Coast Bank v. Holmes

CourtCalifornia Court of Appeals
Citation97 Cal.Rptr. 30,19 Cal.App.3d 581
Decision Date24 August 1971
PartiesCOAST BANK, a California Banking Corporation, Plaintiff, Cross-Defendant and Appellant, v. Robert E. HOLMES, Defendant, Cross-Complainant and Respondent. Civ. 10509.

TAMURA, Associate Justice.

Plaintiff (Bank) brought the present action on a promissory note to recover the principal ($51,053.00), accrued interest, and attorney fees. Defendant (Holmes) admitted execution of the note but pleaded failure of consideration, nonoccurrence of conditions precedent, constructive fraud and illegality. He also cross-complained for reformation. Except as to illegality, the court found in favor of defendant on all affirmative defenses and adjudged that plaintiff take nothing on the complaint. In addition, the judgment decreed reformation of the note as prayed for in the cross-complaint and awarded defendant attorney's fees in the sum of $9,836.00. The Bank appeals from the judgment.

The decisive issues posed by this appeal are: (1) Whether the admission of evidence to prove the affirmative defenses constituted a violation of the parol evidence rule and (2) whether the award of attorney's fees pursuant to Civil Code, section 1717, constituted an invalid retroactive application of the statute.

The facts may be summarized as follows: The Bank had made loans to one David Reid and others with Reid apparently being the ultimate beneficiary. In late 1965, as a result of a bank examiner's expression of concern over the liberality of the Reid loans, the Bank was pressing Reid either for payment or for additional collateral. Reid was sole stockholder of a corporation which owned two parcels of land, one seven acres and the other eight, and escrows were then pending for the sale of the seven acres for $150,000.00 and the eight acres for $175,000.00. The properties were subject to first and second trust deeds securing an indebtedness of approximately $107,000.00. During this period Reid was sharing offices with Holmes and owed him approximately $7,000.00. Holmes was a man of considerable means and his financial position was solid.

Sometime in December 1965, Mr. Woods, as assistant vice president to the Bank, prepared a trust deed in favor of the Bank covering the seven-acre parcel and took it to Reid for his signature to provide the Bank with additional security. When asked to sign the trust deed, Reid remarked that he didn't think the Bank could legally take a third trust deed as collateral. Woods did not pursue the matter. Later, however, Woods suggested that Holmes assume Reid's obligation to the Bank and, as security, take a third trust deed on the sevenacre parcel and, as added protection, a quitclaim deed to the parcel. Holmes agreed to do so provided Woods obtained the Bank's assurance that it would protect Holmes' third trust deed from foreclosure by senior lien holders. Ultimately, Holmes took a note for $7,987.55 from Reid (the amount represented $51,053.00 Reid owed the Bank and $6,934.55 he owed Holmes), a trust deed and a quit-claim deed to the seven-acre parcel and, upon receiving assurances from officials of the Bank, including its president, that it would protect his third trust deed from foreclosure, he executed and delivered to the Bank his promissory note for $51,503.00. 1 The Bank recorded an unsecured loan to Holmes for the amount of the note, secured a written authorization from him to disburse the funds, and applied the loan proceeds to discharge Reid's indebtedness to the Bank. The escrow for the sale of the two parcels failed to close, the purchaser withdrew his deposits from escrow, the senior lien holders foreclosed and Holmes' third trust deed was extinguished.

The court found that the promissory note was not intended to be a complete embodiment of the agreement of the parties but represented only a part of an overall agreement. The court found that the Bank promised that if Holmes would assume Reid's obligations, it would obtain for Holmes a third trust deed on the sevenacre parcel, would not demand payment on the note until the parcel was sold for an amount sufficient to satisfy the liens and pay off the note, pending the sale it would protect Holmes' trust deed by preventing foreclosure by senior lien holders, and would cancel the note in the event foreclosure could not be prevented. The court found that the promises constituted the consideration for the note, that there was a failure of consideration, and that conditions precedent to Holmes' liability on the note had not occurred. The court further found the Bank's promises were made with no intention of fulfilling them, that the false promises constituted 'constructive fraud' and that Holmes was entitled to a decree reforming the note to reflect the true agreement of the parties.


We first address ourselves to the propriety of the court's rulings admitting evidence in support of the affirmative defenses.

