Case No. A 107100
COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT, DIVISION FOUR
ON APPEAL AFTER JUDGMENT ENTERED BY THE HONORABLE
APPELLANT'S OPENING BRIEF
TABLE OF CONTENTS
TABLE OF AUTHORITIES
Marin County Superior Court that declines to enforce a contractual
liquidated damage provision already adjudicated to be reasonable and
enforceable in a prior action between these same parties. The trial court
misapplied statutory and case law governing this provision and sua sponte
rewrote the underlying contract to immunize the defendant from any future
liability for breaching a contract he admits having breached well over 200
times, has been adjudicated to have breached 137 times, and which he vows
to continue to breach indefinitely in the future.1
1986, defendant Gerald Armstrong ("Armstrong") and plaintiff Church of
Scientology International ("CSI") entered into a settlement agreement ("the
1This appeal is related to, and has been consolidated with, Church of
2Citations to "Exs, Tab____ " herein refer to the Exhibits in support of
Agreement"), Exs Tab 1, pursuant to which Armstrong received $800,000,
dismissed certain legal claims, and agreed, inter alia, to strict
confidentiality, to forego public mention of Scientology and its leadership,
and to avoid voluntarily assisting or participating in litigation against
Scientology churches. Id., at ¶7D, pg. no. 6-7. The Agreement provided for
liquidated damages for each breach of the contract committed by
Armstrong. Id. at pg. no. 8.
Armstrong openly breached the Agreement. In February 1992, CSI sued
Armstrong for breaching a settlement agreement on multiple occasions.
Exs., Tab 2, Complaint. CSI alleged, inter alia, that Armstrong breached
various provisions of the Agreement, including paragraph 7(D), which
states in pertinent part:
Exs., Tab 2, pg. no. 6-8, (emphasis supplied).
pursuant to the terms of paragraph 7(D), and injunctive relief to preclude
Armstrong from committing additional breaches. Armstrong cross-
complained, challenging the validity of the Agreement on a number of
grounds, including specifically that the liquidated damages provision of
paragraph 7(D) was unreasonable and unenforceable. Exs., Tab 3, ¶31, [pg.
Thomas, presiding, granted CSI's motion for summary judgment against
Armstrong, upheld the validity of the Agreement, and awarded CSI
$300,000 in liquidated damages ($50,000 for each of six specified
breaches). Judge Thomas' order specifically considered and rejected
Armstrong's challenge to the liquidated damages provision of the
Exs., Tab 4, [pg. 82, ln. 19 - pg. 83, ln. 13.]
directly or indirectly any of the following":
Exs., Tab 5, pg. 92.
damages and an order of permanent injunction were entered against
Armstrong. Exs., Tab 6. Armstrong was unswayed. Indeed, he was so
brazen in violating the obligations he undertook in exchange for $800,000
and the obligations against further breaches imposed by the permanent
injunction issued by Judge Thomas that he even appeared in public and on
television and radio to attack Scientology and its leadership, announcing
that he was violating the court order by doing so.
proceedings before Judge Thomas for violating the permanent injunction.
Exs., Tabs 8 and 10. To avoid the jail sentences imposed for his contempt
convictions, Armstrong fled to Canada, from where he committed the
breaches that spawned the instant action, Exs., Tab 15, Answer of
Gerry Armstrong, ¶15, [pg. no. 224, ln. 8-10], and publicly defamed Judge
Thomas by alleging that he had either been bribed or extorted by CSI. To
avoid paying the damages imposed against him by Judge Thomas,
Armstrong filed for bankruptcy, after either spending or "giving away"
the $800,000 he received in the settlement. Id. [pg. no. 222, ln. 26-27.]
dismissed by this Court on December 23, 1997, on the basis of the fugitive
disentitlement doctrine. Exs., Tab. 8
dissuaded Armstrong from his contumacious breaches, and his flight to
Canada afforded him the opportunity to avoid jail and continue his
simultaneous contractual breaches and violations of the permanent
injunction. On April 2, 2002, CSI filed this action for breach of contract
against Armstrong, seeking recovery under the liquidated damages
provision of the Agreement for 201 additional breaches of the Agreement.
