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THE PAROL EVIDENCE RULE DOES NOT EXCLUDE EVIDENCE OF A MISREPRESENTATION OF THE TERMS CONTAINED IN A WRITTEN AGREEMENT AT THE TIME THE AGREEMENT WAS SIGNED
RIVERISLAND COLD STORAGE, INC. et al. V.
FRESNO-MADERA PRODUCTION CREDIT ASSOCIATION
(Cal. App. Ct. 2011)
The Riverisland Cold Storage, Inc., et al. v. Fresno-Madera Production Credit Association (“Fresno-Madera”), the California Court of Appeal ruled that the fraud exception to the parol evidence rule applies where the party seeking admission of parol evidence has alleged that the other party misrepresented the content of the written contract and thereby induced execution of the contract. In so ruling, the Court highlighted the distinction between “promissory fraud,” to which the fraud exception does not apply, from contemporaneous factual misrepresentations, to which the fraud exception does apply.
Factual Background
Plaintiffs’ operating loan from Defendant went into default in January 2007. The parties subsequently entered into a forbearance agreement after Plaintiffs agreed to post additional security. After Plaintiffs again failed to make the required loan payments, Defendant recorded a notice of default. Plaintiffs filed a lawsuit against Defendant, alleging fraud in relation to the forbearance agreement.
On summary judgment, Defendant argued that the parol evidence rule barred alleged statements by its vice president concerning Plaintiff’s additional security prior to and contemporaneous with executing the forbearance agreement since the statements contradicted the terms thereof. The trial court agreed and granted summary judgment in favor of Defendant, rejecting Plaintiffs’ argument that Defendant’s vice president’s statements were admissible evidence under the fraud exception to the parol evidence rule.
The Appellate Court’s Holding
On appeal, the Fresno-Madera Court reversed the summary judgment ruling in favor of Defendant on the basis that the fraud exception to the parol evidence rule did apply. In so holding, the Court emphasized the distinction between promissory fraud and misrepresentation of fact regarding the content of an agreement. The Court explained that the fraud exception to the parol evidence rule applied to the latter, but not the former.
California’s parol evidence rule, codified at Code of Civil Procedure section 1856(a), generally prohibits the introduction of extrinsic evidence, including prior or contemporaneous agreements, to vary, alter, or add to the terms of an integrated written contact.
In overruling the trial court, the Appellate Court adopted the distinction established by prior appellate decisions between promissory fraud and misrepresentation of fact, holding that “parol evidence of a prior promise made without any intention of performing it that directly contradicts the provisions of the written contract [i.e., promissory fraud] must be distinguished from parol evidence of a contemporaneous factual misrepresentation of the terms contained in a written agreement submitted for signing. [i.e., a misrepresentation of fact].”
The Court stated that relief, by way of the fraud exception to the parol evidence rule, is available “when one party made a false statement about the terms contained in the contract after the written contract was prepared, and the other party reasonably relied on that statement and was thereby induced to sign the written contract without discovering that the actual provisions were not as represented.”
The Court further explained that any evidence admitted under its ruling would not be done to “alter, vary or add to the provisions of an integrated agreement; rather, it would be admitted to prove the written contract was not the actual, integrated agreement of the parties.”
If you need a copy of the opinion or would like to discuss these issues please contact us.
Frank T. Sabaitis
Brad A. Byszewski
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