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Contracts Liquidated Damage Civil_Code 1671
(Morris v. Redwood Empire Bancorp)

A. The Termination Fee Is Not a Liquidated Damage Under Civil Code Section 1671

The UCL defines “unfair competition” to include any “unlawful, unfair or fraudulent business act or practice . . . .” (Bus. & Prof. Code, § 17200.) This language is intended to protect consumers as well as business competitors; its prohibitory reach is not limited to deceptive or fraudulent acts, but extends to any unlawful business conduct. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 209-210.) “By proscribing ‘any unlawful’ business practice, ‘section 17200 “borrows” violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable.” (Cel-Tech, supra, 20 Cal.4th 163, 180.) In the second amended complaint, Morris alleges the termination fee runs afoul of two statutes. Specifically, he alleges the termination fee is an unreasonable liquidated damages provision in violation of Civil Code section 1671, and unconscionable under Civil Code section 1670.5.

Civil Code section 1671, subdivision (b), provides in relevant part: “[A] provision in a contract liquidating the damages for the breach of the contract 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.” Absent a relationship between the liquidated damages and the damages the parties anticipated would result from a breach, a liquidated damages clause will be construed as an unenforceable penalty. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.) The question whether a contractual provision is an unenforceable liquidated damages provision is one for the court. (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1393 (Beasley).) Although on demurrer a reviewing court ordinarily assumes as true the facts alleged in the complaint, a pleader’s legal characterization of a contract is not controlling, particularly when the contract is attached to the pleading. (See Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505.)

The $150 termination fee in the merchant agreement is not expressly denominated a liquidated damages provision. Nonetheless, as Morris correctly points out, to determine the legality of a provision, we examine its true function and operation, not the manner in which it is characterized in the contract. (See Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 737 [“We have consistently ignored form and sought out the substance of arrangements which purport to legitimate penalties and forfeitures”].) The merchant agreement’s termination provision reads as follows: “Any party may terminate this Agreement at any time with or without cause by providing written notice to the other parties. However, if Merchant terminates this Agreement, Bank and [Innovative] shall have thirty (30) days from date of receipt of the notice to delete Merchant’s account during which time Merchant shall remain liable for all fees and charges, including any monthly minimum processing charge and a termination fee of $150.00.”

Where a contract for a specified period of time permits a party to terminate the agreement before its expiration in exchange for a lump-sum monetary payment, the payment is considered merely an alternative to performance, and not a penalty. (See Blank v. Borden (1974) 11 Cal.3d 963, 970 (Blank).) In Blank, the Supreme Court held a contract allowing a real property owner to terminate a listing agreement with a broker before its expiration upon the payment of a specified fee was not a liquidated damages provision because the fee was not triggered by a breach or default under the agreement. The court noted the contract presented the owner with a true option or alternative, as follows: “[I]f, during the term of an exclusive-right-to-sell contract, the owner changes his mind and decides that he does not wish to sell the subject property after all, he retains the power to terminate the agent’s otherwise exclusive right through the payment of a sum certain set forth in the contract.” (Id. at p. 970.)

Morris distinguishes the case on the ground the merchant agreement has no termination date. Because the contract is of indefinite duration, Morris contends the merchant’s cancellation is effectively a “breach” of the agreement. We are not persuaded.

Although a contract’s characterization of a particular provision is not controlling, to constitute a liquidated damage clause the conduct triggering the payment must in some manner breach the contract. Perdue illustrates this point. There, the plaintiff alleged a bank’s NSF fee, charged to the bank’s customer whenever the customer wrote a check in an amount exceeding available deposits, was a liquidated damages provision subject to the scrutiny of Civil Code section 1671. In rejecting this contention, the court concluded, “because the depositor has never agreed to refrain from writing NSF checks, the writing of such a check is not a breach of contract.” (Perdue, supra, 38 Cal.3d at p. 932.)

Similarly, Morris never agreed not to terminate the merchant agreement. Indeed, the merchant agreement expressly allowed Morris to terminate his performance at any time. Morris notes the lack of any specified duration in the merchant agreement makes payment of the termination fee inevitable. But this very inevitability takes the provision out of the realm of liquidated damages, which by definition are assessed only upon a breach. A merchant seeking to open an account with National knows at some point he or she must pay the $150 termination fee, and may, if desired, create a reserve against this liability. Thus, the fee is merely a deferred charge attendant to initiating the account.

Morris also argues the termination fee effectively operates as a liquidated damage when the merchant agreement is terminated upon an independent breach by the merchant, such as nonpayment of the minimum monthly service fee. This argument misses the point. It is the merchant’s termination of the agreement, by whatever means, that triggers the termination fee. Because the agreement expressly allows the merchant to terminate at any time, imposition of the fee is not dependent upon any breach of contract and is therefore not a liquidated damage.

Morris v. Redwood Empire BancorpG0336494/29/05 CA4/3
Morris v. Redwood Empire BancorpG0336494/29/05 CA4/3-pdf

Apr 29 2005

G033649
[PDF] [DOC]

Morris v. Redwood Empire Bancorp 4/29/05 CA4/3

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Bruton v. United States, supra, 391 U.S. 123 [20 L.Ed.2d 476] hhh
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