California Case Law Update for Credit Professionals and Risk Managers
Posted by GibbsGiden Under California Law
The pandemic certainly did not slow down California’s Legislature and appellate courts. The following five appellate decisions significantly impact businesses that use standard form agreements, employ mechanics lien and related remedies to ensure payment for labor or materials on construction projects, rely on website/online terms and conditions, and agree to resolve debts with written agreements.
INCONSPICUOUS ARBITRATION (AND POSSIBLY OTHER CONTRACT) CLAUSES WILL NOT BE ENFORCED
The Domestic Linen Supply Co., Inc. v. L J T Flowers, Inc., 58 Cal. App. 5th 180 (2020) case should encourage all distributors and manufacturers that utilize standard form credit, sales, or rental agreements to carefully review their form contract documents to ensure enforceability. The pre-printed contract at issue was double-sided with the signature block at the bottom of the front page. And while the first paragraph on the front page clearly stated that the parties agreed to the terms on both the front and back pages, the Court of Appeal refused to enforce a contractual provision on the back page in 8-point font size noting that there was no heading, boldface, italics, or capitalization, and no place on the back page for the parties’ initials or signature. Specifically, the court said the clause was invalid “because the clause is as inconspicuous as a frog in a thicket of water lilies.”
Although the appellate decision focused on the enforceability of an arbitration provision in a form contract, suppliers should consider using bold, italics, capitalization, and larger font size for important contract provisions such as arbitration, limitation of liability, warranty, guarantees, and other clauses. In addition, businesses should carefully consider the location of the customer’s signature and initials on their contract forms.
In order to bind parties to new terms pursuant to a change-of-terms provision, both parties must have notice that the terms have changed and an opportunity to review the changes.
Although the Stover v. Experian Holdings., No. 19-55204 (9th Cir. Oct. 21, 2020)decision may be important for consumer credit rights, the recent Ninth Circuit Court of Appeals decision is a reminder that businesses that use online terms and conditions should be wary of relying on unilateral change-of-terms clauses in their online terms and conditions. The issue before the court was whether a single website visit after assent to a contract containing a change-of-terms provision was enough to bind the parties to the terms of the newly revised contract. The Ninth Circuit Court of Appeals determined that it was not and applied the original contract terms. The Court noted that in Douglas v. United District Court for the Central District of California decided in 2007, the court determined that lack of notice will make changed terms unenforceable even if a plaintiff visited the website where the new contract was posted. This is because contracting parties have no obligation to check the terms on a periodic basis to see if anything has changed.
What lessons can businesses take away from the Stover decision? For new customers, make sure the customer is properly presented with your up-to-date terms as part of the initial credit agreement/sales contract including through a proper incorporation by reference clause. For existing customers, businesses should consider written notices or specific email alerts (or both), letting customers know that your terms, conditions, and/or policies have been updated and changed. It may be best practice to enclose the entirety of the new updated terms, or at least include a brief summary of the revisions, in addition to links to the updated terms or policies themselves. It is also important to reference the revision date of the new terms and to be sure to keep a copy of a complete set of terms and conditions for each such revision date. Finally, ensure that each change-of-terms are documented/recorded in a way in which the business could prove that the change occurred if and when it has to.
Stipulated judgments will be unenforceable penalties when there is no meaningful effort to anticipate the damages that may flow from a breach of the stipulation
The Graylee v. Castro, 52 Cal. App. 5th 1107 (2020) appellate decision was the latest of several decisions on the enforceability of liquidated damages and, specifically, stipulations for entry of judgment. A stipulation for entry of judgment is often used in the settlement of collection-type cases as “the stick” to ensure the debtor follows through with installment payments required under a settlement agreement. In Graylee, the specific issue on appeal was whether a stipulation for entry of judgment by a tenant/debtor was an unenforceable penalty under Civil Code section 1671(b).
