Stipulated Judgments in California Settlements: When the Default Number Is an Unenforceable Penalty

You settle a collection case for less than you are owed, because a discount you can actually collect beats a judgment you cannot. To protect the discount you add the clause every lawyer adds: miss a payment, fail to cure, and judgment enters for a much bigger number. The other side defaults. You file the stipulation, the trial court signs it, and you finally have a judgment worth something. On August 24, 2026, the California Court of Appeal took exactly that judgment away.

The decision is Lakeshore Investment LLC v. Now Solutions, Inc. (Aug. 24, 2026, B343435), certified for publication by the Second Appellate District, Division Eight, which hears appeals out of Los Angeles County. It is worth reading closely if your business has ever signed a settlement agreement with a default provision in it, on either side of the deal.

What happened in Lakeshore

In January 2013, Lakeshore Investment loaned $1,759,000 to Now Solutions, Inc. at 11 percent, secured by a pledge of the borrower's intellectual property. The borrower defaulted, and the payment schedule was amended eight times. The last amendment, in December 2017, added the parent company as an additional debtor and guarantor, set the monthly payment at $31,564, and raised the default rate to 16 percent. Lakeshore sued for breach of the note in May 2019 in Los Angeles Superior Court.

In November 2023, more than four years into the litigation, the parties signed a settlement agreement and mutual release. The defendants agreed to pay $450,000 in three installments over roughly ten months: $30,000, then $50,000, then a final $370,000 due September 30, 2024. They admitted no liability. Both sides were represented by counsel. And the agreement contained this: if the defendants missed an installment and did not cure within ten business days of an emailed notice, they "agree and stipulate to the entry of a judgment against them in the amount of $1,500,000."

The defendants paid the first $80,000 and never paid the $370,000. Lakeshore gave notice, the default went uncured, and the trial court entered judgment for the full $1.5 million plus interest. The defendants appealed, arguing the number was a penalty.

Why the court called $1.5 million a penalty

The Court of Appeal agreed and reversed, sending the case back to the trial court to determine the actual damages caused by the breach. Two things drove the result.

First, the record was empty. Civil Code section 1671, subdivision (b) says a liquidated damages provision is valid unless the party challenging it proves it was unreasonable under the circumstances existing when the contract was made. That burden sits on the challenger, and the court said so plainly. But the court then held the defendants carried it on the arithmetic alone: $1.5 million was three times the amount owed under the settlement, and nothing in the record showed the figure was, in the California Supreme Court's phrase from Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977, "the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained." Lakeshore argued the number accounted for the defendants' payment history since 2013, their financial condition, the cost of five years of litigation, and the risk of ever collecting. Those are all sensible things to price. The problem was that Lakeshore conceded there was "no demonstrable evidence that these factors were considered, by both sides, in the settlement discussions," and the court declined to presume the conversation had happened.

Second, the number failed on its face. The court described its approach as one "some might label a 'per se unreasonable proportion' approach in the absence of other evidence of reasonableness," and said the caselaw supports it. A stipulated judgment $1 million larger than the total owed under the settlement, the court held, fails "to take into account the need for proportion in damages, the critical item in evaluating penalty and forfeiture," quoting Sybron Corp. v. Clark Hosp. Supply Corp. (1978) 76 Cal.App.3d 896, 903.

The comparison that decides these cases

This is the part most people get backwards, and it is the single most useful thing to take from the opinion.

When a court tests a settlement default clause, it does not compare the stipulated judgment to what you sued for. It compares the stipulated judgment to the damages flowing from breach of the settlement itself. The relevant breach is the failure to pay the settlement, not the underlying wrong you filed suit over. Lakeshore asked the court to measure $1.5 million against the $1,759,150 plus interest and fees demanded in the original complaint. The court refused, holding that the caselaw "rejects using the damage amount of the original complaint as any sort of yardstick."

Once you accept that framing, most default clauses are in trouble, because the damages from a failure to pay money are easy to calculate. They are interest, plus the reasonable administrative and collection costs of chasing the money. Civil Code section 3302 fixes the measure for the wrongful withholding of money, and the California Supreme Court made the same point in Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731. A settlement that goes unpaid for a year does not generate damages of triple the settlement. It generates a year of interest.

Three earlier decisions that set the pattern

Lakeshore did not invent this. It sits at the end of a line of cases that keep reaching the same result on nearly identical facts:

1. Greentree Financial Group, Inc. v. Execute Sports, Inc. (2008) 163 Cal.App.4th 495. A suit for $45,000 settled for $20,000 in installments, with a default triggering judgment for the full amount prayed for in the complaint. The defendant missed the first installment and judgment was entered for $61,232.50. The Court of Appeal reversed and directed the trial court to reduce the judgment to $20,000. The record showed nothing about how the parties arrived at the larger number, and nothing about the plaintiff's odds of winning at trial.
2. Purcell v. Schweitzer (2014) 224 Cal.App.4th 969. An $85,000 note dispute settled for $38,000 payable over 24 months. Late payment made the full $85,000 due, and the defendant signed a stipulation admitting he owed it. He was late, and judgment entered for roughly $59,000. The trial court set the judgment aside and the Court of Appeal affirmed. The plaintiff's explanation, that the higher figure reflected the economics of proceeding with the lawsuit, failed because nothing in the record supported it.
3. Vitatech Internat., Inc. v. Sporn (2017) 16 Cal.App.5th 796. A complaint seeking more than $166,000 settled on the eve of trial for a single payment of $75,000, with the defendants stipulating to judgment in the full prayer if they did not pay. They did not pay, and judgment entered for more than $300,000. Void as a matter of law, said the Court of Appeal, because no reasonable relationship existed between the $75,000 the plaintiff agreed to accept and the judgment it took.

