Daily Blast January 14, 2013

On January 14, 2013, the California Supreme Court issued an opinion in Riverisland Cold Storage Inc. v. Fresno-Madera Production Credit Association (Jan. 14, 2013, S190581) ___ Cal.4th ___, analyzing the scope of the fraud exception to the parol evidence rule. (Slip opn., p. 1.) The court overruled a limitation on the fraud exception created by Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263, and reaffirmed the maxim that “[it] was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.” (Id. at p. 17.)

he action arose out of a debt restructuring agreement between plaintiffs and defendant Fresno-Madera Production Credit Association. (Slip opn., p. 2.) Plaintiffs filed suit alleging causes of action for fraud, negligent misrepresentation, rescission and reformation of the restructuring agreement. (Ibid.) Plaintiffs contended that the Credit Association’s vice president met with them two weeks before the agreement was signed, and told them the Credit Association would extend the loan for two years in exchange for additional collateral consisting of two ranches. (Ibid.) According to plaintiffs, the vice president assured them when they signed the agreement that its term was two years and the ranches were the only additional security. (Ibid.) However, the contract actually contemplated only three months of forbearance by the Credit Association and identified eight parcels as additional collateral. (Ibid.) The Credit Association moved for summary judgment arguing that plaintiffs could not prove their claims because the parole evidence rule barred evidence of representations contradicting the terms of the written agreement. (Ibid.) 

The parole evidence rule “provides that when parties enter an integrated written agreement, extrinsic evidence may not be relied upon to alter or add to the terms of the writing.” (Slip opn., 4.) Under the fraud exception, however, evidence of fraud is permitted to challenge the validity of the agreement. (Id. at pp. 5-6.) This fraud exception was limited in Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263, which held that evidence offered to prove fraud “must tend 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.” (Ibid.) Based upon the Pengergrass opinion, the trial court granted the Credit Association’s summary judgment motion. The trial court found that pursuant to Pendergrass, supra, 4 Cal.2d 258, the fraud exception to the parole evidence rule does not allow parole evidence of promises at odds with the terms of the written agreement. (Ibid.) The Court of Appeal reversed and held that false statements about the contents of the agreement were beyond the scope of the Pendergrass rule. (Id. at p. 4.)

The Supreme Court held that the Pendergrass rule was unsupported by the statute codifying the parole evidence rule and conflicted with the doctrine of the Restatements, most treatises, and other jurisdictions. (Id. at p. 2.) Additionally, it was inconsistent with California law at the time it was decided and is difficult to apply. Further, the court explained that the limitation on evidence of fraud may itself further fraudulent practices. In other words, the Pendergrass rule provides a shield for fraudulent conduct. (Ibid.) As a result, the court overruled Bank of America etc. Assn. v. Pendergrass, supra, 4 Cal.2d 258, 263. (Id. at pp. 2, 17.)

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