Exs., Tab 14. In his answer, Armstrong admitted all 201 breaches saying
that he did so "at the will of God." Id. [pg. no. 223 at ln. 6-7.] Armstrong
further stated that he would continue to breach the Agreement because, in
his view, the permanent injunction was "illegal, unconstitutional, greatly
stupid, impossible to perform, anti-public policy, anti-American, anti-
religion, diabolical, insane and clearly unenforceable," and because, by
issuing the injunction, Judge Thomas "abetted ...illegal blackmail." Id. [pg.
no. 223, ln. 24 - pg. 224, ln. 5.]
Duryee. On that day, the trial court first heard argument on, and took
under submission, CSI's motion in limine to preclude Armstrong from
relitigating the validity and enforceability of the Agreement. The court
then invited opening statements from counsel. Exs., Tab 16, Reporter's
Transcript of Proceedings, April 9, 2004, pg. 25, Exs. pg. no. 320
(hereinafter ("RT__"). In the midst of Armstrong's counsel's opening
statement, Judge Duryee interjected that she would consolidate the
damages trial in this action with Armstrong's sentencing for his third
contempt conviction arising from his defiance of Judge Thomas'
permanent injunction. RT 44, p. 339.
on Armstrong's 131 breaches of contract that CSI sought to pursue on the
grounds that: (1) Armstrong admitted the breaches; (2) the enforceability
of the provisions of the Agreement previously had been litigated to
judgment; and (3) nothing alleged in Armstrong's counsel's opening
statements amounted to a defense. RT 49, p. 344. After a brief recess, the
trial court announced its conclusion that Armstrong's affirmative defenses
this breach of contract action were both precluded by res judicata and, in
any event, were without merit:
RT 56 [pg. no. 359.]
entitled to recover damages in the same amount that Armstrong had
received as consideration eighteen years earlier, when the contract was
executed. Id. Since Armstrong previously had been assessed damages of
$300,000 by Judge Thomas — which he never paid, having declared
bankruptcy — the trial court limited the liquidated damages to $500,000,
which it characterized not as compensation, but as "punishment."
RT 56-57 [pg. no. 350-351].
amount of $500,000. The trial court also ordered that the time Armstrong
would have, but never, served on all three contempt convictions would be
deemed served. RT 62, p. 356.
disregarded clear, long-standing principles of claim and issue preclusion
and for having misapplied the statutory and common law principles of law
governing the reasonableness and enforceability of the Agreement's
liquidated damages provision. Because there is no dispute as to any
material fact pertinent to those issues, the standard of review of the trial
court's actions with respect to the questions of law presented is de novo.
Lomeli v. Department of Corrections, 108 Cal. App. 4th 788, 794 (2003),
quoting Rodriguez v. Solis, 1 Cal. App. 4th 495, 502 (1991). Even to the
extremely limited extent, if any, that this appeal might present a mixed
question of fact and law, the correct standard of review remains de novo or
independent review, because that is the appropriate standard for mixed
questions when the issues, as here, are "predominantly legal." People v.
Ault, 2004 Cal. LEXIS 7574 at *22-23 & n. 8 (Cal. Sup. Ct., August 16,
specifically provides for $50,000 per breach. Judge Thomas' order and
judgment in the earlier breach of contract action between CSI and
Armstrong addressed, considered, and determined the issue of the
reasonableness and enforceability of paragraph 7(D) and found it both
reasonable and enforceable.
damage provision to its full extent on the ground that it is now unreasonable
to do so, because Armstrong would be liable in an amount greater than he
was paid eighteen years ago when the Agreement was executed. In so
doing, the trial court committed fundamental legal error in several respects:
Thomas stated the following:
Exs., Tab 4, pg. no. 82-83. The detailed analysis of the issue in Judge
Thomas' judgment, and that judgment's findings and conclusions,
precluded relitigation of the enforceability or reasonableness of the
liquidated damages provision by Judge Duryee.
issues argued and decided in prior proceedings."' Mycogen Corp. v.
