Tahoe National Bank v. Phillips

480 P.2d 320, 4 Cal. 3d 11, 92 Cal. Rptr. 704, 1971 Cal. LEXIS 296

• Court: California Supreme Court
• Decided: February 5, 1971
• Docket: Sac. 7857
• Status: Published

Opinions

Opinion

TOBRINER, J.

Defendant Beulah F. Phillips appeals from a judgment of the El Dorado County Superior Court that holds that an instrument entitled, “Assignment of Rents and Agreement Not to Sell or Encumber Real Property” (hereinafter referred to as “the assignment”) was intended to be an equitable mortgage, and decrees its foreclosure.

We conclude that this judgment must be reversed. Plaintiff bank, which occupied the more powerful bargaining position and deliberately chose to use a standardized form providing for the assignment of rents and a covenant against conveyances, cannot be permitted to transform this assignment into a mortgage contrary to the reasonable expectation of its borrower. On examining the terms and purpose of the assignment, we conclude that it is not reasonably susceptible of construction as a mortgage at the instance of the bank, and thus that the trial court erred in invoking extrinsic evidence offered by the bank to prove it to be a mortgage.

Defendant and three co-venturers embarked on a real estate development in the Lake Tahoe area. About April 20, 1965, the venturers not only needed further capital but also owed plaintiff sums due on overdrafts on their accounts. Plaintiff agreed to lend $34,000 to defendant, who transferred the funds to the venture’s account. In return, defendant gave plaintiff a single-payment promissory note, payable on demand or on May 20, 1965.¹ At the same time plaintiff executed and delivered to defendant an instrument entitled: “Assignment of Rents and Agreement Not to Sell or Encumber Real Property.”² This document provided that as security for the loan defendant assigned to plaintiff all rent due from the realty described therein and agreed not to encumber or convey that property. The bank was authorized to record the instrument and did so on May 27, 1965.

The real property described in the document was not the venture’s apartment development, but defendant’s residence, which she owned one-half in fee and one-half as trustee under the testamentary trust of her deceased husband. This property was unencumbered as of April 20, 1965. On December 6 of that year defendant recorded a declaration of homestead on the property.

Mr. Ross, president of plaintiff bank, testified that the venturers first requested an unsecured loan but that he refused to issue the loan without security and requested collateral; that defendant then offered her residence as collateral and showed him an FHA appraisal at $34,400. The venturers required the money within two hours, and, for reasons which are not entirely clear,³ Mr. Ross determined that the bank could not conveniently prepare a trust deed within that time limit; consequently he selected instead a form for an assignment of rents and agreement against conveyances. The document was prepared by his secretary and executed by the parties.

Mr. Ross acknowledged that his bank and other banks make unsecured loans upon agreements by the debtor to maintain unencumbered assets of sufficient value in the county. He denied, however, that his purpose in having defendant sign the document in issue was merely to insure that she would have unencumbered assets reachable by the bank;⁴ he maintained that he took the document “knowing it was in actuality a mortgage instrument against that house in lieu of a deed of trust.”

Mrs. Phillips testified that she did not intend to sign or believe that she was signing any security interest “like a mortgage or deed of trust.” She added that since she owned half her interest as trustee she believed that she lacked authority to execute a mortgage or trust deed on the property.

Plaintiff brought suit against the venture on various notes and overdrafts and, in its fifth cause of action, asked foreclosure of the assignment as an equitable mortgage. The court entered judgment against the venturers, jointly and severally, for $92,386 plus costs, interest, and attorney’s fees. It further found that the assignment was an equitable mortgage securing $34,000 of the debt, and decreed its foreclosure.

Mrs. Phillips alone appealed; her appeal challenges only that portion of the judgment finding the assignment to be an equitable mortgage and ordering foreclosure.

1. The language of the assignment is not reasonably susceptible of interpretation as a mortgage at the instance of plaintiff bank.

