LENDER HELD LIABLE FOR FRAUD WHEN FOREBEARANCE AGREEMENT INCLUDED TERMS NOT PART OF ORAL DISCUSSIONS LEADING TO FINAL AGREEMENT

In Riverisland Cold Storage Inc. v. Fresno-Madera Production Credit Association, involving a workout of a commercial real estate loan, the borrower claimed that it was misled when entering into a forbearance agreement which added as collateral six properties that were not subject to discussions in which only two additional properties were to be required in as additional collateral as a condition of the forbearance. The California Supreme Court held that the parol evidence rule does not preclude a borrower from asserting a fraud claim against the lender, even though the lender’s alleged misrepresentations directly contradicted the terms of the parties’ written agreement. The court overruled Bank of America Nat. Trust & Savings Ass’n v. Pendergrass, 4 Cal. 2d 258, 48 P.2d 659 (1935).

The implications are profound for lenders engaged in loan workouts (if not loan originations as well). The door is now open for what transpired in oral discussions as opposed to what a final written agreement provided. Morever, if a Borrower refuses to read a contract, and admits as such, they may still submit evidence of fraud. This may well lead down the road to new lender liability litigation in both commercial and residential real estate finance.

GLF Best Practice Recommendations include for commercial loan modifications and forbearance agreements to require a borrower have counsel and to provide an opinion of counsel as to the enforceability of the agreement, have a provision in the agreement that the borrower has read the agreement and understands its terms and waives all rights to contest its enforcement on the grounds that it may not be consistent with oral discussions, and require that the borrower place its initials next to that paragraph.

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