Recent Developments in Contract Law - Oral Evidence Concerning Written Contracts

As a general rule, persons who enter written contracts can expect the terms of the contract to be enforced in court, as long as the contract is for a lawful purpose. In general, a written contract that completely integrates the mutual promises of the parties will be enforced, and its terms cannot be altered or amended by testimony concerning an oral promise made at the same time as the written agreement. This principle is known as the “parol evidence rule.” The parol evidence rule prohibits the introduction of evidence of an oral promise made either prior to or contemporaneously with a written agreement. The rule is codified at California Code of Civil Procedures §1856 and California Civil Code §1625. For many decades the rule was well established by the California Supreme Court decision of Bank of America vs. Pendergrass (1935) 4 C 2d 258, which held that parol evidence of fraud to induce a written contract would only be admissible as evidence if fraud involved some independent fact or representation, or some fraud in the procurement of the contract, or from some breach of a confidential relationship, such as exists between a principal and agent, and not merely some promise that contradicted the terms of the written instrument.

A major change in the law occurred when the California Supreme Court issued its decision in RiverIsland Cold Storage, Inc. vs. Fresno–Madera Prod. Credit Assn. (2013) 55 C 4th 1169. In RiverIsland a borrower executed a loan forbearance agreement without reading it based upon an oral representation by the president of the lender that the lender would delay collecting loan payments if the borrower would put up additional real property as collateral for the loan. However, the forbearance agreement only provided for three months of forbearance. The lender issued a notice of default to enforce its loan. The borrower sued the lender for fraud. The trial court ruled against the plaintiff/borrower. The court of appeal reversed the trial court, and held that the Pendergrass rule did not apply to claims where the defendant mischaracterized the content of the written agreement. The court of appeals also held that, where the failure to read a written agreement is induced by fraud, then the fraud may be a defense even in the absence of some special confidential or fiduciary relationship between the parties. The Supreme Court affirmed the Court of Appeals and held that oral testimony would be admissible to prove fraud in inducing the execution of a written agreement.

A plaintiff seeking to avoid the effect of a written agreement must still prove the written agreement was induced by a fraudulent representation. Good business practice would therefore seem to dictate that a careful record be kept of all communications between the parties, and/or their attorneys or representatives, in negotiating a contract, including emails, letters, telephone conversations, and meetings, and that records be maintained as to any oral promises made between the parties at or near the time of the execution of the written agreement.

If you have questions concerning your particular situation, then please call our Salinas office at 831-757-5426 during business hours to schedule a telephone conference or office visit, or complete the adjacent form and we will contact you.

An attorney-client relationship is not created between the client and the law firm until the attorney and client execute a written retainer agreement describing the legal work to be performed.


Priority of Mortgage Liens and Mortgage Fraud

California law incorporates a “race–notice” system of recording liens against real property. Simply stated, the general rule is that the first person to “race” to the county recorder’s office and record his mortgage or conveyance has superior legal title to a person who records an instrument later. California Civil Code §1213 states that recorded documents provide constructive notice to third parties of the interest conveyed by the recorded instrument, thereby preventing anyone with a subsequently recorded interest from obtaining better title to the property from the holder of the current title. The importance of the constructive notice statute is enforced by California Civil Code §1107, which provides that every grant of an estate in real property is conclusive against the grantor, also against everyone subsequently claiming under him, except a purchaser or encumbrancer who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first dully recorded. Civil Code §1214 provides every conveyance of real property is void as against any subsequent purchaser or mortgager of the property in good faith and for valuable consideration whose conveyance is first dully recorded. The importance of Civil Code §1214 is that even an earlier conveyance may not be enforceable against a later conveyance, where the holder of the later conveyance races first to the county recorder’s office to record the mortgage or deed.

A type of fraud sometimes occurs when a property owner applies for multiple loans secured by the same parcel of real property in order to receive loan proceeds that exceed the value of the real property, without each lender knowing about the other prospective loan. The property owner commits fraud by failing to inform each lender that he is in the process of obtaining loans from other lenders secured by the same property. This type of fraud can be difficult to detect due to the delay between the time when the borrower signs a deed of trust placing a lien on his land and the time that the deed of trust is finally processed, delivered to the county recorder, and recorded in the public record of the county recorder.

The innocent lender or the innocent purchaser of the later recorded documents then finds himself in a dispute over which conveyance is valid and enforceable. If a title company conducted the transaction, then a policy of title insurance may provide coverage for the loss to the innocent party. However, often in interfamily transactions or transactions handled informally between persons who are acquainted with one another, an escrow might not be used, and title insurance might not be purchased. The best practice is to engage an attorney or use a reputable escrow holder and obtain an appropriate policy of title insurance in every transaction that involves real property, even as between family members and close business associates.

If you have questions concerning your particular situation, then please call our Salinas office at 831-757-5426 during business hours to schedule a telephone conference or office visit, or complete the adjacent form and we will contact you.

An attorney-client relationship is not created between the client and the law firm until the attorney and client execute a written retainer agreement describing the legal work to be performed.