Monsanto Co., 28 Cal. 4th 888, 896 (2002), quoting Lucido v. Superior
Court, 51 Cal. 3rd 335, 341 (1990). For the doctrine to preclude a second,
subsequent adjudication, the proponent of the doctrine must establish that:
(1) the present issue is identical to one litigated in a prior proceeding; (2)
the prior proceeding resulted in final judgment on the merits; and (3) the
party against whom the doctrine is being asserted was a party or in privity
to a party to the prior proceeding. People v. Barragan, 32 Cal. 4th 236,
252-53 (2004); Grinham v. Fielder, 99 Cal. App. 4th 1049, 1054 (2002);
Brinton v. Bankers Pension Services, 76 Cal. App. 4th 550, 556 (1999).
satisfied here. In the prior litigation before Judge Thomas, Armstrong had
every opportunity to litigate the issue, and the result was a final judgment in
favor of CSI, in which the Court found that the Agreement was valid and its
terms, including the paragraph 7(D), were enforceable.
Armstrong's effort to relitigate his prior defenses to CSI's breach of
contract claim. However, after the court dismissed these defenses, the issue
of the liquidated damages provision's viability should have disappeared from
the landscape of the underlying litigation, leaving only the findings of
Judge Thomas's final judgment to be enforced. Instead, in an erroneous
misapplication of the doctrine of collateral estoppel, and after having
dismissed Armstrong's ill-conceived attempt at relitigation, the trial court
declined to enforce the provision according to its express terms and
effectively erased the very finding that it should have enforced. See People
v. Neely, 70 Cal. App. 4th 767, 782 (1999) ("A defense founded upon the
conclusiveness of a former adjudication ...is waived if not raised either by
the pleadings or the evidence").
findings was not its only error of law. The trial court sua sponte determined
that it would be unreasonable to apply the $50,000 per breach provision of
the Agreement to Armstrong's self-admitted 131 breaches because the
contractually mandated result would require Armstrong to pay far more in
damages than he received as consideration when he undertook his
contractual obligations in 1986. RT 56-57. Even assuming that it is
relevant whether Armstrong caused more harm than benefit he received —
which, of course, it is not — the trial court's ruling is antithetical to well-
unambiguous statutory and case law.3
a liquidated damages provision such as paragraph 7(D) of the Agreement is
valid, and requires the party who seeks to invalidate it to show that "the
provision was unreasonable under the circumstances existing at the time the
contract was made." Civil Code § 1671 (emphasis added). Section 1671
has been routinely enforced by the courts for decades. See, e.g., Weber,
Lipshire & Co. v. Christian, 52 Cal. App. 4th 645, 654-55 (1977);
O'Connor v. Televideo System, Inc., 218 Cal. App. 3rd 709, 718 (1990).
for him to overcome the Section 1671 presumption and shift the burden of
3 The trial court initiated the concept that CSI's judgment must
be limited to
proof to CSI. Armstrong failed to bring forth any evidence "that the
amount stated in the contract was not determined, or that it was neither
impracticable nor extremely difficult to determine actual damages, [or that
the] parties did not really agree upon the amount set forth as liquidated
damages through any mutual endeavor." Barbara v. Sokol, 101 Cal. App.
3rd 725, 733 (1980).
breached it hundreds of times, and had not threatened to do so. No one
could have anticipated that he would do so, except perhaps Armstrong
himself. The trial court's conclusion that Armstrong's subsequent,
deliberate, contemptuous, serial breaches somehow retroactively renders
the liquidated damages provision unreasonable has the ironic and disastrous
effect of rewarding Armstrong for his monomaniacal defiance by
immunizing him from any future civil liability.
determined as of the date of the execution of the contract, not at the time of
the breach, and certainly not at the time of a subsequent judgment finding
breach. Hong v. Somerset, 161 Cal. App. 3d 111 (1984); United Savings &
Loan Ass'n of California v. Reeder Development Corp., 57 Cal. App. 3rd
282, 299 (1976), quoting in part Better Foods Markets v. American District
Telegraph Co., 40 Cal. 2nd 179, 185 (1953).
