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