Basic Trust Law

A trust is an arrangement by which a person, known as the settlor or the trustor, delivers money or property to a person, known as the trustee, for the benefit of other persons, known as beneficiaries. A trust is usually established by a formal written declaration, and it can be revocable or irrevocable.

Upon the death of a settlor, often a trust will become irrevocable, and, if that is the case, then the trustee must give written notice to all persons named as beneficiaries of the trust and the heirs of the settlor. (Probate Code §16061.5) A trustee may be personally liable for damages to any person who does not receive the required notice.

Disputes often arise concerning the administration of a trust. A court has general power to supervise the administration of a trust and may order an accounting of the financial affairs of a trust. Christie vs. Kimball (2012).

In general an action may not be brought to contest a trust by a person who received notification of the trust becoming irrevocable more than 120 days after the date of notification, but the 120 days can be extended by 60 days if a copy of the trust is requested during the 120 day period. (Probate Code §16061.8)

If a person other that the original settlor is acting as trustee, the trustee usually provides an annual accounting to the beneficiaries of the trust, and the beneficiaries may have as long as 3 years to object to the accounting report. The time period to object can be shortened to as little as 180 days if the trust and the notice so provide. (Probate Code §16460, 16461)

A current income and principal beneficiary of the trust has standing to pursue an accounting, to petition the court regarding administration of the trust, and to seek redress for breach of trust. (Probate Code §§16061, 17200, and 16420)

The importance of providing an accounting report to the beneficiaries is that the 3-year statute of limitations for breach of fiduciary duty does not start to run until the beneficiary was on notice of his claim for breach of trust or knows the trustee has violated his/her fiduciary duties. (Probate Code §16460; Quick vs. Pearson (2010)) Hence, a trustee will usually provide annual accountings to the beneficiaries.

A trustee owes a fiduciary duty of honesty and loyalty in administering a trust and must be careful not to favor one beneficiary over another, or to gain any unfair advantage by reason of acting as a trustee. Probate Code §16004(a) provides that a trustee has a duty not take part in any transaction in which the trustee has an interest adverse to the beneficiary. Probate Code §16004(c) provides that a transaction between a trustee and a beneficiary during the existence of the trust, while the trustee’s influence with the beneficiary remains, and by which the trustee obtains an advantage from the beneficiary, is presumed to be a violation of the trustee’s fiduciary duties. The court in Toedter vs. Bradshaw (1958) 164 CA 2d 200 held that:

“This rule is unyielding and a trustee may not, under any circumstances, be allowed to have any dealings in the trust property with himself or acquire any interest therein. Courts will not permit an investigation into the fairness or unfairness of such a transaction or allow the trustee to show the dealing was for the best interest of the beneficiaries.”

The court continued by stating “The great purpose of the law is to secure fidelity in the agent. When one undertakes to deal with himself in different capacities – individual and representative – there is a manifest hostility in the position he occupies.”

The court in Estate of Pitzer (1984) 155 CA 3d 979 held that good faith is not a defense to a claim for breach resulting from such a conflict.

As early as 1901, the Supreme Court of California held in Stiles vs. Cain (1901) 134 Cal 170 that then Civil Code §2235, the predecessor of the current Probate Code §16004, established the rule that all transactions between a trustee and a beneficiary during the existence of the trust by which the trustee obtains any advantage from the beneficiary is presumed to be entered into without sufficient consideration and under undue influence.

In Alan vs. Myers (1936) 5 Cal 2d 311, the Supreme Court of California held that beneficiaries had not waived or released their rights to trust property where, at the time of the execution of the releases, the trustee did not advise them as to the full nature and value of the property that was left to the beneficiaries. The court in Alan held that the burden was upon the trustee to overcome the presumption that transactions by which a trustee obtains an interest in property from a beneficiary are presumed to have been acquired under undue influence and for an insufficient consideration. The court further held that, where a trustee enters a transaction with a beneficiary, and the trustee seeks to have the beneficiary release a claim, it is the duty of the trustee to inform the beneficiary of the nature, character, and value of the property held by the trust. In the absence of evidence that such information was given, the trustee could not sustain his burden of showing that there was a sufficient consideration given to the beneficiary for the release of his claims, and the trustee was unable to show his actions were not the result of undue influence. The court held that receipts standing alone are not evidence of a waiver of release of rights in trust property.

If a trustee is found to have breached his fiduciary duty to a beneficiary, regardless of the amount of monetary damages that might be awarded, a beneficiary is entitled to recover her attorney fees and costs from the trustee if the court determines the trustee’s position was without reasonable cause and in bad faith. (Probate Code §17211(b)

The court has very broad powers under Probate Code §16420 to remedy a breach of trust by the trustee and may require the trustee to return property to the trust, remove the trustee, impose an equitable lien or a constructive trust upon property, and trace trust property that has wrongfully been disposed of, and recover the property or its proceeds.

If you have questions concerning your particular situation, then please call our Salinas office at 831-757-5426 during business hours to schedule a telephone conference or office visit, or complete the adjacent form and we will contact you.

An attorney-client relationship is not created between the client and the law firm until the attorney and client execute a written retainer agreement describing the legal work to be performed.