Bank of America v. C.D. Smith Motor Company, Inc.

Decision Date22 May 2003
Docket NumberNo. 02-632.,02-632.
Citation106 S.W.3d 425
CourtArkansas Supreme Court



TOM GLAZE, Associate Justice

This is a contract case which, among other things, involves the interpretation of our Uniform Commercial Code, particularly Ark. Code Ann. §§ 4-1-205 and 4-2-202 (Repl. 2001), the Code's course-of-dealing provisions. We also take jurisdiction of this appeal because it requires the court's interpretation of Ark. Code Ann. § 16-64-130 (Supp. 2001), as to when punitive damages can be awarded in a contract case involving a financial institution.

Appellee C.D. Smith Motor Co., Inc. (C.D. Smith)1 was a used-car dealer in Pine Bluff, and had established a recourse-financing relationship over the years with Bank of America, N.A., and its predecessor banks.2 In the years 1996-1997, C.D. Smith sold approximately seventy percent of its cars through recourse financing, whereby it would guarantee the car purchaser's financing. About thirty to thirty-five percent of C.D. Smith's recourse financing was done through Bank of America.3 C.D. Smith sold a small percentage of its cars through non-recourse financing when a purchaser's credit was sufficient and C.D. Smith was not required to sign the note.

On November 12, 1996, C.D. Smith and the Bank signed a Recourse Chattel Paper and Security Agreement, which included a $2.3 million recourse-financing limit, which reduced an earlier limit set at $4 million. Over the years, C.D. Smith and the Bank had developed various procedures by which they carried out these recourse-financing agreements. Under one such practice, the Bank would attempt to collect on accounts that were less than sixty days delinquent, and it provided a list of those accounts to C.D. Smith, so that C.D. Smith couldassist in the efforts to collect the delinquencies. The Bank also notified C.D. Smith of any bankruptcy filings by delinquent loan-account holders, so that C.D. Smith could file a claim with the bankruptcy court.

After having signed the November 12, 1996, one-year agreement, the Bank sent a letter on February 13, 1997, advising C.D. Smith that, effective April 1, 1997, it would no longer offer recourse financing. The Bank also notified C.D. Smith that it would cease the practice of providing weekly delinquency lists, as had been done in the past. By letter dated March 7, 1997, the Bank informed C.D. Smith that the collection operations of the Bank were being moved to St. Louis, and the delinquency list accompanying the Bank's letter would be the last.

After the Bank discontinued recourse financing to C.D. Smith, C.D. Smith sized down its business and made some unsuccessful efforts to obtain recourse financing with other banks. C.D. Smith's business failed and closed in September 1997. On October 22, 1997, C.D. Smith filed suit against the Bank, asserting the Bank had breached the parties' November 12, 1996, agreement. The Bank answered, admitting liabilityfor breach of contract, but it denied having caused any damages arising from its breach. Prior to trial, on December 3, 2001, the Bank filed a motion in limine requesting the trial court to exclude all evidence pertaining to any alleged custom and usage or course of dealing between C.D. Smith and the Bank. At a hearing on December 5, 2001, the trial court ruled that the course-of-dealing evidence was relevant to determine C.D. Smith's damages and denied the Bank's pretrial motion.

The parties tried their case on December 5, 6, 7, and 8, 2001, and the jury found in C. D. Smith's favor, awarding it $1,066,000 in damages. The court fixed post-judgment interest at 6.25%, denying C.D. Smith's request that 10% interest be imposed. The trial court had earlier denied C.D. Smith's request that it be awarded punitive damages. The court concluded the matter by awarding C.D. Smith attorneys' fees in the amount of $252,605.29.

The Bank filed two post-judgment motions requesting relief from the jury award, but the court denied them. The Bank then filed a timely direct appeal raising three principal points for reversal:

(1) The trial court erred in allowing C.D. Smith to introduce parol evidence pertaining to the parties' course of dealing when considering their November 12, 1996, agreement.

(2) C.D. Smith failed to show the "tacit agreement" required for an award of consequential damages.

(3) C.D. Smith failed to show any damages were caused by the Bank's breach.

