This month the California Supreme Court overruled Bank of America v. Pendergrass (1935) 4 Cal.2d 258 (Pendergrass). Seventy-five years ago, the Pendergrass court held that the fraud exception to the parol evidence rule could not be used to contradict any of a contract’s stated terms.
In reversing the Pendergrass decision, the Supreme Court in (2013) 2013 WL 141731 found that the Pendergrass rule was poorly reasoned, inconsistent with California law, and “may actually provide a shield for fraudulent conduct.”
The Riverisland decision will have far-reaching effects. In the past, lenders frequently relied on the Pendergrass rule to bar evidence by borrowers of oral promises at odds with the terms of their loans. Both Pendergrass and Riverisland involved claims by borrowers that their lenders had orally promised longer repayment terms than were stated in their loan agreements. The Riverisland decision means consumers can now present evidence of oral promises at odds with their written contracts.
However, this may not be a homerun for consumers. Like many consumers, the borrowers in Riverisland did not read the agreement before signing it. The Supreme Court in Riverisland refused to decide whether the borrowers could have justifiably relied on the lender’s promises notwithstanding its decision in Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394 that the negligent failure to read a contract precludes a finding that it is void for fraud. The Riverisland Court left open the possibility of a more lenient rule in cases where equitable relief is sought for fraud in the inducement of a contract.
Bottom line: The Pendergrass rule is dead and the parol evidence rule has been severely diminished. Well-pled claims for promissory fraud will now survive demurrer, but whether they get past summary judgment will depend on the facts of the case. In cases where consumers have not read the agreements before signing them, they will have to show facts establishing that their failure to read the contracts was not negligent given the alleged promises or relationship of the parties.