s breach of the
agreement, however, were supported by substantial evidence.
Accordingly, we reverse in part and remand to the trial court
with directions to reduce the judgment to the $2.1 million
settlement amount, with further adjustments as set forth below,
plus interest from the date of the execution of the stipulated
judgment.
       We publish to remind practitioners whose clients settle a
dispute involving payments over time how to incentivize prompt
payment properly, and what may happen if done incorrectly.

      FACTUAL AND PROCEDURAL BACKGROUND

     The Osteroid Parties loaned R&W $1.8 million. After the
Osteroid Parties declared the loan in default, R&W filed a
complaint alleging the loan was usurious and unenforceable. In
response, the Osteroid Parties filed a complaint against R&W2
alleging five causes of action, including breach of contract, and

2
  The complaint also named other defendants that are not parties
to this appeal.

                                 3
seeking $1.8 million in damages, plus interest and attorneys’
fees. The court consolidated the cases.
       The Osteroid Parties filed a motion for summary
adjudication of the breach of contract cause of action, which the
court granted. The parties then settled all claims for $2.1 million
pursuant to a “Payment Agreement,” which included a schedule
with varying installment amounts to be paid by R&W between
December 15, 2014 and December 31, 2015.
       The parties also executed a stipulation for entry of
judgment (attached to the Payment Agreement as Exhibit A),
which the Osteroid Parties could file by ex parte application in
the event “of any failure by [R&W] to timely cure any non-
payment . . . .” The stipulation for entry of judgment stated in
the event of a default on the payment plan, R&W is “liable to pay
$2,800,000 to the Osteroid Parties, plus interest accrued thereon
at the post-judgment legal rate from the date of the execution of
this stipulated judgment. This total amount shall be reduced by
any payments that [R&W] paid under the Payment Agreement,
with payments applied first to any outstanding interest before
being applied to the principal amount of this stipulated
judgment.”
       Oster died on March 2, 2017. Tatiana Sedycheva, Oster’s
widow and Special Administrator of Oster’s estate, retained
counsel and sent a notice of default on February 2, 2018, and a
revised notice of default on February 9, 2018, stating “unless the
default in payments is cured within 5 days of this letter . . . I will
shortly thereafter seek entry of judgment on an ex parte
basis, . . . .”
       On February 16, 2018, Sedycheva filed an ex parte
application to enforce the stipulation for judgment under Code of

                                  4
Civil Procedure section 664.6. The trial court continued the ex
parte hearing and ordered additional briefing, including a
supplement from R&W with proof of what amounts had been
paid. R&W filed a supplemental opposition arguing R&W “fully
satisfied [its] obligations under the Payment Agreement on
February 8, 2016.” It claimed Osteroid signed an electronic
receipt on February 5, 2016 for “32 kilos of pure gold valued at
$1,177,000 and $83,000 in cash” which stated ‘“[a]s of today there
is only outstanding [balance] of $50,000 to be paid Monday
Februaey [sic] 8, 2016.”’ It further claimed the remaining
“$50,000 was paid by check on February 5, 2016.”
       The trial court granted the application to enforce the
stipulated judgment, reasoning “no one disagrees that whatever
was due was not paid on time. I’m not seeing that anywhere, and
that being the case, the agreement would have been breached.”
The court also held the stipulated judgment did not contain a
liquidated damages provision, but rather “a number that was
reasonable from [the parties’] perspectives as to the damages in
the case . . . .” Based on the terms of the stipulated judgment, the
court entered judgment for $3,654,655. The court advised R&W
it could file a demand for satisfaction of judgment and request a
stay of the judgment pending an evidentiary hearing on the
dispute over the amount of the debt R&W previously paid. R&W
timely appealed from the judgment.

                                 5
                         DISCUSSION

I.    The Trial Court Did Not Err In Determining R&W
      Breached the Agreement

      A motion to enforce a settlement agreement under Code of
Civil Procedure section 664.6 provides a summary procedure “for
specifically enforcing a settlement contract without the need for a
new lawsuit.” (Weddington Productions, Inc. v. Flick (1998) 60
Cal. App. 4th 793, 809.) “Factual determinations made by a trial
court on a section 664.6 motion to enforce a settlement must be
affirmed if the trial court’s factual findings are supported by
substantial evidence. [Citations.] Other rulings are reviewed de
novo for errors of law. [Citation.].” (Id. at p. 815.)
      The settlement agreement provides if the “Osteroid Parties
do not timely receive a payment,” they “shall provide notice of
such non-payment” and R&W “shall then have five (5) calendar
days . . . to cure the deficiency.” It also provides, in the event
R&W fails to timely cure, the “Osteroid Parties may file the
Stipulated Judgment on ex parte notice . . . .” R&W concedes it
received a notice of default before Sedycheva filed the ex parte
application.3 Setting aside the conflicting evidence of whether,
and how much, R&W paid of the settlement amount, R&W’s own
evidence demonstrated the payments were not paid timely in
accordance with the payment schedule. Because R&W breached
the agreement, the Osteroid Parties were entitled under the
terms of the agreement to judgment for “$2,800,000 . . . plus

3     R&W argues the notice was sent two years after the alleged
default, but nothing in the agreement requires the notice be sent
within a certain number of days of the default.