We agree with defendant’s contention that the assignment cannot reasonably be construed as a mortgage and thus that extrinsic evidence, offered by plaintiff to prove the document a mortgage, is legally irrelevant and cannot support the judgment.⁵ We shall examine the purpose and terms of the assignment, and explain that it is a type of agreement commonly used with unsecured loans, that it contains no words of hypothecation, and that it includes language inconsistent with a mortgage. We shall point out that if, as the bank contends, the word “security” in the assignment renders it ambiguous, the bank bears the responsibility for that ambiguity. Having on hand instruments which unambiguously impose liens on realty, the bank cannot select an ambiguous instrument and then, by extrinsic evidence, give it the effect of the unambiguous form it eschewed.

Assignments similar to the present one are “used by many banks in conjunction with small, nominally unsecured loans such as home improvement loans.” (California Real Estate Secured Transactions (Cont. Ed.Bar 1970) § 2.37 (hereinafter cited as “CEB”).)⁶ They provide the lender with a measure of security unavailable in a totally unsecured loan; the creditor holds an assignment of rents and a contractual guarantee that property in which the debtor has an equity will remain unencumbered and unconveyed, and thus available for levy and execution should the creditor reduce his debt to judgment. Indeed, the plaintiff bank commonly makes loans upon the “security” of a promise by the debtor not to convey or hypothecate property, using for that purpose forms similar to that at issue here. (See fn. 4, supra.)

Thus we are not dealing with homemade security instruments in which the parties labor to produce a mortgage but fall short of the legal requirements and must be rescued by a court of equity.⁷ The form used was carefully drafted to produce a security interest with incidents differing from that of a mortgage.⁸ As Justice Friedman pointed out in his dissenting opinion in the Court of Appeal: “Here is a bank which prepared its own printed form, selected a particular one from its array of forms and handed it to the customer for signature. Doubtless the bank had printed forms of trust deed, perhaps even a few dusty, yellowed mortgages. Now the bank claims that by the printed form it selected, it intended to create the legal effect of a form it did not select.” We conclude that the plaintiff, having selected a form for “assignment of rents and agreement not to sell or encumber real property,” is bound by the terms of that agreement.

We turn now to the language of the assignment. Its title gives no hint of a power of foreclosure. It contains no language of hypothecation, no provisions imposing a lien or creating a mortgage, no discussion of foreclosure. (See cases cited in fn. 6, supra.) The substance of the document comprises six covenants by the borrower, none of which purport to give the bank a lien on real property. The covenants respecting recordation and duration of the agreement, and persons bound by its terms, are consistent with a mortgage, but they are equally consistent with an instrument designed to afford the bank the security that the borrower retains unemcumbered assets. The third covenant, however, is inconsistent with an instrument creating a hen on real property. It provides in part that “borrower will not create or permit any lien or any encumbrance (other than those presently existing) to exist on said real property . . . without the prior written consent of bank.” This language apparently assumes that the assignment itself is not an encumbrance; its absolute prohibition on what would be junior encumbrances is inappropriate in a mortgage,⁹ and if in fact such a prohibition appeared in a mortgage it might be unlawful as an unreasonable restraint upon alienation. (See Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 317 [38 Cal.Rptr. 505, 392 P.2d 265].) On the other hand, as unsecured creditor the bank would benefit greatly from an assurance that defendant would not encumber her assets.

Plaintiff points out that the assignment specifies that it was given “as security for a loan,” and that the word “security” may signify a right of foreclosure (see Civ. Code, § 2924; Coast Bank v. Minderhout, supra, 61 Cal. 2d 311, 314). That phrase, however, appears in the preamble which, read as a whole, states that “as security for a loan ... the undersigned . . . hereby covenant and agree with Bank as follows.” The natural interpretation of this language is that it is the six covenants of the borrower that “secures” that loan;¹⁰ that the word “security” in the preamble does not create additional rights and duties not specified in the covenants.

