BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Noreen Evans, Chair 2013-2014 Regular Session AB 824 (Jones) As Introduced Hearing Date: June 11, 2013 Fiscal: No Urgency: No RD SUBJECT Written Agreements: Exclusion of Evidence DESCRIPTION This bill would add trust instruments to the list of agreements that are covered by the statute codifying the parol evidence rule. BACKGROUND Codified at Section 1856 of the Code of Civil Procedure, the parol evidence rule, with certain exceptions, operates to bar the introduction of any extrinsic evidence (oral or written) to vary or add to the terms of a complete and final written agreement. This rule is not merely a rule of evidence; rather, it is a rule of substantive law which holds that the act of embodying the complete terms of an agreement in writing becomes the contract of the parties. In other words, as a matter of law, the writing is the agreement and extrinsic evidence is excluded because it cannot serve to prove what the agreement was when the agreement has already been determined to be the writing itself. (2 Witkin Cal. Evid. Documentary Evidence Secs. 59, 62.) A writing constitutes an integration when it is intended to be a final expression of one or more terms of the parties' agreement. (See Code Civ. Proc. Sec. 1856(a).) The existence of integration, which triggers the application of the parol evidence rule, is a question of law for the judge, as opposed to a question of fact for the jury. The judge must also decide whether the writing is intended also as a complete and exclusive (more) AB 824 (Jones) Page 2 of ? statement of the terms of the agreement-in other words, if the agreement was completely integrated. (Code Civ. Proc. Sec. 1856(d).) If it is a completely integrated agreement, then, generally, no extrinsic evidence may be introduced (exceptions are made in some circumstances, such as where a mistake or imperfection in the writing is put at issue in the pleadings.) If not, then evidence of a consistent collateral term would not necessarily be barred by the parol evidence rule. To help illustrate this distinction, a written contract between an inventor and an entity may provide that royalties received from a license of the inventor's invention should be paid to the entity. While the contract may, in fact, constitute an integrated agreement as to the form of payment and thereby bar any introduction of extrinsic evidence as to that agreement, other evidence may still be relevant and introduced in court to establish an agreement as to the use of that money-such as where it is alleged that the entity had agreed use those royalties to conduct research in the inventor's particular field. (Simmons v. California Institute of Technology (1949) 34 Cal.2d 264.) In such an instance, the introduction of the evidence is not permitted in order to contradict the writing, but rather, operates to prove a consistent additional agreed upon term that is either agreed to for separate consideration or is such a term as in the circumstances might naturally be omitted from the writing. (2 Witkin Cal Evid., Documentary Evidence, Secs. 65, 68, 86-87.) With respect to this bill, the parol evidence rule, as codified in Section 1856, defines "agreement" as a contract, deed, or will. This bill would add "trust instrument" to that definition, thereby ensuring that such instruments fall within the scope of the rule. CHANGES TO EXISTING LAW Existing law provides that the terms set forth in a writing intended by the parties as a final expression of their agreement as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement. (Code Civ. Proc. Sec. 1856(a).) Existing law provides that the terms set forth in a writing described above may be explained or supplemented by evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement. (Code Civ. Proc. Sec. 1856(b).) AB 824 (Jones) Page 3 of ? Existing law requires that the court determine whether the writing is intended by the parties as a final expression of their agreement with respect to such terms as are included therein and whether the writing is intended also as a complete and exclusive statement of the terms of the agreement. (Code Civ. Proc. Sec. 1856(d).) Existing law specifies circumstances in which evidence is not excluded, including, among other things, evidence of a mistake or imperfection in the writing that is put in issue by the pleadings, or where the validity of the agreement is in dispute. (Code Civ. Proc. Sec. 1856(e)-(g).) Existing law defines "agreement" to include deeds and wills, as well as contracts between parties. (Code Civ. Proc. Sec. 1856(h).) This bill would amend the definition above to include "trust instruments" and make other technical changes. COMMENT 1. Stated need for the bill According to the author: Code of Civil Procedure [Section] 1856 sets forth California's statutory "parol evidence rule," which states, in effect, that if a contract (or other similar document) is intended to be final and complete, its terms cannot be contracted by evidence of an earlier agreement or contemporaneous oral agreement. The section specifically refers to deeds, wills, and contracts between the parties, but not trust instruments. It is completely logical and good policy for trust instruments to be included within the parol evidence rule. Courts have recognized this fact, and there is an abundance of case law holding that trust instruments are indeed within the rule's scope. (See Miller v. Security-First National Bank of Los Angeles (1933) 219 Cal. 120, 128-129, Lonely Maiden Productions, LCC v. Goldentree Asset Mgmt., LP (2011) 201 Cal.App.4th 447, 453, Wells Fargo Bank v. Marhsall (1993) 20 Cal.App.4th 447, 453; Levy v. Crocker-Citizens National Bank (1971) 14 Cal.App.3d 102, 104, Kr[o]pp v. Sterling Savings and Loan Assoc. (1970) 9 Cal.App.3d 1033, 1045.) AB 824 (Jones) Page 4 of ? Case law notwithstanding, the fact is that the statute does not include trust instruments in the list of agreements subject to the parol evidence rule. By adding trust instruments to the list, AB 824 would promote clarity and predictability in probate and trust litigation by codifying existing case law. It also would reduce unnecessary litigation and cost to the extent the change would discourage (obviously futile) attempts to litigate the issue of whether the parol evidence rule applies in these cases. 