Best v. U.S. Nat. Bank of Oregon

CourtCourt of Appeals of Oregon
Writing for the CourtRICHARDSON
Citation714 P.2d 1049,78 Or.App. 1
Decision Date17 April 1986
Parties, 1 UCC Rep.Serv.2d 6 Lonnie BEST and Teresa Best, for themselves individually, and for all other persons similarly situated, Appellants-Cross-Respondents, v. UNITED STATES NATIONAL BANK OF OREGON, a national banking association, Respondent-Cross-Appellant. A7905-02523; CA A32299.

Page 1049

714 P.2d 1049
78 Or.App. 1, 1 UCC Rep.Serv.2d 6
Lonnie BEST and Teresa Best, for themselves individually,
and for all other persons similarly situated,
Appellants-Cross-Respondents,
v.
UNITED STATES NATIONAL BANK OF OREGON, a national banking
association, Respondent-Cross-Appellant.
A7905-02523; CA A32299.
Court of Appeals of Oregon.
Argued and Submitted Sept. 20, 1985.
Decided Feb. 26, 1986.
Reconsideration Denied April 17, 1986.

[78 Or.App. 2]

Page 1050

Phil Goldsmith, Portland, argued the cause for appellants-cross-respondents. With him on briefs were Henry A. Carey and John D. Ryan, Portland.

James N. Westwood, Portland, argued the cause for respondent-cross-appellant. With him on brief were Clifford N. Carlsen, Jr., R. Alan Wight, and Miller, Nash, Wiener, Hager & Carlsen, Portland.

Before RICHARDSON, P.J., and WARDEN and ROSSMAN, JJ.

[78 Or.App. 3] RICHARDSON, Presiding Judge.

This is a class action challenging the validity of defendant bank's service charge for processing checks drawn against nonsufficient funds (NSF charge). Plaintiffs brought this action on behalf of themselves and other persons similarly situated. They alleged six claims for relief. On their second (breach of good faith) and fourth (penalty) claims, the trial court certified a class comprised of natural persons who were Oregon residents, had nonbusiness checking accounts with the bank between May 31, 1973, and May 30, 1979, and had paid NSF charges during that period. On their third claim (unconscionability), it certified a subclass consisting of class members who had opened their checking accounts on or after July 1, 1968. The other three claims were peculiar to the named plaintiffs. Only the claims of the class and the subclass are involved in this appeal. Those claims are: (1) the NSF charges were an unlawful penalty for breach of contract; (2) the charges were unconscionable; and (3) the bank breached its implied covenant of good faith by setting the charges at unreasonably high amounts. Plaintiffs sought relief totalling $30 million on those claims. The trial court granted the bank's motion for summary judgment against those claims. 1 Plaintiffs appeal and the bank cross-appeals. We affirm in part and reverse in part.

Our scope of review is to determine whether there are any genuine issues of material fact and whether the bank is entitled to judgment as a matter of law. ORCP 47 C. We review the record in the light most favorable to the party opposing the motion, Uihlein v. Albertson's, Inc., 282 Or. 631, 634, 580 P.2d 1014 (1978), including those issues on which the party opposing the motion would have the burden of proof at trial. Seeborg v. General Motors Corporation, 284 Or. 695, 699, 588 P.2d 1100 (1978).

An initial issue is whether various federal statutes and agency regulations preempt state regulation of bank charges and therefore defeat plaintiffs' claims. Plaintiffs contend that the bank did not properly raise that defense in the [78 Or.App. 4] trial court. 2 We will assume for the sake of argument that it did. The bank asserts essentially the identical preemption argument rejected in Perdue v. Crocker Nat.

Page 1051

Bank, 38 Cal.3d 913, ---- - ----, 216 Cal.Rptr. 345, 702 P.2d 503 (1985), another class action challenging the validity of NSF charges. Perdue contains a thorough, well-reasoned analysis of the preemption issue, and we agree with it. In contrast, Jacobs v. Citibank, N.A., 61 N.Y.2d 869, 474 N.Y.S.2d 464, 462 N.E.2d 1182 (1984), on which the bank relies, contains only two sentences concerning preemption, and we decline to follow it on that issue. Assuming that the issue is properly before us, federal law does not preempt plaintiffs' claims.

The common gravamen of plaintiffs' claims is that the bank's NSF charges were unreasonably high. Plaintiffs introduced evidence, for example, that in 1979, although the bank's cost of processing an NSF check was $1.08, its charge was $5.00.

