Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: Exception to parol evidence rule required remand of fraudulent oral promises claim, (Jan 17, 2014)

By Edward L. Puzzo, J.D.

The rule set forth in the 2013 California Supreme Court Riverisland case, regarding whether oral promises directly contradicting a written contract are admissible to prove fraud, retroactively applied to a trial court’s decision barring parol evidence of fraudulent oral promises allegedly made to an automobile dealer by a franchisor’s financing affiliate, California’s Fourth District Court of Appeal in Santa Ana has ruled (Nissan Motor Acceptance Corporation v. Superior Automotive Group, January 16, 2014, Thompson, D.). The court required remand and retrial on those issues.

Nissan Motor Acceptance Corporation (NMAC) obtained a $40 million judgment against Michael Kahn, owner of the Superior Automotive Group (SAG), based upon breach of inventory, construction, and various other loan agreements. As SAG was defaulting on various loan agreements during the 2008 economic downturn in the automotive industry, NMAC and Kahn entered into certain forbearance agreements to extend Kahn’s payment schedule. Later, when NMAC sued for default, Kahn’s cross-complaint alleged that NMAC had made certain fraudulent oral promises in connection with the forbearance agreements. However, the trial court’s parol evidence ruling barred the admission of this evidence. Kahn appealed the trial court’s evidence ruling.

Parol evidence rule exception. A longstanding exception to the parol evidence rule allows a party to present extrinsic evidence to show the agreement was tainted by fraud, the appellate court stated. However, under binding precedent at the time of trial, the Bank of America Etc. Assn. v. Pendergrass, 4 Cal.2d 258 (1935) case narrowly limited that fraud exception.

The trial court had held a two-day hearing on this issue and concluded that the forbearance agreements constituted an integrated agreement, that the allegedly fraudulent promises of NMAC’s representative directly contradicted the terms of that agreement, and therefore, under case law, the fraud exception to the parol evidence rule did not apply and evidence of the fraudulent promises was inadmissible at trial.

Riverisland rule. During litigation on this appeal, the California Supreme Court, in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., 55 Cal.4th 1169 (2013), overturned the 78-year-old Pendergrass rule that oral promises directly contradicting a written contract are inadmissible to prove fraud.

The central issue on appeal became whether the Riverisland decision overturning the Pendergrass rule applied to this case. SAG argued that the trial court’s application of the parol evidence rule severely prejudiced its case, leading to the dismissal of the promissory fraud claims and the erroneous grant of nonsuit on the fraudulent concealment and ADDCA claims. The appellate court agreed.

The Supreme Court’s decisive and emphatic rejection of the Pendergrass rule left little doubt that it should apply immediately to all pending cases, the appellate court stated. in overruling Pendergrass, the appellate court continued, the Supreme Court intended to remove an unwarranted judicially-created limitation on the fraud exception, and that considerations of fairness and public policy are served by giving that decision immediate, retroactive effect.

Consequently, the trial court’s error in excluding SAG’s parol evidence, resulting in the dismissal of SAG’s promissory fraud claims, was prejudicial. The appellate court remanded for retrial on SAG’s cross-complaint claims of negligent and intentional misrepresentation, promissory fraud, fraudulent concealment, and violation of the ADDCA.

The case is Civil Action No. G046914.

Attorneys: Jan T. Chilton (Severson & Werson) for Nissan Motor Acceptance Corporation. Louis R. Miller (Miller Barondess) for Superior Automotive Group.

Companies: Nissan Motor Acceptance Corporation; Superior Automotive Group

Cases: FranchisingDistribution CaliforniaNews