Plaintiffs appeal from a judgment entered against them after defendant's motion for summary judgment was granted. Plaintiffs' complaint alleged causes of action including fraud, negligent misrepresentation, rescission and reformation; plaintiffs alleged they signed a written agreement with defendant, but they were induced to do so by defendant's oral misrepresentations of the terms contained in the written agreement, made at the time of execution of the agreement. The court granted defendant's motion for summary judgment after ruling that plaintiffs' evidence of misrepresentations was inadmissible pursuant to the parol evidence rule, and therefore plaintiffs had not presented admissible evidence raising a triable issue of material fact that would prevent entry of judgment against them. We find the evidence fell within the fraud exception to the parol evidence rule and should have been admitted to raise a triable issue of material fact in opposition to defendant's motion. Accordingly, we reverse the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
On January 1, 2007, plaintiffs' operating loan from defendant went into default when they failed to make a required payment. On March 26, 2007, plaintiffs and defendant entered into a written forbearance agreement, in which defendant agreed to temporarily forbear from pursuing collection and plaintiffs agreed to make specified payments and provide additional security for the debt. The written agreement provided that defendant would forbear from collection until July 1, 2007, and plaintiffs would pledge as additional collateral certain real property, which included plaintiffs' residence and a truck yard. Plaintiffs failed to make the payments required by the March 26, 2007, agreement and defendant recorded a notice of default. Plaintiffs subsequently repaid the loan.
On April 2, 2008, plaintiffs filed their complaint, alleging causes of action including fraud, negligent misrepresentation, rescission, and reformation. They alleged that, two weeks prior to their execution of the written forbearance agreement, defendant's senior vice-president, David Ylarregui, met with them and represented defendant would agree to forbear from collection for
Defendant moved for summary judgment, asserting it was entitled to judgment on plaintiffs' first four causes of action because plaintiffs failed to perform in accordance with the written forbearance agreement, and they were barred by the parol evidence rule from presenting evidence of any prior or contemporaneous oral agreement that contradicted the terms of the written agreement. Plaintiffs opposed the motion, presenting evidence that, at the time of execution of the forbearance agreement, Ylarregui gave them the agreement to sign and stated that it contained a forbearance of two years and only included the two orchards as additional security. They asserted the fraud exception to the parol evidence rule applied, making the parol evidence of defendant's factual misrepresentations admissible. The trial court granted defendant's motion, concluding the parol evidence rule barred admission of evidence of an oral agreement that directly contradicted the terms of the written agreement, and therefore plaintiffs had failed to raise a triable issue of material fact to prevent entry of judgment in defendant's favor. Plaintiffs appeal.
I. Standard of Review
"We review the trial court's decision [on a motion for summary judgment] de novo, considering all of the evidence the parties offered in connection with the motion[,] except that which the court properly excluded . . . ." (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476 [110 Cal.Rptr.2d 370, 28 P.3d 116].) Plaintiffs challenge the ruling on the summary judgment motion only as to the first four causes of action: fraud, negligent misrepresentation, rescission, and reformation.
II. Parol Evidence Rule
B. Fraud exception
The rule has been criticized, but it continues to be applied in cases of promissory fraud. In Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465 [261 Cal.Rptr. 735], the plaintiffs alleged they entered into a loan agreement with the defendant after the defendant promised to make the loan with an interest rate less than that being offered by another bank. By the time the promissory note was ready for signing, however, interest rates had risen and both banks were demanding a higher rate. After noting that Pendergrass "perceived a conflict between the [parol evidence] rule and promissory fraud relating to the principal terms of an agreement" (213 Cal.App.3d at pp. 483-484), the court discussed that decision at length:
"The Pendergrass decision has been severely criticized by scholarly commentators. [Citations.] While applying the decision, the court in Coast Bank v. Holmes (1971) 19 Cal.App.3d 581, 591 [97 Cal.Rptr. 30], termed the Pendergrass distinction between different forms of promissory fraud as being `tenuous' and `inconsistent' with tort principles. The court opined, `[t]he recent decisions liberalizing the parol evidence rule cast some doubt on the continued vitality of the distinction.' [Citations.]