Hong v. Somerset, 161 Ca1.App.3d at 115 (emphasis supplied), citing
California Law Revision Comm'n Comment to Civil Code Section 1671,
subd. (b); United Savings & Loan Ass'n of California v. Reeder
Development Corp., 57 Cal. App. 3rd at 299 ("[I]t is immaterial whether or
not there is impracticality or difficulty in fixing damages after there has
been a breach of the contract.").
damages is also error as a matter of law.
provision by concluding — without a legal or even a factual basis — that
Armstrong would be "punished enough" by a damages award of $500,000.
RT 57. That, too, was erroneous as a matter of law, and reflects a
misunderstanding of the nature of liquidated damages.
punishment for wrongdoing. See, e.g., Harbor Island Holdings v. Kim, 107
Cal. App. 4th 790, 796 (2003), (a liquidated damages provision represents
the "result of a reasonable endeavor by the parties to estimate a fair average
compensation for any loss that may be sustained") (emphasis supplied);
Chodos v. West Publishing Co., 292 F.3d 992, 1002 (2002), (California law
defines liquidated damages as "an amount of compensation to be paid in the
event of a breach of contract, the sum of which is fixed and certain by
agreement ....") (emphasis supplied), quoting Kelly v. McDonald, 98
Cal.App. 121, 125 (1929), overruled in part on other grounds, McCarthy v.
Tally, 46 Cal. 2d 577 (1956).
enforceable, liquidated damages for each and every breach Armstrong
committed pursuant to an Agreement already adjudicated to have been
reasonable and enforceable at the time of its creation. Punishment is
another question, to be determined in the context of a criminal proceeding
or punitive damages, where applicable, but it is neither an element of,
nor relevant to, the issue of enforcing a valid liquidated damages provision.
"unconscionable" for CSI to recover cumulative damages an amount in
excess of what it paid Armstrong under the terms of the contract is without
legal support or merit. A liquidated damages provision that has already
been adjudicated as reasonable and enforceable cannot become
unconscionable just because one party to the contract decides to commit
several hundred willful breaches. As this Court held in H. S. Perlin Co. v.
Morse Signal Devices, 209 Cal. App. 3rd 1289, 1301-02 (1989), "the
reasonableness standard set forth in section 1671 . . .provides for more
judicial scrutiny than is allowed under the unconscionability standards."
Thus, where a contract "meets the requirements imposed by section 1671,"
the defendant "cannot make any claim the contract is nonetheless
unconscionable." Id. Moreover, there is not a single shred of authority for
the proposition that the consideration received under a contract is the upper
limit for a liquidated damages provision, under an "unconscionabilty"
estoppel to disregard a reasonable and enforceable liquidate damages
provision or artificially capping CSI's damages to convert a judgment in
CSI's favor into a license for Armstrong to breach the Agreement at will
and with impunity.
recovery, which it distinctly did not, the judgment gives Armstrong a
windfall to which he certainly is not entitled — the use of $800,000 for 18
years without interest while committing over 200 breaches and practical
immunity for any further breaches because his breaches have already met
the arbitrary, court-imposed maximum in damages. In effect, the trial court
has rewarded Armstrong because he has breached the contract so many
times and promises to do it again. Reversal for all for the foregoing reasons
is compelled by this record, along with the imposition of damages
according to the parties' Agreement.
CERTIFICATE OF LENGTH
Court, appellant certifies that the number of words in the body of this brief
is approximately 4,163 according to the word processor program used for
PROOF OF SERVICE
I, the undersigned, declare:
I am employed in the County of Marin, State of
California. I am over the
On August 23, 2004,
I served the foregoing document(s) described as
APPELLANT'S OPENING BRIEF and
on the interested parties in this action by placing true copies thereof enclosed
XX BY MAIL:
Clerk of the Superior Court
XX BY FEDERAL EXPRESS OR OVERNIGHT COURIER:
XX BY HAND DELIVERY:
California Supreme Court (5 copies)
Executed on August 23, 2004, at Sausalito, California
XX (State) I declare under penalty of perjury under the laws of the
___ (Federal) I declare that I am employed in the office of a member of the