Filed 9/24/26 Night Light, Inc. v. Background Images, LLC CA2/3
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
NIGHT LIGHT, INC., B339911
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. 23AHCV01222)
v.
BACKGROUND IMAGES, LLC,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Joel L. Lofton, Judge. Reversed and
remanded with directions.
Snell & Wilmer, Keith M. Gregory and Jing Hua, for
Defendant and Appellant.
Law Offices of John D. Monte and John D. Monte, for
Plaintiff and Respondent.
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Appellant Background Images, LLC (Background) appeals
from a judgment entered after the trial court granted respondent
Night Light, Inc.’s (Night Light) motion to enforce a default
clause in a settlement agreement. Background contends that the
clause is an unenforceable liquidated damages provision. For the
reasons stated herein, we agree. We reverse the judgment and
remand for further proceedings.
BACKGROUND
In May 2023, Night Light sued Background for breach of
contract and conversion. The complaint alleged that Night Light
suffered damages of $219,255.40 based on rental fees for certain
equipment and the cost of repossessing that equipment.
The parties settled the dispute in January 2024. The
settlement agreement (the agreement) specified that the
terms therein did not constitute “an admission or
concession by any PARTY as to the merits of another
PARTY’s claims or the liability of any nature on the part of
any PARTY.”
Through the agreement, Background agreed to pay Night
Light $62,000 in three installments of $20,667. The first
installment was due on January 31, 2024. The agreement
specified that “[e]ach installment payment must be credited to
NIGHT LIGHT’s bank account on or before the due date for each
payment.” It further specified that “[f]or purposes of timeliness
of payment, a scheduled [Automated Clearing House] payment
that is not received in NIGHT LIGHT’s account on or before the
due date shall be a default of the terms and conditions set forth
herein and shall trigger the default provisions set forth in
Paragraph 7 herein.”
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Paragraph 7 of the agreement stated as follows:
“7. Default and Remedies: In the event that
BACKGROUND fails to timely make any payment
required under the terms and conditions of this
AGREEMENT and/or fails to make payment or
payments at all, NIGHT LIGHT shall be entitled to
the full amount demanded in its Complaint in the
sum of $219,255.40. In the event of default, NIGHT
LIGHT, at its option, shall, without further notice to
BACKGROUND, seek entry of Judgment against
BACKGROUND based upon the terms and conditions
of this AGREEMENT and BACKGROUND’s default
of such terms and conditions.”
At 8:12 p.m. on January 31, 2024—the due date for the first
installment payment—Background employee Kimberley Randall
initiated a $20,000 wire transfer to Night Light. The funds were
transferred to Night Light the next day. A few days later,
Randall realized that the agreement required Background to pay
Night Light $20,667 in each installment. Randall initiated a
second wire transfer of $667 to Night Light, which was completed
on February 5, 2024.
On February 6, 2024, Night Light asserted that
Background was in default of the agreement. Night Light
informed Background that it would accept $219,255.40 to settle
the matter, and that it would otherwise file a motion to enforce
the agreement. The parties conferred over the following weeks
but were unable to reach agreement. Night Light moved to
enforce the agreement, seeking $219,255.40 in damages, $1,662
in pre-judgment interest, and $5,031 in attorney fees and costs,
for a total of $226,148.40.
3
Background’s opposition asserted that the default clause in
the agreement was unenforceable under Civil Code section 1671,
subdivision (b).1 That statute specifies that a liquidated damages
clause 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.”
(§ 1671, subd. (b).) Background specifically argued that the
default clause was unreasonable and invalid because the
liquidated damages amount bore no relationship to the amount of
damages that the parties believed would flow from a breach of
the agreement.
In its reply, Night Light contended that the default
provision was an enforceable acceleration clause. It also asserted
that Background waived its right to object to any aspect of the
agreement because Background was represented by counsel
during the negotiations and agreed to all terms in the agreement.
The trial court granted Night Light’s motion, entered
judgment in favor of Night Light, and awarded it $203,619.40.2
Background timely appealed.
1 All further undesignated statutory references are to the
Civil Code.
2 The record does not include the calculations that led to this
amount. It appears to reflect the $219,255.40 specified in the
default clause, less the $20,667 that Background had already
transferred to Night Light, plus the $5,031 in attorney fees
requested in Night Light’s motion.
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DISCUSSION
On appeal, Background contends that the default provision
in the agreement is an invalid liquidated damages clause under
section 1671, subdivision (b).3 For the reasons discussed herein,
we agree. We therefore reverse the judgment and remand for
further proceedings.
