Dissent warns liquidated damages ruling could raise cost of business credit

A sharply worded dissent from a Court of Appeal ruling striking down a $1.5 million liquidated damages provision warns the decision could undermine negotiated settlements between sophisticated businesses and ultimately make commercial credit more expensive.

The 2nd District Court of Appeal on Monday reversed a Los Angeles County judge who enforced the provision against NOW Solutions Inc. and its parent, Vertical Computer Systems. The companies had agreed to pay Lakeshore Investment LLC $450,000 to settle a long-running loan dispute but defaulted after paying $80,000.

Presiding Justice Maria E. Stratton, joined by Justice Hernaldo J. Baltodano Viramontes, concluded the $1.5 million stipulated judgment was an unenforceable penalty because it bore no reasonable relationship to damages caused by breaching the settlement. The court remanded the case to determine Lakeshore's actual damages.

Justice John Shepard Wiley Jr. dissented, arguing the majority improperly rescued a sophisticated corporate borrower from a bargain negotiated with lawyers.

"The majority opinion has five problems," Wiley began. "It misapplies the statute. It conflicts with recent judicial precedent. It is illogical. It is unfair. It will be economically destructive."

Wiley focused on Civil Code Section 1671(b), which presumes commercial liquidated damages provisions are valid unless the party challenging them proves they were unreasonable when the contract was made.

NOW and Vertical presented no evidence about those circumstances, Wiley wrote. Because the companies bore the statutory burden, that should have ended the inquiry.

"If we attend to the statute, this case is open and shut," he wrote.

Philip C. Tencer of TencerSherman LLP in San Diego represented NOW Solutions and Vertical Computer Systems, the defendants/appellants in the case, said he was not sure why Wiley decided to write the dissent.

"The law is clear that a payment penalty has to be reasonably related to the actual damages suffered by the non-breaching party," Tencer responded in an email. "In this case, Appellants only owed $370,000, but the payment penalty was $1,500,000 (which is 4x of the actual damages). The plaintiff (respondent), could not, and did not identify any rational or reasonable explanation as to how the 4x payment penalty was reasonably related to any actual damages."

Jonathan T. Nguyen of Gilbert & Nguyen in El Segundo represented Lakeshore Investment, the plaintiff/respondent in the case. He could not be reached immediately for comment.

The dispute dates to a $1.759 million loan Lakeshore made to NOW Solutions in 2013. After years of payment problems and litigation, the parties settled in 2023 for $450,000, payable in three installments. The agreement provided for a $1.5 million judgment following an uncured default.

Wiley disputed the majority's comparison of the $1.5 million judgment with the discounted $450,000 settlement. Relying heavily on Gormley v. Gonzalez, 84 Cal.App.5th 72 (2022), he said the appropriate comparison was with Lakeshore's potential recovery in the underlying litigation.

Lakeshore alleged that more than $2.26 million was already due in 2019, with interest accumulating at $1,071.87 per day. Wiley calculated the amount at more than $4.4 million by November 2024, making the $1.5 million provision reasonable in his view.

Wiley also framed the dispute as one with implications beyond the parties. Refusing to enforce negotiated default provisions, he argued, increases lenders' risks and could lead to fewer business loans or higher interest rates.

"A deal is no longer a deal but instead a lawsuit," Wiley wrote.

The majority rejected that approach, reasoning that California Supreme Court precedent requires liquidated damages to reasonably approximate losses flowing from breach of the settlement itself, rather than damages alleged in the underlying lawsuit.

Wiley ended his dissent by urging another appeal.

"I recommend Lakeshore seek further review," he wrote.

The case is Lakeshore Investment LLC v. NOW Solutions, Inc., B343435 (Cal. App. 2nd Dist., Aug. 24, 2026).