BILL ANALYSIS                                                                                                                                                                                                    






                             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  
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          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).)  
                                                                      



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           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.) 

                                                                      



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            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  
                                                                      



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          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  
                                                                      



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          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)

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