In overturning more than 75 years of precedent regarding the treatment of parol evidence in the interpretation and enforcement of contracts in California, the California Supreme Court recently ruled that a defendant may now directly contradict the terms of a written contract with oral claims of alleged fraud, notwithstanding the fact that the agreement is a fully integrated writing. Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, (2013) 55 Cal. 4th 1169, 291 P. 3d 316; 151 Cal Rptr. 3d 93.
Defendant fell behind in loan payments to Plaintiff, and subsequently agreed to restructure its debt (approximately in the amount of $776,000). Plaintiff agreed to forbear for 90 days if Defendant agreed to make a series of scheduled payments and provide for additional collateral in the form of eight parcels of real property. However, Defendant subsequently defaulted on the restructured payments and thus Plaintiff recorded a Notice of Default against the real property.
Defendant later repaid the loan and Plaintiff dismissed its pending foreclosure proceeding. However, Defendant proceeded to file an action against Plaintiff, asserting claims of fraud and negligent misrepresentation, including claims for rescission and reformation regarding the restructuring agreement. Defendant alleged that one of Plaintiff’s officers promised to forbear for two years, requiring only two additional parcels of real property collateral. As it turned out, the restructuring agreement provided otherwise – it provided for eight (not two) additional parcels of collateral and for a shorter 90-day (not two year) forbearance period. The Court noted that the agreement had an integration clause plus the Defendant had specifically initialed most of the description pages for the additional parcels.
Plaintiff was awarded summary judgment by the trial court since Defendant’s extrinsic evidence of representations in contradiction to the terms of a written agreement was barred by the parol evidence rule. The appellate court reversed, reasoning that the excluded evidence was admissible because the alleged facts went beyond the current parol evidence rule in California, as articulated in Bank of America etc. Association v. Pendergrass (1935) 4 Cal.2d 258, 263. Plaintiff’s petition for review was granted by the California Supreme Court.
The Court affirmed the appellate court’s decision, holding that the Pendergrass rule was an aberration and that the parol evidence rule was never intended to be used as a shield to prevent the proof of fraud. The Court proceeded to undertake an extensive analysis of the background and application of the parol evidence rule and its limitation provided for under Pendergrass. Most significantly, the Court noted that Section 1856 of the California Code of Civil Procedure clearly permits evidence of fraud, without limitation, regarding the validity of an agreement. On the other hand, the Pendergrass Court rule limited parol evidence of fraud only to independent facts or representations regarding the procurement of the agreement as opposed to facts that were directly at variance with the promises contained in the contested agreement. The Court noted that this distinction of permitted and impermissible parol evidence was unworkable and had been routinely criticized over the years. Furthermore, when Section 1856 was subsequently revised in 1977, the California Law Revision Commission simply ignored the Pendergrass decision in developing its recommendations. All this led the Court to conclude that the existing limitation on parol evidence was inappropriate. Therefore, with the overturning of the Pendergrass decision, the Court found that the Defendant’s allegation of fraud had raised a material triable fact and therefore summary judgment was inappropriate for the Plaintiff for the case at bar.
The Riverisland decision will make it more difficult for plaintiffs in California to achieve summary judgment on a contract claim when a defendant alleges fraud in connection with a written agreement. This will likely force more plaintiffs go to trial in order to resolve these types of factual disputes. There appears to be no easy transactional solution to avoid this situation (i.e. initialing the property descriptions did not work and neither did the existing integration clause). The Defendant apparently successfully claimed that he did not read the restructuring agreement. However, the Court appears to throw a “bone” to future plaintiffs, highlighting at the end of the opinion that it had not considered the question whether or not the Defendant had established “justifiable reliance” with respect to his fraud claim, pointing to a possible future avenue to challenge weak or baseless fraud claims made by defendants regarding their contracts.