Tuesday, August 25, 2026
Page 3
Court of Appeal:
Liquidated-Damages Clause Invalid Due to Trebling of Sum
Opinion Says Public Policy Precludes Enforcement of Term Allowing Lender to Seek Stipulated Judgment for $1.5 Million if Company Defaults on Paying $450,000 Owed Under Settlement Agreement, Drawing Dissent
By a MetNews Staff Writer
Div. Eight of this district’s Court of Appeal held yesterday that a liquidated-damages clause in a settlement agreement that anticipates the entry of a stipulated judgment for $1.5 million in the event that the corporate defendant fails to cure a default of its obligations to repay $450,000 to the plaintiff is unenforceable under California law, drawing a sharp dissent calling the decision “illogical, unfair, and destructive.”
At issue is whether the provision is enforceable under Civil Code §1671, which provides:
“[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.”
Presiding Justice Maria E. Stratton authored yesterday’s opinion, joined in by Justice Victor Viramontes. She noted that “[t]he record lacks facts establishing that the amount” represents a reasonable attempt to estimate the loss attributable to the breach of the settlement agreement and said:
“We acknowledge that defendants bear the burden of showing that the amount of $1.5 million in liquidated damages is unreasonable because it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach….We conclude that defendants have met their burden by the fact that the $1.5 million is three times the amount of the money due under the settlement agreement.”
Justice John Shepard Wiley Jr. dissented, arguing that the majority opinion “offers a paternalistic hand to a deadbeat corporation to get it out of the bed it made for itself” and will lead to unintended consequences in the lending market. He wrote:
“[W]hen a publicly traded corporation represented by lawyers in a fair bargaining process agreed it was reasonable to set its liquidated damages at $1.5 million, why are we disagreeing?”
2013 Loan
Seeking to enforce the terms of the agreement was Calabasas-based Lakeshore Investment LLC, which agreed to loan more than $1.7 million to NOW Solutions Inc. at 11% interest in 2013. After NOW Solutions defaulted, the parties amended the agreement on Dec. 11, 2017, adding NOW Solution’s parent company, Vertical Computer Systems Inc., as a co-borrower and calling for monthly payments of $31,564 as well as a 16% default interest rate.
On May 2, 2019, Lakeshore filed a complaint against NOW Solutions and Vertical for breach of contract, alleging that no payments had been made since January 2018. The lender asserted that, at the time of the filing, the defendants owed them more than $2.2 million.
In November 2023, the parties entered into a settlement agreement under which the defendants agreed to pay Lakeshore $450,000 over three installments during the 10 months that followed execution. The contract included a liquidated-damages clause, which specifies:
“In the event Defendants default, and such default is not cured within [10] business days, Defendants hereby agree and stipulate to the entry of a judgment against them in the amount of $1,500,000…to bear interest at the legal rate.”
After the Vertical-related parties defaulted and failed to cure after receiving the required notice, Lakeshore filed an ex parte application for default judgment based on the contract. On Nov. 6, 2024, Los Angeles Superior Court Judge Tony L. Richardson directed the entry of judgment in favor of the plaintiffs in the amount of $1.5 million plus 10% interest.
Unreasonable Proportion
Stratton cited jurisprudence that invalidated provisions calling for a payment of four times the amount of an agreed-upon settlement “as a matter of law” when there were no facts set forth establishing a link between the sum and the breach. She remarked:
“What some might label a ‘per se unreasonable proportion’ approach in the absence of other evidence of reasonableness is supported by caselaw.”
Saying that “[w]hen a stipulated judgment amount is not reasonably related to damages arising solely from the failure to pay the stipulated judgment, it constitutes an unenforceable penalty,” she said:
“$1.5 million, on its face, bears no reasonable relationship to the range of actual damages the parties could have anticipated from a breach of the stipulation to settle the dispute for $450,000….Plaintiff asks us to compare the damages sought in the original complaint…to the $1.5 million default assessment and conclude that the $1.5 million judgment was appropriate….[C]aselaw…rejects using the damage amount of the original complaint as any sort of yardstick by which to measure damages from breach of the settlement agreement.”
Additional Basis
The jurist offered an additional basis for the court’s reversal, commenting:
“[T]he stipulated judgment of $1.5 million would result in an additional assessment of approximately $1 million more than the total due under the settlement agreement. This differential of $1 million fails ‘to take into account the need for proportion in damages—the critical item in evaluating penalty and forfeiture.’…We conclude it is clearly a penalty rather than a reasonable estimate of damage plaintiff could have sustained by defendants’ breach.”
As to the plaintiff’s assertion that the defendants should be precluded from seeking to invalidate a contract for which they had legal representation when there was no evidence of malfeasance, she reasoned:
“[A] liquidated damages provision lacking a reasonable relationship to the range of damages the parties reasonably could have anticipated is unenforceable and void as against public policy, regardless of the presence or absence of fraud or compulsion.”
She added:
“Defendants do not escape unscathed from their obligations under the settlement agreement. They remain liable for the actual damages resulting from their default….We direct the trial court on remand to conduct a hearing to fix the actual damages caused by defendants’ breach of the settlement agreement.”
Wiley’s View
Wiley argued that, “[i]f we attend to the statute, this case is open and shut” and said:
“Vertical offered no relevant evidence. Because the party seeking to invalidate the provision had the burden but offered no facts about the circumstances, the liquidated damages provision is ‘valid.’ ”
Taking issue with the majority’s conclusion that the liquidated-damages payment amount is to be weighed only against the sum agreed to in the settlement contract, he cited the 2022 decision by the Third District in Gormley v. Gonzalez, which he said “enforced a liquidated damages clause like this one.”
The settlement agreement at issue in that case called for the payment of $575,000 and capped liquidated damages at $1.5 million, to be reduced, if applicable, based on how much the defendants had paid off before defaulting. Wiley reasoned that “Gormley is recent and squarely on point” and the case “explained it is proper to compare the liquidated damages number to the sum the underlying case sought and not to the discount for which the underlying case settled.”
Applying the principles announced in Gormley, he opined:
“[T]he majority errs by comparing $1.5 million to a mere $450,000, which was the ‘steep discount’ at which Lakeshore finally decided to settle this case.”
Sophisticated Parties
The justice pointed out the sophistication of the parties and asked:
“Why would the California Legislature write a law to help a corporation like Vertical, with all its lawyers, to break its promise on repaying its debt? What public policy could that possibly serve?”
He questioned the justice of the decision and wrote:
“Vertical owed money to Lakeshore and, to get forbearance, promised to pay liquidated damages in the event of default. Now Vertical is claiming what it offered is invalid. This is a ‘hey neener neener, gotcha sucker’ defense….This opportunistic trickery is unfair.”
Turning to purported unintended consequences, he asserted:
“If your prospective lender reads the majority opinion, the effect would be to make the lender less willing to loan you funds at a favorable rate. The majority opinion will make business loans riskier and thus more expensive, because a deal is no longer a deal but instead a lawsuit. In the long run, increasing risk and the cost of credit is harmful. It helps no one.”
Wiley remarked:
“I dissent because, by misapplying the statute and departing from recent precedent, the majority reaches a result at once illogical, unfair, and destructive. I respect and admire my dear colleagues, and for these reasons view their decision with puzzlement and dismay. I recommend Lakeshore seek further review.”
The case is Lakeshore Investment LLC v. NOW Solutions Inc., 2026 S.O.S. 2637.
Jonathan T. Nguyen of the El Segundo-based Gilbert & Nguyen acted for Lakeshore. Philip C. Tencer of the San Diego firm TencerSherman LLP represented the defendants.
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