Sybron Corp. v. Clark Hosp. Supply Corp.

• Decision Date: 18 January 1978
• Court: California Court of Appeals Court of Appeals
• Parties: SYBRON CORPORATION, Plaintiff and Respondent, v. CLARK HOSPITAL SUPPLY CORP., d.b.a. Scientific Surgical Supply Company, Century City Hospital, and Pacific Coast Medical Enterprises, Inc., Defendants and Appellants. Civ. 50943.

Page 306

143 Cal.Rptr. 306

76 Cal.App.3d 896

SYBRON CORPORATION, Plaintiff and Respondent, v. CLARK HOSPITAL SUPPLY CORP., d.b.a. Scientific Surgical Supply Company, Century City Hospital, and Pacific Coast Medical Enterprises, Inc., Defendants and Appellants.

Civ. 50943.

Court of Appeal, Second District, Division 2, California.

Jan. 18, 1978.

Blacker & Stauber by Sidney G. Blacker, Los Angeles, for defendants and appellants.

Latham & Watkins by Lance B. Wickman, Los Angeles, for plaintiff and respondent.

FLEMING, Associate Justice.

Respondent seller sued appellant buyers for payment of $143,977.68 for hospital beds delivered under contract. Appellants raised affirmative defenses of defective goods and out-of-court rescission and also cross-complained for damages of $159,739. Under a settlement reached on 2 December 1975 appellants agreed to pay respondent $72,000 in twelve equal monthly installments with interest on the unpaid balance at 10 percent, with the proviso that if appellants should default on any payment, then, after 10 days notice of default and opportunity to cure, stipulated judgment for $100,000 could be entered in respondent's favor. After paying $42,000 appellants became delinquent, and on proper notice, respondent on 24 August 1976 obtained a stipulated judgment for $100,000. On 15 October 1976 appellants offered to pay with interest the delinquent installments owing on the agreed $72,000, an offer which respondent rejected. Thereafter on October 26 appellants moved to set aside the judgment, claiming surprise and excusable neglect under Code of Civil Procedure section 473 and requesting equitable relief from forfeiture under Civil Code section 3275. ¹ The motion was denied. On appeal appellants principally contend that the $28,000 differential between the installment obligation of $72,000 and the stipulated judgment of $100,000 constitutes an unenforceable penalty and forfeiture imposed on them for nonpayment of $30,000. (Civ.Code, §§ 1670, 1671, 3275.) ²

Appellants' installment payments under the December 1975 agreement were late five times. The installment due 3 March 1976 was not paid until March 24. The May 3 installment became delinquent, and was not paid until after May 28. Finally, the June and July installments were both missed, and on July 9 respondent demanded payment and gave formal notice of default under the agreement. On July 13 and 19 appellants submitted two checks in payment of the delinquent installments but one of these checks was returned on August 3 for insufficient funds. The August installment likewise remained unpaid. Respondent thereupon obtained the $100,000 stipulated judgment. In appellants' motion to

set aside the judgment, they asserted their bank mistakenly returned their check for insufficient funds, because although there were insufficient funds in the account on which the check was drawn, appellants had authorized the bank to use funds from other accounts to cover checks drawn on this account. The trial court rejected this excuse as unsupported by the record.

DISCUSSION

1. The decision to set aside a judgment for surprise or excusable neglect under Code of Civil Procedure section 473 rests in the sound discretion of the trial court, and in the absence of clear abuse that decision will not be disturbed. We find no abuse of discretion here. (E. g., Price v. Hibbs (1964) 225 Cal.App.2d 209, 37 Cal.Rptr. 270.)

2. This cause, however, additionally involves the more difficult problem of the enforceability of an agreed contract containing ostensibly penal provisions. Under California law liquidated damages not reasonably related to actual damages are unenforceable and void as penalties. An exception exists where damages cannot readily be ascertained (Civ.Code, §§ 1670, 1671, supra, footnote 2), but since damages for the withholding of money are easily determinable i. e., interest at prevailing rates penal provisions for mere delay in the payment of money are not ordinarily enforceable. (Civ.Code, § 3302; Knight v. Marks (1920) 183 Cal. 354, 357, 191 P. 531.) Although provisions for liquidated damages for late payments can be characterized as provisions for alternative performance rather than penalties, and were once enforced as such (see Hellbaum v. Lytton Savings and Loan Assn. (1969) 274 Cal.App.2d 456, 79 Cal.Rptr. 9), it is now clear that when such " late charges" bear no relation to actual damages for delay, they are void. (Garrett v. Coast & Southern Fed. S. & L. Assn. (1973) 9 Cal.2d 731, 740, 108 Cal.Rptr. 845, 511 P.2d 1197.) Furthermore, the burden falls on the party seeking to enforce liquidated damages to establish that damages for delay were impracticable to ascertain at the time the contract specifying liquidated damages was executed. (Lowe v. Mass. Mut. Life Ins. Co. (1976) 54 Cal.App.3d 718, 734, 127 Cal.Rptr. 23.) And, finally, the substance of the transaction governs, rather than the parties' characterization of the form in which it has been cast. (Garrett, supra, pp. 735-37, 127 Cal.Rptr. 23.)

