Wolf Wallenstein & Abrams’ Ellen Kaufman Wolf Published in L.A. Daily Journal

WOLF GROUP L.A.’S ELLEN KAUFMAN WOLF PUBLISHED IN L.A. DAILY JOURNAL: DISCOUNTED PAYMENTS IN SETTLEMENT (OR STIPULATED JUDGMENT?) MAY NO LONGER BE A “PENALTY”:

Creditors may be able to better enforce their “full balance” stipulated judgments—which often provide for higher or “full debt balance” judgment amounts if agreed discounted payments are not timely made. Such stipulated judgments have historically been subject to attack as containing an “unenforceable penalty,” but a recent case may change these results. [Link to Daily Journal article? – text set forth below]. In the 2014 case of Jade Fashion & Co., Inc., v. Harkham Industries, Inc. (2014) 2014 Lexis 807, an appellate court found that offering a discount for timely payments in a workout did not render the higher original balance an “unenforceable penalty.” This case is contrary to the earlier cased of Greentree Financial Group, Inc. v. Execute Sports, Inc. (2008) 163 Cal.App.4th 495, and Purcell v. Schweitzer (2014) 224 Cal.App.4th 969, which provided that a stipulated judgment by which the creditor agreed to to accept less than the full debt balance if the smaller amount were timely paid, novated and superseded the original debt contract and made the original outstanding balance uncollectible as an “unenforceable penalty.” The Greentree court reasoned that the agreement to pay the creditor additional sums (e.g., the original outstanding balance), in the event the discounted payments were not made, constituted liquidate damages; under Civil Code §1671, liquidated damages are enforceable unless the party seeking to invalidate the provision shows that the provision was unreasonable under the circumstances existing at the time the provision was made. The courts have held that liquidated damages must bear some reasonable relationship to the range of actual damages that the parties could have anticipated would result from a breach of the contract terms. The newer, and more reasonable ruling in the Jade case, did not clearly articulate distinctions with the Greentree case, but may inform that, under the current circumstances, perhaps the best approach is to try to construct a settlement agreement or stipulated judgment that follows the terminology of Jade as much as possible:

• Have the defendant agree to the total amount owing and that it is actually due and owing and not disputed;
• Have the defendant acknowledge that the amount was owed in exchange for goods, or services, or a loan;
• Have the defendant acknowledge and agree that the lower amount is an inducement for prompt and earlier payment, and not a compromise or novation of the actual amount owed;
• Have the defendant acknowledge and agree that the higher amount is not a liquidated damage, penalty or otherwise unenforceable;
• Don’t use the word “compromise” or settlement, but use “forbear” where possible;
• Make it as clear as possible in the settlement that any deviation from the agreed forbearance conditions by the defendant will result not in a penalty or forfeiture, but rather in the cessation of forbearance and the enforcement of the defendant’s agreement to pay the amount actually due. (Include standard terms of future nonwaiver by failure to act on any particular event of untimely payment.)
• Don’t forget to include attorney fees to be shown by Declaration at Entry of Judgment and thereafter via Memo of Costs (This did not happen in )

And, don’t forget to advise your client of the risks of litigation expense and result, despite your adherence to the language in Jade