I. Legal framework and standard of review
A liquidated damages clause requires a party that breaches
a contract to pay a predetermined amount of damages to the non-
breaching party. (Vitatech Internat., Inc. v. Sporn (2017) 16
Cal.App.5th 796, 810 (Vitatech).) Such a clause 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.” (§ 1671, subd. (b).)
Accordingly, courts presume that “liquidated damages provisions
in nonconsumer contracts are valid, [and] the party challenging
the provision bears the burden to show the provision was
unreasonable” when the contract was made. (Vitatech, at p. 806.)
The validity of a liquidated damages clause “is a question of
law, which we review de novo.” (Red & White Distribution, LLC
v. Osteroid Enterprises, LLC (2019) 38 Cal.App.5th 582, 588 (Red
3 Background also argues, for the first time in its appellate
reply brief, that equity should excuse any default because its
failure to timely pay the first installment was a minor breach.
Ordinarily, “arguments raised for the first time in a reply will not
be considered,” meaning Background forfeited this contention.
(Gormley v. Gonzalez (2022) 84 Cal.App.5th 72, 82 (Gormley).)
Background also forfeited this point by failing to raise it below.
(JJD-HOV Elk Grove LLC v. Jo-Ann Stores, LLC (2024) 17
Cal.5th 256, 270.)
5
& White Distribution); Greentree Financial Group, Inc. v. Execute
Sports, Inc. (2008) 163 Cal.App.4th 495, 499 (Greentree).)4
II. The default provision is an unenforceable liquidated
damages clause
A. The provision is a liquidated damages clause
Background argues, and we agree, that the default clause
at issue is a liquidated damages clause. A liquidated damages
clause is one that “predetermines the amount of damages” to
which one party is entitled if the other party breaches the
agreement. (Vitatech, supra, 16 Cal.App.5th at p. 810.) Here, the
default clause specifies that if Background failed to timely pay
Night Light as required under the agreement, Night Light would
be entitled to a predetermined and fixed amount of $219,255.40
in damages. Although the clause “does not use the phrase
liquidated damages, . . . its legal effect is the same as a liquidated
damages provision.” (Ibid.)
Night Light asserts that the clause is not a liquidated
damages clause, but is instead an enforceable acceleration clause.
It cites two cases in which courts found acceleration clauses valid
and permitted a non-breaching party to demand the entire debt
owed after the other party failed to timely make a payment owed
4 Night Light argues that we should review the trial court’s
ruling for substantial evidence and defer to its finding that the
default clause is enforceable. But Night Light acknowledges that
this court need not defer to the trial court’s finding where “the
facts are undisputed and susceptible of only one reasonable
conclusion.” (Krechuniak v. Noorzoy (2017) 11 Cal.App.5th 713,
715.) Here, Night Light has not identified any conflict in the
evidence, and the undisputed facts lead to only one reasonable
conclusion.
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under the contract. (Wienke v. Smith (1918) 179 Cal. 220, 225;
Trigg v. Arnott (1937) 22 Cal.App.2d 455, 458.) These cases are
distinguishable. To start, neither court considered or determined
whether the clauses at issue were liquidated damages clauses, or
whether they might be invalid under section 1671, subdivision
(b). “A decision, of course, is not authority for what it does not
consider.” (Mercury Ins. Group v. Superior Court (1998) 19
Cal.4th 332, 348.) Additionally, the clauses at issue in both cases
simply accelerated the due date for an existing debt owed under
the contract. (Wienke, at p. 225; Trigg, at p. 458.) The clause at
issue in this case does not accelerate, in the event of a default,
the due date for the $62,000 debt owed under the agreement. It
instead requires Background to pay a different amount—the
$219,255.40 in damages alleged in the underlying complaint.
Because the clause requires Background to pay a predetermined
amount of damages, it is a liquidated damages provision.
(Vitatech, supra, 16 Cal.App.5th at p. 810.)
B. Background established that the clause was
unreasonable when the contract was made
Background further contends that the liquidated damages
clause in this case is unenforceable because it “was unreasonable
under the circumstances existing at the time the contract was
made.” (§ 1671, subd. (b).) We agree.
A liquidated damages clause is unenforceable under section
1671, subdivision (b) when it bears “no reasonable relationship to
the range of actual damages that the parties could have
anticipated would flow from a breach.” (Ridgley v. Topa Thrift &
Loan Assn. (1998) 17 Cal.4th 970, 977 (Ridgley).) The amount of
liquidated damages must represent a “ ‘reasonable endeavor by
the parties to estimate a fair average compensation for any loss
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that may be sustained.’ ” (Ibid.) In the absence of such
relationship, “a contractual clause purporting to predetermine
damages ‘must be construed as a penalty.’ ” (Ibid.)
