The problem with payment plans is that they are a nuisance to enforce. It seems that more often than not, the party that is supposed to make the payments at some point stops keeping up with its obligations, and the party to whom the payments are due has to take some action to get the payment plan back on track. Naturally, people at the time of entering into such arrangements usually want to avoid these problems. The debtor wants an agreement that they can perform, and the creditor wants the best enforcement tools available to make sure the payments are made.
One common technique is to provide that in the event of default, judgment can be entered for an amount much larger than the total value of the payments. That is supposed to give the debtor an incentive to keep up with the payment plan, and compensate the creditor for the time and trouble of having to enforce the agreement. Surprisingly, however, the appellate courts in California have been quite hostile to these kinds of arrangements.
Another Court of Appeal opinion in California recently reaffirmed the rule that penalty provisions in settlement agreements are not enforceable. In a settlement agreement entered in Purcell v. Schweitzer, the plaintiff agreed to accept payments totaling $38,000, but provided that in the event of a default, judgment in the full amount of $85,000 could be entered. Evidently hoping to make such a judgment enforceable, the settlement agreement also recited that the $85,000 “is an agreed upon amount of monies actually owed . . . and is neither a penalty nor is it a forfeiture.” Further, the agreement set forth a host of reasons why an $85,000 judgment was reasonable, and barred the defendant from appealing or otherwise contesting this amount.
No dice, said the Court of Appeal. The additional amounts over and above the damages and interest resulting from breach of the settlement agreement, could not be justified, and the contractual language attempting to characterize these amounts as something other than a penalty was swept aside as contrary to public policy.
Mediators probably lament the loss of of a useful tool to persuade settling parties to enter into payment arrangements. I’ll bet, however, that parties will continue using them (prior court rulings refusing to enforce these provisions haven’t ended the practice), either in the hope that they might be found enforceable, or with the desire to strike some fear into the debtor of the uncertain consequences of non-payment. Paying parties can feel fairly safe making those agreements in the hope that they will actually be able to make all the payments on time, but also having the comfort of knowing that in the event they fall behind, such penalties will probably be held unenforceable.
I suggest that in the true spirit of mediation, we probably should not regret that the courts have taken away the club of draconian sanctions to induce parties to perform their agreements. Better to try to bring about enough change in attitude between the reconciled parties that they will be able to manage the payment plan on an amicable basis.