"We must accept Pendergrass, however, as the governing law. The first (and sufficient) reason is that, since the decision has never been overruled, it may not be challenged by an appellate court. [Citation.] . . . Moreover, despite scholarly criticisms, the decision is based on an entirely defensible
"The scholarly commentators correctly point out that there is no conceptual inconsistency between promissory fraud and the parol evidence rule. Promissory fraud requires a showing of tortious intent and reliance in addition to proof of an oral promise; the parol evidence rule is concerned only with proof of an oral promise. The two legal concepts can logically coexist. The policy considerations underlying promissory fraud apply fully when the promise relates to the main terms of the agreement. By limiting promissory fraud to promises relating to collateral matters, not at variance with the principal obligations, Pendergrass compromises the objectives of tort law in a manner that is not strictly necessary to give effect to the parol evidence rule.
"On the other hand, if loosely construed, the concept of promissory fraud may encourage attempts to convert contractual disputes into litigation over alleged fraud. To be sure, fraud requires proof of the additional elements of intent and reliance. But these can so easily be inferred from any broken promise that promissory fraud may in fact open the door to attempts to enforce oral promises through tort causes of action under the guise of a promise made without intention to perform. A broad doctrine of promissory fraud may allow parties to litigate disputes over the meaning of contract terms armed with an arsenal of tort remedies inappropriate to the resolution of commercial disputes. Thus, the practical impact of alleged promissory fraud may in fact undermine the policies of the parol evidence rule.
"In short, Pendergrass compromises the policies of tort law, but a contrary rule would compromise those of the parol evidence rule. How one weighs the conflicting considerations will depend largely on the importance one attaches to the respective policies. In Pendergrass, the Supreme Court gave priority to the policies of the parol evidence rule. While the decision was by no means logically inevitable, it represents a rational policy choice that should be reconsidered only by the Supreme Court itself." (Price v. Wells Fargo Bank, supra, 213 Cal.App.3d at pp. 484-486.)
In Banco Do Brasil, the bank sued the defendants to recover on promissory notes and a written guaranty. (Banco Do Brasil, supra, 234 Cal.App.3d at p. 981.) The defendants cross-complained against the bank, asserting fraud and claiming the bank orally promised to extend them a $2 million line of credit, which it failed to do. (Id. at pp. 982-983.) The bank's request for exclusion of parol evidence of the alleged line of credit agreement was denied, and the defendants prevailed on their cross-complaint. (Id. at pp. 983-984.) The appellate court reversed. It concluded evidence of the alleged oral agreement was not admissible as evidence of a false promise
In Bank of America v. Lamb Finance Co. (1960) 179 Cal.App.2d 498 [3 Cal.Rptr. 877] (Lamb Finance) and Wang v. Massey Chevrolet (2002) 97 Cal.App.4th 856 [118 Cal.Rptr.2d 770] (Wang), the court followed the Pendergrass rule where the party seeking admission of the parol evidence alleged the other party induced execution of the written agreement by misrepresenting the terms it contained. In both cases, the court applied the rule without distinguishing between promises made without intent to perform and factual misrepresentations as to the content of the written contract. The parties did not raise, and the court did not discuss, this issue.
