The California Supreme Court handed down a unanimous decision earlier this week, broadening the scope of the “fraud exception” to the parol evidence rule, to allow a plaintiff challenging the terms of a written agreement to present parol evidence that the agreement is inconsistent with prior negotiations and thus was procured or tainted by fraud. The case, Riverisland Cold Storage v. Fresno-Madera PCA, made big waves, not only in the legal newspapers and blogs but also in the mainstream press, for two reasons.

First, though the Court does not directly link the lender’s alleged deceitful actions in this case to the kind of wrongful lender actions in the homeowner foreclosure sector that has been a huge national story for the past five years, it is impossible not to view this case as an outgrowth of that “bad lender conduct” theme. Second, in reaching its decision, the Court specifically renounced and overruled its own 1935 decision in Bank of America v. Pendergrass, which held that parol evidence offered to prove fraud must establish “some independent fact or representation,” not merely a promise at variance with the terms of the written agreement. The Court did not shy away from acknowledging the importance of its decision. It stated that the principle of stare decisis need not and should not be followed in the case of a “poorly reasoned,” “aberrant” or “ill-considered” opinion – all phrases that the Court used to describe the Pendergrass decision.

There is no question that, in this era of “lender-slamming,” this decision opens the door for disgruntled borrowers to attack written loan agreements, thereby casting doubt on the enforceability of integration provisions. Lender groups have suggested several actions as possible responses to the Riverisland holding, including (1) utilizing ADR provisions in loan documents, in order to avoid being hammered by impassioned anti-lender juries, and (2) sending loan documents to the borrower at least a few days prior to signing, to be in a position to demonstrate that the borrower had ample opportunity to review the documents. These are worthwhile recommendations, but the strongest response may be for lenders to require, at least in commercial loan transactions, that (a) the borrower be represented by counsel, and (b) both the borrower and its counsel sign a “certification,” as part of the closing documents, that they (i) have discussed the basic terms of the agreement, (ii) are not aware of any matters in the agreement that are inconsistent with the borrower’s understanding of the fundamental terms of the agreement, and (iii) have had an opportunity to discuss the written agreement with the lender or its representatives. Anything is possible, but this kind of certification should go a long way toward debunking borrower protestations that the written agreement does not reflect the terms negotiated with the lender.