Filed 5/19/17 Fannie Mae v. Marchesiello CA1/5
NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.


IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE


FANNIE MAE,
Plaintiff, Cross-Defendant and Respondent,
v.
GIANFRANCO A. MARCHESIELLO,
Defendant, Cross-Complainant and Appellant.

A146624

(Sonoma County
Super. Ct. No. SCV-253635)


Fannie Mae filed a complaint against Gianfranco A. Marchesiello after he failed to comply with various agreements requiring him to pay default interest on an outstanding real property loan. Gianfranco cross-complained against Fannie Mae, alleging the default interest provisions constituted an unenforceable penalty. Following a bench trial, the trial court determined the interest provisions were valid and enforceable and entered judgment for Fannie Mae.
Gianfranco appeals. As he did in the trial court, Gianfranco contends the default interest provisions are an unenforceable penalty. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
In February 2007, Washington Mutual Bank, FA (Washington Mutual) loaned Lea Marchesiello and the Marchesiello Trust (the Trust) $2.7 million, secured by an apartment building on Commerce Boulevard in Rohnert Park (the property).
In connection with the loan, Lea and the Trust executed a promissory note and addendum (collectively, note). Section 9 of the note — a default interest provision — provided in relevant part: “Upon the occurrence of an Event of Default . . . all amounts owed under this Note, including all accrued but unpaid interest, shall thereafter bear interest at a variable rate . . . of 5% per annum above the Note Rate that would have been applicable from time to time had there been no Event of Default . . . until all Events of Default are cured. . . . Interest at the Default Rate shall commence to accrue upon the occurrence of any Event of Default.”
Lea and the Trust also executed a deed of trust encumbering the property as a lien of first priority. As relevant here, the deed of trust prohibited any further encumbrance of the property without the lender’s prior written consent. In late February 2007, Lea violated the deed of trust by obtaining a second loan secured by the property, without Washington Mutual’s knowledge or consent (2007 encumbrance).
Lea died in 2011 and Gianfranco became the successor trustee of the Trust. A fire damaged the property and the Trust fell behind on the loan payments and “defaulted on other fees. In addition, the . . . Trust was in default due to the violation of the [deed of trust] provision prohibiting junior encumbrances.”
Forbearance Agreement
In 2012, Fannie Mae — which owns the note — began judicial foreclosure proceedings on the property. After some negotiation between counsel for Gianfranco and Fannie Mae, the parties entered a forbearance agreement agreeing the unpaid balance on the note was $2,658,553.87 and the reinstatement amount was $178,572.46, of which $61,294.43 was default interest. The parties also agreed “[i]nterest at the default rate continues to accrue at the daily rate of $369.24 (in addition to the non-default rate set forth in the [n]ote) from March 28, 2012 to the date the Reinstatement Amount is received” by Fannie Mae.
In the forbearance agreement, Gianfranco agreed to: (1) remove the 2007 encumbrance; (2) pay Fannie Mae $147,925.29 of which $30,647.21 was accrued default interest; and (3) expressly release any claims against Fannie Mae. In return, Fannie Mae agreed to: (1) wait until September 2012 to exercise its default remedies; (2) dismiss the foreclosure action; and (3) waive 50 percent of the default interest that had accrued — and all of the remaining default interest accruing during the forbearance period — if Gianfranco timely performed under the forbearance agreement. The parties agreed that if Gianfranco complied with the forbearance agreement, the “Reinstatement Amount that will then be due is $96,625.24.”
Gianfranco paid $147,925.29 of which $30,647.21 was accrued default interest, but he did not remove the 2007 encumbrance by September 2012. In October 2012, the parties agreed to extend the forbearance agreement to March 2013 (the extension). In the extension, Gianfranco agreed the default interest under the note accrued beginning in March 2012 and that the default provision was enforceable. He also agreed to remove the 2007 encumbrance by March 2013.
In return, Fannie Mae agreed to cancel “all Default Interest due” if Gianfranco timely performed his obligations under the extension. Gianfranco believed he “lacked any real negotiating power” over the terms of the forbearance agreement or the extension; he “believed that entering these agreements was the only way to avoid having a Receiver appointed.” Gianfranco did not remove the 2007 encumbrance by March 2013 and Fannie Mae “accelerated the remaining balance due” under the note.
The Lawsuit
In May 2013, Fannie Mae filed a complaint against Gianfranco for specific performance of the forbearance agreement, including $202,375.19 in default interest. In July 2013, Gianfranco sold the property for a profit of $446,110.65.
