Update: How to Draft a Settlement Agreement with Payments

At last, a California appellate decision has provided clear instructions on how to draft a settlement agreement with payments secured by a judgment that will stand up in court.

In a 2015 note, we discussed the law at that time on this topic and suggested how to draft an agreement that will withstand challenge. The recent decision in Red & White Distribution, LLC v. Osteroid Enterprises, LLC, 2019 DJDAR 7516 (August 9, 2019), validates our advice and provides a road map.

The Red & White case concerns a debt of $1.8 million plus interest and attorneys’ fees. To resolve it, the defendant agreed to make payments totaling $2.1 million secured by a judgment for $2.8 million. Defendant defaulted and, at plaintiff’s request, judgment was entered for $2.8 million.

The Court of Appeal voided the judgment for $2.8 million and ruled that the correct amount of judgment was $2.1 million, $700,000 less. This was based on the language of the settlement documents.

Under California law, a penalty for breach of contract is illegal. A settlement agreement is a contract.

The error in the Red & White settlement agreement was stating that defendant was “liable to pay the [plaintiff] $2,100,000.00 (‘Total Payment Plan Amount’) plus interest thereon....” The court is clear on the language needed to avoid this problem. “The parties could have, but did not, include terms in the agreement stating that [defendant] is liable to pay the [plaintiff] $2.8 million, but so long as all payments are timely made in accordance with the payment schedule, the amount due shall be discounted to $2.1 million.”

The rule is simple. A penalty for non-payment will not be enforced, but loss of a discount for prompt payment will be enforced.