Arrow Industries, Inc. v. Zions First Nat. Bank, 19413

Decision Date30 December 1988
Docket NumberNo. 19413,19413
Parties9 UCC Rep.Serv.2d 672 ARROW INDUSTRIES, INC., a Utah corporation, Plaintiff and Appellant, v. ZIONS FIRST NATIONAL BANK, a national association; Western Dairymen Cooperative, Inc., a Nebraska corporation; and Grant and Ruby Cooper, individually and dba Rocky Mountain Enterprises and Rocky Mountain Irrigation, a Utah corporation, Defendants and Appellees.
CourtUtah Supreme Court

Joseph M. Chambers, Logan, for plaintiff and appellant.

John Beckstead, Steven R. Ellinwood, Salt Lake City, for defendants and appellees.

HALL, Chief Justice:

Arrow Industries, Inc. ("Arrow") appeals the trial court's dismissal of its contract and negligence claims against Zions First National Bank ("Zions").

As payment for inventory sold, Arrow received five checks drawn by Rocky Mountain Irrigation ("Rocky Mountain") upon Zions, totalling $28,148.64. When Arrow presented the checks for payment, the account did not contain sufficient funds to pay them. Consequently, counsel for Arrow placed the checks with Zions for collection, with the agreement that they would be held for a period of thirty days. After only three days, and after having paid other checks later presented, Zions returned Arrow's checks unpaid and informed Arrow's counsel that as long as the checks were held for collection, other checks could not clear the account.

Alleging that it suffered a detriment as the result of Zions' actions, Arrow brought this suit. Arrow's initial cause of action sounded in tort. It alleged that the process of collecting checks engaged in by Zions in this instance was one that arose out of common banking custom and that Zions breached its duty and failed to exercise ordinary care by wrongfully returning the checks. However, the trial court concluded that the pleadings failed to advance a theory of negligence that would support a recovery and dismissed Arrow's cause of action.

Thereafter, Arrow was permitted to amend its cause of action and allege breach of contract on two theories: (1) breach of the contract between Zions and its depositor, Rocky Mountain, to which Arrow was a third-party beneficiary, and (2) breach of a fiduciary duty under a contract of agency. As part of its complaint, Arrow alleged that Zions was a creditor of Rocky Mountain and that by returning the checks unpaid, Zions wrongfully enhanced its position as a secured party to the inventory for which the checks were payment.

Zions brought a second motion to dismiss pursuant to rule 12(b)(6) of the Utah Rules of Civil Procedure. The motion was supported by written memoranda, affidavits, answers to interrogatories, and Arrow's responsive memoranda and affidavits. Hence, the motion was appropriately treated as one for summary judgment. 1

The trial court granted summary judgment in favor of Zions, concluding in its memorandum decision that Arrow did not stand in the relationship of a third-party beneficiary of the contract between Zions and Rocky Mountain because Arrow would only have been a beneficiary of that contract if there had been sufficient funds in the bank to pay the checks at the time they were presented. The court also concluded that there was no consideration for any promise to hold the checks for thirty days and that Zions was thus free to elect to return the checks at any time. We disagree.

A motion to dismiss is only appropriate where it appears to a certainty that the plaintiff would not be entitled to relief under any state of facts which could be proved in support of its claim. 2 In reviewing an order granting a motion to dismiss, we are obliged to construe the complaint in the light most favorable to the plaintiff and to indulge all reasonable inferences in its favor. 3

Similarly, when ruling on an appeal from a motion for summary judgment, we inquire whether there is any genuine issue as to any material fact and, if there is not, whether the moving party is entitled to judgment as a matter of law. In reviewing the record on an appeal from summary judgment, the Court treats the statements and evidentiary materials of the appellant as if a jury would receive them as the only credible evidence and sustains a judgment only if no issues of fact which could affect the outcome can be discerned. 4 Application of these standards of review in this case prompts the conclusion that the trial court erred in dismissing Arrow's causes of action.

