Tuesday, January 15, 2013
S.C. Overturns Limit on Fraud Exception to Parol Evidence Rule
By JACKIE FUCHS, Staff Writer
The California Supreme Court yesterday overruled its 75-year-old limitation on the fraud exception to the parol evidence rule.
Saying that Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258 “was an aberration,” the justices unanimously held that limitations on extrinsic evidence of fraud run counter to both statutory and case law.
The holding arises out of a 2007 loan modification agreement between Fresno-Madera Production Credit Association and Lance and Pamela Workman. Under that agreement, the Workmans pledged eight parcels of real property as additional collateral, which they acknowledged by initialing pages bearing the legal descriptions of such parcels.
When the Workmans failed to make all the payments required under the agreement, the association recorded a notice of default. The Workmans eventually repaid the loan and the association dismissed its foreclosure proceedings, but the Workmans nevertheless sued the association for fraud and negligent misrepresentation.
The Workmans alleged that two weeks before the agreement was signed, the association’s vice president had assured them that the term was two years and that the only additional security for the restructured loan was two ranches owned by the couple. In fact, the contract contemplated just three months of forbearance and identified eight parcels as additional collateral.
According to the pleadings, the Workmans did not read the agreement, but simply signed it at the locations tabbed for signature.
Fresno Superior Court Judge Adolfo Corona, relying on Pendergrass, declined to hear the plaintiffs’’ evidence on whether oral representations by the association contradicted the terms of the written agreement. He granted summary judgment in favor of the association.
The Court of Appeal reversed, saying that Pendergrass was limited to cases of promissory fraud, and that false statements about the contents of the agreement were factual misrepresentations beyond the scope of the ruling.
Rule of Substantive Law
On review, the high court noted that although the parol evidence rule results in the exclusion of evidence, it is not a rule of evidence but one of substantive law founded on the principle that when the parties put all the terms of their agreement in writing, extrinsic evidence of its terms becomes irrelevant. The purpose of the rule, Corrigan said, is to ensure that the parties’ final understanding is not subject to change.
But Code of Civil Procedure Sec. 1856(f) establishes a broad exception to the operation of the parol evidence rule:
“Where the validity of the agreement is the fact in dispute, this section does not exclude evidence relevant to that issue.”
The provision rests on the principle, Corrigan explained, that the parol evidence rule, which is intended to protect the terms of a valid written contract, should not bar evidence challenging the validity of the agreement itself.
In Pendergrass, the court imposed a limitation on the fraud exception, saying that in order to be admissible, the extrinsic evidence “must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.”
The high court said, however, that the doctrine of stare decisis notwithstanding, there were good reasons for the court to reexamine its holding in Pendergrass.
The case’s limitation, Corrigan wrote, “finds no support in the language of the statute,” is difficult to apply, and conflicts with the doctrine of most treatises and other states.
‘Out of Step’
Moreover, Corrigan said, “Pendergrass was plainly out of step with established California law,” even at the time it was decided, and “the vagaries of its interpretations in the Courts of Appeal” have called its functionality into question.
In addition, the court expressed concern that any limitation on evidence of fraud could itself further fraudulent practices, allowing the parol evidence rule to be used as a shield to protect misconduct or mistake.
The court stressed, however, that its reversal of Pendergrass left the intent element of promissory fraud unchanged, and that plaintiffs would still be required to show more than proof of an unkept promise or a mere failure of performance, as well as justifiable reliance on the defendant’s misrepresentation.
The case is Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association; 1 S.O.S. 137.
Copyright 2013, Metropolitan News Company