The Parol Evidence Rule and Debt Collection

The Parol Evidence Rule and Debt Collection

On Behalf of | Jul 8, 2016 | Business

The start of a collection lawsuit begins with the summons and the complaint. A complaint is the first document filed with the court by a person or entity claiming legal rights against another.

Many collection cases revolve around a claim for damages based upon a breach of a written contract. In a perfect world, the written contract is a fully integrated document eliminating many debtor defenses. A fully integrated contract is one that is a final and complete expression of all the terms agreed upon between (or among) the parties. An experienced collections attorney appreciates the fully integrated contract for several reasons, including the parol evidence rule.

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The parol evidence rules provides that when parties enter into an integrated contract, extrinsic evidence may not generally be relied upon to alter or add to the terms of the writing. See, e.g., California Code of Civil Procedure Section 1856, California Civil Code Section 1625 and California Commercial Code Sections, 2202 and 10202. Why is this? The court believes that an integrated written contract is intended to be the final expression of the agreement between the parties, that the contract speaks for itself, and the parties should not be able to use oral evidence to contradict or change the terms of their written agreement.

There is however, one exception to the parol evidence rule. A certain type of promissory fraud can be introduced to establish the invalidity of the written agreement and oral evidence can be admissible to prove such, notwithstanding the parol evidence rule. Promissory fraud is a promise made by the promisor, when he had no intention to perform the promise when it was made.

In 1935, the California Supreme Court narrowed the fraud exception. In Bank of America v. Pendergrass (1935) 4 Cal.2d 258, the Court held that any evidence offered to prove fraud must tend to establish some independent fraud or representation and not a promise directly at variance with the written terms of the agreement. By way of example, if a contract provides for interest at the rate of 8%, evidence that the loan officer represented to the borrower that the interest rate would be 3% would be in direct variance of the terms of the written contract and therefore, could not be introduced under the fraud exception. For many years, Pendergrass has been the case cited to and relied upon to exclude evidence contradicting terms of an integrated written agreement.

With the recent holding in Riverisland Cold Storage, Inc., v. Fresno-Madera Production Credit Association (2013) 55 Cal.4th 1169, that could be changing. The California Supreme Court has made it substantially more challenging for a collection attorney to dispose of an action for breach of written contract by summary judgment.

The facts of Riverisland are as follows: The plaintiffs fell behind on their loan payments. They restructured their debt in a new agreement but fell behind again, and the lender started a non-judicial foreclosure. They repaid the loan and then sued the lender for fraud and negligent misrepresentation, alleging that the lender’s vice president had met with them beforehand and told them that the term of the forbearance was two years although the contract only said three months. The lender moved and was granted summary judgment contending that the parol evidence rule barred any evidence of representations contrary to the written agreement.

The Court of Appeals reversed and the California Supreme Court affirmed the Court of Appeal and in doing so, overruled Pendergrass. The Court found that Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement. As a result of this ruling, a collection attorney may have difficulty moving for summary judgment because the debtor now has the ability to defeat summary judgment by submitting declarations alleging that another party to the agreement represented that the terms of the a contract were different than what was included in the instrument, even representations that contradict the terms of the integrated contract.

To reduce the potential impact of this case, whenever credit is extended or renewed, the forbearance, extension or modification agreement should include recitals acknowledging and affirming the debt, the amounts owed, and the fact that there are no defenses, claims or causes of action known. A good litigator will also flesh out the issue of oral representations in discovery to determine whether based on the holding in Riverisland, summary judgment is still appropriate.

To speak to an experienced collection attorney about a breach of contract or debt collection issue, contact Ronald P. Slates today.