Central District Consumer Bankruptcy Attorney's Association

Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., 2012 Westlaw (Cal.).
Courtesy of CalBar Insolvency Committee
SUMMARY:
The California Supreme Court has held that the parol evidence rule does not preclude a borrower from asserting a fraud claim against the lender, even though the lender's alleged misrepresentations directly contradicted the terms of the parties' written agreement. The court overruled Bank of America Nat. Trust & Savings Ass'n v. Pendergrass, 4 Cal. 2d 258, 48 P.2d 659 (1935). [Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., 2012 Westlaw (Cal.).]
Facts: A commercial borrower entered into a written forbearance agreement with its lender, providing that the lender would forbear from collection in return for additional collateral. As the lender began to foreclose, the borrower was able to repay the loan.
The borrower then filed a fraud action against the lender, claiming that one of the loan officers had falsely stated that the forbearance agreement would encumber just two parcels of property, rather than eight. Supposedly, the borrower declined to read the written agreement, in reliance on the loan officer's representations of its terms. The lender moved for summary judgment on the ground that the parol evidence rule barred the borrower's claim of fraud. The trial court granted the motion, the intermediate appellate court reversed, and the California Supreme Court affirmed the appellate court.
Reasoning: The court held that the trial court's decision was mandated by Bank of America Nat. Trust & Savings Ass'n v. Pendergrass, 4 Cal. 2d 258, 48 P.2d 659 (1935), but that Pendergrass was wrongly decided. That case held that parol evidence cannot be admitted to prove an oral promise made without the intent to perform it, where the promise directly contradicts the express provisions of the written agreement. The court noted that under California Civil Code 1856(f), the parol evidence rule does not preclude the introduction of evidence to show that the agreement itself is invalid: "Where the validity of the agreement is the fact in dispute, this section does not exclude evidence relevant to that issue."
The court held that Pendergrass was inconsistent with that statute. Further, when the Legislature revised the parol evidence statute in the late 1970s, the Legislature did not adopt the rule in Pendergrass. Also, Pendergrass is inconsistent with the approach taken by most other jurisdictions, and it has been very difficult to apply. The court then traced the provenance of Pendergrass and held that it was an aberration, even in light of the state of the law at the time it was decided. The court concluded:
Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties' agreement. When fraud is proven, it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds.
Author's Comment: This is a huge development in California contract law (and in the law of lender liability). Pendergrass and its progeny have been a major obstacle to borrowers claiming that the loan agreements they signed were inconsistent with the contemporaneous oral representations made by the loan officers. I predict that we will see a significant increase in lender liability litigation in the wake of this decision.
From the perspective of the commercial finance industry, is there anything that can be done to avoid or mitigate this problem? I think so. First, it may be helpful to have the borrower initial a paragraph that says "I have read this entire agreement." Second, in a larger transaction, it may be helpful to require that the borrower have independent counsel and to obtain a representation from counsel that the borrower has read the agreement.
For a discussion of the appellate court's opinion in this case, see
2011 Comm. Fin. News. 10, Where Loan Officer Has Misrepresented Terms of Forebearance Agreement and Has Induced Borrower Not to Read Documents, Parol Evidence Rule Does Not Preclude Fraud Claim.
These materials were written by Professor Dan Schechter of Loyola Law School, Los Angeles for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.
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Insolvency Law Committee

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