                                 6
interest accrued thereon at the post-judgment legal rate from the
date of the execution of this stipulated judgment.”
       The Payment Agreement does not appear to allow for
litigation of the amount that had been paid, if any, in advance of
entry of the stipulated judgment. This is something the trial
judge commented on: “[T]his is different from the language that I
usually see because a stipulation for judgment usually says that
if there is a breach, the plaintiff is to recover a judgment for X
amount minus whatever has been paid” but here the agreement
states “judgment shall be entered . . . in the event of default” and
then the “total amount shall be reduced by any payments that
judgment debtors have paid.”
       Thus, the court entered judgment for $2.8 million plus
interest (less two agreed upon payments), noting R&W may file a
“demand for a satisfaction of judgment” and request a stay of the
judgment pending an evidentiary hearing to determine whether
the judgment should “be reduced by any [additional] payments
that [R&W] . . . paid under the Payment Agreement . . . .”
       R&W contends the trial court erred in entering judgment
because it: (1) ignored evidence of R&W’s payment in full of the
settlement agreement amount; and (2) concluded R&W breached
the agreement because not all payments were timely made
without giving R&W an opportunity to refute this finding. We
reject these arguments.
       First, the court was well within its discretion in declining
to give any weight to a “receipt” purportedly containing
Osteroid’s electronic signature or testimony offered in support of
its authentication. In opposition to Sedycheva’s ex parte
application, R&W attached a receipt to the declaration of Mikhail
Cheban, the President of Red & White Distribution Sacramento,

                                 7
LLC, stating the receipt is a “true and correct copy of a receipt
that was signed by Eric Oster in my presence for 32 kilos of gold
and $83,000 in cash I caused to be paid to him.” As the court
correctly stated, “as to this supposed-receipt . . . signed
electronically, you would have to bring in your experts . . . to talk
about these machines and how they work. I don’t know. Mr.
Oster may have signed for something at some prior occasion, and
the language next to that receipt subsequently gone back and
been redacted and changed to say what the defendant now says
it’s claimed to have said at the time the signature was rendered.
So this [is] kind of almost like a backdating process, or whether
this is, in fact, his signature at all. Plaintiff has said it’s not.”
Thus, the trial court had insufficient evidence to determine R&W
paid the settlement in full, and was within its discretion to defer
resolution of that issue to a post-judgment evidentiary hearing.
        Second, R&W had ample opportunity to present evidence of
timely payments, if such evidence existed. Although the
agreement permitted the Osteroid Parties to file the stipulated
judgment on ex parte notice, the court continued the ex parte
hearing, and ordered additional briefing, including a supplement
from R&W setting forth proof of what amounts had been paid.
The only evidence R&W offered, however, demonstrated
payments were purportedly made in February 2016 (over a
month past due). Accordingly, the trial court’s determination
that R&W breached the agreement is supported by substantial
evidence.

                                  8
II.   The Stipulated Judgment Is an Unenforceable
      Penalty

       As noted above, under section 1671, subdivision (b), “a
provision in a contract liquidating the damages for the 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.” A
liquidated damages clause will generally be considered
unreasonable, and hence unenforceable under section 1671 if it
“bears no reasonable relationship to the range of actual damages
that the parties could have anticipated would flow from a
breach.” (Ridgley, supra, 17 Cal.4th at p. 977.) Whether an
amount to be paid upon breach is to be treated as an enforceable
liquidated damages provision or as an unenforceable penalty is a
question of law, which we review de novo. (Harbor Island
Holdings v. Kim (2003) 107 Cal. App. 4th 790, 794.)
       R&W contends the trial court erred in entering the
stipulated judgment using $2.8 million as the total settlement
amount. It contends $700,000 of that total was an unenforceable
penalty barred by section 1671 because R&W only owed $2.1
million under the settlement agreement. We agree.
       In Ridgley, our Supreme Court held “the charge of six
months’ interest on the entire principal, imposed for any late
payment or other default, cannot be defended as a reasonable
attempt to anticipate damages from default.” (Ridgley, supra, 17
Cal.4th at p. 981.) It 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