After escrow closed, Gianfranco claimed Fannie Mae’s entitlement to default interest of $202,375.19, which had accrued and remained unpaid since the loan went into default, “was unenforceable.” In August 2013, Gianfranco filed a cross-complaint for declaratory relief, alleging the default interest provision was “void and unenforceable in that it constitutes a penalty, and as such is prohibited as punitive damages.” The cross-complaint further alleged the “application of default interest . . . bears no relationship to any actual damages, if any, suffered by Fannie Mae due to [Gianfranco’s] alleged default in failing to remove the 2007 Encumbrance as a lien against the subject property.” Among other things, Gianfranco sought a judicial declaration the default interest provisions were “void and unenforceable as constituting a penalty” because they bore “no relationship to any damages which could or would be suffered by Fannie Mae based on such default.”
Trial and Judgment for Fannie Mae
The court denied Gianfranco’s summary judgment motion. The parties stipulated to try the cross-complaint to the court before Fannie Mae’s complaint and submitted 48 stipulated facts, which the court admitted into evidence. Two witnesses testified at the bench trial.
In its statement of decision, the court determined the evidence “f[e]ll far short of establishing that the Default Interest Provision” was “unreasonable” when the note, forbearance agreement or extension were entered. The court noted the paucity of evidence at trial regarding the circumstances under which Lea signed the note and observed Lea converted the office building to residential apartments and there was “no evidence” she lacked the necessary sophistication to complete this multi-million dollar conversion.” Additionally, the court concluded there was no evidence of oppression or surprise, specifically “no evidence at all as to whether Lea could have refinanced the property with one or more other lenders. There was no evidence that she was under any kind of time pressure or other compunction to refinance . . . .” The court observed Gianfranco was represented by an attorney when he entered into the forbearance agreement and extension.
Next, the court rejected Gianfranco’s contention that the forbearance agreement and extension improperly obligated him to pay default interest. As the court explained, the forbearance agreement and extension agreement “relieved [Gianfranco] of the obligation to pay additional Default Interest beyond the amount paid to obtain the original Forbearance Agreement. [Gianfranco] is . . . being asked to pay the ‘deferred Default Interest’ and the additional, subsequently accrued Default Interest because he first failed to perform within the time allowed by the Forbearance Agreement and then failed to perform within the time allowed by the Extension Agreement.” According to the court, Gianfranco obtained the benefit of the forbearance agreement and extension by delaying the foreclosure proceedings until he could sell the property: Gianfranco “was only able to sell the property at a profit because Fannie Mae agreed to forbear—to hold off on its foreclosure—for over a year after [Gianfranco] defaulted.”
The court noted the forbearance agreement represented an attempt to avoid litigation, explaining “Fannie Mae was willing to give [Gianfranco] more time to try to cure the two defaults . . . but only if it meant it could foreclose without further litigation if [Gianfranco] was unable to cure the defaults. Avoidance of litigation is one of the reasons expressly cited by the Legislature when it amended Civil Code section 1671 to make liquidated damages provisions presumptively valid. [Citation.]” Finally, the court rejected the cross-complaint’s premise that the default interest provision was unenforceable as lacking a proportional relation to the damages flowing from the breach of the forbearance agreement. The court noted, based on the evidence introduced at trial and the circumstances of the case, that “the default interest provision represented a reasonable attempt to anticipate costs in the event of default.”
The court entered judgment for Fannie Mae, concluding it was entitled to $202,375,19 in interest at the default rate “as prayed in its Complaint.”
DISCUSSION
As he did in the trial court, Gianfranco contends the default interest provisions in the “note and in the forbearance agreements” are “invalid and unenforceable” because they are liquidated damages bearing “no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach of those agreements.”
Under Civil Code section 1671, 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.” (Civ. Code, § 1671, subd. (b).) “A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under [Civil Code] section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The amount set as liquidated damages ‘must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.’ ” (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977 (Ridgley).) “In short, ‘[a]n amount disproportionate to the anticipated damages is termed a “penalty.” A contractual provision imposing a “penalty” is ineffective, and the wronged party can collect only the actual damages sustained.’ ” (Ibid.)
