California Supreme Court Eliminates Lender Defense to Borrower Fraud Claims

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On January 14, the California Supreme Court issued its opinion in Riverisland Cold Storage v. Fresno-Madera Production Credit Assn., which takes away a lender defense to borrower fraud claims and will therefore have a significant impact on all California lenders.

In Riverisland, commercial borrowers sued a lender over a forbearance agreement. The borrowers claimed that the workout officer orally promised them that the bank would extend the loan for two years in exchange for two additional properties as collateral. The integrated forbearance agreement, which the borrowers admitted they did not read, provided for a three-month forbearance and eight additional properties as collateral. Notably, the borrowers had initialed most of the pages referencing the eight properties, indicating that they had an opportunity to read those pages, but the Supreme Court did not find this persuasive on the legal issue it decided. In the borrowers’ suit for fraud, the trial court granted summary judgment for the lender and excluded the borrowers’ parol evidence of the alleged pre-agreement promises, because they directly contradicted the forbearance agreement terms. The Court of Appeal reversed. The Supreme Court unanimously affirmed the reversal, overruling the trial court and California law in effect for more than 75 years.

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