                                9
operation, our laws place limits on liquidated damages clauses.”
(Id. at pp. 976-977.) Justice Mosk dissented on the ground there
“is nothing illogical or unfair about the agreement.” (Id. at p.
983.) Instead, “[t]he prepayment clause was a negotiated
agreement between sophisticated commercial parties.” (Ibid.) As
the majority stated, however, “[t]hat plaintiffs are small business
owners rather than consumers, . . . does not deprive them of
section 1671’s protection against unreasonable penalties . . . .”
(Id. at p. 981, fn. 5.)
       In this case, the stipulated judgment for $2.8 million bears
no reasonable relationship to the range of actual damages the
parties could have anticipated from a breach of the agreement to
settle the dispute for $2.1 million. “[D]amages for the
withholding of money are easily determinable—i.e., interest at
prevailing rates . . . .” (Sybron Corp. v. Clark Hosp. Supply Corp.
(1978) 76 Cal. App. 3d 896, 900.) The judgment, however,
provided for interest at the legal rate from the date of the
execution of the stipulated judgment, attorneys’ fees to enforce
the judgment, plus $700,000 more than the parties agreed to in
their settlement agreement. This additional $700,000 was an
unenforceable penalty. (Greentree Financial Group, Inc. v.
Execute Sports, Inc. (2008) 163 Cal. App. 4th 495, 501 (Greentree)
[holding the stipulated judgment amount for $45,000 constituted
an unenforceable penalty where the underlying settlement was
for $20,000].)
       The trial court declined to follow Ridgley and Greentree,
stating “I’m not inclined to go along with the argument that this
was a liquidated damage settlement per whatever that case was.
I’d be inclined to follow the later case [Jade Fashion & Co., Inc. v.
Harkham Industries, Inc. (2014) 229 Cal. App. 4th 635 (Jade

                                 10
Fashion)] and, frankly, any other case I could find. I think that
first case [presumably Greentree] is bad law. Bad cases make bad
law.”
       Jade Fashion is not at all inconsistent with Ridgley and
Greentree, however. In Jade Fashion, the court held it is
permissible under section 1671 for the parties to agree to a
discount for timely payment of an admitted debt. (Jade Fashion,
supra, 229 Cal.App.4th at p. 649.) Thus, based on Jade Fashion,
if the parties stipulate that the debt is a certain number, they
may agree that it may be discharged for that number minus some
amount. They may also agree that in the event the debtor does
not timely make the agreed payments, a stipulated judgment
may be entered for the full amount.
       But that is not how the parties in this case structured their
agreement. Despite the Osteroid Parties’ repeated claims to the
contrary, nothing in the settlement agreement nor the appellate
record demonstrates R&W admitted it owed $2.8 million. Rather,
the settlement agreement states R&W is “liable to pay to the
Osteroid Parties $2,100,000.00 (“Total Payment Plan Amount”)
plus interest thereon . . . .” Had the parties intended to settle for
$2.8 million, but apply a discount for timely payments, they could
have done so expressly. The parties could have, but did not,
include terms in the agreement stating R&W is liable to pay the
Osteroid Parties $2.8 million, but so long as all payments are
timely made in accordance with the payment schedule, the
amount due shall be discounted to $2.1 million.
       The rules in this area may be subject to legitimate criticism
that sophisticated parties should be free to include a substantial
penalty for default. While we generally support freedom of
contract, on this issue both the Legislature and our Supreme

                                 11
Court have spoken, however, and we are bound by their
pronouncements. Thus, we conclude the stipulated judgment
constitutes a $700,000 unenforceable penalty for breach of the
agreement.4

4      At one of the hearings, the trial court stated “the parties
themselves attempted to reach a number that was reasonable
from all of their perspectives as to the damages in the case, and
I’m convinced that’s what the settlement agreement in this case
reflected, no liquidated damage provision.” The Osteroid Parties
contend this comment reflects a finding by the trial court that the
parties agreed the debt was $2.8 million, exclusive of any penalty.
We do not read it that way, but if we did, it would not be
supported by substantial evidence, or any evidence.

                                12
                        DISPOSITION

      The judgment is reversed in part and the matter is
remanded to the trial court with directions to reduce the
judgment to $2.1 million, less agreed upon payments of $45,000
and $56,000, plus interest from the date of the execution of the
stipulated judgment. On remand, the trial court may also
conduct one or more evidentiary hearings to determine the
portion of the judgment that has been satisfied. It may also hear
and decide a motion for attorneys’ fees under the attorneys’ fees
provision in the stipulated judgment. The parties shall bear their
own costs on appeal.

              CERTIFIED FOR PUBLICATION

                                                     CURREY, J.

WE CONCUR:

      MANELLA, P. J.

      WILLHITE, J.

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