California Supreme Court Overturns Long-standing Rule Limiting Fraud Exception to Parol Evidence Rule

Consumer Lending

On January 14, the California Supreme Court overturned a long-standing state limitation on the fraud exception to the parol evidence rule. Riverisland Cold Storage, Inc. v. Fresno-Madera Prod. Credit Assoc., No. S190581, 2013 WL 141731 (Cal. Jan. 14, 2013). Generally, the parol evidence rule limits the use of evidence outside a contract itself to contradict or add to the terms of the contract. The exception allows a party to present extrinsic evidence to support a claim of fraud. In California, the Supreme Court in 1935 established a rule in Bank of Am. etc. Assn. v. Pendergrass, 4 Cal. 2d 258 (1935) to limit the fraud exception to evidence that establishes an independent fact or representation, a fraud in the procurement of the instrument, or a breach of confidence concerning its use. That Pendergrass limitation excluded evidence of a promise at odds with the written contract. The instant case involved two borrowers who entered into a restructured debt agreement with a credit association after falling behind on their payments. After the credit association sought to foreclose on the borrowers for failing to perform under the agreement, the borrowers sued the association, claiming that its vice president had promised terms different from those reflected in the written contract. The Supreme Court affirmed the intermediate appellate court’s holding in favor of the borrowers that evidence of an alleged oral misrepresentation of the written terms is not barred by the Pendergrass rule; concluding that Pendergrass was “an aberration,” it overturned the rule. The court determined that the Pendergrass rule was out of step with established state law at the time it was adopted and was improperly supported in the court’s 1935 decision, and reaffirmed that the parol evidence rule was never intended to be used as a shield to prevent proof of fraud. The court did not address whether, in this case, the borrowers had presented evidence of reasonable reliance on the promised terms, particularly given that the borrowers admit to having not reviewed the contract. That issue will need to be first addressed by the trial court on remand.