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California Courts May Consider Evidence of Oral Fraud When Interpreting Contracts - Riverisland Cold Storage Assn v. Fresno-Madera Prod. Assn

January 18, 2013

Vincent Howard and our Moreno Valley foreclosure defense attorneys were extremely interested to see a recent California Supreme Court decision that makes new, consumer-friendly law in our state. Riverisland Cold Storage Association v. Fresno-Madera Production Credit Association overturned a 78-year-old rule in California courts that forbade them from considering evidence outside a contract when ruling on that contract. The decision came in the context of interpreting a mortgage signed by Lance and Pamela Workman of Tulare County, who claimed they were promised a different mortgage than they signed. The Workmans narrowly avoided foreclosure, then sued for fraud and negligent misrepresentation. The decision permits their case to go forward.

The Workmans owned a farm business, for which they refinanced some delinquent debt in 2007, pledging their home and some orchards as collateral. The written agreement required them to make specified payments in order to avoid loan enforcement; they didn't make those payments, and the credit association started the foreclosure process. They were eventually able to make up the missed payments and the foreclosure was dismissed, but the Workmans then sued, alleging the credit association's vice president told them they'd have two years rather than three months to resume payment, and that they were pledging less real estate than they actually did. (They conceded not having read the contract they signed.)

The trial court granted summary judgment to the credit association, agreeing that a California rule called the Pendergrass rule forbade it from considering promises at odds with the written contract. The Court of Appeal reversed, however, saying false statements about the content of the contract are beyond the scope of the rule.

The California Supreme Court affirmed, but with different reasoning. The court threw out the Pendergrass rule, finding it was contradicted by statute and not followed in other jurisdictions. California law says that written contracts cannot be modified by statements made during negotiations, because the writing supersedes any extrinsic evidence. However, state law carves out an exception when the validity of the contract itself is the dispute. The high court said the Pendergrass court ignored this exception when it made its ruling in a similar case. As a result, the rule has been inconsistently followed by courts, was ignored by the California Law Revision Commission in 1977, and diverges from most other states as well as the Restatements. Finding that Pendergrass was weakly supported and inconsistent with prior decisions, the Supreme Court overturned it. Declining to address the underlying dispute, it returned the case to trial court.

At Howard Law, P.C., our Newport Beach foreclosure defense lawyers work frequently with people claiming they were defrauded when they took out their mortgage documents. That's why we're delighted to see this rule overturned. As the high court observed, a rule excluding evidence of fraud external to the contract essentially permits fraud. After all, the party committing the fraud is unlikely to put it in writing. Furthermore, as the court said, permitting defendants to use this rule as a shield may even induce them to commit fraud, knowing there are technical reasons the evidence won't even be considered by the court. Vincent Howard and our Pomona foreclosure defense attorneys are pleased to have another tool in our arsenal for protecting clients.

If you believe you were misled when you took out your mortgage, and you'd like to talk to an experienced attorney about your legal options, don't wait to call Vincent Howard and the team at Howard Law. For a consultation, you can reach us through our website or call 1-800-872-5925.

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