United States: California Supreme Court Further Enhances Borrowers’ Powers To Disavow Written Loan Agreements

In a recent decision characterizing precedent as a seven decade "aberration," the Supreme Court of California permitted plaintiffs, borrowers on a real estate collateralized loan, to introduce against defendant, a lending institution, parol evidence directly contradicting the terms of their written, integrated loan agreement. The parol evidence supported the plaintiffs' allegations that the defendant's loan officer orally misrepresented the loan agreement's written terms before the plaintiffs agreed to sign it.

This new decision, Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Ass'n, 55 Cal.4th 1169 (2013), continues California's long tradition of protecting borrowers of loans secured by real estate.

A. Riverisland: Expanding the Scope of the Fraud Exception of the Parol Evidence Rule

The parol evidence rule – a doctrine that, in broad terms, prevents a party to a lawsuit from trying to alter or add to an integrated, written agreement's terms by introducing extrinsic evidence – has long carried with it a so-called 'fraud exception.' The fraud exception permits a court or jury to consider evidence outside the agreement's terms when the agreement's validity itself is in dispute, or to establish fraud.

However, a 78-year-old Supreme Court of California case, Bank of America Nat'l Trust & Savings Assn. v. Pendergrass, 4 Cal. 2d 258 (1935), long imposed a confusing and challenging limit on the fraud exception. Under Pendergrass, parol evidence was admissible only if it tended to prove some fraud in the inducement to enter the contract or some other fact independent of the contract's terms. Thus, parol evidence of an oral promise that contradicted the terms of a subsequent written instrument was inadmissible, even for the purpose of contesting the instrument's validity itself.

With its Riverisland decision, issued earlier this year, the Supreme Court of California dispensed with the Pendergrass limitation to the parol evidence rule's fraud exception. Now, parol evidence of representations contradicting the terms of a written agreement may be admitted as factual misrepresentations to prove fraud or negligence.

In Riverisland, plaintiff ranch-owners sought to restructure their loan agreement with the defendant, a credit association. At trial, plaintiffs introduced evidence that, two weeks before they signed the restructured loan agreement, the credit association's vice president told them that the new loan agreement's terms would extend the loan for two years in return for plaintiffs pledging two ranch properties as additional collateral.

Based on the terms as stated to them, the plaintiffs signed the restructured agreement at the locations tabbed for signature, without reading the document. The new terms actually contained in the document were far more burdensome than the plaintiffs had been told. The new terms provided that the plaintiffs pledged eight separate real property parcels as collateral, not two, and that the credit association would refrain from enforcement action for only three months, not two years.

The credit association initiated foreclosure activities after the plaintiffs missed making payments for a year. Ultimately, the loan was repaid and the foreclosure action against the plaintiffs was dismissed. Nonetheless, the plaintiffs subsequently filed an action against the credit association seeking damages for fraud and negligent misrepresentation. They argued that the credit association's vice president made promises that directly contradicted the written contract.

Relying on the Pendergrass limitation, the trial court granted summary judgment for the defendant, holding that the fraud exception to the parol evidence rule did not apply because the credit association's alleged oral promises were offered to contradict the loan agreement's express terms. The Court of Appeal reversed, reasoning that Pendergrass applied only to promissory fraud, and that false statements about the content of the agreement were not false promises, but rather were factual misrepresentations.

In affirming the Court of Appeal's decision, the Supreme Court of California took the opportunity to expressly overrule Pendergrass, calling it an "aberration" and characterizing it as "plainly out of step" with established California law even at the time Pendergrass issued in 1935.

B. Riverisland's Place In the History of California's Real Estate Collateralized Borrowers' Protections

California has long been known as a state highly protective of real estate borrowers. Not surprisingly, California's major protections of borrowers have been prompted by severe economic conditions. The Riverisland decision continues that tradition.

Under former law, borrowers who had proffered real estate as security faced not only foreclosure, but also actions for money judgments for deficiencies. Thus, suffering borrowers faced not only the loss of real estate collateral, including even their homes, but also the specter of unfettered litigation seeking money judgments that could result in the loss of other assets and even the garnishment of their wages. Indeed, lenders formerly had the option of ignoring foreclosure on real estate collateral – assets with a potentially highly depressed value in tough economic times – and instead proceeding directly to recover on the loan via a money judgment, without losing the real estate collateral. See, e.g., Martin v. Becker, 169 Cal. 301, 146 P. 665 (1915); see also Bernhardt, et al., CALIFORNIA MORTGAGES, DEEDS OF TRUST, AND FORECLOSURE LITIGATION, Vol. 1 § 5.2 (4th Ed. CEB 2012).

In response to such multi-pronged attacks by lenders, California and other states enacted a variety of borrower protections to regulate the process of real estate transactions. By enacting California Code of Civil Procedure § 726(a), California ended lenders' ability to collect debts from borrowers without first foreclosing on real property collateral by making clear that "[t]here can be but one form of action" for the recovery of any debt secured by real property. That "One Action Rule" requires lenders to seek foreclosure before seeking a money judgment.

More early protections of borrowers arose from the wreckage of the Great Depression in the 1930s. That economic disaster included the collapse of real estate values. In 1933, California enacted Code of Civil Procedure § 725(a), which ensured that the One Action Rule applied not only to mortgages, but also to deeds of trust – a common form of security that previously had been excluded from the One Action Rule. CALIFORNIA MORTGAGES, DEEDS OF TRUST, AND FORECLOSURE LITIGATION, supra, Vol. 1 at § 4.3.

California enacted several more protections during the Great Depression and its aftermath. Known as "Anti Deficiency Rules," these statutes limit lenders' menu of remedies. Codified at California Code of Civil Procedure §§ 580a-580d, these protections bar any deficiency judgment when a mortgagee elects to foreclose by way of a private, i.e. a non-judicial, foreclosure sale, impose a three (3) month time limit within which a judicially foreclosing creditor may seek a deficiency judgment, limit the amount of a deficiency judgment by a calculation based on the fair value of the property on the date of the foreclosure sale, prohibit deficiency judgments as to purchase money loans, and bar deficiency judgments in certain contexts involving short sales.

In the face of the so-called Great Recession following the collapse of the real estate market beginning in 2009, California law again responded by protecting borrowers. For example, Code of Civil Procedure § 580e was amended to bar deficiency judgments on junior deeds of trust after a short sale (previously, only first deeds of trust were covered).

Riverisland now provides borrowers who believe that they have been defrauded by verbal assurances of loan officers and other agents with a new, more confrontational, tool to defend their interests. As discussed above, the parol evidence rule will now be interpreted more broadly to permit the introduction of evidence of false statements about the content of a written agreement. As the plaintiffs in Riverisland can attest, this new development may assist borrowers in their never ending quest to avoid liability to lenders.

C. What Lenders Should Do to Protect Themselves

To limit their exposure to borrowers' post hoc contests of loan agreements, lenders should avoid making oral representations of the substantive terms of proposed contracts. Lenders also should keep contemporaneous written records of all communications with potential borrowers, especially of oral communications. Lenders should, as a matter of company policy, send customers written summaries of such oral communications – the 'confirming email' well known to litigators – whenever possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.