Plaintiffs' "penalty" claim was based on the theory that they breached their deposit agreement with the bank when they wrote NSF checks and that the NSF charges constituted unreasonably high liquidated damages for that breach and hence were void as a penalty. See Illingworth v. Bushong, 297 Or. 675, 688 P.2d 379 (1984). They contend that the deposit agreement in question contains an express or implied promise not to write NSF checks and, although the bank would be entitled to damages for that breach, the NSF charges were far in excess of the anticipated cost for processing such checks. The bank responds that the deposit agreement neither expressly nor impliedly prohibits the writing of NSF checks. It argues that it processes NSF checks as a service for depositors and that the NSF charge is merely a service charge for the processing of such checks. The trial court agreed with the bank.

To establish that the NSF charge was an unlawful [78 Or.App. 5] penalty for breach of contract, plaintiffs first must establish that writing an NSF check was a breach of their deposit agreement. The deposit agreement appeared on the signature card plaintiffs signed when they opened their accounts. It provided, as pertinent:

"1. All transactions are governed by contract as printed on Bank's deposit slips and other forms * * *.

"2. This account is subject to Bank service charges existing at any time. * * *

"* * *

"4. It is agreed that all transactions between said Bank and the signers shall be governed by contract as printed on this signature card, deposit slips and other forms: that said account is subject to Bank's service charges in effect at any time * * *." 3

The agreement does not expressly prohibit the writing of NSF checks, nor does it specifically mention NSF checks. Plaintiffs, however, rely on the following grab bag of facts from which they argue that an implied promise not to write NSF checks should be read into the deposit agreement: (1) the deposit agreement did not explicitly permit them to write NSF checks; (2) the cost of processing an NSF check greatly exceeded the cost of writing a check against sufficient funds; (3) the bank discouraged the writing of NSF checks; (4) plaintiffs' accounts were subject to being closed for the writing of NSF checks; (5) a bank officer in a memorandum concerning the closing of unsatisfactory accounts referred to a hypothetical depositor who wrote many NSF checks as having engaged in "blatant contractual violations"; (6) another bank officer referred to persons who regularly wrote NSF checks as "habitual offenders"; (7) if customers asked whether they were permitted to write NSF checks, they were told that they were not; (8) a relatively small number of the bank's customers actually wrote NSF checks; (9) the bank referred to the NSF charge as a "penalty charge"; and

Page 1052

(10) one of the bank's advertisements suggested that "innocent" persons could avoid [78 Or.App. 6] writing NSF checks if they participated in the bank's automatic cash transfer program.

The appellate courts of California and New York have confronted the so-called "penalty theory" in class actions challenging the validity of NSF charges. In none of those cases were the plaintiffs able to establish an implied promise not to write NSF checks.

In three cases from California that illustrate the reasoning, the plaintiff alleged that the banks' NSF charges constituted unlawful liquidated damages in violation of a state statute. In Hoffman v. Security Pacific Nat. Bank, 121 Cal.App.3d 964, 176 Cal.Rptr. 14 (1981), the court upheld a directed verdict in favor of the bank. It held that plaintiff failed to prove that the writing of an NSF check was a breach of their deposit agreement:

"Plaintiff argued, and attempted to prove, that the depositors entered into a covenant not to write NSF checks when they executed signature cards which contained the statement: 'This account shall be governed by applicable banking laws, customs, and Clearing House regulations and by the rules presented in the bank book, and shall be subject to the service charge schedule of the bank.' Plaintiff attempted to show that industry custom prohibited the writing of overdrafts without prior agreement and that the depositors' promise to pay a service charge for any NSF check contained an implied covenant not to write such checks.

"Plaintiff failed to establish any such custom or any agreement on the depositors' part not to write overdrafts. Moreover, statutes governing the obligations of banks and their depositors, which are incorporated into and become part of the contract between a bank and its depositors * * *, treat an overdraft as an application for advance credit rather than as a breach of an express or implied covenant. California Uniform Commercial Code section 4401 4 specifically authorizes[78 Or.App. 7] a bank to pay overdrafts and to charge customers' accounts to recover amounts paid, even when payments result in overdrafts on the account. While a bank has a statutory obligation to honor any check drawn by a depositor for an amount not exceeding the balance in his account, and while the depositor has a contractual obligation to pay a service charge when he presents a NSF check, the depositor has no statutory or contractual obligation to refrain from drawing checks for amounts in excess of the balance in his account. (Cal.U.Com.Code, § 4401.) In brief, plaintiff did not and could not prove that the depositors breached an obligation to Bank when they negotiated NSF checks. Accordingly, the service charge they agreed in advance to pay for presenting such an overdraft was not a penalty under former Civil Code section 1670." 121 Cal.App.3d at 968-69, 176 Cal.Rptr. 14. (Citations omitted.)