Civil Code section 1671(b) states that a liquidated damages clause will be valid unless it “bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.” To determine whether the tenant’s stipulated judgment was an unenforceable liquidated damages clause the Court of Appeal analyzed other recent cases including Greentree Financial Group, Inc. v. Execute Sports, Inc., 163 Cal.App.4th 495 (2008) and Jade Fashion & Co., Inc. v. Harkham Industries, Inc., 229 Cal.App.4th 635 (2014). Taken together, these cases provide valuable guidance on using a stipulated judgment to secure payment of a settlement.
What is the key takeaway for creditors that want the ability to use the carrot and stick of a stipulation for entry of judgment? Make it clear in the settlement documents and stipulated judgment that the parties agree to a discount for the timely payment of an admitted debt. As Judge Brian Currey of the Second Appellate District noted in Red & White Distribution, LLC v. Osteroid Enterprises, LLC, 38 Cal.App.5th 582, 589 (2019):
“Based on Jade Fashion, if the parties stipulate that the debt is a certain number, they may agree that it may be discharged for that number minus some amount. They may also agree that in the event the debtor does not timely make the agreed payments, a stipulated judgment may be entered for the full amount…. We publish [this case] to remind practitioners whose clients settle a dispute involving payments over time how to incentivize prompt payment properly, and what may happen if done incorrectly.”
WHEN A DEBTOR MAKES PAYMENTS “ON ACCOUNT” AND FAILS TO DIRECT THE CREDITOR REGARDING HOW PAYMENTS SHOULD BE APPLIED, THE CREDITOR MAY DETERMINE HOW TO APPLY PAYMENTS TOWARD ANY PARTICULAR DEBT OR OBLIGATION; MECHANICS LIEN RIGHTS EXTEND TO PROPERTIES BENEFITTED BY WORK PERFORMED; PREJUDGMENT INTEREST ON A MECHANICS LIEN CLAIM IS 7%
In Carmel Development Co., Inc. v. Anderson, 48 Cal.App.5th 492 (2020), the Court of Appeal took on several important topics concerning the proper application of payments, the extent of real property to which mechanics lies attach based on the benefit provided by the work performed, and the appropriate measure of interest in mechanics lien foreclosure actions. Three distinct lessons came from this appellate decision.
Application of Payments
First, the court explored the application of Civil Code section 1479 which often is extremely important in the construction context when an owner or contractor owes amounts to other contractors or suppliers under several different invoices, payment applications, or job accounts. Specifically: (1) If, at the time of performance, the debtor indicates that its performance is to be applied to a particular obligation, then the performance must be applied to the particular obligation specified; (2) If no such indication is made by a debtor, then within a reasonable time after performance by the debtor, the creditor may apply such performance to any obligation he or she desires (as long as the application is made before a lawsuit is filed); and (3) If no indication is made by a debtor, and a creditor does not apply a debtor’s performance to a particular obligation within a reasonable time after performance by the debtor, the performance is to be applied in the following order: (a) to interest due at the time of performance; (b) to principal due at the time of performance; (c) to the obligation earliest in date of maturity; (d) to an obligation not secured by a lien or collateral; and, finally (e) to an obligation secured by a lien or collateral. In this case, the Court of Appeal allowed the contractor to apply the owner’s payments to the project invoices that the contractor itself decided appropriate since the owner failed to designate how payments were to be applied and the contractor applied such payments on the owner’s account before it filed suit.
Applicability of Mechanics Liens to Particular Lots
The Court of Appeal reiterated a principle previously articulated by the California Supreme Court that with respect to the extent of real property to which a mechanics lien attaches, the focus must be the amount of land to be improved or benefitted by the creation and use of the improvements. In this case, the appellate court found that the construction of a water treatment plant was intended to provide water to all of the lots in a subdivision and, therefore, the lien recorded for the water treatment plant work could not be only allocated to specific lots within the subdivision. On the other hand, the construction of roads and related infrastructure only benefitted lots constructed in two particular phases of the project and had little impact on the rest of the development. As such, the separate mechanics lien recorded in connection with the construction of roads and related site improvement should only be allocated to the lots benefited by such work.