The trial court determines the validity of a contractual liquidated damages provision. (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1393 (Beasley).) Applying the standards outlined above, the trial court determines: (1) whether the contract provision results from a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained; and (2) whether the contract provision has a reasonable relationship to the range of actual damages the parties could have anticipated would flow from a breach. (Ridgley, supra, 17 Cal.4th at p. 977.) Gianfranco had the burden to establish the default interest provision was “unreasonable under the circumstances existing at the time the contract was made.” (Civ. Code, § 1671, subd. (b).)
Gianfranco’s opening brief does not address our standard of review and we are not persuaded by his claim, made at oral argument, that our review is de novo. “Where the facts are undisputed, we review the question of whether a liquidated damages clause is enforceable de novo. [Citation.] Where, as here, there is a conflict in the evidence, we review the trial court’s ruling for substantial evidence supporting it. Simply put, our reviewing power in such instances ‘ “ ‘begins and ends with a determination as to whether there is any substantial evidence to support [the factual findings]; [we have] no power to judge of the effect or value of the evidence, to weigh the evidence, to consider the credibility of the witnesses, or to resolve conflicts in the evidence or in the reasonable inferences that may be drawn therefrom.’ ” ’ ” (El Centro Mall, LLC v. Payless ShoeSource, Inc. (2009) 174 Cal.App.4th 58, 62.)
At trial, the court admitted the parties’ stipulated facts into evidence, heard testimony from two witnesses, and determined the evidence “f[e]ll far short of establishing that the Default Interest Provision” was “unreasonable” when the note, forbearance agreement, or extension were entered. The court noted the lack of evidence regarding the circumstances under which Lea signed the note, particularly the lack of evidence she lacked the necessary sophistication to convert the property from an office building to residential apartments, and the absence of evidence of oppression or surprise. In addition, the court noted Gianfranco was represented by counsel when he entered the forbearance agreement and extension. Finally, the court concluded “the default interest provision represented a reasonable attempt to anticipate costs in the event of default.”
We will not disturb these findings on appeal. Gianfranco has not summarized the trial testimony and we are “under no obligation to search the record in an effort to ascertain a sound legal reason either for reversal of the judgment.” (People v. Gidney (1937) 10 Cal.2d 138, 142, disapproved on other grounds in People v. Hutchinson (1969) 71 Cal.2d 342.) Because the determination of whether the default interest provision was for liquidated damages or for a penalty is a “question of fact,” it “would be particularly inappropriate for us to decide that issue independently if it turns on witness credibility.” (Beasley, supra, 235 Cal.App.3d at pp. 1393-1394; Hitz v. First Interstate Bank (1995) 38 Cal.App.4th 274, 290 [appellate court would not second guess trial court’s factual determination as to bank’s motivation and purpose in imposing certain credit card fees, in determining whether fees constituted invalid liquidated damages].)
Gianfranco’s reliance on the parties’ stipulated facts does not demonstrate the default interest provision is unreasonable. When considering the validity of a liquidated damages clause and determining whether the liquidated damages bear a reasonable relationship to the range of harm that might reasonably be anticipated, “[a]ll the circumstances existing at the time of the making of the contract are considered, including the relationship that the damages provided in the contract bear to the range of harm that reasonably could be anticipated at the time of the making of the contract. Other relevant considerations in the determination of whether the amount of liquidated damages is so high or so low as to be unreasonable include, but are not limited to, such matters as the relative equality of the bargaining power of the parties, whether the parties were represented by lawyers at the time the contract was made, the anticipation of the parties that proof of actual damages would be costly or inconvenient, the difficulty of proving causation and foreseeability, and whether the liquidated damages provision is included in a form contract.’ ” (Weber, Lipshie & Co. v. Christian (1997) 52 Cal.App.4th 645, 654-655 (Weber).)
Here, the stipulated facts do not address any of the factors listed above. As a result, Gianfranco has failed to demonstrate the lack of evidence supporting the trial court’s conclusion that default interest provision was unreasonable under the circumstances existing when the note and forbearance agreements were made. (O’Connor v. Televideo System, Inc. (1990) 218 Cal.App.3d 709, 718; Weber, supra, 52 Cal.App.4th at p. 657 [liquidated damages provision was enforceable].) Having concluded Gianfranco has failed to demonstrate the default interest provisions are unreasonable, we need not address the parties’ remaining arguments regarding consideration and waiver.
DISPOSITION
The judgment is affirmed. Fannie Mae is entitled to costs on appeal. (Cal. Rules of Court, rule 8.278(a)(2).)




_________________________
Jones, P. J.


We concur:


_________________________
Simons, J.


_________________________
Needham, J.