What a new appellate case teaches California creditors about stipulated judgments, liquidated damages, and discounted debt.
A California Court of Appeal just wiped out a $1.5 million stipulated judgment against a defaulting borrower and sent the creditor back to the trial court to prove what it actually lost thirteen years after making the loan.
The case is Lakeshore Investment LLC v. NOW Solutions, Inc., No. B343435, a published decision from the Second Appellate District, Division Eight, filed August 24, 2026. It arrives with a dissent sharp enough from Justice John Shepard Wiley Jr. to make the Daily Journal: https://www.dailyjournal.com/articles/393918-dissent-warns-liquidated-damages-ruling-could-raise-cost-of-business-credit.
Six years ago, I wrote a California appellate case update that covered Graylee v. Castro (2020) 52 Cal.App.5th 1107, along with the rest of that year’s decisions worth knowing: https://www.linkedin.com/pulse/2020-2021-significant-california-appellate-cases-construction-ng. NACM Commercial Services ran a version of it as well: https://www.nacmcommercialservices.org/california-case-law-update-for-credit-professionals-and-risk-managers/.
The lesson I drew then still holds. A stipulated judgment risks becoming an unenforceable penalty when the default amount bears no defensible relationship to the anticipated consequences of breach. A different result is possible when the debtor genuinely acknowledges the larger obligation as already due and owing and timely performance merely earns a discount. Lakeshore is the sequel, and it is worth more than the majority-versus-fiery-dissent story.
What happened
In 2013, Lakeshore loaned $1,759,150 to NOW Solutions on an 11 percent note secured by the borrower’s intellectual property. The borrower fell behind. The parties amended the payment schedule eight times. The last amendment, in December 2017, added the parent company Vertical Computer Systems as a co-debtor and guarantor, set the monthly payment at $31,564, and raised the default rate to 16 percent. Lakeshore sued in May 2019.
The parties settled in November 2023. Defendants agreed to pay $450,000 in three installments, and they admitted no liability. If they defaulted and failed to cure within ten business days, they stipulated to a $1.5 million judgment plus interest. They paid $80,000, then missed the final $370,000 installment. The trial court entered the $1.5 million judgment.
The Court of Appeal reversed.
The majority
Presiding Justice Stratton, joined by Justice Viramontes, applied Civil Code section 1671(b) and Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970. The court focused on the damages caused by breaching the settlement, not on the size of Lakeshore’s original claim.
The record said almost nothing about the circumstances at formation beyond a boilerplate reference to good faith negotiations. Lakeshore conceded there was no demonstrable evidence that either side considered the relevant factors during the settlement discussions. The $1.5 million came to more than three times the entire $450,000 settlement and more than four times the $370,000 payment actually left unpaid. With no evidence showing how the parties arrived at that number, the court treated the provision as a penalty.
The court did not stop with the thin record. It gave a second reason for striking the provision. Even apart from the lack of evidence showing how the parties arrived at $1.5 million, the majority concluded that the number was facially disproportionate to the damages that could reasonably flow from breaching a promise to pay $450,000. The stipulated judgment added roughly $1 million beyond the settlement total. Because damages from withholding money ordinarily consist of interest plus reasonably related administrative and collection costs, the court concluded that the additional $1 million could not be justified as compensation rather than a penalty.
It remanded for the trial court to determine Lakeshore’s actual damages, including the value of the money wrongfully withheld and reasonable administrative and collection costs, citing Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731 and Civil Code section 3302.
The dissent has a point. But Gormley was different.
Justice Wiley did not hold back as highlighed in the Daily Journal article. Justice Wiley’s dissent listed five problems: the majority misapplies the statute, conflicts with recent precedent, is illogical, is unfair, and will be economically destructive.
The statutory argument carries real weight. Section 1671(b) puts the burden on the party challenging the clause. Vertical offered no evidence about the circumstances at formation. The dissent leaned on the 1977 amendment and the Law Revision Commission comment, which separate consumer contracts from business deals and favor enforcement in the latter, and he quoted Judge Posner on why courts should enforce penalty clauses that sophisticated, represented parties negotiate. The dissent warned that the decision will produce fewer loans or higher rates.
The dissent offered Gormley v. Gonzalez (2022) 84 Cal.App.5th 72 for the proposition that the right comparator is the value of the underlying case rather than the discounted settlement. On Justice Wiley’s math, the principal had grown to $2,261,324.60 and was accruing at $1,071.87 per day, reaching roughly $4.4 million by November 2024. Against that figure, $1.5 million looks modest.
Gormley, however, did not compare its stipulated judgment to whatever the complaint happened to demand. There, the parties themselves had estimated $1.5 million as the plaintiffs’ likely recovery at trial. The record showed lawyers on both sides, extended negotiation over the liquidated damages provision in particular, collection and insurance risks including a burning limits policy, and a cap keyed to that negotiated estimate. Gormley enforced a number the parties had jointly built.
Lakeshore had no comparable evidentiary record. The parties were represented and the agreement recited extensive good faith negotiations, but nothing showed how those negotiations produced $1.5 million. The majority distinguished Gormley on exactly that basis. Justice Wiley’s $4.4 million calculation is economically compelling and it may well describe what Lakeshore really lost. But it is arithmetic performed on appeal from figures in a complaint, not evidence of what the parties jointly estimated when they sat down to negotiate. Section 1671(b) asks about the circumstances existing when the contract was made. A number reconstructed years later by a reviewing court does not answer that question.
Two roads, and Lakeshore took neither
California gives a creditor two distinct routes to a default provision that will hold up.
The first is the Gormley road. Treat the default amount as liquidated damages, and build a record showing why that figure was reasonable under the circumstances existing when the settlement was made. Gormley won on that road. Lakeshore failed on it, because the record was empty and the number was disproportionate on its face.