The court initially admitted the evidence subject to a motion to strike but, after hearing and considering all the evidence, determined that the note was not intended as the exclusive embodiment of the agreement of the parties and denied a motion to strike. The Bank urges that the court's rulings violated the parol evidence rule and compel reversal of the judgment. Defendant, on the other hand, contends that under the landmark decisions of Pacific Gas & E. Co. v. G. W. Thomas Drayage Etc. Co., Inc., 69 Cal.2d 33, 69 Cal.Rptr. 561, 442 P.2d 641, Delta Dynamics, Inc. v. Arioto, 69 Cal.2d 525, 72 Cal.Rptr. 785, 446 P.2d 785 and Masterson v. Sine, 68 Cal.2d 222, 65 Cal.Rptr. 545, 436 P.2d 561, extrinsic evidence was properly received to prove a collateral oral agreement and, moreover, that the parol evidence rule does not preclude proof of failure of consideration, failure of a condition precedent, or fraud.

In Masterson v. Sine, Supra, 68 Cal.2d 222, 65 Cal.Rptr. 545, 436 P.2d 561, the court rejected the orthodox 'facially complete test' in determining whether a writing is to be construed as the complete agreement of the parties. It held that the ultimate test is whether the parties intended the writing to be the exclusive embodiment of their agreement and that in making that determination, the judge should examine evidence of the collateral or contemporaneous oral agreement as well as the circumstances surrounding the execution of the writing. The court posited two standards of credibility for determining whether proof of a collateral oral agreement should be permitted, the restatement standard that proof should be permitted if such agreement might 'naturally' have been made separately and the test suggested by draftsmen of the Uniform Commercial Code that the terms of such agreement should be excluded only if they would 'certainly' have been included in the writing. (68 Cal.2d at pp. 227--228, 65 Cal.Rptr. 545, 436 P.2d 561.) In Pacific Gas & E. Co. v. G. W. Thomas Drayage Etc. Co., Inc., Supra, 69 Cal.2d 33, 69 Cal.Rptr. 561, 442 P.2d 641; and Delta Dynamics, Inc. v. Arioto, Supra, 69 Cal.2d 525, 72 Cal.Rptr. 785, 446 P.2d 785, the court applied the Masterson rationale to questions of interpretation and repudiated the traditional facially clear and unambiguous test for determining the admissibility of extrinsic evidence to prove the meaning of terms of a written agreement.

The foregoing decisions liberalizing the parol evidence rule have not, however, changed the rule that extrinsic evidence is inadmissible to vary or contradict the terms of a written agreement. (Weisenburg v. Thomas, 9 Cal.App.3d 961, 965, 89 Cal.Rptr. 113, hearing denied; see Tahoe National Bank v. Phillips, 4 Cal.3d 11, 23, 92 Cal.Rptr. 704, 480 P.2d 320.) Defendant directs our attention to the court's observation in Masterson, supra, 68 Cal.2d at p. 227, 65 Cal.Rptr. at p. 548, 436 P.2d at p. 564, that a promissory note give by a debtor to a creditor 'may integrate all their present contractual rights and obligations, or it may be only a minor part of an underlying executory contract that would never be discovered by examining the face of the note.' We do not view the passing comment as a disapproval of the long-settled rule that in the absence of fraud, mistake, lack or failure of consideration, or nonoccurrence of a condition precedent, a prior or contemporaneous oral agreement that a promissory note is not to be payable according to its terms is not a defense to an action on the note. (Oakland Medical Bldg. Corp. v. Aureguy, 41 Cal.2d 521, 523, 261 P.2d 249; Bank of America v. Pendergrass, 4 Cal.2d 258, 263, 48 P.2d 659; Sapin v. Security First National Bank, 243 Cal.App.2d 201, 204, 52 Cal.Rptr. 254; Bank of America v. Lamb Finance Co., Inc., 179 Cal.App.2d 498, 502, 3 Cal.Rptr. 877.) We should add as a caveat, however, that under Masterson, supra, extrinsic evidence of a collateral oral agreement is admissible to rebut a term of the writing 'that the Law would otherwise presume.' (Emphasis supplied.) (68 Cal.2d at p. 229, 65 Cal.Rptr. at p. 549, 436 P.2d at p. 565.)

Leaving aside for the moment the admissibility of extrinsic evidence to prove failure of consideration or fraud, evidence was received in the instant case to prove the Bank orally agreed not to enforce the note if the seven-acre parcel were foreclosed, to demand payment only if the parcel were sold for a sum sufficient to enable Holmes to pay off the note from the proceeds and to cancel the note if the property were foreclosed. Those terms of the collateral oral agreement were clearly inconsistent with the unconditional terms of the promissory note and evidence thereof should have been excluded. (Oakland Medical Bldg....

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