Commercial Cotton Co. v. United California Bank

• Decision Date: 10 January 1985
• Citation: 163 Cal.App.3d 511,209 Cal.Rptr. 551
• Parties: , 55 A.L.R.4th 1017, 40 UCC Rep.Serv. 234 COMMERCIAL COTTON COMPANY, INC., et al., Plaintiffs and Respondents, v. UNITED CALIFORNIA BANK, et al., Defendants and Appellants. D000690. Civ. 28559.
• Court: California Court of Appeals Court of Appeals

Page 551

209 Cal.Rptr. 551

163 Cal.App.3d 511, 55 A.L.R.4th 1017, 40 UCC Rep.Serv. 234

COMMERCIAL COTTON COMPANY, INC., et al., Plaintiffs and Respondents, v. UNITED CALIFORNIA BANK, et al., Defendants and Appellants.

D000690.

Civ. 28559.

Court of Appeal, Fourth District, Division 1, California.

Jan. 10, 1985.

As Modified Feb. 8, 1985.

Hearing Denied March 28, 1985. ^*

James W. O'Neil and Dennis D. Slattery, Los Angeles, for defendants and appellants.

Ewing, Kirk & Johnson, Richard C. Stamper, El Centro, and C. Delos Putz, Jr., for plaintiffs and respondents.

WORK, Associate Justice.

United California Bank (UCB) appeals a judgment in favor of Commercial Cotton Company, Inc. and its principal shareholder, Travis H. Calvin, Jr., awarding them $4,000 for negligently debiting Commercial Cotton's commercial checking account in that amount on a check containing unauthorized signatures, $20,000 for intentionally inflicting emotional distress by unjustifiably refusing to repay Calvin the loss sustained by its error, and $100,000 punitive damages because UCB breached the implied covenant of good faith and fair dealing inherent in the contractual relationship with its depositor.

UCB admits it negligently debited the bank account for a check plainly containing unauthorized signatures, but contends no substantial evidence supports a finding Calvin suffered compensable emotional distress

from its refusal to reimburse. UCB further argues it did not breach its duty of good faith and fair dealing because it legitimately pursued its economic interest by raising what it perceived as legitimate defenses in refusing to reimburse the loss its negligence caused. We find no substantial evidence supports the award of damages for emotional distress, but affirm the rest of the judgment.

FACTUAL BACKGROUND

Since approximately 1972, Commercial Cotton's non-interest bearing commercial checking account at UCB (Calexico branch) was essentially dormant, with only two or three checks a month being written. Calvin is a neurosurgeon practicing in El Centro, California, and since at least 1972 has been the sole signatory on that account which in prior years had been an active conduit for transactions relating to cotton ginning and cotton sales.

In 1972, Calvin's wife reported the loss of a series of blank checks to UCB and received a new number series in a different style and color. She did not report the checks stolen because she believed they only had been inadvertently discarded.

Four years later, August 1976, one of the missing checks in the amount of $4,000 containing two unauthorized signatures was negligently paid by UCB.

Although Commercial Cotton's monthly bank statements for September 1976 listed the $4,000 unauthorized transaction, Calvin did not read the statement or discover the loss until March 1978. He promptly presented the faulty check to the manager of the Calexico UCB branch who admitted the bank had erred but refused to reimburse Calvin on advice of UCB's inhouse counsel who stated the claim was barred by a one-year statute of limitations. (Cal.Com.Code, § 4406, subd. 4, and Code Civ.Proc. § 340, subd. 3.)

When Calvin renewed his claim through his attorney, on July 31, 1978, the bank's general counsel denied the claim by letter on the same grounds. However, on July 20, 11 days before the date of the general counsel's letter, the California Supreme Court, in a landmark decision directly involving UCB, expressly held these one-year statutory limitations do not apply where a customer sues a bank for negligent conduct. The holding of Sun 'N Sand, Inc. v. United California Bank, 21 Cal.3d 671, 699, 148 Cal.Rptr. 329, 582 P.2d 920, confirms the one-year limitations in Commercial Code section 4406 applies only to warranty actions and holds the three-year statute of limitations for general negligence actions applies where, as here, the customer alleges a breach of duty.

We find it inexplicable that UCB's general counsel could have been unaware of the Supreme Court holding affecting the bank for which he was general counsel at the time he wrote the July 31 letter. However, he later admitted these statutory bars were not applicable but, without stating reasons for his belief, still advised "notwithstanding the foregoing decision [Sun 'N Sand] it is our opinion [Commercial Cotton] would be required to prove its case on the merits and we believe that the factual issues would be resolved in favor of United California Bank." UCB's "hard line" is unsupported by any reasonable analysis of the known facts. The letter was written following receipt of a memorandum from a staff attorney suggesting, although the check was drawn on an out-dated form and did not contain authorized signatures, UCB "may argue that as a result of fully automated check processing, very few signatures are actually examined before payment and that this is a reasonable commercial practice." ¹

Further, the memorandum suggested UCB might "be allowed to diminish any liability on its part" by proving comparative negligence on part of the depositor.

However, although a tortfeasor may diminish the amount of damages he or she must pay by the proportionate share of fault for which the victim is responsible, that doctrine is factually inapplicable here. At trial, the only contention regarding comparative negligence was that the bank was never told there were missing checks. Plaintiffs' evidence is contrary and, on appeal, we view the evidence in the light most favorable to the prevailing party. The further claim, originally made but not presented at trial, that Calvin was negligent in not discovering the loss for one and one-half years when, had he examined his September 1978 bank statement he would have been able to notify the bank of the loss approximately one month after it occurred, is irrelevant to the issue of comparative negligence. The delay in reporting had nothing to do with the bank negligently paying the $4,000 unauthorized check. The delay in discovery and reporting the loss to UCB did not contribute to the transaction. [163 Cal.App.3d 514] Calvin's after-the-fact conduct did not contribute to UCB's negligence in making the $4,000 unauthorized payment.

COVENANT OF GOOD FAITH AND FAIR DEALING

UCB acknowledges the tort of breach of the covenant of good faith and fair dealing is not limited to insurance cases but claims the "special relationship" that must exist before a tort action will arise does not exist here.

In the context of an insurance contract the Supreme Court emphasized the relationship between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility created the necessary special relationship. (See Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141.) In Seaman's Direct Buying Service, Inc. v. Standard Oil Co. of California, Inc., 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158, the Supreme Court found it unnecessary to determine how far, if at all, the doctrine should extend to ordinary commercial contracts where parties of "roughly equal bargaining power are free to shape the contours of their agreement ...." (Id., at p. 769, 206 Cal.Rptr. 354, 686 P.2d 1158.)

Analogizing to the factors set out in Egan we agree with Calvin's contention that banking and insurance have much in common, both being highly regulated industries performing vital public services substantially affecting the public welfare. A depositor in a noninterest-bearing checking account, except for state or federal regulatory oversight, is totally dependant on the banking institution to which it entrusts deposited funds and depends on the bank's honesty and expertise to protect them. While banks do provide services for the depositor by way of monitoring deposits and withdrawals, they do so for the very commercial purpose of making money by using the deposited funds....