Read together with Lakeshore, the pattern is hard to miss. Four cases, four multiples in the range of three to four times the settlement amount, four clauses struck down. In every one of them the record was silent on how the parties picked the number.

There is a real split, and Lakeshore drew a dissent

The counterexample matters just as much. In Gormley v. Gonzalez (2022) 84 Cal.App.5th 72, the Third Appellate District enforced a liquidated damages provision in a settlement. Twenty medical malpractice plaintiffs settled globally for $575,000 payable in two installments, with liquidated damages accruing at $50,000 per month and $1,644 per day up to a cap of $1.5 million. The defendants defaulted and the trial court entered judgment for $1,393,084. The Court of Appeal affirmed.

What was different was the evidence. The plaintiffs showed the agreement went through numerous drafts, that the liquidated damages provision itself was heavily negotiated, and that they had accepted a steeply reduced number in exchange for assurance of prompt payment, with the escalating damages there to make prompt payment happen. The defendants offered nothing in response. The Lakeshore majority distinguished Gormley on precisely that basis: there the plaintiffs presented the dynamics behind the number, and here no party presented anything.

Justice Wiley dissented in Lakeshore, and forcefully. His view is that section 1671, subdivision (b) draws a deliberate line between consumer contracts and deals between sophisticated businesses, that Ridgley was a consumer case involving a preprinted form and unrepresented borrowers, and that a publicly traded company advised by its own lawyers should be held to a number it agreed to and signed. He would have compared the $1.5 million to the roughly $4.4 million the debt had grown to by the time judgment was entered, called the majority's result a gotcha defense for a company that did not pay, and warned that it will make lenders less willing to work with distressed businesses. He recommended that Lakeshore seek review in the California Supreme Court.

That last point has practical value. Lakeshore is published and citable today, but the law here is genuinely contested between appellate districts, and this decision could still be reviewed. Do not build a settlement structure that only works if one side of the split holds.

Section 664.6 does not make the trial court a rubber stamp

Lakeshore also made an argument that comes up constantly: that Code of Civil Procedure section 664.6 lets the court enter the settlement the parties made and gives it no authority to alter the terms. The court's answer is short and worth remembering. Section 664.6 provides that a court may enter judgment pursuant to the terms of the settlement. It does not compel the court to do so merely because the parties agreed to those terms. A provision that is void as against public policy does not become enforceable because it arrived by stipulation rather than by contract.

The same goes for the argument that both sides had lawyers. Representation defeats a claim that a party misunderstood the deal. It does not answer whether the number bears a reasonable relationship to anticipated damages, which is a separate question the statute asks on its own.

How to draft a default provision that survives

The lesson of Gormley is that these clauses hold up when the record explains them. The lesson of Lakeshore, Vitatech, Purcell, and Greentree is that the record almost never does. If you are the party taking the discount, build that record inside the agreement itself, at signing, when it costs nothing:

• Recite how the number was derived. Put the reasoning in the document: the discount taken off the claim, the collection risk assumed, the interest given up, the cost of resuming litigation. The Lakeshore court looked for exactly this and found nothing.
• Tie the default amount to something measurable. A figure that accrues over time, as in Gormley, reads as compensation for delay. A flat multiple that lands the same whether the default lasts one day or one year reads as a punishment.
• Keep it proportional. Roughly three times the settlement has now been struck in four published decisions. Interest at a contract rate, plus documented collection costs and fees, is defensible in a way that a round number lifted from the prayer is not.
• Make the escalation stop somewhere. The provision Gormley enforced had a cap. A cap signals an estimate rather than a threat.
• Have both sides acknowledge the estimate in writing. The court refused to presume the parties discussed the figure. One recital saying they did, signed by both, changes what the record shows.
• Consider security instead of a bigger number. A deed of trust, a personal guaranty, a stipulation for judgment in the unpaid balance rather than an inflated sum, or a prejudgment writ of attachment in the underlying case does more for collection than a clause a court can void.

If you are the party that defaulted

Two things are true at once, and clients tend to hear only the first.

The good news is that a grossly disproportionate stipulated judgment is challengeable, the challenge succeeds regularly, and Lakeshore holds the disparity itself can carry your burden when the other side's record is thin. Raise it in written opposition before judgment is entered, the way the defendants in Lakeshore did, rather than trying to unwind a judgment afterward.

The bad news is that you still owe the money. The court was explicit that the defendants "do not escape unscathed." They remain liable for the actual damages caused by the default: interest for the period the money was wrongfully withheld, plus the administrative and accounting costs reasonably related to collecting a late payment. What you win is the difference between a penalty and a real number, and a hearing to fix it. You do not win the obligation itself.

What to do now

If you hold a settlement in default. Before you file the stipulation, compare your default number to the settlement amount, not to your complaint. If the ratio is anywhere near the range in these cases, expect a fight, and gather whatever you have showing how the figure was negotiated.

If you are settling this month. Spend ten minutes on the default clause and write the reasoning into it. It is the cheapest insurance in the agreement, and all four cases above are about parties who skipped that step.

If a stipulated judgment was just entered against you. The deadline to appeal is short. Lakeshore reached the Court of Appeal from a postjudgment order, and the argument survived because the defendants opposed the application in writing before the hearing.

For related reading, see our discussion of liquidated damages clauses in California contracts, the liquidated damages entry in our legal glossary, our breach of contract FAQ, and our post on recovering attorney fees in litigation.

Talk to a Los Angeles business litigation attorney

The Darvish Firm's Los Angeles business litigation attorneys negotiate and enforce settlement agreements, defend against stipulated judgments, and litigate contract disputes for businesses across Southern California. Call (310) 677-3512 or request a consultation.

This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Every case depends on its facts. Consult an attorney about your specific situation.