C.D. Smith filed a cross-appeal, contending the trial court erred (1) in ruling the Bank was not subject to punitive damages, and (2) in fixing post-judgment interest at 6.25% instead of 10%.

The Bank's initial argument submits several reasons why the trial court should have excluded evidence of the parties' prior course of dealings. First, the Bank contends course-of-dealing evidence was inadmissible because the parties' written agreement included an explicit merger provision. That merger clause provided as follows:

This Agreement contains all the terms of the Chattel Paper purchase agreement between the parties, and noother statement or agreement shall have any force or effect. Borrower [Smith] agrees that he is not relying on any representation or agreement regarding the purchase of Chattel Paper except those contained in this Agreement.

In support of its argument that the course-of-dealing evidence should not have been admitted, the Bank cites a court of appeals case, Hagans v. Haines, 64 Ark. App. 158, 984 S.W.2d 41, wherein that court reversed a trial court's decision to permit parol evidence regarding an oral rental agreement, even though the parties' written rental agreement contained a merger clause. That clause provided that the written agreement contained the entire understanding and agreement between the parties, and the written agreement superceded all prior or contemporaneous agreements, representations, and understanding, and no oral representation or statement shall be considered a part of the written agreement.

Despite the Bank's reliance on Hagans, that case offers little help in the instant case because that decision did not involve the Uniform Commercial Code. Here, C.D. Smith and theBank executed the November 12, 1996, agreement captioned "Recourse Chattel Paper and Security Agreement," whereby the Bank retained security interests governed by the Code. Under the Code, a writing intended to be the parties' final expression of their agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement, but "may be explained or supplemented by course of dealing." See § 4-2-202(a) (emphasis added). Ark. Code Ann. § 4-1-205 (Repl. 2001), in relevant part, defines course of dealing as follows:

(1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

* * * *

(3) A course of dealing between parties . . . give[s] particular meaning to and supplement[s] or qualif[ies] terms of an agreement.

(4) The express terms of an agreement and an applicable course of dealing or usage of trade shallbe construed wherever reasonable as consistent with each other; but when such construction is unreasonable, express terms control both course of dealing and usage of trade[.]

(Emphasis added.)

Citing Precision Steel Warehouse, Inc. v. Anderson-Martin Machine Co., 313 Ark. 258, 854 S.W.2d 321, the Bank urges that, as long as the parties' November 12, 1996, agreement was unambiguous, any evidence related to course of dealing is irrelevant and, therefore, inadmissible. The Bank further submits that the rule precluding course-of-dealing evidence to interpret an unambiguous contract is one aspect of the parol-evidence rule, which provides that "a written contract merges, and thereby extinguishes, all prior and contemporaneous negotiations, understandings, and verbal agreements on the same subject." See Ultracuts, Ltd. v. Wal-Mart Stores, Inc., 343 Ark. 224, 33 S.W.3d 128. Additionally, the Bank argues that C.D. Smith admitted by stipulation that the course-of-dealing evidence was not intended to interpret unambiguous terms contained in their agreement, and since such parol evidence does not interpret anexisting word or term in the agreement, it fails to qualify as a "course of dealing." On this point, however, we quickly note that, although C.D. Smith stipulated that the parties' collection practices were not contained in their contract, it did not concede the Bank did not have the obligation to provide the delinquency lists under a "course of dealing." Finally on this point, the Bank, relying on § 4-2-202(a) and (b), submits that, while the parties' agreement may be explained or supplemented by course of dealing and evidence of consistent additional terms, such evidence is inadmissible if the court finds the parties intended the writing to be a complete and exclusive statement of the terms of their agreement. The Bank concludes that the merger clause clearly reflects the parties' intention at that time to have the written agreement serve as the complete and exclusive statement. We must disagree.

We first point out that, in arguing that course-of-dealing evidence may not be used to interpret an unambiguous agreement which has a merger clause, the Bank relies on the Ultracuts and Hagans cases. However, both cases are non-Uniform Commercial Code cases and did not involve or discuss parol andcourse-of-dealing evidence, which may be allowed under circumstances described by the Code in §§ 4-1-205 and 4-2-202.

In their treatise on the Uniform Commercial Code, Professors James J. White and Robert S. Summers considered merger clauses and the...

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