In Lamb Finance, the defendant signed a guarantee of a promissory note. She testified a representative of the plaintiff bank represented at the time she signed that she was not guaranteeing the note with any of her personal property and it was only a corporate note. The court observed that, "if, to induce one to enter into an agreement, a party makes an independent promise without intention of performing it, this separate false promise constitutes fraud which may be proven to nullify the main agreement; but if the false promise relates to the matter covered by the main agreement and contradicts or varies the terms thereof, any evidence of the false promise directly violates the parol evidence rule and is inadmissible." (Lamb Finance, supra, 179 Cal.App.2d at p. 502.) Parol evidence of promissory fraud is "`only permissible in the case of a promise to do some additional act which was not covered by the terms of the contract.'" (Ibid.) Because the alleged' false
In Wang, the plaintiffs sued for damages for fraud in the purchase of a vehicle from the defendant. The plaintiffs had gone to the defendant intending to purchase a vehicle with a downpayment and the balance ($15,000) to be financed through a short-term (two-month) loan. Instead, the defendant prepared a lease agreement which required the plaintiffs to pay the balance in 60 monthly payments with a final payment of $15,000 to purchase the vehicle at the end of the lease. (Wang, supra, 97 Cal.App.4th at p. 863.) The lease required the plaintiffs to pay $22,000 more than if they had purchased the vehicle with the short-term loan. The defendant induced the plaintiffs to sign the lease by misrepresenting that they could pay off the contract in two months or at any time without a prepayment penalty and there were no contractual differences between a loan and a lease. (Ibid.) The trial court granted the defendant's summary judgment motion, on the ground the parol evidence rule precluded admission of evidence of the defendant's alleged oral misrepresentations. Following the Pendergrass rule, the appellate court agreed, concluding the fraud exception did not apply because the alleged oral representations directly contradicted the terms of the written agreement.
Just two years after Pendergrass was decided, the California Supreme Court issued its decision in Fleury v. Ramacciotti (1937) 8 Cal.2d 660 [67 P.2d 339] (Fleury), indicating admissibility of parol evidence to prove that fraudulent representations as to the content of a written agreement induced its execution survived Pendergrass. In that case, defendant Ramacciotti executed a promissory note and mortgage. Babin, the executor of the estate of the payee, allowed the statute of limitations to run on his action on the note. Babin discussed the matter with his friend, Ramacciotti, and Ramacciotti offered to waive the defense of the statute of limitations provided no deficiency judgment would be entered against him. Ramacciotti signed a renewal note and mortgage on which he later defaulted. After Babin's death, Ramacciotti discovered Babin had obtained a decree of foreclosure and deficiency judgment against him. He had the judgment set aside and defended, alleging he signed the new note without reading it, in reliance on Babin's representation that it contained provisions preventing a deficiency
Plaintiffs cite Pacific State Bank v. Greene (2003) 110 Cal.App.4th 375 [1 Cal.Rptr.3d 739] (Greene) in support of their contention that the Pendergrass rule does not apply to exclude parol evidence that execution of a written agreement was induced by a misrepresentation of the content of the written agreement, which was made at the time the written agreement was executed. In Greene, the defendant claimed she agreed to guarantee a single loan. On the day she signed the guarantee agreement, the bank's representative stated the guarantee related only to that loan; that loan's number and amount were specified at the top of the guarantee agreement. (Greene, supra, at p. 378.) In the fine print of the written agreement, however, the "`Indebtedness'" to be guaranteed was defined as "`all of Borrower's liabilities, obligations, debts, and indebtedness to Lender,'" which included four loans. (Id. at pp. 380-381.) The trial court granted summary judgment in favor of the plaintiff, after sustaining the plaintiff's objections to the defendant's parol evidence of the misrepresentation. The appellate court reversed.
The court held that, even though the bank's alleged misrepresentation was directly contrary to the express terms of the contract, the evidence was admissible under the statutory exception for fraud. (Greene, supra, 110 Cal.App.4th at pp. 385-387; Code Civ. Proc., § 1856, subd. (g).) "`It is . . . settled that parol evidence of fraudulent representations is admissible as an exception to the parol evidence rule to show that a contract was induced by fraud.' [Citations.]" (Greene, at p. 389.) Although Pendergrass limited the fraud exception, making it inapplicable when the evidence is offered to show a promise contradicting the written agreement, the Greene court declined to extend that limitation to include evidence of a misrepresentation of fact. (Greene, at pp. 389-390, 396.) It discussed the Pendergrass rule:
"But we disagree that the promissory fraud limitation precludes admission of a misrepresentation of fact over the content of a physical document at the time of execution. `"Promissory fraud" is a promise made without any intention of performing it.' [Citation.] The Supreme Court's limitation on the fraud exception expressly bars `a promise directly at variance with the promise of the writing' [citation], not a misrepresentation of fact. [Citations.]" (Greene, supra, 110 Cal.App.4th at pp. 390-391.)