2. This bill appears consistent with case law applying the parol evidence rule in the context of trusts The parol evidence rule generally operates to prohibit the use of extrinsic evidence to contradict the terms of a final and complete agreement between two parties. This rule has been codified in Section 1856 of California's Code of Civil Procedure since 1872, and in its current form since 1978. That section defines agreement to mean a contract, deed, or will. This bill would add "trust instruments" to that definition to remove any ambiguity as to the inclusion of trust instruments within the scope of the rule. The sponsor of this bill, the Conference of California Bar Associations, writes that "[t]he lack of specific mention in statute has not dissuaded the courts, which have found on numerous occasions that trust instruments are indeed within the rule's scope. [Citations omitted.] Even so, the lack of specific mention can lead to unnecessary and wasteful litigation by attorneys who see this absence as an issue that can be raised. AB 824 would stop this practice." In support of their position, the author and sponsor note several cases. While some of these cases predate the current version of the statute, the prior statute also included a substantially similar definition of "agreements" (the 1978 amendments renumbered the provision and added the words "As used in this section"). To be clear, staff notes that the courts in some of these cases did not rule specifically on Section 1856 of the Code of Civil Procedure but, nonetheless, they applied principles of the parol evidence rule to cases involving trust instruments. For example, in Miller v. Security-First National Bank of Los Angeles (1933) 219 Cal. 120, 128-129, the California Supreme Court rejected the plaintiff's argument on appeal that they should have been permitted to introduce extrinsic evidence of a AB 824 (Jones) Page 5 of ? preliminary oral contract where there was otherwise in existence a trust instrument, writing that "[t]hese prior negotiations and stipulations were all superseded by the written documents of the parties subsequently executed which purported to and did contain in full the agreement of the parties. [ . . . ] No claim is made that the declaration of trust is in any way uncertain or ambiguous as to the obligations it imposed upon the bank. Neither do the appellants contend that they were not perfectly familiar with the terms of the declaration of trust at the time of their written approval thereof. [ . . . ] Under these facts and circumstances the court correctly and properly struck out all evidence of plaintiffs as to any prior or preliminary oral contract [ . . . ]." (See also Kropp v. Sterling Savings and Loan Assoc. (1970) 9 Cal.App.3d 1033, 1045: extrinsic evidence legitimately bearing on a trustor's intent is admissible only when the trust instrument is unclear or ambiguous.) Also of note, California case law provides that "[i]n interpreting a document such as a trust, it is proper for the trial court in the first instance and the appellate court on de novo review to consider the circumstances under which the document was made so that the court may be placed in the position of the testator or trustor whose language it is interpreting, in order to determine whether the terms of the document are clear and definite, or ambiguous in some respect. Thus, extrinsic evidence as to the circumstances under which a written instrument was made is admissible to interpret the instrument, although not to give it a meaning to which it is not reasonably susceptible." (Wells Fargo Bank v. Marshall (1993) 20 Cal.App.4th 447, 453, citing Estate of Russell (1968) 69 Cal.2d 200, 208-210.) In Wells Fargo Bank v. Marshall, while the court made no specific mention of the parol evidence rule or Section 1856, the court ruled that because the language in the trust instrument relating to the trustor's son's wife was ambiguous when taking into consideration all the circumstances surrounding the making of the trust, it was proper to consider other evidence (the trustor's letter to the proposed trustee outlining the terms of the trust and the trust language itself) to determine the intent of the trustor with respect to the potential trustee. Based upon that extrinsic evidence, the court then held that the trustor had intended to benefit whoever the son may be married to and living with at the time of his son's death. More recently, in 2011, a California Court of Appeal was presented with an issue of whether or not a trust was created AB 824 (Jones) Page 6 of ? between the parties-a question that turns upon whether or not the court finds that the parties manifested the intent to create a trust. In making this determination, the court noted that "[t]he settlor is not required to use the words 'trust' or 'trustee.' In interpreting the settlor's words and conduct [to determine if the parties manifested an intent to create a trust, as opposed to a debt], the circumstances surrounding the transfer may be considered unless they are excluded by the parol evidence rule." There, the court found, however, that an "integration clause establishe[d] that the written service agreements are complete and final expressions of the parties' terms" and thus, while parol evidence might still be used for interpretation purposes, in that case and in accordance with Section 1856, extrinsic evidence could not be considered to explain the terms because the service agreements between the parties were not ambiguous. Accordingly, the court held that no trust had been created in that case: "They did not properly manifest intention to create an express trust [in the service agreements] and the parol evidence rule bars extrinsic evidence from showing otherwise." (Lonely Maiden Productions, LLC v. Goldentree Asset Mgmt. (2011) 201 Cal.App.4th, 368, 376-381.) This bill would arguably be consistent with the above cases, among others, and remove any ambiguity in the law by explicitly adding trust instruments to the definition of agreement in the statute codifying the parol evidence rule. Support : None Known Opposition : None Known HISTORY Source : Conference of California Bar Associations Related Pending Legislation : None Known Prior Legislation : None Known Prior Vote : Assembly Floor (Ayes 75, Noes 0) Assembly Judiciary Committee (Ayes 10, Noes 0) ************** AB 824 (Jones) Page 7 of ?