Plaintiff further contends that the term “security,” and the provisions of the assignment describing the real property and permitting recordation, render the assignment ambiguous, thus requiring extrinsic evidence to determine whether it places a lien on defendant’s property. (See Coast Bank v. Minderhout, supra, 61 Cal.2d at p. 315.)¹¹ If ambiguity there is, that ambiguity may be deliberate. Professor Hetland, referring to assignments similar to that at issue in the present case, states that “the instrument seems to have been designed by a group of lenders to afford the lender the option of being a secured or an unsecured creditor at the time of the debtor’s default . . . .” (CEB, § 2.38.) Thus, although the assignment primarily serves to protect unsecured loans (see fn. 6, supra), it may also be used “[t]o lead a borrower who refuses to give a mortgage into believing he is not doing so” (CEB, § 2.25).

Since the alleged ambiguities appear in a standardized contract, drafted and selected by the bank, which occupies the superior bargaining position, those ambiguities must be interpreted against the bank.¹² The rule of resolving ambiguities against the drafter “does not serve as a mere tie-breaker; it rests upon fundamental considerations of policy.” (Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 871 [27 Cal. Rptr. 172, 377 P.2d 284].) Thus, in determining whether an instrument is reasonably susceptible to an interpretation suggested by the extrinsic evidence, one factor for consideration by the court is whether that interpretation would do violence to the principles of construing documents against the party who drafts and selects them.

In the present case, we conclude that to permit a creditor to choose an allegedly ambiguous form of agreement, and then by extrinsic evidence seek to give it the effect of a different and unambiguous form, would be to disregard totally the rules respecting interpretation of adhesion contracts, and to create an extreme danger of overreaching on the part of creditors with superior bargaining positions. The bank must bear the responsibility for the creation and use of the assignment it now claims is ambiguous; it is only “poetic justice” (CEB, § 2.38) if such ambiguity is construed in favor of the borrower.¹³ Legal alchemy cannot convert an assignment into an equitable mortgage, violating the customer’s reasonable expectation and bestowing upon the bank the riches of an hypothecation of title.

We recognize that in Coast Bank v. Minderhout, supra, 61 Cal.2d 311, we ordered foreclosure as an equitable mortgage of an instrument similar to the assignment in the present case, but we do not consider that case controlling. The agreement in Coast Bank contained an acceleration clause and stated that the loan was intended to improve the property described in the agreement—both characteristics indicative of a mortgage and both absent in the present assignment. Of greater significance is the differing context of Coast Bank and the present case. In Coast Bank, the borrower had breached a covenant prohibiting conveyance of the realty. Such a breach confronts the court with a difficult problem in fashioning a remedy. An award of damages would prove ineffective; “[t]he maximum damages the bank could suffer from breach would be the amount of the debt, the same amount for which it could get a judgment on the note.” (CEB, § 2.38.) Specific performance of the covenant against conveyances might create an invalid restraint against alienation. (See Coast Bank v. Minderhout, supra, 61 Cal. 2d at p. 317.) Under these circumstances, enforcement as an equitable mortgage, which permits the property to be conveyed subject to the lien, is the only alternative to invalidation of the instrument. (See Comment, supra, 12 U.C.L.A. L.Rev. 954, 966-967.)

In the present case defendant has performed all terms of the assignment,¹⁴ with the result that defendant’s interest in the realty, over the homestead exemption, is available to satisfy the bank’s judgment on the note. If this security is not fully adequate, such is the result of the bank’s choice of the governing instrument.

2. Defendant’s failure to object to extrinsic evidence at trial does not bar her from contending on appeal that the instrument is not fairly susceptible of interpretation as a mortgage.

