The case Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association may soon be as ubiquitous as Pendergrass once was. In Riverisland, the California Supreme Court struck down the Pendergrass limitation to the fraud exception of the parol evidence rule. Pendergrass had been the law for 78 years, although the Court in Riverisland recognized that it was often criticized and narrowly construed. Moreover, the Court noted that it was not supported by the statutory language, difficult to apply, and conflicted with other jurisdictions.
"We conclude that Pendergrass was ill-considered, and should be overruled," wrote Justice Corrigan.
What exactly does that mean?
The Parol Evidence Rule and the Fraud Exception
As we recall from the days of taking Contracts, the parol 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. An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement. This rule is codified in Code of Civil Procedure section 1856 and Civil Code section 1625.
There is a major exception to this rule, codified in Code of Civil Procedure section 1856(f): "Where the validity of the agreement is the fact in dispute, this section does not exclude evidence relevant to that issue." The statutory scheme further specifies in section 1856(g) that "[t]his section does not exclude other evidence . . . to establish . . . fraud."
The Pendergrass Limitation
In Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, the California Supreme Court 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." Id at 263. The Pendergrass court therefore excluded evidence of alleged misrepresentations by defendants that they would hold off on foreclosing on plaintiff's loan until they sold their crops.
The Court first noted that the facts in Riverisland were similar to those in Pendergrass. In Riverisland, plaintiff fell behind in their loan payments to defendant and restructured their debt in a new agreement with defendant. They alleged that the defendant's vice president, met with them two weeks before the agreement was signed, and told them the defendant would extend the loan for two years in exchange for additional collateral consisting of two ranches. They also claimed that when they signed the agreement the vice-president assured them its term was two years and the ranches were the only additional security. In reality, the contract actually contemplated only three months of forbearance by defendant, and identified eight parcels as additional collateral. According to the Court, plaintiffs did not read the agreement, but simply signed it at the locations tabbed for signature. After they fell behind on payments, defendant filed a Notice of Default. Although plaintiffs eventually repaid the loans and defendant dismissed the foreclosure proceedings, plaintiffs sued defendant for fraud and misrepresentation.
The trial court excluded evidence of the alleged misrepresentations, but the Court of Appeal reversed, holding that Pendergrass was limited to cases of promissory fraud.
The California Supreme Court first noted that "[t]he primary ground of attack on Pendergrass has been that it is inconsistent with the principle, reflected in the terms of section 1856, that a contract may be invalidated by a showing of fraud." Further, the Court opined that "its limitation on evidence of fraud may itself further fraudulent practices."
Of additional concern to the Court was that it was difficult to apply, often applied inconsistently by various courts, and was at odds with the Restatements, the majority of other states, and most commentators.
Also of significance was that in 1977 the California Law Commission ignored Pendergrass when it proposed modifications to the statutory formulation of the parol evidence rule.
Ultimately, in analyzing the text of the Pendergrass decision and numerous cases and commentary that allowed evidence in cases of promissory fraud, the Court concluded that Pendergrass was an "aberration."
"Its restriction on the fraud exception was inconsistent with the terms of the statute, and with settled case law as well. 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. Moreover, Pendergrass has led to instability in the law, as courts have strained to avoid abuses of the parol evidence rule. The Pendergrass court sought to " 'prevent frauds and perjuries' " (id. at p. 263), but ignored California law protecting against promissory fraud. The fraud exception has been part of the parol evidence rule since the earliest days of our jurisprudence, and the Pendergrass opinion did not justify the abridgment it imposed."
Although the limitation on the fraud exception was removed, the Court stressed that "the intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance." The Court cited with approval the statement in Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, that "if [a] plaintiff adduces no further evidence of fraudulent intent than proof of nonperformance of an oral promise, he will never reach a jury." Thus, practitioners will need to present evidence of proof of intent not to perform, which will likely come in the form of circumstantial evidence, as the Tenzer court noted.
Moreover, plaintiffs must show justifiable reliance on the defendant's misrepresentation. Here, defendant argued that plaintiffs could not make such a showing because they admitted that they had not read the agreement. But the lower courts had not reached that issue, and the California Supreme Court declined to address that question.