Arrow advances the same arguments on appeal as were presented to the trial court. Its first claim is that Zions owed it a duty in tort and that this duty was breached to Arrow's detriment when Zions prematurely returned the five checks. Arrow concedes that Uniform Commercial Code ("UCC") section 4-202, which explicitly provides that "collecting banks" must use "ordinary care," does not apply to the transaction in question since Zions was acting as a "payor bank." 5 Arrow claims, however, that Zions is subject to the general duty owed by all banks to act in good faith and exercise ordinary care in handling all banking transactions. To support this proposition, Arrow relies upon UCC section 4-103:

(1) The effect of the provisions of this chapter may be varied by agreement except that no agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable.

(2) Federal Reserve regulations and operating letters, clearinghouse rules, and the like, have the effect of agreements under subsection (1), whether or not specifically assented to by all parties interested in items handled.

(3) Action or nonaction approved by this chapter or pursuant to Federal Reserve regulations or operating letters constitutes the exercise of ordinary care and, in the absence of special instructions, action or nonaction consistent with clearinghouse rules and the like or with a general banking usage not disapproved by this chapter, prima facie constitutes the exercise of ordinary care.

....

(5) The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount which could not have been realized by the use of ordinary care, and where there is bad faith it includes other damages, if any, suffered by the party as a proximate consequence.

(Emphasis added.) In reference thereto, "good faith" is defined in section 1-201(19) as "honesty in fact in the conduct or transaction concerned." And section 4-103 provides that action or nonaction consistent with general banking usage and reasonable business standards constitutes the exercise of ordinary care. 6

Arrow cites First National Bank v. Brandon State Bank 7 for the proposition that section 4-103 recognizes a duty which is owed by banks to use ordinary care in all their dealings. In that case, the court considered the issue of whether a payor bank was in violation of Florida's codification of the UCC or federal reserve regulation in failing to wire "advice of dishonor" of a presented check. Although the court determined that there was no apparent requirement that "wire advice" be sent before the payor bank's deadline, the court held:

There is a requirement that all "collecting banks" exercise ordinary care in handling items being collected. [UCC § 4-202.] But "payor banks" are expressly excluded from the definition of "collecting banks". [§ 4-105.]

That leaves only the general and vague reference in Section [4-103(1) and (5) ] to a duty owed by all banks to use ordinary care, presumably in all their dealings. 8

That case was then remanded to the trier of fact to determine in part whether the bank breached its duty, whether any breach was excused under the facts of the case, and whether the plaintiff's loss was a proximate result of any unexcused breach.

In another case involving the issue of a payor bank's duties and responsibilities under the UCC, the court in Charles Ragusa & Son v. Community State Bank 9 noted:

We have been unable to find any ... case specifically dealing with the payment of a stale check and the aspect of good faith under [UCC § 4-404]. However, it seems obvious that although [§ 4-404] protects a bank which pays a stale check so long as it acts in "good faith", it does not eliminate the requirement of ordinary care which a bank must observe in all its dealings. [§ 4-103(1).] 10

This basic proposition is also supported in Phillips Home Furnishings, Inc. v. Continental Bank: 11

[We] hold that a bank cannot contractually exculpate itself from the consequences of its own negligence or lack of good faith in the performance of any of its banking functions. We find the public need for professional and competent banking services too great and the legitimate and justifiable reliance upon the integrity and safety of financial institutions too strong to permit a bank to contract away its liability for its failure to provide the service and protections its customers justifiably expect, that is, for its failure to exercise due care and good faith. The Bank, while acting as a bailee, was also acting in its capacity as a bank. The Bank undertook to provide the Night Depository Service from utilitarian, not altruistic motives. The service was conducive to continued growth and prosperity; and represented one of many "banking services." Although the parties could delay the initiation of the normal depositor-creditor relationship, they could not erase the relationship of bank-customer. As we have stated above, we hold that a bank, irrespective of contractual attempts at exculpation, continues to owe its customers a duty of due care and good faith. 12

This general principle, which we acknowledge as applicable today, that UCC section 4-103 recognizes a bank's duty to act in good faith and exercise ordinary care in all its...

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