We turn now to plaintiff’s contention that since defendant did not object at trial to plaintiff’s extrinsic evidence intended to show that the assignment was a mortgage, she is precluded from arguing on appeal that the assignment is not reasonably susceptible of that construction. To support its contention plaintiff relies on Pao Ch'en Lee v. Gregoriou (1958) 50 Cal.2d 502, 506 [326 P.2d 135], in which we held that “the admission of parol evidence to vary or add to a written instrument cannot be objected to for the first time in the appellate court.”¹⁵

Developments in the law of parol evidence since 1958, however, require a modification of the approach of Pao Ch'en Lee. Recent decisions make clear that, in most cases, extrinsic evidence must be admitted provisionally in order that the court may determine if that evidence is relevant to establish an interpretation of the instrument to which it is reasonably susceptible. (Pacific Gas & E. Co. V. G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 40; Delta Dynamics, Inc. v. Arioto (1968) 69 Cal.2d 525, 528 [72 CaLRptr. 785, 446 P.2d 785].) Moreover, “[t]he parol evidence rule, as is now universally recognized, is not a rule of evidence but one of substantive law. It does not exclude evidence for any of the reasons ordinarily requiring exclusion, based on the probative value of su6h evidence or the policy of its admission. . . . Extrinsic evidence is excluded because it cannot serve to prove what the agreement was, this being determined as a matter of law to be the writing itself.” (Estate of Gaines (1940) 15 Cal.2d 255, 264-265 [100 P.2d 1055].)¹⁶ Thus the Legislature, when it enacted the Evidence Code in 1965, excluded from it the subject of parol evidence. (See Witkin, Cal. Evidence (2d ed. 1966) §714.)

If we treat the parol evidence rule as one of substantive law, we cannot consistently subjugate that rule to the principles of objection and waiver codified in the Evidence Code. (Evid. Code, § 353.) To be sure, a party who has not objected to the introduction of extrinsic evidence cannot complain if that evidence is considered by the trier of fact. But in determining whether substantial evidence supports a judgment, extrinsic evidence inconsistent with any interpretation to which the instrument is reasonably susceptible becomes irrelevant;¹⁷ as a matter of substantive law such evidence cannot serve to create or alter the obligations under the instrument. Irrelevant evidence cannot support a judgment. (Kitchel v. Aeree (1963) 216 Cal.App.2d 119, 124 [30 Cal.Rptr. 714].)¹⁸

We conclude that defendant, having not objected at trial, cannot now take exception to the trial court’s receipt of extrinsic evidence, but that she may argue on appeal that such extrinsic evidence conflicts with any interpretation to which the instrument is reasonably susceptible.

3. Conclusion.

Part 2 of the superior court judgment, the only portion of that judgment from which defendant appeals, held that the assignment was an equitable mortgage and ordered foreclosure. We conclude that this determination is in error; the assignment cannot reasonably be construed as a mortgage at the instance of the party who drafted and selected it.

Part 2 of the judgment against defendant Beulah Phillips is reversed.

Wright, C. J., McComb, J., Peters, J., Mosk, J., and Burke, J., concurred.

1 The promissory note reads as follows: $34,000.00 Stateline California, April 20, 1965. No. OT-516 “On Demand or if no demand then on May 20, 1965, for value received, the undersigned promise(s) to pay to the order of the Tahoe National Bank, Stateline Office, the sum of Thirty Four Thousand and 00/100 Dollars with interest at the rate of 7% percent per annum from date until paid, interest payable at maturity and if not punctually paid, it shall become a part of the principal, and thereafter bear the same rate of interest as the principal debt; and should the interest not be paid when due, then the whole sum of principal and interest shall become immediately due and payable and may be charged to the account in said Bank of either the principal maker, or sureties on said note, at the option of the holder thereof. Should an attorney be employed to collect, or should suit be commenced to enforce the payment of this Note the undersigned agree (s) to pay a reasonable sum additional as attorney’s fees; also costs of such suit. Principal and interest payable in lawful money of the United States. Should this note be signed by more than one person, and/or firm, and/or corporation, all covenants and obligations herein contained shall be considered for all purposes as joint and several covenants and obligations of each signer hereof. Renewed Nov 18 1965 Address P.O. Box 2612, Tahoe Valley, Calif. Beulah F. Phillips Address Tahoe National Bank, Stateline, Calif. . . . Unsecured Single Payment Note Assignment on Record.”

