Promises to Keep—Lender Beware: California Supreme Court Expands Parol Evidence Fraud Exception

In 1935, the California Supreme Court in Bank of America National Trust and Savings Ass’n v. Pendergrass prohibited a borrower from introducing external or parol evidence to demonstrate fraud in connection with an agreement if the evidence directly contradicted the terms of the written agreement. In Pendergrass, the California Supreme Court refused to allow the borrowers to present evidence that loan officers had promised one thing while the agreement said something else, finding that parol evidence could not be used to prove fraud where it directly contradicted the written terms of the agreement. Seventy-five years later, however, the California Supreme Court recently overruled this long-standing jurisprudence in Riverisland Cold Storage v. Fresno-Madera Production Credit Ass’n, holding that the rule departed from established California law at the time it was decided and provided a potential shield for wrongdoers. Additionally, the Riverisland Court noted that the holding in Pendergrass was contrary to the language of the statute regarding parol evidence and the laws of other states. Thus, with one fell swoop, the California Supreme Court potentially loosened the litigation flood gates by allowing borrowers to introduce parol evidence of alleged promises, even if those alleged promises directly contradict the terms of a written agreement.

While the impact of the Riverisland decision remains to be seen, lending institutions should take the opportunity to proactively evaluate and modify their workout processes to protect against a potential future Riverisland argument.

Please see full advisory below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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