Filed 2/24/14; pub. order 3/17/14 (see end of opn.)




                   COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                               DIVISION ONE

                                        STATE OF CALIFORNIA



LENNOX A. PURCELL,                                      D063435

         Plaintiff and Appellant,

         v.                                             (Super. Ct. No. 37-2009-00059423-
                                                                        CU-BC-NC)
MICHAEL SCHWEITZER,

         Defendant and Respondent.


         APPEAL from a judgment of the Superior Court of San Diego County, Earl H.

Maas III, Judge. Affirmed.

         Soden & Steinberger, Robert J. Steinberger, Jason W. Cobberly; Boudreau

Williams and Jon R. Williams for Plaintiff and Appellant.

         The Perry Law Firm, Michael R. Perry, Larry M. Roberts and Michelle A.

Hoskinson for Defendant and Respondent.

         This action arises out of a promissory note in the amount of $85,000 given by

defendant Michael Schweitzer to plaintiff Lennox A. Purcell. After Schweitzer defaulted

on the promissory note, Purcell brought a lawsuit seeking to recover the monies he had
loaned him. The parties settled the action, with Schweitzer agreeing to pay the sum of

$38,000, along with interest at the rate of 8.5 percent, in installments over 24 months.

The settlement agreement also provided that payments were due on the first day of each

month. To be considered timely, payment had to be received no later than the fifth day of

the month. Of relevance to this appeal, the agreement provided that if a payment was not

made on time, it was considered a breach of the entire settlement agreement, making the

entire original liability of $85,000 due. The agreement also specified that that provision

did not constitute an unlawful "penalty" or "forfeiture."

       When Schweitzer was late on a payment, Purcell sought and was granted a default

judgment in the amount of $58,829.35. Schweitzer thereafter brought a motion to set

aside the default judgment, asserting the default judgment was the result of an unlawful

penalty. The court set aside the default judgment, finding that it constituted an

unenforceable penalty because the amount of the judgment bore no reasonable

relationship to the amount of damages Purcell would actually suffer as a result of

Schweitzer's breach.

       Purcell appeals, asserting the court erred in setting aside the judgment because (1)

Schweitzer waived his right to challenge the judgment on any grounds; and (2) the

judgment did not constitute an unenforceable penalty because it fairly represented the

amount of his damages. We affirm.1



1     Schweitzer asserts that the appeal should be dismissed because Purcell failed to
comply with California Rules of Court, rule 8.204(a)(2)(B) by failing to explain why the
appealed from order is appealable. However, Purcell has cured that defect in his reply
                                             2
                   FACTUAL AND PROCEDURAL BACKGROUND

       A. The Original Lawsuit and Settlement

       In September 2009 Purcell brought a lawsuit against Schweitzer and others to

recover the money he loaned them. In March 2010 Schweitzer signed a settlement

agreement with Purcell. Pursuant to that agreement, Schweitzer agreed to pay Purcell the

sum of $38,000, along with interest on the unpaid principal at the rate of 8.5 percent in

installments over 24 months. Monthly payments by Schweitzer then began on April 1,

2010, with a balloon payment of all remaining principal and accrued interest due on April

1, 2012. Schweitzer was to make an initial payment of $20,000, with the monthly

payments of $750 occurring thereafter. The payments Schweitzer made under the

payment plan ranged from $750 to $1,332.58.

       The settlement agreement also provided that all payments by Schweitzer were due

on the first day of each month and considered late if not actually received by the fifth

calendar day of the month. Moreover, the settlement agreement provided that in the

event of such a breach, a judgment for the full amount of Schweitzer's original liability of

$85,000 could be entered against him. The stipulation for entry of judgment attached to

the settlement agreement further provided that the $85,000 "is an agreed upon amount of

monies actually owed, jointly and severally, by the Defendant [Schweitzer] to the

Plaintiff [Purcell] and is neither a penalty nor is it a forfeiture." (Italics added.) That

section also provided that the $85,000 took into consideration "the economics associated


brief explaining that an order setting aside a judgment is appealable under Code of Civil
Procedure section 904.1, subdivision (a)(2).
                                               3
with proceeding further with this matter, including but not limited to: [¶] (1) A fully

performed settlement; [¶] (2) Limiting the continuing attorneys' fees and costs relating to

litigation; [¶] (3)Limiting attorneys' fees and costs relating to post-judgment procedures,

including without limitation debtor examinations, debtor and asset searches, levies, writs,

assignments and sister-state judgments; [¶] (4) Elimination of uncertainties relating to

collection of a Judgment in contrast to a full, voluntary payment and performance by

Defendant; and [¶] (5) Support for the public policy of judicial economy."

