Court: Superior County: Fresno Judge: Adolfo M. Corona Super. Ct. No. 08CECG01416 Ct.App. 5 F058434
The opinion of the court was delivered by: Corrigan, J.
The parol evidence rule protects the integrity of written contracts by making their terms the exclusive evidence of the parties' agreement. However, an established exception to the rule allows a party to present extrinsic evidence to show that the agreement was tainted by fraud. Here, we consider the scope of the fraud exception to the parol evidence rule.
As we discuss below, the fraud exception is a longstanding one, and is usually stated in broad terms. However, in 1935 this court adopted a limitation on the fraud exception: evidence offered to prove fraud "must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing." (Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263 (Pendergrass).) The Pendergrass rule has been criticized but followed by California courts, for the most part, though some have narrowly construed it. The Court of Appeal in this case adopted such a narrow construction, deciding that evidence of an alleged oral misrepresentation of the written terms themselves is not barred by the Pendergrass rule.
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.
Plaintiffs Lance and Pamela Workman fell behind on their loan payments to defendant Fresno-Madera Production Credit Association (Credit Association or Association). They restructured their debt in an agreement, dated March 26, 2007, which confirmed outstanding loans with a total delinquency of $776, 380.24.*fn1 In the new agreement, the Credit Association promised it would take no enforcement action until July 1, 2007, if the Workmans made specified payments. As additional collateral, the Workmans pledged eight separate parcels of real property. They initialed pages bearing the legal descriptions of these parcels.*fn2
The Workmans did not make the required payments. On March 21, 2008, the Credit Association recorded a notice of default. Eventually, the Workmans repaid the loan and the Association dismissed its foreclosure proceedings. The Workmans then filed this action, seeking damages for fraud and negligent misrepresentation, and including causes of action for rescission and reformation of the restructuring agreement. They alleged that the Association's vice president, David Ylarregui, met with them two weeks before the agreement was signed, and told them the Association would extend the loan for two years in exchange for additional collateral consisting of two ranches. The Workmans further claimed that when they signed the agreement Ylarregui assured them its term was two years and the ranches were the only additional security. As noted, the contract actually contemplated only three months of forbearance by the Association, and identified eight parcels as additional collateral. The Workmans did not read the agreement, but simply signed it at the locations tabbed for signature.
The Credit Association moved for summary judgment. It contended the Workmans could not prove their claims because the parol evidence rule barred evidence of any representations contradicting the terms of the written agreement. In opposition, the Workmans argued that Ylarregui's misrepresentations were admissible under the fraud exception to the parol evidence rule. Relying on Pendergrass, supra, 4 Cal.2d 258, the trial court granted summary judgment, ruling that the fraud exception does not allow parol evidence of promises at odds with the terms of the written agreement.
The Court of Appeal reversed. It reasoned that Pendergrass is limited to cases of promissory fraud. *fn3 The court considered false statements about the contents of the agreement itself to be factual misrepresentations beyond the scope of the Pendergrass rule. We granted the Credit Association's petition for review.
A. The Parol Evidence Rule and the Pendergrass Limitation
The parol evidence rule is codified in Code of Civil Procedure section 1856 and Civil Code section 1625. It provides that when parties enter an integrated written agreement, extrinsic evidence may not be relied upon to alter or add to the terms of the writing.*fn4 (Casa Herrera, Inc. v. Beydoun (2004) 32 Cal.4th 336, 343 (Casa Herrera).) "An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement." (Rest.2d Contracts, § 209, subd. (1); see Alling v. Universal Manufacturing Corp. (1992) 5 Cal.App.4th 1412, 1433.) There is no dispute in this case that the parties' agreement was integrated.
Although the parol evidence rule results in the exclusion of evidence, it is not a rule of evidence but one of substantive law. (Casa Herrera, supra, 32 Cal.4th at p. 343.) It is founded on the principle that when the parties put all the terms of their agreement in writing, the writing itself becomes the agreement. The written terms supersede statements made during the negotiations. Extrinsic evidence of the agreement's terms is thus irrelevant, and cannot be relied upon. (Casa Herrera, at p. 344.) "[T]he parol evidence rule, unlike the statute of frauds, does not merely serve an evidentiary purpose; it determines the enforceable and incontrovertible terms of an integrated written agreement." (Id. at p. 345; cf. Sterling v. Taylor (2007) 40 Cal.4th 757, 766 [explaining evidentiary function of statute of frauds].) The purpose of the rule is to ensure that the parties' final understanding, deliberately expressed in writing, is not subject to change. (Casa Herrera, at p. 345.)
Section 1856, subdivision (f) establishes a broad exception to the operation of the parol evidence rule: "Where the validity of the agreement is the fact in dispute, this section does not exclude evidence relevant to that issue." This provision rests on the principle that the parol evidence rule, intended to protect the terms of a valid written contract, should not bar evidence challenging the validity of the agreement itself. "Evidence to prove that the instrument is void or voidable for mistake, fraud, duress, undue influence, illegality, alteration, lack of consideration, or another invalidating cause is admissible. This evidence does not contradict the terms of an effective integration, because it shows that the purported instrument has no legal effect." (2 Witkin, Cal. Evidence (5th ed. 2012) Documentary Evidence, § 97, ...