Fraud Exception to Parol Evidence Rule: Pendergrass Restriction Abrogated.

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In Riverisland Cold Storage v. Fresno-Madera Credit Assn. (2013) 55 C.4th 1169, 151 C.R.3d 93, 291 P.3d 316, plaintiffs fell behind in their payments to defendant lender. The parties entered into a restructuring agreement in which they confirmed the amount of the delinquent payments, defendant promised to take no enforcement action, and plaintiffs put up additional real estate as collateral. Plaintiffs failed to make the required payments, defendant recorded a notice of default, and, after plaintiffs paid off the loan, defendant dismissed the foreclosure proceeding. Plaintiffs then filed an action for fraud and negligent misrepresentation, alleging that two weeks before the restructuring agreement was signed, defendant's vice-president orally promised that the loan extension would be for two years and only two properties would be required as additional collateral. In reality, the agreement provided for only three months of forbearance and identified eight parcels as additional collateral. Plaintiffs signed the agreement without reading it. Relying on Bank of America v. Pendergrass (1935) 4 C.2d 258, 48 P.2d 659, the trial court found that evidence of promises at variance with terms of the written agreement was inadmissible, and it granted summary judgment for defendant. The Court of Appeal reversed. Held, judgment of the Court of Appeal affirmed.

(a) The Pendergrass Rule. Under the Pendergrass rule, evidence offered to prove fraud for purposes of the parol evidence rule "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." (55 C.4th 1172, quoting Pendergrass.) Because the oral promise at issue in Pendergrass contradicted the unconditional promise made in the written instrument, it could not be admitted. Then-current law, however, imposed no such restriction on the fraud exception, and the ruling was criticized by commentators and questioned in later cases. In 1977, the Law Revision Commission ignored Pendergrass when proposing modifications to the parol evidence rule, and the Legislature adopted a new version of the rule without changing the fraud exception to accommodate the Pendergrass holding. (55 C.4th 1178.)

(b) Pendergrass Reconsidered. There are many reasons to question the Pendergrass rule. Its limitation on the fraud exception is inconsistent with the governing statute, it diverges from the path followed by the Restatements and most other states, and it has continued to be criticized by commentators. Moreover, the rule was out of step with California law at the time it was formulated, and the cases it relied on actually provided little support for it. "Accordingly, we conclude that Pendergrass was an aberration. . . . [It] 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. . . . For these reasons, we overrule Pendergrass and its progeny." (55 C.4th 1182.)

(c) Effect of Abrogation Here. The intent element of promissory fraud entails more than proof of an unkept promise or mere failure to perform. Further, as with all fraud, there must be a showing of justifiable reliance on the defendant's misrepresentations. Defendant contends that plaintiffs failed to present evidence sufficient to raise a triable issue as to reliance, given that they failed to read the contract. "However, we decline to decide this question in the first instance. The trial court did not reach the issue of reliance in the summary judgment proceedings below, nor did the Court of Appeal address it." (55 C.4th 1183.)

Witkin References

On parol evidence rule generally, see 2 Cal. Evidence (5th), Documentary Evidence, §60 et seq.

On fraud exception to parol evidence rule, see 2 Cal. Evidence (5th), Documentary Evidence, §99.

On Pendergrass and its progeny, see 2 Cal. Evidence (5th), Documentary Evidence, §100.

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Last updated
Wednesday, August 20, 2014