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Settlements and Unenforceable Penalties

When a case is settled, and the defendant will make payments over time, it's common to include a stipulated judgment. But if the amount of the stipulated judgment is legally found to be a penalty, the settlement will not be enforceable. If a stipulated judgment imposes liquidated damages of $1.1 million, is that stipulated judgment enforceable? Last month, the Third District Court of Appeal published a decision addressing this issue. To find out what they decided, watch the video above and read my summary of the case below.

New Settlement Decision  

Gormley v. Gonzalez (2022) _ Cal.App.5th _ , 2022 WL 6924078: The Court of Appeal affirmed the trial court’s order granting plaintiffs’ motion to enforce a settlement agreement and entering judgment against defendants in the amount of $1,393,084 (the settlement amount of $575,000 plus $818,084 in liquidated damages). Plaintiffs in 20 separate medical malpractice lawsuits (plaintiffs) filed against two doctors and a medical spa and the defendants in those lawsuits (defendants) resolved the underlying lawsuits by entering into a global settlement agreement pursuant to which defendants agreed to pay plaintiffs $575,000 in two installments. If the installments were not paid on time, liquidated damages would be assessed at the rate of $50,000 per month and $1,644 per day, up to a cap of $1.5 million. The trial court rejected defendants’ argument that the liquidated damages provision was unreasonable and thus invalid pursuant to Civil Code section 1671(b). The trial court properly considered all of the circumstances existing at the time the settlement agreement was negotiated, and it properly concluded defendants failed to meet their burden of establishing the liquidated damages provision was unreasonable under the circumstances existing at the time the contract was made. The parties were represented by counsel throughout the settlement negotiations, and the liquidated damages provision involved “significant negotiations” and “numerous drafts.” Although the parties estimated plaintiffs’ recovery at trial would be $1.5 million, defendants only had insurance for six of the 20 lawsuits, which meant plaintiffs might be unable to collect any judgments they obtained after trial. Plaintiffs thus agreed to accept a significantly reduced settlement amount ($575,000) in exchange for assurances that defendants would be able to pay that amount quickly. The liquidated damages provision was negotiated in order to incentivize prompt payment, and the damages were capped at $1.5 million, the amount the parties estimated plaintiffs would have recovered at trial. (C.A. 3rd, October 12, 2022.)

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Mediation, Arbitration & Referee Services

I help attorneys and their clients settle cases as a mediator, and decide cases or issues as an arbitrator or referee at ADR Services, Inc. I handle cases in the areas of business, employment, insurance bad faith, insurance coverage, legal malpractice, medical malpractice, personal injury, real property and wrongful death. I conduct Zoom and in-person hearings throughout California.
To schedule a matter, please contact my case managers at ADR Services, Inc., Haward Cho, (213) 683-1600, [email protected] or Rachael Boughan, (619) 233-1323, 
[email protected]. 

Stay safe and healthy.

Best regards,
Monty A. McIntyre, Esq.
California Case Summaries™
Mediator, Arbitrator & Referee
Master Lawyer Mentoring™
CA Civil Trial Attorney Since 1980
ABOTA Member Since 1995
Past President San Diego County Bar Assn., SD ABOTA Chapter
Phone: (619) 990-4312.
Email: [email protected]