The Greene court believed "a distinction between promissory fraud and misrepresentations of fact over the content of an agreement at the time of execution is a valid one . . . ." (Greene, supra, 110 Cal.App.4th at p. 392.) It posited three justifications for holding the fraud exception applicable to such misrepresentations of fact: "The language of the statutory exception is unqualified and does not limit the misrepresentations covered; it is not necessary to extend Pendergrass to cover factual misrepresentations over the content of the writing in order to safeguard the vitality of the parol evidence rule; and a further extension of Pendergrass would unduly restrict the statutory exception for fraud." (Greene, at p. 392.) It explained: "In the case of promissory fraud, an earlier or contemporaneous promise is proffered in variance with the promises in the agreement; evidence of such a contrary promise goes to the heart of that which the parol evidence rule is intended to protect against. But a claim of a mischaracterization of the content of the physical document to be signed is more narrow in time and circumstance: It can only occur at the time of signing . . . . And the need to prove the element of reasonable reliance in order to successfully make out a misrepresentation claim also protects against abuse: In light of the general principle that a party who signs a contract `cannot complain of unfamiliarity with the language of the instrument' [citation], the defrauded party must show a reasonable reliance on the misrepresentation that excuses the failure to familiarize himself or herself with the contents of the document." (Id. at p. 393.) The court acknowledged "there can occasionally be a fine line between a promise that induces an agreement and a misrepresented fact concerning the physical content of an agreement at the time of signing" (id. at p. 392), but concluded
The court in Continental Airlines, Inc. v. McDonnell Douglas Corp. (1989) 216 Cal.App.3d 388 [264 Cal.Rptr. 779] (Continental) also distinguished between precontract oral promises and statements of fact. It applied the Pendergrass exclusion only to promises made prior to execution of the written contract and not to factual misrepresentations that were contrary to the provisions of the written contract. It concluded statements made orally and in precontract promotional sales brochures that "`[t]he fuel tank will not rupture under crash load conditions'" were promises that contradicted the language of the contract. (Continental, supra, at p. 418, italics omitted.) In light of Pendergrass, those statements were inadmissible to prove promissory fraud. (Continental, at p. 421.)
Statements made in the promotional sales brochures that "`[t]he landing gear, flaps, and wing engines/pylons are designed for wipe-off without rupturing the wing fuel tank . . .'" and "`the main landing gear is designed to break away from the wing structure without rupturing fuel lines or the integral wing fuel tank'" were properly admitted. (Continental, supra, 216 Cal.App.3d at p. 422, italics omitted.) They were analyzed as factual misrepresentations which were admissible pursuant to the fraud exception to the parol evidence rule even if they contradicted the provisions of the contract. (Id. at pp. 422-424.) Although the agreement was integrated, factual representations at variance with the written agreement were not barred, because to do so would nullify the fraud exception. (Id. at p. 424.) "[T]he clear mandate of our [L]egislature [is] that, when fraud is alleged, the parol evidence rule does not apply, and evidence of precontract representations which vary or contradict the terms of an integrated contract [is] admissible. [Citations.] [¶] The theory of the exception is that such evidence does not contradict the terms of an effective integration, since it shows the purported instrument has no legal effect. [Citation.]" (Id. at pp. 427-428.)
The Pendergrass court's rationale for excluding evidence of a prior oral promise that directly contradicts the promises contained in the written agreement depended on the nature of promissory fraud. The court was concerned that, if evidence of a prior oral promise contrary to the promises made in the written agreement were admissible as an exception to the parol evidence rule, such oral promises would be admissible in every case where an oral agreement preceded the final written contract, thereby nullifying the parol evidence rule. This would be so because the party seeking to admit the evidence could always argue that the failure to include the prior oral promise in the written contract was evidence of an intention not to perform it. (Pendergrass, supra, 4 Cal.2d at p. 264.)
The judgment is reversed with directions to vacate the order granting summary judgment and to enter a new order denying summary judgment, and
Levy, J., and Kane, J., concurred.