The second is the forbearance road, and neither the majorty or dissent in Lakeshore mentions it. Jade Fashion & Co., Inc. v. Harkham Industries, Inc. (2014) 229 Cal.App.4th 635 held that a discount conditioned on timely payment of an admitted debt is not liquidated damages at all, so section 1671 never applies. Creditors Adjustment Bureau, Inc. v. Imani (2022) 82 Cal.App.5th 131 enforced a $251,200.13 stipulated judgment where the debtor paid $30,000 under a schedule and had expressly acknowledged in the stipulation that the larger sum was due and owing. In Red & White Distribution, LLC v. Osteroid Enterprises, LLC (2019) 38 Cal.App.5th 582, Justice Currey spelled out the mechanics: parties may stipulate that the debt is a certain number, agree it may be discharged for that number minus a discount, and agree that judgment for the full amount enters on default.
Lakeshore failed on that road too, and for the threshold reason. Defendants admitted no liability, so there was no acknowledged debt for the $1.5 million to represent. The agreement compromised a disputed claim, and the default figure appeared from nowhere. It matched nothing in the record. Not the $1,759,150 principal. Not the $2,261,324.60 balance alleged in the complaint. Not the $370,000 left unpaid.
Missing one road is survivable. Missing both is not.
Would better drafting have saved it?
Possibly, but not through magic words.
Red & White makes the point directly: parties may establish X as the debt, provide that timely performance earns a discount to Y, and allow judgment for X on default. Imani enforced that arrangement. A creditor holding a documented promissory note with an objectively calculable balance may be particularly well positioned to use that structure, if the borrower can truthfully acknowledge the resulting balance as due and owing without offset or defense.
Purcell v. Schweitzer (2014) 224 Cal.App.4th 969 is the counterweight. That stipulation recited that the $85,000 was monies actually owed and was neither a penalty nor a forfeiture, and it still failed. Significantly, the court held that the public policy behind section 1671 cannot be circumvented by words used in a contract. Reciting an acknowledgment does not create one where the economic substance says otherwise, and labeling a figure “not a penalty” does not stop a court from looking at what the figure actually does.
So the question is not which sentence to add. It is which road you are on, and whether the deal you papered can carry you down it.
Reconciling the no-admission clause
If you choose the forbearance road, the standard no-admission provision sits in obvious tension with the acknowledgment you need. The two can coexist if you stop treating liability as one undifferentiated thing.
Your customer’s legitimate interests are keeping the deal out of other litigation, protecting insurance positions, avoiding a public concession on tort or fraud counts, and staying quiet as to third parties. None of that requires denying the principal balance on a note. So carve the acknowledgment out. Have the debtor acknowledge the specific liquidated obligation, meaning principal, accrued interest through a stated date, and fees, as due and owing without offset, defense, counterclaim, or right of recoupment. Leave everything else in the complaint disclaimed.
Watch the verbs. “Plaintiff alleges X was due” signals a disputed claim. Imani came out the other way because the debtor stated the sum was due and owing.
Watch the arithmetic. Pay Y or else owe X is the structure Purcell rejected. Run it the Jade Fashion way. The debtor owes X, the installments total X, and if every payment arrives on time the debtor deducts the discount from the final installment. Nothing gets added on default, because the obligation was always X.
But recognize what you are asking for. An acknowledgment carries real consequences. Vertical Computer Systems was publicly traded, so formally admitting that it owed a multimillion-dollar debt could affect what it reported to investors and how the obligation appeared on its financial statements. That helps explain why a debtor may resist the very acknowledgment that would make the creditor’s preferred structure more enforceable.
Takeaways for commercial creditors
- Decide at the outset which road you are on. A liquidated damages provision needs a record. A forbearance with a discount needs an acknowledged debt. Trying to do both halfway produces neither.
- If you take the liquidated damages road, build the record inside the agreement. Recite the payment history, the collection risk, the litigation costs, and the parties’ shared estimate of what the claim is worth. Gormley won on that showing. Lakeshore lost without it.
- If you take the forbearance road, start with a real, acknowledged debt. Then give the debtor a discount for paying on time. The larger amount should be the debt that already exists, not a new amount triggered by default. The cleanest Jade Fashion structure is to apply the payments against the full debt and let the debtor earn the discount with the final payment.
- Do not choose a default number because it sounds serious. Tie it to something provable: interest for the time the money is withheld plus reasonable administrative and collection costs. A figure that corresponds to nothing in your file will read as a penalty.
- Do not assume the size of the underlying claim justifies the default number. Lakeshore’s complaint alleged far more than $1.5 million, and it did not matter, because nothing showed the parties used that figure when they negotiated.
- Know when a stipulated judgment is actually available. In California, a creditor can no longer obtain a prelitigation confession of judgment; that procedure has been unenforceable since January 1, 2023. If litigation is already pending, the parties can settle and use a stipulated judgment, but the settlement still has to comply with California’s rules against unlawful penalties.
What to watch
Whether Lakeshore seeks review, which Justice Wiley openly invited. But regardless of what happens next, the practical lesson is already clear: the enforceability of a stipulated judgment often turns on choices made when the settlement is drafted, not after the debtor defaults.
Know which structure you are using. Make the numbers defensible. Make the document explain why they are defensible. And do not assume that a negotiated default provision will survive simply because sophisticated parties agreed to it. By the time the enforcement fight begins, the most important drafting decisions may already have been made.
For more information contact:
310-374-3367
Christopher Ng is the managing partner of Gibbs Giden. Chris primarily represents companies in a wide range of business, commercial and construction transactions and disputes.
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