Interest on Mechanics Lien Claims
The Court of Appeal finally held that while prejudgment interest is awardable in a mechanics lien foreclosure action, whether the applicable interest rate is ten percent (10%) or seven percent (7%) depends on who the defendant is. Specifically, according to the court, the ten percent interest rate under Civil Code Section 3289 (which applies to breach of contract claims) would apply to claims between a mechanics’ lien claimant and a party with whom it is in direct contract (e.g., a direct contractor and project owner). However, the lower seven percent (7%) interest rate under Constitution (which does not require that there was a contract) applies to claims between a mechanics’ lien claimant and a party with whom it is not in direct contract.
MECHANICS LIENS ARE A PROTECTED PETITIONING ACTIVITY UNDER THE LITIGATION PRIVILEGE EVEN IF THEY ARE INVALID AND DUPLICATIVE OF FORMER LIENS; A SLANDER OF TITLE CLAIM TO REMOVE A MECHANIC’S LIEN CAN BE STRUCK DOWN BY AN ANTI-SLAPP MOTION.
The result of the RGC Gaslamp case (RGC Gaslamp, LLC v. Ehmcke Sheet Metal Co., Inc., 56 Cal.App.5th 413 (2020)) may be surprising to many based on the facts of the case. RGC Gaslamp, LLC (“RGC”) hired Ehmcke Sheet Metal (“Ehmcke”) to perform sheet metal installation and fabrication on a hotel project. Ehmcke claimed that it was not being paid by RGC and filed and recorded a mechanics lien for $257,978. The following month, RGC secured and recorded a bond from Liberty Mutual for $322,473 to release the lien. Ehmcke then filed a second mechanic’s lien identical to the first one. A few months later, Ehmcke filed and recorded a series of documents in which it withdrew the first and second liens and filed a third identical lien. RGC then obtained another bond from Liberty Mutual, which led Ehmcke to release the third lien and file a fourth. After the fourth lien, RGC filed a lawsuit against Ehmcke for quiet title, slander of title, and declaratory and injunctive relief. RGC argued that the fourth lien was untimely and would damage its property in excess of $2 million. Ehmcke immediately removed the fourth lien and filed an anti-SLAPP motion contending that its liens were protected petitioning activity under the litigation privilege. The trial court granted Ehmcke’s anti-SLAPP motion holding that the fourth mechanic’s lien was protected by the litigation privilege because that privilege “is absolute and applies irrespective of Ehmcke’s evil motives or total lack of merit of the recorded lien.” Ehmcke received $30,000 in attorney’s fees and $1,062 in costs.
The Court of Appeal affirmed the trial court’s ruling in favor of Ehmcke and determined that Ehmcke’s anti-SLAPP motion was properly granted because the filing of mechanics liens constitutes protected activity, even if the liens are invalid or otherwise improper. While the appellate court noted that RGC could have proceeded with its quiet title action if the mechanics lien had remained on the property, RGC could not attack Ehmcke with a claim of slander of title. The court also suggested that RGC could have sought declaratory or injunctive relief allowing it to post a single bond to release all duplicative liens. Also, it should be noted that the RGC Gaslamp decision puts in doubt a previous appellate decision (A.F. Brown Electrical Contractor, Inc. v. Rhino Electric Supply, Inc., 137 Cal.App.4th 1118 (2006)) and may in the future allow a stop payment notice claimant to successfully use the litigation privilege to protect service of a stop payment notice since it is a prerequisite to a stop payment notice enforcement action.
Written for NACM March 15, 2022. See the original here: https://www.nacmcommercialservices.org/california-case-law-update-for-credit-professionals-and-risk-managers/
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Christopher Ng is an equity partner, executive committee member, and the managing partner of Gibbs Giden. Chris primarily represents companies in a wide range of business, commercial and construction negotiations and disputes. Chris is a member of the State Bar of California and District of Columbia and licensed to practice in all California state and federal courts. Chris is also an educator, active speaker, published author and frequent contributor to local, regional and national legal publications. For his achievements, Chris has been named to the “Rising Star” and “Super Lawyers” lists by Los Angeles Magazine and Super Lawyers® (Thomson/Reuters) regularly since 2009 (including again in 2020), a distinction conferred upon less than 5% of all California attorneys. Chris was also named the 2015-2016 “Educator of the Year” by Credit Management Association (CMA).
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