/>iThe word "forfeiture" has an interesting etymology. It is derived from two Latin words, foris meaning a door or gate, and facere meaningto do. Eventually, the word came to refer to a misdeed punishable by a fine. Today, it used to refer the loss of life, liberty, or property that is lost in consequence of a crime or other misdeed. Thus in Act III, Scene 2 of Shakespeare's Henry VIII, the Duke of Suffolk addresses Cardinal Wolsey:
Lord cardinal, the king's further pleasure is,
Because all those things you have done of late,
By your power legatine, within this kingdom,
Fall into the compass of a praemunire,**
That therefore such a writ be sued against you;
To forfeit all your goods, lands, tenements,
Chattels, and whatsoever, and to be
Out of the king's protection. This is my charge.
The California Civil Code provides a means to avoid a forfeiture, but does not define the term:
Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.
Cal. Civ. Code § 3275. It is often said that the law condemns a forfeiture, but the recent decision in Tuli v. Specialty Surgical Center of Thousand Oaks, LLC, 2024 WL 4499271 (Oct. 16, 2024) demonstrates that it is quite possible for someone to suffer a loss without having that loss count as a forfeiture.
In Tuli, the plaintiff was a member of a limited liability company whose operating agreement included a "terminating event" provision. Under this provision, a member's interest could be terminated for no compensation if the member disrupted the LLC's affairs or acted adversely to the best interests of the LLC. The Court of Appeal, citing VFLA Eventco, LLC v. William Morris Endeavor Entertainment, LLC, 100 Cal. App. 5th 287 (2024), found that two factors were significant in considering the enforceability of a forfeiture provision. First, did the forfeiting party commit a breach? Second, was there a reasonable relationship between the amount of the loss and the anticipated harm at the time of contracting? As to the first factor, the court found that while a breach is not a necessary element of a forfeiture it was a "hallmark" of the doctrine. The Court of Appeal found the second element to be more decisive, holding that the plaintiff's loss bore a reasonable relationship to the anticipated harm. Finally, the Court noted that the plaintiff was a sophisticated and experienced business executive and the parties were represented by two law firms in negotiating the operating agreement. Thus, in this case the terminating event provision was valid.
For discussions of other aspects of Tuli, see Court Finds Usurpation Of LLC Opportunity To Be Derivative, Is Failing To Hold A Formal Board Meeting A Breach of Contract?, and Does Personal Animosity Vitiate The Business Judgment Rule?
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* Cardinal Wolsey had been appointed Legatus a Latere; i.e, a cardinal or other clergy member representing the Pope in a special assignment. Translated, the term means a legate from the side [of the Pope].
**Praemunire refers to the crime of supporting a foreign jurisdiction. When Cardinal Wolsey failed to secure an annulment of King Henry VIII's marriage to Catherine of Aragon, he fell from the King's favor and was indicted for pramunire.
