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Court of Appeal:
Judge Erred in Adding Prejudgment Interest to Award
Where Parties Have Settled a Case, Trial Court May Not Insert Terms Not Contained in Agreement, Opinion Says
By a MetNews Staff Writer
A judge, in directing entry of a judgment pursuant to a settlement, may not tack on prejudgment interest where there was no provision for it in the parties’ agreement, Div. Four of the First District Court of Appeal has declared.
The holding comes in a portion of an opinion, filed Thursday, that was certified for publication. It reverses a judgment to the extent of wiping out the prejudgment interest award to the plaintiffs—BTHHM Berkeley, LLC, and others—in the amount of $55,671.52.
Justice Jeremy M. Goldman wrote the opinion that otherwise affirms the judgment by Alameda Superior Court Judge Patrick R. McKinney in the amount of $1,870,044.59 including $250,000, pursuant to a liquidated-damages clause based on timely payment not having been made. That clause, Goldman said in an unpublished portion of the opinion, doesn’t call for an unenforceable penalty.
CCP §664.6(a)
The judgment was made pursuant to Code of Civil Procedure §664.6(a), which provides:
“If parties to pending litigation stipulate, in a writing signed by the parties outside of the presence of the court…, for settlement of the case…, the court, upon motion, may enter judgment pursuant to the terms of the settlement….”
McKinney added prejudgment interest under the authority of Civil Code §3287(a). That provision says:
“A person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in the person upon a particular day, is entitled also to recover interest thereon from that day….”
No Variation
In explaining why the prejudgment award cannot stand, Goldman wrote:
“Section 664.6 authorizes the trial court to enter a judgment reflecting the terms of the parties’ settlement agreement—nothing more, and nothing less….
“Prejudgment interest is not a cost, but an element of damages….Here, the parties reached an agreement about what amount of money would adequately compensate BTHHM for the harm it suffered to warrant BTHHM’s release of claims. That agreement included a liquidated damages provision that would become operative if Johnston failed to make timely payment. By awarding prejudgment interest to compensate BTHHM for damages it suffered by virtue of Johnston’s failure to pay, the court entered a judgment that differed materially from the terms of the parties’ agreement, and to that extent it was unauthorized.”
Liquidated-Damages Provision
Defendant Stewart Johnston, who had been accepting rent payments from BTHHM in exchange for keeping premises owned by him vacant while BTHHM sought a permit from the City of Berkeley to operate a cannabis dispensary there, declined to surrender the premises once the permit was granted. The settlement agreement sets forth that in the event Johnson did not timely make the three scheduled payments, amounting to $16 million, “Plaintiffs shall have the right to immediately file the Stipulation for Entry of Judgment in the Action in the amount of the unpaid balance owed by Defendant plus $250,000….”
Johnston contested the validity of the liquidated-damages proviso. Goldman responded that under Civil Code §1671(b), a liquidated-damages provision “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.”
He said:
“[T]the parties were represented by counsel and had relatively equal bargaining power. The settlement was not a form contract, but rather the result of significant negotiations, including prior settlement conferences. In addition, the liquidated damages amount of $250,000 was not unreasonably out of proportion to the $2.2 million settlement….The trial court also concluded that Johnston failed to meet his burden to show $250,000 was an unreasonable amount in the circumstances, a determination to which we defer.”
Johnston pointed to a paragraph in the “settlement term sheet” specifying that “Parties agree to execute a final settlement agreement,” arguing that a binding settlement was not reached because such a formal document was not signed by him. Goldman responded in an unpublished portion of the opinion that McKinney “found, and we agree, that the term sheet is not ambiguous or indefinite, and objectively reflects a mutual intent to be bound by its terms.”
The agreement also recited that “Judge Warren is available to further assist the parties as necessary.” That reference was to the mediator, retired San Francisco Superior Court Judge James L. Warren, a grandson of Earl Warren, who served as governor of California and chief justice of the United States.
The ability of the parties to consult with the mediator, Johnston argued, shows that the parties did not intend the term sheet to be a final, binding agreement. Goldman said: “It would be entirely reasonable for the parties to seek the assistance of the mediator to flesh out—without materially altering—the terms of their agreement in the anticipated formal writing; to further negotiate non-material details of the agreement; to assist them in resolving any disputes regarding performance; or to address other minor issues. That they contemplated doing so only reinforces that they agreed to be bound, while acknowledging that the term sheet was not a formal, long-form agreement.” The agreement called for payment to the plaintiffs of $600,000 by cross-defendant Landmark Real Estate Management, Inc. which acted as Johnston’s property manager. That sum was paid.
The case is BTHHM Berkeley, LLC, et al. v. Johnston, 2024 S.O.S. 1167.
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