       Finally, the agreement provided that Schweitzer waived any right to an appeal and

any right to contest or otherwise set aside the judgment whether pursuant to Civil Code2

section 3275 "or otherwise."

       B. The Second Default Judgment

       In October 2011 Schweitzer failed for the first time to make a monthly payment on

time, paying it on October 11 instead of October 5. Purcell accepted that payment, even

though it was late.

       Nevertheless, Purcell applied for entry of judgment, and judgment was thereafter

entered on October 17, 2011, in the amount of $58,829.35, with $58,101.85 of that

amount identified as consisting of "punitive damages."

       Thereafter, Schweitzer continued to make payments pursuant to the stipulated

payment plan, making monthly payments in November and December 2011. The

December payment was the last payment due.



2      All further undesignated statutory references are to the Civil Code.
                                             4
       According to Schweitzer, he was informed by Purcell's attorney in August 2012

that there was a balance remaining on the payment plan of $67.42. Purcell denies that he

or his attorney ever said the balance due was $67.42. Rather, Purcell states that the

balance was $1,776.58 and supports this contention by pointing out that Schweitzer paid

that amount in August 2012. Payment of that balance was accepted by Purcell. Thus, as

of August 2012, the settlement had been paid in full.

       C. Motion To Set Aside Default Judgment

       Schweitzer thereafter brought a motion to set aside the second default judgment.

In that motion Schweitzer asserted that the stipulation and subsequently entered judgment

represented an unlawful penalty for his breach of the settlement agreement.

       Purcell opposed that motion, arguing the parties' agreement anticipated strict

compliance by Schweitzer and materially differed from other installment agreements

inasmuch as Schweitzer had expressly agreed that if he defaulted, the full amount would

be due and was not a penalty or a forfeiture. Purcell further asserted that the parties also

agreed that the full amount of the judgment was the actual amount of Purcell's damages,

that Schweitzer expressly waived his right to challenge that amount by moving to set

aside or appealing the judgment, and that such a waiver was fully enforceable and should

be enforced by the court.

       D. Court's Order

       The court granted the motion to set aside the default judgment, finding the

damages sought by Purcell bore no rational relationship to the damages Purcell would



                                              5
actually suffer as a result of Schweitzer's breach. The court further found Schweitzer's

waiver was unenforceable as against public policy.

                                       DISCUSSION

                                I. STANDARD OF REVIEW

       Because we are presented with a question of law on undisputed facts, our review is

de novo. (Harbor Island Holdings v. Kim (2003) 107 Cal.App.4th 790, 794.)

                                       II. ANALYSIS

       "[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."

(§ 1671, subd. (b), italics added.)

       However, a liquidated damages clause becomes an unenforceable penalty "if it

bears no reasonable relationship to the range of actual damages that the parties could

have anticipated would flow from a breach." (Ridgley v. Topa Thrift & Loan Assn.

(1998) 17 Cal.4th 970, 977.) "The amount set as liquidated damages 'must represent the

result of a reasonable endeavor by the parties to estimate a fair average compensation for

any loss that may be sustained.'" (Ibid.) "Absent a relationship between the liquidated

damages and the damages the parties anticipated would result from a breach, a liquidated

damages clause will be construed as an unenforceable penalty. " (Morris v. Redwood

Empire Bancorp (2005) 128 Cal.App.4th 1305, 1314.)

       Greentree Financial Group. Inc. v. Execute Sports, Inc. (2008) 163 Cal.App.4th

495 (Greentree), is instructive. The plaintiff brought an action for breach of contract

                                              6
against the defendant, alleging the defendant failed to pay $45,000 due under the

contract. The parties settled the action, which was memorialized in a stipulation for entry

of judgment. The stipulation provided defendant would pay a total of $20,000 in two

installments, but if defendant defaulted, plaintiff was entitled to have judgment entered

against defendant for the full amount prayed for in the complaint. After defendant

defaulted on the first installment payment of $15,000, plaintiff succeeded in having a

judgment entered for $61,232, consisting of $45,000 in damages, $13,912 in prejudgment

interest, $2,000 in attorney fees, and $320 in costs. (Id. at p. 498.)

       In reversing and directing the trial court to reduce the judgment to $20,000, the

Court of Appeal concluded the stipulated judgment amount constituted an unenforceable

penalty under section 1671. (Greentree, supra, 163 Cal.App.4th at pp. 500-501.)

       The Greentree court further explained that under section 1671, subdivision (b), a

liquidated damages clause constitutes an unenforceable penalty "'if it bears no reasonable

relationship to the range of actual damages that the parties could have anticipated would

flow from a breach. The amount set as liquidated damages "must represent the result of a

reasonable endeavor by the parties to estimate a fair average compensation for any loss

that may be sustained." [Citation.] In the absence of such relationship, a contractual

clause purporting to predetermine damages "must be construed as a penalty."'"

