New York Law Review

Tag: parol evidence rule

  • Republic National Bank of New York v. Richter, 16 N.Y.2d 163 (1965): Parol Evidence Rule and Usury Defense

    Republic National Bank of New York v. Richter, 16 N.Y.2d 163 (1965)

    The parol evidence rule bars the admission of oral evidence to contradict the clear terms of a written agreement, even when a party claims the written terms were a mere formality to circumvent usury laws.

    Summary

    Republic National Bank loaned Richter $150,000 at 10% interest, secured by stock and personal guarantees, with the note stating it was payable “On Demand.” When the bank sued for repayment, Richter claimed the loan was actually for one year and the “On Demand” clause was a sham to avoid usury laws. The Court of Appeals held that the parol evidence rule prevented Richter from introducing oral evidence to contradict the written terms of the note. The court also clarified the requirements for collateral under the relevant statute, finding that collateral need not equal the full loan amount to be considered valid security.

    Facts

    Richter borrowed $150,000 from Republic National Bank, evidenced by a promissory note with 10% interest, payable “On Demand.” The loan was secured by corporate stock valued at approximately 40% of the loan amount and personal guarantees from Wolf, Spilky, and Eckhaus. Richter claimed he applied for a one-year loan through Spinrad, an officer at an affiliated bank, who allegedly assured him the “On Demand” clause was a mere formality. The bank’s records indicated initial discussion of a one-year loan, but the final approved loan was documented as payable on demand.

    Procedural History

    The bank sued for summary judgment based on the note. The defendants argued usury. Special Term granted partial summary judgment to the bank. The Appellate Division modified the interest rate post-default but otherwise affirmed the judgment for the bank. The defendants appealed to the Court of Appeals.

    Issue(s)

    1. Whether the parol evidence rule bars the admission of oral evidence to contradict the “On Demand” term in a promissory note, where the borrower claims the true agreement was for a one-year loan.

    2. Whether collateral pledged as security for a loan must equal or exceed the loan amount to satisfy the requirements of Section 379 of the General Business Law (now General Obligations Law, § 5-523).

    Holding

    1. Yes, because the parol evidence rule prevents the introduction of oral evidence that contradicts the clear terms of a written agreement, even if the borrower claims the written terms were intended to circumvent usury laws.

    2. No, because Section 379 requires only that the lender accept property of substantial value as security; it does not mandate that the collateral’s value equal or exceed the loan amount.

    Court’s Reasoning

    The Court of Appeals emphasized the importance of the parol evidence rule: “The rule of law which defeats defendants and makes this summary judgment valid is that which makes parol evidence inadmissible to vary the terms of a written instrument.” The court distinguished this case from fraud in the inducement, where oral evidence may be admitted to show that the written agreement was procured by fraud. Here, the defendants received the loan they sought but were attempting to avoid repayment based on an alleged oral agreement contradicting the written terms. The court cited Thomas v. Scutt, 127 N.Y. 133, 138 as direct authority. As to the collateral issue, the court noted that the statute requires only that the lender accepts “collateral security.” While declining to speculate on a situation involving only nominal collateral, the court held that collateral of “substantial value” satisfies the statute’s requirements. The court stated, “If the lender accepts as security property of a substantial value and of the kind required by the statute, that should satisfy its requirements.” The court also noted, “It is of course no defense here that plaintiff made the note payable on demand to avoid usury and to take advantage of the exempting statute (Dunham v. Cudlipp, 94 N. Y. 129; Jenkins v. Moyse, 254 N. Y. 319).”

  • Mill Factors Corporation v. Irving Trust Company, 27 N.Y.2d 53 (1970): Admissibility of Parol Evidence to Prove Fraudulent Inducement

    Mill Factors Corporation v. Irving Trust Company, 27 N.Y.2d 53 (1970)

    Parol evidence of a fraudulent misrepresentation, including a misrepresentation of intent, is admissible to avoid an agreement induced by such fraud, even if the written agreement is unconditional and makes no mention of the alleged misrepresentation.

    Summary

    Mill Factors sued Irving Trust and others on guarantees. The defendants claimed they were fraudulently induced into signing the guarantees by Mill Factors’ oral promises of extended credit and forbearance, promises Mill Factors allegedly never intended to keep. The lower courts granted summary judgment to Mill Factors, finding the fraud defense “feigned.” The New York Court of Appeals reversed, holding that a triable issue of fact existed regarding the alleged fraudulent inducement. The court emphasized that parol evidence is admissible to prove fraud, even if the written contract is unconditional.

    Facts

    Mill Factors sold cattle feed to Briarcliff Farms. The individual defendants, controlling shareholders and directors of Briarcliff, guaranteed Briarcliff’s debts to Mill Factors. Originally, the guarantee was for $400,000. When Briarcliff’s debt exceeded this amount, Mill Factors requested an increased guarantee of $1,000,000. The defendants alleged that Mill Factors orally promised additional credit up to $1,000,000 and forbearance from demanding payment until the debt reached that limit, inducing them to increase their guarantee. The written guarantees were unconditional and silent on these promises. Shortly after the new guarantees were signed, Mill Factors demanded payment, leading to the lawsuit.

    Procedural History

    The trial court initially granted summary judgment for Mill Factors. After reargument based on affidavits alleging fraudulent inducement, the trial court denied summary judgment and allowed the defendants to amend their answer. The Appellate Division reversed, granting summary judgment to Mill Factors, concluding the defense of fraudulent inducement was “feigned.” The Court of Appeals reversed the Appellate Division’s decision, reinstating the trial court’s order denying summary judgment.

    Issue(s)

    Whether parol evidence is admissible to prove that a written guarantee was fraudulently induced by oral misrepresentations regarding future credit and forbearance, despite the absence of such terms in the written agreement.

    Holding

    Yes, because parol evidence of a fraudulent misrepresentation, including a misrepresentation as to intent, is admissible to avoid an agreement induced by such fraud. The court found a triable issue of fact existed as to whether the guarantee was fraudulently induced.

    Court’s Reasoning

    The court reasoned that summary judgment is inappropriate when there is a material and triable issue of fact. The Appellate Division erred in concluding that the defendants’ fraud defense was “feigned.” The Court of Appeals acknowledged arguments against the defendants’ claim, such as the absence of the alleged promises in the written guarantees. However, the court also noted the improbability that the defendants would increase their guarantees from $400,000 to $1,000,000 without some assurance of continued credit for Briarcliff. The court cited Sabo v. Delman, 3 N.Y.2d 155, 160-161, stating that “Parol evidence of a fraudulent misrepresentation including a misrepresentation as to intent is admissible to avoid an agreement induced by such fraud.” The court emphasized that the truth should be determined through trial, where witnesses can be examined and cross-examined. The court stated, “The truth as to these matters must be arrived at in the lawful and customary way, this is, by a trial where the witnesses can be examined and cross-examined and their demeanor and their versions put under the scrutiny of the triers of the facts.”