January 28, 2013
By Dowling Aaron Incorporated on January 28, 2013 6:00 AM |

Contract Law.jpgFor more than 75 years, the California fraud exception to the parol evidence rule in written contract cases has been limited to evidence which tends "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." (Bank of America v. Pendergrass (1935) 4 Cal.2d 258, 263.) Although often criticized and occasionally limited in application, the Courts of Appeal have applied the Pendergrass rule to exclude extrinsic evidence of promises that are not consistent with the terms of an integrated written contract. Pendergrass has been relied on heavily by financial institutions as a defense against claims by borrowers that bank representatives made promises that were contrary to the terms set forth in the loan documents to forbear exercise of remedies, and have been able to avoid liability on fraud claims through demurrer or summary judgment.

However, on January 14, 2013, the California Supreme Court filed its opinion in Riverisland Cold Storage, Inc. v. Fresno Madera Production Credit Association, case S190581, reversing Pendergrass' limitations on the fraud exception to the parol evidence rule. The Court found that Pendergrass was a "poorly reasoned opinion" which "departed from an established general rule" without discussing the "contrary authority." Reviewing the California law on the scope of the fraud exception when Pendergrass was decided, the Court found that Pendergrass itself was inconsistent with the state of the law at the time it was decided and was, in fact, "an aberration." On that basis, the Riverisland court overruled Pendergrass and its progeny and their limitations on introduction of intrinsic evidence under the fraud exception to the parol evidence rule.

By expanding the types of extrinsic evidence admissible in actions arising out of written contracts, the Supreme Court has given borrowers and other plaintiffs substantial leverage, in that they no longer have to show that oral promises be "consistent" with the written agreement terms in order to be admissible in evidence. However, such evidence still will have to overcome the presumption that an integrated written agreement sets forth the true intent of the parties at the time the agreement was signed. Nevertheless, Riverisland has altered the playing field and is likely to result in increased lender liability and other contract litigation.

By Christopher E. Seymour

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