2 The assignment reads as follows: “Assignment of Rents and Agreement Not to Sell or Encumber Real Property In consideration and as security for a loan made or purchased by Tahoe National Bank (hereinafter called ‘Bank’) which loan is evidence[d] by a promissory note in favor of Beulah F. Phillips dated April 20, 1965, in the amount of Thirty Four Thousand and 00/100 ($34,000.00), the undersigned, and each of them, (hereinafter sometimes called ‘Borrower’) hereby covenant and agree with Bank as follows: 1. The real property referred to herein is located in County of El Dorado, State of California, and is described as follows: ‘Lot 270, Tahoe Keys Unit No. 1, as said lot is shown on the Official Map of said Tahoe Keys Unit #1, filed in the office of the County Recorder of the County of El Dorado, State of California, on May 11, 1959, in Map Book C, Map No. 7. 2. Borrower hereby assigns to Bank all moneys due or to become due to Borrower as rental or otherwise for or on account of such real property, reserving unto Borrower the right to collect and retain any such moneys prior to Borrower’s default under the terms of the loan described above; 3. Borrower will not create or permit any lien or any encumbrance (other than those presently existing) to exist on said real property and will not transfer, sell, assign or in any manner dispose of said real property or any interest therein without the prior written consent of Bank; 4. Bank is hereby authorized and permitted to cause this instrument to be recorded at such time and in such places as Bank at its option may elect. 5. This agreement is expressly intended for the benefit and protection of Bank and all subsequent holders of the note described above. Borrower warrants and represents that Borrower owns the above-described real property. 6. This agreement shall remain in full force and effect until the loan described above shall have been paid in full or until twenty-one (21) years following the death of the last survivor of the undersigned, whichever first occurs. Dated: April 20, 1965 (s) Beulah F. Phillips.”

3 Defendant’s attorney inquired of Mr. Ross: “[W]ouldn’t it have been just as easy to prepare a deed of trust on a form as an assignment of rents?” Mr. Ross answered: “No, it would not have been, simply because of the recording from the Tahoe Valley area into Placerville of the deed of trust with an amendment or new title policy showing our position if there had been a proper first deed of trust of record.”

This answer of Mr. Ross is inconsistent with his assertion that the assignment was-intended to be a mortgage on defendant’s property. If the bank requires the protection of a title policy before executing a trust deed, and prompt recording of the trust deed, logically the bank should impose the same conditions on execution of an instrument intended to serve the purpose of a trust deed.

4 On cross-examination of Mr. Ross, defendant’s attorney inquired: “The [sic] isn’t it true that the banks, many banks will loan on money as long as they know that their borrower maintains a certain worth or property situation in the county in which the bank is doing business?” Ross answered: “Speaking from my own banking, the banks that I have been associated with, yes.”

5 “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.” (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37 [69 Cal.Rptr. 561, 442 P.2d 641]; accord, Delta Dynamics, Inc. v. Arioto (1968) 69 Cal.2d 525, 528 [72 Cal.Rptr. 785, 446 P.2d 785].)

Defendant did not object at trial to the extrinsic evidence, and thus cannot posit error upon its receipt by the trial court. This failure to object, however, does not bar her from contending on appeal that the extrinsic evidence is irrelevant since the assignment is not reasonably susceptible of being construed as a mortgage. (See part 2 of this opinion.)

6 A covenant against conveyances and encumbrances is sometimes referred to as a “negative pledge” agreement. (See G. Osborne, Mortgages (1951) §§43-44; Coogan, Kripke, and Weiss, The Outer Fringes of Article 9: Subordination Agreements, Security Interests in Money and Deposits, Negative Pledge Clauses, and Participation Agreements (1965) 79 Harv.L.Rev. 229, 263-264; Comment (1965) 12 U.C.L.A. L.Rev. 954-962; but see CEB, § 2.37.) As summarized in the article by Coogan, Kripke, and Weiss: “The case law in this area is rather thin and in general dates from the depression. It indicates that a purely negative covenant creates no security interest in the property described.” (79 Harv.L.Rev. at p. 264; see G. Osborne, supra, at § 44.) (See B. Kuppenheimer & Co. v. Mornin (8th Cir. 1935) 78 F.2d 261, 263-264 [101 A.L.R. 75]; Kelly v. Central Hanover Bank & Trust Co. (D.N.Y. 1935) 11 F.Supp. 497, 507, revd. on other grounds (2d Cir. 1936) 85 F.2d 61; Fisher v. Safe Harbor Realty Co. (1959) 38 Del.Ch. 297 [150 A.2d 617, 620]; Western States Finance Co. v. Ruff (1923) 108 Ore. 442 [215 P. 501, 504-505]; Redemptorist Fathers of State of Wash. v. Purdy (1933) 174 Wash. 326 [24 P.2d 1089, 1090]; Knott v. Shepherdstown Manufg. Co. (1888) 30 W.Va. 790 [5 S.E. 266, 269].)

7 Compare Estate of Pitts (1933) 218 Cal. 184, 189 [22 P.2d 694]; Bank of Suisun v. Fiske (1924) 65 Cal.App. 771, 778 [225 P. 7],

8 See CEB, § 2.37. Comment, supra, 12 U.C.L.A. L.Rev. 954, 962, 964, discusses the purpose of assignments such as that employed in the present case: “[L]enders are willing in some instances to advance credit on the basis of a long pay-off period to a person who appears to have property which may be attached or secured in case the debtor becomes in financial difficulty. However, when the property is transferred, the credit picture immediately shifts and the lender wants to be in a position to accelerate maturity at once; he is no longer willing to take the risk over the long pay-off period— a risk he would gladly take if the property remained ‘locked’ with the debtor.”

The comment adds: “Even though the Financial Code prohibits savings banks and trust companies from securing their loans by taking second liens, lending institutions have made real estate loans to homeowners using the negative pledge agreement when the property specified in the agreement was already encumbered by a prior mortgage or trust deed on the theory that no security interest was created by the negative pledge agreement.”

9 A secured lender may protect against subsequent encumbrances by the borrower which may diminish the borrower’s capacity to pay the loan by a clause making the debt due upon alienation of the property. (See CEB, § 4.55.) Neither the assignment nor the note in the present case contain “due-on-sale” provisions; the note provides for acceleration upon non-payment of interest installments, .a meaningless provision since interest was payable only at maturity.

10 Although the term “security” may denote a lien, it is also used in a broader sense; “whenever the performance of some undertaking is necessary to secure or preserve the value of some asset or other agreement, we could possibly refer to the undertaking as one that has been given ‘as security.’ ” (Greve v. Leger, Ltd. (1966) 64 Cal.2d 853, 858 [52 Cal.Rptr. 9, 415 P.2d 824].)

11 The promissory note carried the mark “OT.” The bank argues that the meaning of this mark cannot be ascertained without extrinsic evidence, and that such evidence shows that “OT” means the note is secured by “other trusts.” The bank, however, cannot create an ambiguity by the device of adding to the note a private code designation which is unexplained to the borrower.

12 See, e.g., Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269 [54 Cal.Rptr. 104, 419 P.2d 168]; Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862 [27 Cal.Rptr. 172, 377 P.2d 284]; Henningsen v. Bloomfield Motors, Inc. (1960) 32 NJ. 358 [161 A.2d 69, 75 A.L.R.2d 1]; Kessler, Contracts of Adhesion—Some Thoughts About Freedom of Contract (1943) 43 Colum.L.Rev. 629.

13 Usually it will be the lender who chooses an ambiguous instrument, but Kogan v. Bergman (1966) 244 Cal.App.2d 613 [53 Cal.Rptr. 371], was that rare case in which the borrower drafted an ambiguous security device. The court gave the creditor an election to enforce the note as a secured or an unsecured note. (244 Cal.App.2d at p. 621.)

14 The declaration of homestead by defendant did not breach her covenant against encumbering or conveying the property. “[A] homestead right is not an estate in the land, but a mere privilege of exemption from execution of such estate as the holder occupies.” (Arighi v. Rule & Sons, Inc. (1940) 41 Cal.App.2d 852, 855 [107 P.2d 970]; Holmes v. Grange etc. Fire Ins. Assn. (1951) 102 Cal.App.2d 911, 917 [228 P.2d 889].) It is not a conveyance (see Ontario State Bank v. Gerry (1891) 91 Cal. 94, 97 [27 P. 531]); it transfers no title or interest in the property (see Holmes v. Grange etc. Fire Ins. Assn., supra, 102 Cal.App.2d 911). “[A]n encumbrance, within the meaning of a covenant . . . [against encumbrances] had been defined as ‘any right to or interest in land which may subsist in third persons to the diminution of the value of the estate to the tenant, but consistently with the passing of the fee.’ ” (Fraser v. Bentel (1911) 161 Cal. 390, 394 [119 P. 509].) The filing of a declaration of homestead creates no rights in third persons, and does not diminish the title of the declarant; it cannot be encompassed within the definition of an encumbrance.

15 Prior to Pao Ch’en Lee v. Gregoriou, supra, 50 Cal.2d 502, 12 California cases (and one federal case applying California law) had taken the position that parol evidence erroneously admitted, but without objection, should be ignored on appeal and could not constitute substantial evidence in support of a judgment. (Smith v. Bear (2d Cir. 1956) 237 F.2d 79, 84 [60 A.L.R.2d 1119]; Harding v. Robinson (1917) 175 Cal. 534, 540 [166 P. 808]; Pinsky v. Sloat (1955) 130 Cal.App.2d 579, 589 [279 P.2d 584] (may be dictum); El Zarape etc. Factory v. Plant Food Corp. (1949) 90 Cal.App.2d 336, 344 [203 P.2d 13]; Love v. Gulyas (1948) 87 Cal.App.2d 608, 614 [197 P.2d 405] (dictum); Lifton v. Harshman (1947) 80 Cal.App.2d 422, 432 [182 P.2d 222]; Mulrooney v. Pietro (1947) 79 Cal.App.2d 311, 314 [180 P.2d 62]; Gore v. Bingaman (1938) 29 Cal.App.2d 460, 479 [85 P.2d 172]; Hanrahan-Wilcox Corp. v. Jenison M. Co. (1937) 23 Cal.App.2d 642, 645 [73 P.2d 1241]; Middlecamp v. Zumwalt (1929) 100 Cal.App. 715, 733 [280 P. 1003]; Rottman v. Hevener (1921) 54 Cal.App. 474, 479 [202 P. 329]; Dollar v. International Banking Corp. (1910) 13 Cal.App. 331, 343 [109 P. 499].)

Thirteen cases took a contrary position, but most of these are dictum; none is more recent than 1942. (Jacoby v. Wolff (1926) 198 Cal. 667, 676 [247 P. 195] (invited error); Mooney v. Cyriacks (1921) 185 Cal. 70, 80 [195 P. 922] (dictum); McCombs v. Church (1919) 180 Cal. 233, 237 [180 P. 535] (dictum); Le Mesnager v. Hamilton (1899) 101 Cal. 532, 539-540 [35 P. 1054]; Tebbs v. Weatherwax (1863) 23 Cal. 58, 60; Graham v. Smither (1942) 53 Cal.App.2d 701, 706 [127 P.2d 1024] (dictum); Palm v. Smither (1942) 52 Cal.App.2d 500, 507 [126 P.2d 428] (dictum); Bonner v. Finney (1930) 110 Cal.App. 518, 521-522 [294 P. 466] (dictum); Tennant v. Wilde (1929) 98 Cal.App. 437, 441-442 [277 P. 137] (dictum); Anthony v. Crocker First Nat. Bank (1928) 95 Cal.App. 347, 350 [272 P. 767] (dictum); Inner Shoe Tire Co. v. Tondro (1927) 83 Cal.App. 689, 693 [257 P. 211]; Caine v. Polkinghorn (1921) 54 Cal.App. 387, 390 [201 P. 936]; McComish v. Kaufman (1919) 43 Cal.App. 507, 510 [185 P. 476].)

