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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions