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California Loan Modification Negotiation re-opened by Lender’s Oral Misrepresentations

A California business borrower went into default on their loan. They worked out a loan modification with the Lender; According to the Borrower, the Lender told the Borrower that the agreement would be to forebear collection for two years and would include as additional security only two orchards, and not the Borrower’s residence or the truck yard. However, the written agreement actually delayed collection for only 6 months, and required that the Borrower pledge additional collateral which included the residence and truck yard.

After a default the Borrower brought the loan current and sued for fraud based on the misrepresentations regarding the loan modification. The Lender relied on the Parole Evidence Rule, which prohibits the Court from considering any evidence outside the terms of the written agreement.

The Court of Appeals found for the Borrower, holding that the Lender’s alleged oral misrepresentations of the terms contained in a written agreement, made at the time of execution of the agreement, fell within the fraud exception to the parol evidence rule, since the alleged misrepresentations related to the content of the physical document. The frud exception allows evidence outside the terms of the contract to be admitted to show fraud.

This just sends the suit back to the trial court, and a still tough road for the Borrower. Was the Borrower justified in not reading the document, but instead relying on the statements of the Lender? With this much at stake, he should have consulted an experienced real estate attorney. Surely the Borrower had to sign a deed of trust identifying his residence in order for it to be recorded. Nonetheless, this decision gives Borrowers some daylight in the struggle against fraudulent lenders.