Since Pao Ch’en Lee most Court of Appeal cases have followed that decision and held that failure to object at trial to parol evidence bars that argument on appeal. (Crummer v. Zalk (1967) 248 Cal.App.2d 794, 797 [57 Cal.Rptr. 185]; Martin v. Town & Country Development (1964) 230 Cal.App.2d 422, 427 [41 Cal.Rptr. 47, 10 A.L.R.3d 1347]; Calabrese v. Rexall Drug & Chemical Co. (1963) 218 Cal.App.2d 774; 780-781 [32 Cal.Rptr. 665]; Santa Clara Properties Co. v. R.L.C., Inc. (1963) 217 Cal.App.2d 840, 850 [32 Cal.Rptr. 333]; Kreipl v. Philosophical Research Soc., Inc. (1963) 212 Cal.App.2d 588, 596 [28 Cal.Rptr. 323]; Wilson v. Anderson (1962) 208 Cal.App.2d 62, 64 [25 Cal.Rptr. 105]; Collins v. Home Sav. & Loan Assn. (1962) 205 Cal.App.2d 86 [22 Cal.Rptr. 817]; Ferrara v. La Sala (1960) 186 Cal.App.2d 263, 268-269 [9 Cal.Rptr. 179]; Tsarnas v. Bailey (1960) 179 Cal.App.2d 332, 338 [3 Cal.Rptr. 629].) Youngblood v. Silvagni (1959) 173 Cal.App.2d 731, 743 [343 P.2d 951], although decided after Pao Ch’en Lee, permitted challenge to the evidence on appeal.

16 Accord: Hale v. Bohannon (1952) 38 Cal.2d 458, 465 [241 P.2d 4]; 3 Corbin, Contracts, § 573; McCormick, Evidence, p. 433; Witkin, Cal. Evidence (2d ed. 1966) § 715. Twenty-three other California decisions hold the parol evidence rule to be one of substantive law, and one case, Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 264 [48 P.2d 659], refers to it as both a rule of evidence and of substantive law. No decisions treat the rule as one of evidence only.

17 Generally, points not urged in the trial court cannot be raised on appeal. (See, e.g., Damiani v. Albert (1957) 48 Cal.2d 15, 18 [306 P.2d 780].) The contention that a judgment is not supported by substantial evidence, however, is an obvious exception to the rule.

18 Professor Corbin, .analyzing Pao Ch’en Lee v. Gregoriou, supra, 50 Cal.2d 502, states that: “Evidence having been admitted without objection, it was not error to admit it. But the legal operation of the facts proved by such evidence is a matter for the consideration of the appellate court, just as in the case of facts proved by other evidence. If the facts so proved show that the parties agreed upon a writing as a complete and accurate ‘integration,’ the substantive law of contracts declares that prior inconsistent negotiations and agreements are no longer operative. If the facts so proved show no such agreement, the prior agreements have continued operation.” (3 Corbin, Contracts (1964 Supp.) p. 179.)

Professor Edmund Morgan notes that: “The decisions are now overwhelmingly in accord with the doctrine of the Restatement that the rule is fundamentally a rule of substantive law. It declares specified conduct of the parties to be without legal effect with respect to their later conduct; the earlier conduct is inoperative to add to or vary the later writing. Consequently, any evidence offered to prove the earlier conduct is irrelevant. And the one rule of evidence to which there is no exception is that irrelevant evidence is inadmissible.” (Morgan, Basic Problems of Evidence (1962 ed.) p. 399; see also 4 Williston, Contracts (3d ed. 1961) §§ 961, 963.)