Re Fraud Exception to Parol Evidence Rule

2 Mar

From: Charles Cox []
Sent: Monday, February 25, 2013 5:21 AM
To: Charles Cox
Subject: Re Fraud Exception to Parol Evidence Rule

Lenders beware

Reed Smith LLP
Peter S. Clark, II and Marsha A. Houston
February 18 2013

A new troubling case from California allows borrowers to present evidence of prior oral statements of a lender which contradict the terms of the written agreement between the parties with a standard integration clause. Marsha Houston of our Los Angeles office writes more about the case below.

On January 14 2013, the California Supreme Court overturned a rule that lenders and parties to contracts have long relied upon to prohibit the admission of parol evidence of terms outside the four corners of the agreement. In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, No. S190518, 2013 Cal. LEXIS 253 (Cal. Jan. 14, 2013), Riverisland Cold Storage (and related borrowers and guarantors) defaulted on a loan provided by Fresno-Madera PCA in 2007. On March 26 2007, the parties entered into a written forbearance agreement with a standard integration clause that provided that the lender would forbear from collection efforts until July 1 2007 in exchange for the borrowers’ pledge of eight parcels of additional real estate to secure the loan. Thereafter, the borrowers defaulted under the forbearance agreement and the lender began foreclosure proceedings. Although the borrowers repaid the loan in full and the foreclosure proceedings were dismissed, the borrowers and guarantors filed suit against the lender, seeking damages for fraud and negligent misrepresentation, and including causes of action for rescission and reformation of the forbearance agreement.

Plaintiffs alleged that they met with the lender’s senior vice-president, who represented to them that the lender would forbear from collection for two years and would require the pledge of only two parcels of real estate in connection with the forbearance agreement. Plaintiffs acknowledged that they signed the agreement (and presumably eight separate deeds of trust), and claimed that they did not read it, relying instead upon the representations of the lender’s representative.

The lender successfully moved for summary judgment, alleging that the plaintiffs’ claims were barred by the parol evidence rule from presenting evidence of prior oral agreements which contradicted the terms of the written agreement. Plaintiffs asserted that this was consistent with the 70-year-old decision of the California Supreme Court in Pendergrass, which held that a “fraud exception” to the parol evidence rule could not be asserted to prove a fraudulent oral promise that directly contradicted the written terms of the agreement. Plaintiffs won on appeal when the California Court of Appeals held that the fraud at issue was a misrepresentation of fact, not a fraudulent promise (a distinction recognized in Pendergrass and its progeny).

The California Supreme Court affirmed the Appellate Court and overturned its own decision in Pendergrass, finding that the decision was confusing, difficult to apply and did not account for the principle that fraud undermines the very validity of the parties’ agreement and that when fraud is proven, it cannot be held that the parties had a meeting of the minds.

For decades, lenders have relied upon Pendergrass and integration clauses in agreements to protect them against claims by borrowers of fraudulent misrepresentations by loan officers. Apparently, lenders and contracting parties will no longer be able to rely upon this defense in California. While one cannot prevent a party from asserting fraudulent misrepresentation, and it is not clear exactly what precautions might convince the courts to exclude parol evidence, we recommend: insisting that borrowers and guarantors have counsel review the documents; providing a separate document acknowledging that borrowers and guarantors were represented by counsel and that each of them and counsel have read and understood the terms of the loan documents which are named and providing at least the salient terms of any restructure in the separate document; insisting upon a pre-negotiation agreement; providing sufficient time for the borrowers and guarantors to review the documents; and, stating such in the documents.

Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn..docx

2 Responses to “Re Fraud Exception to Parol Evidence Rule”

  1. Ana March 2, 2013 at 1:55 pm #

    I am looking for an attorney to sue Chase for the similar cause of forbearance agreement. My mortgage note gave me the right of forbearance, but when I called to inform the bank that I was ready to undergo surgery, they laughed. They actually placed me on speaker and asked me to repeat what I had just said. The entire office was laughing their heads of and making comments which I will not like to repeat. I asked to have this placed in writting that they would not grant me or honor the forbearance right that I was entitled to under my mortgage and they also laughed, and said banks NEVER GIVE YOU ANYTHING IN WRITTING, WE WILL HAVE YOUR HOUSE FORECLOSED IN LESS THAN 3 months.

    I am a Real Estate Broker who specialized in foreclosure properties in the very good times of the economy and by the grace of God always managed to save all my clients from being thrown in the street without a penny to their name. Many of my clients were parents to maybe 2 to four children too young to know how close they were from living homeless without a roof. Because of all the lies that banks continually told me, I never believed a word they said, even when the owners insisted in lowering the price I always sold it for above the mortgage debt and to the maximum market value, leaving a good incentive for a buyer to be interested in a good buy.

    100% of the times the banks lied, often they would tell me “So we lied, so what”.

    In my own case when I asked for forbearance, they actually told me that they were allowed to serve all papers at once instead of the procedural code for forclosure, therefore they assured me I would loose the house if I pursued forberance.

    We are back to the “Wild, Wild, West” when the Banksters still get your land with forgery, fraud, misrepresentations (it does not matter if it is in writting), they will win. The judges, go along with banks and barely look at the homeowner during the trial. You feel as though you are being ignored totally. This sort of homeowner oblivion attitude by the judges themselves, makes one feel less than a spec of sand, worst.

    I can not tell you all the illegal foreclosure tactics done by Chase, but I will say, what didn’t they do? Would be an easier question to answer.

    May God help us all.

  2. rob March 8, 2013 at 8:54 pm #

    I feel we have lost justice in our courts and what i see is pollitics using power to get what ever they want, How can We the people of the U,S,A STOP THIS ABUSE I am sorry to say it’s time to unite and to make a CHANGE FOR THE GOOD OF OUR COUNTRY

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