Night Light, Inc. v. Background Images, LLC CA2/3

Opinion

Filed 9/24/26 Night Light, Inc. v. Background Images, LLC CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

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.”

2 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.

4 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.

6 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 7 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.”

8 (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 9 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.

10 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.

13 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.