The California Supreme Court has just overruled a long standing
ruling in a seminal case (Bank of America
v. Pendergrass (1935) 4 Cal.2d 258, 263.
Under Pendergrass, evidence of
alleged oral promises, which conflicted with the written terms of a fully
integrated written contract, were barred – referred to as the parol evidence
rule. The effect of the Pendergrass rule was that a plaintiff
could not argue that promises the defendant with whom he contracted made before
or at the time of contracting that varied with the terms of a fully integrated
written agreement, i.e. that the defendant would not take certain action if the
Plaintiff defaulted on his payment obligations.
This rule has been a mainstay in the arsenal that lenders had to protect
themselves against disgruntled borrowers.
Under Riverisland Cold Storage v.
Fresno-Madera Production Credit Association dated January 14, 2013, the Supreme
Court examined the parol evidence statute (Code of Civil Procedure section
1856) and many of the cases decided under it both pre- and post-Pendergrass as well as case law from
other jurisdictions and held that the fraud exception to the parol evidence
rule as codified in CCP §1856 basically
holds that if the defendant defrauded the Plaintiff into signing a fully integrated
agreement, the agreement itself is not valid and the courts can no longer bar
evidence that goes to prove fraud, including promissory fraud, which Pendergrass had heretofore prohibited.
It is expected that this will greatly
increase lender's exposure to fraud claims by borrowers. Indeed, all a borrower would have to allege
is that the lender orally misstated the terms of the loan, promised that the
lender would not foreclose if the borrower did not make timely payments, said
that the interest rate would be lower than the loan actually provides,
etc. Up until now, the Pendergrass rule could be used at
summary judgment or even demurrer. Under Riverisland
these cases will be allowed to proceed to trial.
Contact Laurie Murphy
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