Overruling a 78-year-old precedent, the California Supreme Court on Monday made it easier for parties to a written contract to claim it was tainted by fraud.
The unanimous decision in Riverisland Cold Storage v. Fresno-Madera Production Credit Association overrules Bank of America v. Pendergrass and relaxes the rules for parol evidence in California. It will give a Tulare County couple a chance to prove that a loan agreement they signed differed from the one allegedly promised them orally by a credit association vice president.
“The Pendergrass limitation finds no support in the language of the statute codifying the parol evidence rule and the exception for evidence of fraud,” Justice Carol Corrigan wrote for the court. “It is difficult to apply. It conflicts with the doctrine of the restatements, most treatises, and the majority of our sister-state jurisdictions. …We now conclude that Pendergrass was ill-considered, and should be overruled.”
A lawyer for the credit association said the decision will cast uncertainty on otherwise iron-clad contracts. “The ruling in essence tells all contracting parties in the state that if they take the time to memorialize the terms of their agreements in a clear and unambiguous written agreement, our courts will refuse to enforce those agreements based upon alleged oral statements that directly conflict with the written terms,” said Scott Ivy, a partner at Fresno’s Lang, Richert & Patch, in an email.
But Eric Amador, an attorney for the couple, said it was the Pendergrass decision that caused uncertainty, generating decisions that were “all over the map.
“This basically wipes the slate clean,” said Amador, of LaMontagne & Amador.
In Riverisland, the operator of a farm business, Lance Workman, owed about $770,000 to a credit association in 2007. He and his wife signed a three-month forbearance agreement, pledging their home and two orchards as collateral. When they failed to make the required payments, the credit association recorded a notice of default, damaging their credit ratings and forcing them to sell some of their properties into a soft market to pay off the loan.
They then sued the credit association, saying Vice President David Ylarregui, a family friend, had promised them two years to pay back the loan, with less collateral at stake. The Workmans said they signed the agreement without reading it based on Ylarregui’s assurances.
Under California’s parol evidence rule, no extrinsic evidence may be considered when construing an integrated written agreement. California Code of Civil Procedure §1856(f) lays out an exception for mistake, fraud, duress or other evidence bearing on the validity of the agreement. Pendergrass, meanwhile, created an exception to the fraud exception, saying it did not apply to alleged promises that are in direct conflict with contract terms.
To be admissible, Justice Ira Thompson wrote 78 years ago in Pendergrass, parol evidence must “establish some independent fact or representation, some fraud in the procurement of the instrument … and not a promise directly at variance with the promise of the writing.”
Pendergrass has been followed by the courts of appeal “albeit with varying degrees of fidelity,” according to Corrigan, but most other jurisdictions have stuck with what she called the “traditional view” of the fraud exception.
Also, Corrigan wrote, Pendergrass is at odds with California’s parol evidence statutes and was ignored by the California Law Revision Commission when it suggested updates to the parol evidence rule that were adopted by the Legislature in the 1970s.
“We respect the principle of stare decisis, but reconsideration of a poorly reasoned opinion is nevertheless appropriate,” Corrigan wrote. “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.”
Ivy noted that the court left open the issue of whether a party that didn’t read a contract could be said to have reasonably relied alleged oral representations. He said he’s confident that resolution of that issue will give contracting parties “at least some level of protection” from the elimination of the Pendergrass precedent.
Scott Graham is a reporter for The Recorder, a Legal affiliate based in San Francisco.