Tuesday, February 5, 2013

Recent California High Court Decision Involving Loan Modifications Resets State Law On Parol Evidence When Trying To Establish Fraud When Entering Into Written Contracts

In Fresno, California, The Business Journal reports:

  • It’s rare that a legal case originating in the San Joaquin Valley makes it as far as the state Supreme Court. It’s even more rare that the case sets a precedent changing a decades-old law for years to come.(1)

    That’s exactly what happened this month when the seven-judge Supreme Court of California ruled in favor of limiting fraud liability in contract cases and overturning a provision that has protected defendants for the last 78 years.

    At issue was an agreement signed between River Island Cold Storage of Dinuba and the company’s lenders, the Fresno-Madera Production Credit Association, to restructure more than $775,000 in debt.

    According to the deal inked in March 2007, Lance and Pamela Workman, who own River Island Cold Storage, agreed make specified payments and a pledge of eight separate parcels of land as additional collateral. In return, the credit association promised it would take no enforcement action on the debt for three months.

    Although the Workmans failed to make the required payments as stated in the written agreement, they claimed the association’s vice president approached them prior to its signing and modified the deal.

    Under that oral agreement, which was highly contested in court for the next four years, the couple believed their loan was extended for two years in exchange for additional collateral consisting of two ranches.

    Keeping in step with the written agreement’s terms, the association recorded a notice of default after the company failed to make the required payments within the three-month forbearance.

    Although eventually paying off their debt and avoiding foreclosure proceedings, the Workmans later filed suit, seeking damages for fraud and negligent misrepresentation, and including causes of action for rescission and reformation of restructuring the agreement.

    What followed was a legal can of worms that hasn’t properly been reopened for several decades...
For more, see State Supreme Court resets precedent with local case.

For an earlier post on this case, see California Supremes: Oral Promises Not Appearing In Written Contract Admissible In Court When Trying To Prove Bankster Fraudulently Tricked Borrower Into Signing Agreement.

(1) Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, S190581 (January 14, 2013).

In actuality, this case dosesn't create new precedent, it merely resets the law back to the pre-1935 precedent, prior to the state high court ruling in Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263 ("Pendergrass"), a ruling that apparently sidetracked California law for the last 75+ years. From the recent ruling:
  • Plaintiffs, who prevailed below, not only defend the Court of Appeal's holding but, alternatively, invite us to reconsider Pendergrass. There are good reasons for doing so.

    The Pendergrass limitation finds no support in the language of the statute codifying the parol evidence rule and the exception for evidence of fraud. It is difficult to apply.

    It conflicts with the doctrine of the Restatements, most treatises, and the majority of our sister-state jurisdictions. Furthermore, while intended to prevent fraud, the rule established in Pendergrass may actually provide a shield for fraudulent conduct.

    Finally, Pendergrass departed from established California law at the time it was decided, and neither acknowledged nor justified the abrogation.

    We now conclude that Pendergrass was ill-considered, and should be overruled. stare decisis

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