Here, Background argues that the $219,255.40 liquidated
damages amount did not represent a reasonable effort to
estimate fair compensation to Night Light in the event of a
default. (Ridgley, supra, 17 Cal.4th at p. 977.) Background cites
Greentree, supra, 163 Cal.App.4th 495, which we agree is
illustrative. There, the plaintiff sued the defendant for $45,000,
and the parties settled the matter for $20,000. (Id. at p. 498.)
The settlement agreement specified that if the defendant failed to
timely pay any settlement payment, the plaintiff would be
entitled to a judgment for the full $45,000 demanded in the
complaint. (Ibid.) After the defendant defaulted, the trial court
enforced the settlement and entered judgment in favor of the
plaintiff, which included $45,000 in damages. (Ibid.)
Citing Ridgley, the Greentree court explained that a
liquidated damages clause is unenforceable under section 1671,
subdivision (b) “ ‘if it bears no reasonable relationship to the
range of actual damages that the parties could have anticipated
would flow from a breach.’ ” (Greentree, supra, 163 Cal.App.4th
at p. 499, citing Ridgley, supra, 17 Cal.4th at p. 977.) The court
reasoned that the parties “did not attempt to anticipate the
damages that might flow from a breach of the stipulation. Rather,
they simply selected the amount [plaintiff] had claimed as
damages in the underlying lawsuit.” (Greentree, at p. 499.) The
court noted that the clause “would have been enforceable if it had
been designed to encourage [defendant] to make its settlement
payments on time, and to compensate [plaintiff] for its loss of use
of the money plus its reasonable costs in pursuing the payment.”
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(Ibid.) But the clause resulted in a judgment that far exceeded
the settlement amount, meaning it did not reasonably
compensate the plaintiff for its losses and instead simply
penalized the plaintiff. (Id. at p. 500.) The court concluded that
this penalty bore no reasonable relationship to the expected
damages from a failure to pay the first installment payment, and
reversed the judgment. (Id. at p. 502.)
At least two other courts have followed Greentree in
concluding that a liquidated damages clause in a settlement
agreement is unenforceable when it requires the defaulting party
to pay the full amount of damages demanded in an earlier
complaint. (Vitatech, supra, 16 Cal.App.5th at pp. 800, 808–809;
Purcell v. Schweitzer (2014) 224 Cal.App.4th 969, 975–976
(Purcell).)
Like in Greentree, the liquidated damages clause required
Background to pay Night Light the full amount demanded in the
complaint—$219,255.40—in the event of any untimely payment.
This amount did not attempt to anticipate, and bore no
reasonable relationship to, the losses that Night Light might
expect to sustain if Background failed to timely pay the $62,000
owed under the agreement. (Ridgley, supra, 17 Cal.4th at p.
977.) We therefore conclude that Background has established
that the clause was unreasonable at the time the parties entered
the agreement, and, in turn, that the clause is unenforceable.
(Greentree, supra, 163 Cal.App.4th at p. 502; § 1671, subd. (b).)
Night Light argues that Greentree is inapposite because it
“rests on an outdated framework drawn from Ridgley . . . .”
Night Light specifically asserts that Ridgley improperly employed
a “heightened scrutiny” standard that is only “appropriate to
consumer contracts or penalty clauses,” and which “no longer
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governs non-consumer agreements like the one at issue here.”
Not so. The Ridgley court mentioned a “strict standard” that had
previously applied to all liquidated damages clauses. (Ridgley,
supra, 17 Cal.4th at p. 977.) And it noted that this strict
standard still applies to consumer contracts, which are governed
by section 1671, subdivisions (c) and (d).5 (Ridgley, at p. 977.)
But the Ridgley court then explained that 1977 amendments to
section 1671, subdivision (b) “liberalize[d]” the standard for
assessing liquidated damages clauses in other contracts.
(Ridgley, at p. 977.) The court held that a liquidated damages
clause is “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.” (Ibid.)
In short, the rule on which Greentree relies is drawn from the
part of Ridgley that described section 1671, subdivision (b)—not
from the part of the decision describing the stricter standard
applicable to consumer contracts. (Ridgley, at p. 977. )6
Night Light also asserts that Greentree is not comparable
because the $219,255.40 default amount in this case was
“pleaded in the complaint and supported by specific calculations.”