In Shapiro v. United California Bank, 133 Cal.App.3d 256, 184 Cal.Rptr. 34 (1982), the court also upheld a directed verdict in favor of the bank. At trial, the plaintiffs had introduced the testimony of a banking expert to prove that...

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11 practice notes
  • Carey v. Lincoln Loan Co., 9706-04753; A117696.
    • United States
    • Supreme Court of Oregon
    • December 28, 2005
    ...follows it. See, e.g., W.L. May Co. v. Philco-Ford Corp., 273 Or. 701, 543 P.2d 283 (1975) (sale of goods); Best v. U.S. National Bank, 78 Or.App. 1, 10, 714 P.2d 1049 (1986), aff'd on other grounds, 303 Or. 557, 739 P.2d 554 (1987) (Restatement § 208 follows the UCC, and the UCC is general......
  • Motsinger v. Lithia Rose-Ft, Inc., 04CV2574CC.
    • United States
    • Court of Appeals of Oregon
    • April 4, 2007
    ...(Second) of Contracts and are influential in nonsales cases. Carey, 203 Or.App. at 421, 125 P.3d 814 (citing Best v. U. S. National Bank, 78 Or.App. 1, 10, 714 P.2d 1049 (1986), aff'd on other grounds, 303 Or. 557, 739 P.2d 554...
  • Best v. U.S. Nat. Bank of Oregon
    • United States
    • Supreme Court of Oregon
    • September 9, 1987
    ...reversed and remanded with respect to the breach of good faith claim but otherwise affirmed the circuit court. Best v. U.S. National Bank, 78 Or.App. 1, 714 P.2d 1049 (1986). We allowed both the depositors' and the Bank's petitions for review and affirm the decision of the Court of [303 Or.......
  • Arthur v. Microsoft Corp., No. S-01-1325.
    • United States
    • Supreme Court of Nebraska
    • March 19, 2004
    ...789 (1989) (unconscionability provision does not create affirmative cause of action, but only defense); Best v. U.S. National Bank, 78 Or.App. 1, 714 P.2d 1049 (1986) (no authority that doctrine of unconscionability is basis for restitutionary The plaintiffs' claim for damages under § 2-302......
  • Request a trial to view additional results
11 cases
  • Carey v. Lincoln Loan Co., 9706-04753; A117696.
    • United States
    • Supreme Court of Oregon
    • December 28, 2005
    ...follows it. See, e.g., W.L. May Co. v. Philco-Ford Corp., 273 Or. 701, 543 P.2d 283 (1975) (sale of goods); Best v. U.S. National Bank, 78 Or.App. 1, 10, 714 P.2d 1049 (1986), aff'd on other grounds, 303 Or. 557, 739 P.2d 554 (1987) (Restatement § 208 follows the UCC, and the UCC is general......
  • Motsinger v. Lithia Rose-Ft, Inc., 04CV2574CC.
    • United States
    • Court of Appeals of Oregon
    • April 4, 2007
    ...(Second) of Contracts and are influential in nonsales cases. Carey, 203 Or.App. at 421, 125 P.3d 814 (citing Best v. U. S. National Bank, 78 Or.App. 1, 10, 714 P.2d 1049 (1986), aff'd on other grounds, 303 Or. 557, 739 P.2d 554...
  • Best v. U.S. Nat. Bank of Oregon
    • United States
    • Supreme Court of Oregon
    • September 9, 1987
    ...reversed and remanded with respect to the breach of good faith claim but otherwise affirmed the circuit court. Best v. U.S. National Bank, 78 Or.App. 1, 714 P.2d 1049 (1986). We allowed both the depositors' and the Bank's petitions for review and affirm the decision of the Court of [303 Or.......
  • Arthur v. Microsoft Corp., No. S-01-1325.
    • United States
    • Supreme Court of Nebraska
    • March 19, 2004
    ...789 (1989) (unconscionability provision does not create affirmative cause of action, but only defense); Best v. U.S. National Bank, 78 Or.App. 1, 714 P.2d 1049 (1986) (no authority that doctrine of unconscionability is basis for restitutionary The plaintiffs' claim for damages under § 2-302......
  • Request a trial to view additional results

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