Archive | March, 2013

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

The Honorable(?) Judge Carolyn Ellsworth has some EXPLAINING to do

2 Mar

From: Charles Cox []
Sent: Wednesday, February 27, 2013 4:51 AM
To: Charles Cox
Subject: The Honorable(?) Judge Carolyn Ellsworth has some EXPLAINING to do

The judicial corruption never ceases to amaze.

Judge tosses mortgage ‘robosigning’ case in Vegas

By KEN RITTER, Associated Press
Updated 3:28 pm, Tuesday, February 26, 2013

MERS wins again

2 Mar

From: Charles Cox []
Sent: Wednesday, February 27, 2013 4:51 AM
To: Charles Cox
Subject: MERS wins again

Sixth Circuit upholds dismissal of putative class action

Squire Sanders
Pierre H. Bergeron
February 20 2013

In Christian County Clerk v. Mortgage Electronic Registration Systems, Inc., the Sixth Circuit upheld dismissal of an action brought by various Kentucky county clerks against the MERS system and a variety of banks that utilized it. The clerks essentially alleged that the defendant banks established MERS to enable its members to avoid recording mortgage assignments and paying the associated recording fees to the country clerks. The district court dismissed the case on 12(b)(6) grounds, and the country clerks appealed.

The first issue addressed by the Court concerned the standing of the county clerks. The defendants insisted that the clerks lacked constitutional standing because the clerks purportedly only have an official, but not a personal, stake in the litigation. The Sixth Circuit, however, found that because the clerks alleged that the defendant’s actions deprived them of fees and interfered with their duties as custodians of property records, they had alleged sufficient injury to pass constitutional muster.

Turning to the merits of the claim, the Court assessed whether the Kentucky statutes upon which the clerks sued afforded them a private right of action. The statutes relied upon by the clerks did not provide any express cause of action, and therefore the clerks invoked a Kentucky negligence per se statute, which can create a private right of action for a violation of certain state statutes. The Sixth Circuit, however, rejected this argument, concluding that the clerks were not within the class of persons the Kentucky legislature intended to protect under the recording statutes. While the recording statutes served multiple purposes, the Sixth Circuit found “no indication that the legislature intended to protect the officers who administer those laws and collect fees.” This case is a blow to county officers who have sought to recoup fees that they claim are lost through the use of the MERS system, and it certainly begs the question of whether states will pursue other statutory efforts to prevent the loss of those revenues.

Kentucky MERS.pdf

OCC News Release: Amendments to Consent Orders Memorialize $9.3 Billion Foreclosure Agreement

2 Mar

From: Charles Cox []
Sent: Thursday, February 28, 2013 8:09 AM
To: Charles Cox
Subject: OCC News Release: Amendments to Consent Orders Memorialize $9.3 Billion Foreclosure Agreement

Amendment to Consent Orders:

Comptroller of the Currency, Administrator of National Banks Office of the Comptroller of the Currency, Ensuring a safe and sound national banking system for all America
NR 2013-35
February 28, 2013
Board of Governors of the Federal Reserve System
Office of the Comptroller of the Currency

Amendments to Consent Orders Memorialize $9.3 Billion Foreclosure Agreement

WASHINGTON — The Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board today released amendments to their enforcement actions against 13 mortgage servicers for deficient practices in mortgage loan servicing and foreclosure processing. The amendments require the servicers to provide $9.3 billion in payments and other assistance to borrowers.

The amendments memorialize agreements in principle announced in January with Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo. The amount includes $3.6 billion in cash payments and $5.7 billion in other assistance to borrowers such as loan modifications and forgiveness of deficiency judgments.

Borrowers covered by the amendments include 4.2 million people whose homes were in any stage of the foreclosure process in 2009 or 2010 and whose mortgages were serviced by one of the companies listed above. These borrowers are expected to be contacted by the Paying Agent—Rust Consulting, Inc.—by the end of March 2013 with payment details. The Paying Agent will send payments and correspondence.

Borrowers covered by the amendments are expected to receive compensation ranging from hundreds of dollars up to $125,000. Borrowers are not required to take any additional steps to receive the payments. In addition, borrowers will not be required to execute a waiver of any legal claims they may have against their servicer as a condition for receiving payment.

Borrowers can call the Paying Agent at 1-888-952-9105 to update their contact information or to verify that they are covered by the amendments.

In providing the $5.7 billion in assistance, the 13 servicers are expected to undertake well-structured loss mitigation efforts focused on foreclosure prevention, with preference given to activities designed to keep borrowers in their homes through affordable, sustainable, and meaningful home preservation actions.

Borrowers seeking assistance should work directly with their servicer or a counselor approved by the U.S. Department of Housing and Urban Development (HUD). Borrowers can reach HUD-approved counselors by calling 888-995-HOPE (4673).

OCC and Federal Reserve examiners continue to monitor the servicers’ implementation of corrective actions required by the original enforcement actions to address unsafe and unsound mortgage servicing and foreclosure practices.

For the 13 servicers, these amendments to the enforcement actions replace the requirements related to the Independent Foreclosure Review. For GMAC Mortgage, Everbank, and OneWest, which did not enter agreements in principle with federal regulators, the Independent Foreclosure Review process continues. Regulators expect the reviews for these servicers to be completed over the course of the coming year. These companies service 457,000 mortgages that were in some stage of foreclosure in 2009 or 2010.

Media Contacts

Federal Reserve Barbara Hagenbaugh 202-452-2955
OCC Bryan Hubbard 202-649-6870

Related Links

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OCC shield The Office of the Comptroller of the Currency (OCC) charters and oversees a nationwide system of national banks and federal savings associations and assures that these banking institutions are safe and sound, competitive, and capable of serving the banking needs of their customers in the best possible manner. OCC press releases and other information are available at To receive OCC press releases and issuances by e-mail,


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