In this respect, the two cases are indistinguishable—the
liquidated damages clause in Greentree, like the clause in this
5 The parties agree that the agreement at issue in this case
is not a consumer contract.
6 Citing California Law Revision Commission comments, the
Gormley court also concluded that courts should consider
additional factors beyond the one identified in Ridgley. (Gormley,
supra, 84 Cal.App.5th at p. 81.) But Night Light does not argue
that any such factors are relevant or applicable in this case.
Accordingly, this aspect of Gormley does not affect our analysis.
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case, was based on the amount of damages alleged in the
complaint. (Greentree, supra, 163 Cal.App.4th at p. 498.) And
while Night Light explained the basis for its damages claim in
the complaint, those numbers are merely allegations. Using an
untested damages claim as the liquidated damages amount was
unreasonable when the parties entered the agreement, because
that amount bore no reasonable relationship to Night Light’s
anticipated damages from a breach.
Next, Night Light contends that this case is unlike
Greentree, and more akin to Creditors Adjustment Bureau, Inc. v.
Imani (2022) 82 Cal.App.5th 131. We do not agree. In Creditors
Adjustment Bureau, the plaintiff sued the defendant for around
$250,000. (Id. at p. 134.) The parties settled through a
stipulated judgment that required the defendant to pay the
plaintiff $30,000. (Ibid.) Through the settlement, the defendant
“ ‘acknowledge[d] that the amount of $251,200.13 is due and
owing,’ ” and agreed that the plaintiff would be entitled to a
judgment of $251,200.13 in the event of any default. (Ibid.) The
appellate court reasoned that the liquidated damages clause was
not unreasonable under section 1671, subdivision (b) because it
reflected the “actual and stipulated amount of damages” owed by
the defendant. (Creditors Adjustment Bureau, at pp. 230–231.)
But unlike in Creditors Adjustment Bureau, the agreement in
this case contains no acknowledgement of liability—in fact,
Background expressly disclaimed any such admission. Notably,
the court in Creditors Adjustment Bureau distinguished
Greentree because it “involved disputed claims and here,
appellant admitted owing the $251,200.13 as unpaid rent, i.e.,
damages.” (Id. at p. 137.) Because Background disputes Night
11
Light’s damages claims, Creditors Adjustment Bureau is
inapposite.
Finally, Night Light argues that Background waived any
right to challenge the provisions of the agreement by failing to
object during negotiations. However, “ ‘the public policy
expressed in Civil Code sections 1670 and 1671 may not be
circumvented by words used in a contract.’ ” (Purcell, supra, 224
Cal.App.4th at p. 975, italics omitted.) Background did not waive
its right to challenge the unenforceable default clause by initially
consenting to the terms of the agreement.
In sum, the liquidated damages provision is unenforceable
under section 1671, subdivision (b), because it was unreasonable
when the parties entered the agreement.
III. The judgment is reversed and the matter is
remanded for further proceedings
The parties’ appellate briefing did not address what should
occur on remand if this court concludes that the liquidated
damages clause is unenforceable. However, even when a
liquidated damages clause is invalid under section 1671,
subdivision (b), the aggrieved party may still collect its actual
damages. (Ridgley, supra, 17 Cal.4th at p. 977.) Under similar
facts and in a parallel procedural posture, other courts have
reversed and remanded with instructions for the trial court to
reduce the judgment to reflect the amount owed under the
parties’ settlement agreement. (Red & White Distribution, supra,
38 Cal.App.5th at pp. 585, 590; Greentree, supra, 163 Cal.App.4th
at pp. 498, 503.)
We reverse the judgment, remand the matter, and instruct
the trial court to enter a new judgment. The trial court shall use
the $62,000 owed under the agreement as the principal amount
12
owed by Background to Night Light, and shall credit Background
for any previous payments made to Night Light. The trial court
shall also award interest, attorney fees, and costs to the extent
permitted under the agreement and by law. On remand, the trial
court may order additional briefing and/or hold evidentiary
hearings to the extent necessary to render its judgment.
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DISPOSITION
The judgment is reversed. The matter is remanded to the
trial court with directions to enter a new judgment in favor of
Background. The judgment shall include $62,000 in damages,
less any payments already made by Night Light and received by
Background. The court may also award interest, attorney fees,
and costs to the extent permitted under the parties’ settlement
agreement. On remand, the trial court may order additional
briefing and may conduct one or more evidentiary hearings as
necessary. The parties shall bear their own appellate costs.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
HANASONO, J.
We concur:
ADAMS, P. J. DELGADO, J.*
* Judge of the Santa Clara Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
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