Garrett expressly held that late charges assessed under savings and loan installment notes are void when not based on attempts to estimate "a fair compensation for a loss which would be sustained on the default of an installment payment." (9 Cal.3d at 740, 108 Cal.Rptr. at 851, 511 P.2d at 1203.) Damages for wrongful withholding of money are fixed by law, said the court, and other damages resulting from a borrower's default, such as administrative and accounting costs, "would not appear to present extreme difficulty in prospective fixing." (p. 741, 108 Cal.Rptr. p. 852, 511 P.2d p. 1204.)

Subsequent to Garrett several cases have considered contract provisions challenged as penal under Civil Code sections 1670 and 1671. In Lowe v. Mass. Mut. Life Ins. Co. (1976) 54 Cal.App.3d 718, 728, 732-33, 127 Cal.Rptr. 23, the court upheld retention of a 2 percent stand-by deposit to secure a real estate loan commitment, in that the deposit (1) was in the nature of an option that gave the borrower further time to shop around, and (2) was reasonable in amount. In Western Camp Inc. v. Riverway Ranch Enterprises (1977) 70 Cal.App.3d 714, 725-27, 138 Cal.Rptr. 918, the court upheld a lump-sum payment for termination of a sublease as a valid alternative performance provision. In Blank v. Borden (1974) 11 Cal.3d 963, 970, 971-2, 115 Cal.Rptr. 31, 524 P.2d 127, the court upheld the withdrawal-from-sale provision of an exclusive authorization to sell real estate, concluding that such provision was neither a penalty nor a claim for liquidated damages, but rather a claim of indebtedness under contract provisions which presented a true alternative choice of performance. The court in Blank quoted a passage from McCormick on Damages which helps clarify the distinction between alternative performance and penalty "(I)n . . . an alternative contract the promise to pay may be a penalty, and void as such. If a contract provides that A will either convey land then worth about $10,000 within six months at a price of $10,000 or will pay $250, it is quite clear that a reasonable man might look forward to either choice as a reasonable possibility, and there is no reason for hesitating to enforce the promise to pay if the land is not conveyed. If, on the other hand, A's promise provides that he shall either pay $100 on January 1st or $200 on demand thereafter, a different situation is presented. No reasonable man would, when the contract was made, consider that there was any rational choice involved (conceding the ability to pay either sum) in determining which course to pursue. If he can do so, he will pay the lesser sum, and the agreement necessarily is founded on this assumption, and the only purpose and effect of the formal alternative is to hold over him the larger liability as a threat to induce prompt payment of the lesser sum. Consequently, while an alternative promise to pay money when it presents a conceivable choice is valid, yet, if a contract is made by which a party engages himself either to do a certain act or to pay some amount which at the time of the contract no one would have considered an eligible alternative, the alternative promise to pay is unenforceable as a penalty." (McCormick, Damages, (1935), § 154, pp. 617-18.)

In contrast to the foregoing cases a provision for retention of a $25,000 liquidated damages deposit for failure of the buyers to purchase real property was held invalid as a penalty clause in Cook v. King Manor and Convalescent Hospital (1974) 40 Cal.App.3d 782, 792, 115 Cal.Rptr. 471. The court found no evidence that damages were difficult or impossible to ascertain and declared that the language used by the parties was not controlling, in that parties may not circumvent the public policy of section 1670 and 1671 by characterizing penalties as something else. ³

Two other cases are factually close to that at bench and relevant to the issue of stipulation Chambreau v. Coughlan (1968) 263 Cal.App.2d 712, 69 Cal.Rptr. 783, and Los Angeles City School District v. Landier Investment Co. (1960) 177 Cal.App.2d 744, 2 Cal.Rptr. 662. In Chambreau, the parties stipulated to judgment for $8,025, but agreed to stay execution provided defendant paid the lesser sum of $5,500 in regular monthly installments. On default, the larger judgment would become effective. Defendant paid the full $5,500 but was late in paying one installment. The court disallowed plaintiff's attempt almost two years later to execute on the greater judgment, concluding that defendant was entitled to equitable relief from forfeiture under Civil Code section 3275. In Landier, the parties stipulated that defenda...