(Greentree, supra, 163 Cal.App.4th at p. 499.)

       Further, the relevant breach to be analyzed "is the breach of the stipulation, not the

breach of the underlying contract." (Greentree, supra, 163 Cal.App.4th at p. 499.) In

Greentree, the stipulation provided for payment of $20,000. But rather than attempting

                                              7
to anticipate the possible damages resulting from breach of the stipulation, the parties had

designated the full amount claimed as damages in the underlying lawsuit. The Court of

Appeal concluded the $61,232 judgment bore "no reasonable relationship to the range of

actual damages the parties could have anticipated from a breach of the stipulation to settle

the dispute for $20,000. '[D]amages for the withholding of money are easily

determinable—i.e., interest at prevailing rates . . . .' [Citation.] The amount of the

judgment, however, was more than triple the amount for which the parties agreed to settle

the case." (Id. at p. 500.)

       Purcell attempts to distinguish the Greentree case on the basis that the Court of

Appeal there was not confronted with a situation where the defendant provided an

"express waiver" of any challenges to the stipulated judgment "on any basis." He also

asserts that the parties agreed that the amount of the stipulated judgment reflected the

economics of proceeding further with the matter.

       However, "the public policy expressed in Civil Code sections 1670 and 1671 may

not be circumvented by words used in a contract; that whether or not a particular clause is

a penalty or forfeiture or a bona fide provision for liquidated damages depends upon the

actual facts existing at the time the contract is executed and whether or not, in fact, it was

then impracticable or extremely difficult to fix actual damages and that the parties did in

fact then make a good faith and reasonable effort to do so; that a litigant seeking the

benefits of a clause purporting to fix liquidated damages must plead and prove that the

clause is valid under the facts which then existed. The applicability of Civil Code section

1671 depends upon the actual facts not the words which may have been used in the

                                              8
contract." (Cook v. King Manor and Convalescent Hospital (1974) 40 Cal.App.3d 782,

792, italics added.)

       Here, the stipulation that allowed for entry of judgment in the amount of almost

$60,000 was likewise an unenforceable penalty because the underlying settlement was for

$38,000. The stipulation bore no reasonable relationship to the damages that it could be

expected that Purcell would suffer as a result of a breach by Schweitzer. This is shown

by the payment plan itself, which provided that Schweitzer would make payments of

$750 per month. Indeed, Purcell suffered no damages at all because judgment was

entered on October 17, after payment was accepted on October 11.

       Purcell's contention that the $85,000 amount reflected the economics associated

with "proceeding further" with the lawsuit is also unavailing. That provision in the

settlement agreement bore no reasonable relationship to damages he would be expected

to actually suffer as a result of a breach, such as the late payment that occurred in this

case. There is nothing in the record to support the fact that obtaining a judgment and

instituting postjudgment procedures would cost $85,000. Moreover, Purcell entered a

default judgment for alleged "punitive damages," not for costs associated with pursuing

the lawsuit.

       The language in the stipulation seeking to tie the $85,000 to the economics of

proceeding further with the matter was an obvious attempt to circumvent the public

policy expressed in section 1761. However, as discussed, ante, that public policy may

not be circumvented by words used in a contract. (Cook v. King Manor and

Convalescent Hospital, supra, 40 Cal.App.3d at p. 792.)

                                              9
       Finally, the judgment was improperly entered as "punitive damages." Punitive

damages are not recoverable in breach of contract actions. (Myers Building Industries,

Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 960.)

                                     DISPOSITION

       The order setting aside the default judgment is affirmed. Respondent shall recover

his costs on appeal.


                                                                      NARES, Acting P. J.

WE CONCUR:


HALLER, J.


McDONALD, J.




                                           10
Filed 3/17/14

                            CERTIFIED FOR PUBLICATION

                COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                      DIVISION ONE

                                   STATE OF CALIFORNIA



LENNOX A. PURCELL,                                 D063435

        Plaintiff and Appellant,

        v.                                         (Super. Ct. No. 37-2009-00059423-
                                                                   CU-BC-NC)
MICHAEL SCHWEITZER,

        Defendant and Respondent.


        The opinion filed February 24, 2014, is ordered certified for publication.

        Soden & Steinberger, Robert J. Steinberger, Jason W. Cobberly; Boudreau

Williams and Jon R. Williams for Plaintiff and Appellant.

        The Perry Law Firm, Michael R. Perry, Larry M. Roberts and Michelle A.

Hoskinson for Defendant and Respondent.



                                                                       NARES, Acting P. J.

Copies to: All parties
