BipHoo Company / Flickr Stormy Daniels sues Trump over alleged...
BipHoo Company / Flickr

Donald Trump now claims that Stormy Daniels (“Stormy”) owes him $20 million under a liquidated damage clause in the Hush Money Contract.  See Exhibit 1 of Stormy’s state court complaint at documents.latimes.com/

The clause provides that each time Stormy discloses something in breach of the Hush Money Contract, the assumed or “liquidated” damages she must pay him are $1 million.  Trump now says, in a court filing, that Stormy breached the Hush Money Contract 20 times (and counting) and thus owes him at least $20 million.  See www.nbcnews.com/… and page 5 of Trump’s federal court filing at www.politico.com/

This diary focuses on the question of whether that liquidated damages clause is valid and enforceable.

As background, the Hush Money Contract, signed by Stormy on Haloween, eight days before the 2016 presidential election, forbade Stormy from disclosing any details of the Stormy-Trump dalliance.  The parties to the Hush Money Contract were Stormy, a Delaware limited liability company called Essential Consultants, LLC (“EC”) formed by Trump lawyer Michael A. Cohen, Esq., and Trump.  The Hush Money Contract also contained a compulsory arbitration clause.  In recent weeks, EC ran to the arbitrator, and without giving notice to Stormy, obtained from the secret arbitrator a temporary restraining order forbidding Stormy from discussing her relationship with Trump.  Stormy countered by going to a California state court, seeking a declaratory judgment that the contract (and therefore the arbitration clause) is invalid on three grounds, including the fact that Trump did not sign it.  See www.dailykos.com/…

Now, Trump seeks to remove Stormy’s state litigation from state to federal court.  www.nbcnews.com/…  Whether the venue is California state court, California federal court, or the private arbitrator, California law applies to this dispute and explicitly to the liquidated damages question.  Let me explain.

The parties so stipulated (to the application of California state law) in the Hush Money Contract, at Para. 8.2, which provides that ”this Agreement [Hush Money Contract] and any dispute or controversy relating to this Agreement, shall in all respects be contrued, interpreted, enforced, and governed by the law of the State of California, Arizona or Nevada at DD’s [David Denison’s, or Trump’s alias’s], election.”  Trump chose California by filing his arbitration there.  Thus, whichever of the three fora (federal court, state court, or the arbitrator) gets to decide the validity of the liquidated damage clause, the forum must apply California law.

The choice of California law would be upheld because California has a sufficient connection to the facts of this case; that’s is where Trump and Stormy commenced their affaire de coeur et zizi.  All of which leads to the question: how does California law treat liquidated damage clauses?

Generally, the rule everywhere is that a liquidated damages provision is invalid if it may be viewed as a forfeiture or penalty as opposed to one reasonable in the circumstances.  The California statute at Cal. Civ. Code § 1671(b) provides that a liquidated damages provision “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.”  The leading California Supreme Court decision interpreting § 1671(b) lays out the rule with explicit clarity:

liquidated damages clause will generally be considered unreasonable, and hence unenforceable under 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.” . . . 

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.” . . .

[A]ny provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.

Ridgeley v. Topa Thrift & Loan Ass’n, 953 P.2d 484 (Cal. 1998).  Here, Trump can never meet that test and must prove actual damages.  Actual damages to what, to his reputation?  Trump had long sought and cultivated the reputation for iniquity, as a viscerally disgusting Page Six coxswain.  See, e.g., the many interviews with Howard Stern.  See www.washingtonpost.com/…  and see www.politico.com/…  What damages?  Polls show that most of the public believes Trump’s sexual assault accusers, see, e.g., www.businessinsider.com/… , a matter even more damaging to his alleged reputation than an eight-month affair with a porn star.  What can anybody do to his reputation for social/sexual behavior that would make it worse?  No actual damages here.

While it may have other effects on the case, Trump’s removal of the matter to federal court does not affect the choice of law provision.  Generally, in a private dispute, federal courts derive their jurisdictions from one of only two sources: (a) where the matter in dispute is a federal question or (b) where there is “diversity,” which has come to mean (i) no defendant resides in the same jurisdiction as any plaintiff and (ii) the amount in controversy is $75,000 or more.  Now, Trump has chosen to try to remove the case from state to federal court under diversity jurisdiction, not federal question jurisdiction.  I say “chosen” because there is indeed a federal question involved: whether the payment was a campaign contribution, see www.dailykos.com/… , but Trump and Michael Cohen obviously do not want to go there; that road leads to perdition, campaign finance violations and money laundering crimes.  A federal court sitting in diversity jurisdiction must apply state substantive law.

The arbitrator as well must apply the law applicable to the case.  It is somewhat more likely she will do so for the fact that — despite the secret nature of the arbitration — her (the arbitrator’s) identity is known, and her reputation, indeed her legacy, will depend on her applying the law correctly or at least with some measure of professionalism.  (Granted, in entering that Temporary Restraining Order, and doing so ex parte, i.e., without notice to Stormy’s lawyers, she is off to a bad start.)  Thus, knowledge of who the arbitrator is (so far, an otherwise reputable retired California judge named Jadqueline O’Connor, Esq.) may begin to flash a ray of sunshine onto the arbitration proceedings, or so one can hope.

There are two competing forces here.  First, arbitrators’ and mediators’ ears become attuned to the side from which they are more likely to get their next assignment; a week ago, I would have assumed that side is Trump/Cohen, but now, watching Stormy’s lawyer, the estimable Michael Avenatti, Esq., on the talk shows, I am not so sure.  Second, the big case arbitrators and mediators (for mediation firms, up to $20,000 per day) must maintain some measure of reputation for quality and probity, otherwise, in the next case, one side or the other will object to their nomination.  As to the second, the Hush Money Contract is most unusual in that only one side picks the arbitrator; I have been at this a long time, soon 58 years since law school graduation, but I have never seen such a one-sided method of picking an arbitrator or mediator.  Thus, while I would do what Stormy’s lawyers are doing and push hard to avoid arbitration, ending up there may not result in a lost cause.

What is also important here is that arbitration rulings are not self-executing.  To turn an arbitration award into an enforceable judgment, the winning party must take the award to a court for execution.  If Trump or Michael Cohen’s LLC win, they will have to take the award to a proper judge and get a court to enter an order that the arbitrator’s award must be enforced.  If Trump succeeds in his “removal” efforts, it will be the federal court; if for some reason he does not, it will be the state court in which Stormy’s lawyers filed the declaratory judgment action.

At that point, the arbitrator’s order may be appealed, albeit on very narrow grounds.  Granted, generally arbitration orders are unappealable, but there are a few exceptions.  One such exception is that the arbitrator completely ignored applicable law that had been brought to her attention.  Here, it is the California law of liquidated damages.  Plainly, an award of $1 million for each breach, each disclosure, is a forfeiture or penalty under California law, bears no reasonable relationship to any analysis of real damages, and is unenforceable under controlling California law.

I fully expect and predict that the ultimate forum will conclude that the liquidated damages provision in the Hush Money Contract is unenforceable and that Donald Trump will have to prove actual damages.

And, depending on your tradition, actual damages are bupkis or ungatz.  The president can wipe his grand orange derriere with that liquidated damages clause.

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