Duncan v. Coahoma Bank, 52585

• Decision Date: 06 May 1981
• Docket Number: No. 52585,52585
• Parties: 34 UCC Rep.Serv. 354 Bennie M. DUNCAN v. COAHOMA BANK, a Branch of the Grenada Bank, and Mark Foster.
• Court: Mississippi Supreme Court

Page 891

397 So.2d 891

34 UCC Rep.Serv. 354

Bennie M. DUNCAN v. COAHOMA BANK, a Branch of the Grenada Bank, and Mark Foster.

No. 52585.

Supreme Court of Mississippi.

May 6, 1981.

John Kirkham Povall, Jacobs, Griffith, Pearson, Eddins & Povall, Cleveland, for appellant.

Roy D. Campbell, Jr., Campbell & DeLong, Greenville, William R. Bradley, Maynard, Fitzgerald & Bradley, Clarksdale, for appellees.

Before PATTERSON, C. J., and SUGG and WALKER, JJ.

SUGG, Justice, for the Court:

Bennie M. Duncan filed suit against Coahoma Bank, a Branch of The Grenada Bank, and its loan officer, Mark Foster, and charged that the bank's exercise of its written contractual right of set-off was wrongful or tortious; that because of the wrongful exercise of the right of set-off plaintiff was subjected to mental stress which caused him to have a heart attack; and that defendants were liable for damages for plaintiff's heart attack.

After the jury returned a verdict for $30,000 against defendants, the trial judge sustained defendants' motion for judgment notwithstanding the verdict, set aside the jury verdict, granted a judgment for the defendants, and plaintiff appealed.

Plaintiff purchased a 1971 Audi automobile on January 23, 1976, and borrowed $1,967 from the bank to pay for the automobile. On the same day plaintiff executed an installment note to the bank payable in twenty-four monthly installments of $94.22 each, beginning March 5, 1976, and secured the note with the automobile as collateral.

The automobile was unsatisfactory and plaintiff was forced to make extensive repairs to it. He was unable to make payments on the note as scheduled because of the expense of repairs to the automobile. After attempting unsuccessfully to sell the automobile, plaintiff delivered the car to Foster who agreed to try to sell the automobile. The bank, acting through its agent, Foster, was unable to sell the automobile and stored it with a third party. While in possession of the third party, the automobile was severely damaged by unknown persons who removed many parts from it.

On December 30, 1977, plaintiff executed a renewal note at the request of the bank payable in twenty-four monthly installments of $78.93 each beginning February 5, 1978. Plaintiff made two payments on the renewal note and when he delivered the automobile to the bank he had permitted the insurance to lapse.

Both notes contained the following provision:

Each maker, co-maker, endorser, surety and guarantor hereof jointly and severally agrees to pay this note and guarantees payment hereof and waives demand, presentment, protest and notice of dishonor, and consents to any extensions and renewals hereof without notice, and consents to the release by the holder hereof with or without consideration of any of them, and exonerates the holder hereof from all duty and obligation to make demand on anyone for payment of any collateral now or hereafter securing this note or to give notice to anyone of nonpayment thereof or to collect or sell the same and consents to the extension, renewal, exchange, surrender or release by the holder hereof with or without consideration of any such collateral, and agrees that when or at any time after this note becomes due the holder hereof may without notice setoff or charge this note against any deposit account or other account then maintained by any of them with the holder hereof or then existing between any of them and the holder hereof and to pay any deficiency, and agrees in case of any default to pay all costs of collection, including reasonable attorney's fees, and the late charges listed in the "Rebate & Default" section on the other side.

In February, 1978, plaintiff opened a savings account with the bank with a deposit of $6,300. By October 24, 1978, the balance in that account had been reduced to $1,710.10 by withdrawals made by the plaintiff.

On October 24, 1978, Foster, as agent for the bank, made the decision to set-off the balance due on plaintiff's note against plaintiff's savings account because the note was past due, plaintiff was depleting his savings account by withdrawals, and the loan had a history of delinquency. About October 26, 1978, plaintiff received his two notes, all of the documents pertaining to his loan transaction, and a withdrawal slip showing that $1,547 had been withdrawn from his savings account to pay off his delinquent debt. Plaintiff had not been advised that the bank intended to set-off the balance due on the note against his savings account. He testified that the notification from the bank that this had been done upset him to the extent that three days later he suffered a heart attack while visiting with relatives in another city.

The first question is whether a bank which holds collateral to secure a loan is required to seek satisfaction of its loan from the collateral before exercising its right to set-off a deposit of the debtor. We do not find any Mississippi case dealing with the right of set-off when a bank's indebtedness is secured by collateral. However, in Moreland v. People's Bank, 114 Miss. 203, 74 So. 828 (1917) the Court held:

It is well settled that the bank itself has a right, if it so desires, to apply whatever amount the maker of the note has on deposit with it to a payment on the note. Or, in other words, the bank itself has the right to set off the amount it owes the depositor against the amount owed it by the depositor. The relation existing between a bank and a depositor is simply one of debtor and creditor. (114 Miss. at 211, 212, 74 So. at 829, 830)

The majority rule is that the right of set-off exists even if a bank's indebtedness is secured by collateral. The rationale of the majority rule is stated in Olsen v. Valley National Bank of Aurora, 91 Ill.App.2d 365, 234 N.E.2d 547 (Ill.App.1968) as follows:

The plaintiffs argue that other jurisdictions make a distinction between indebtedness secured by collateral and indebtedness not secured by collateral, relative to the right of set-off; however, plaintiffs do concede that the distinction they urge is the minority rule. The ultimate test, of course, should not be numerical superiority, but the rationale supporting the rule. A bank should not be deprived of its right of set-off simply because it has the foresight to obtain collateral in exchange for obligations owed to it. The majority rule, including Illinois, is founded on the rationale that a creditor is able to pursue any one of a number of remedies against a debtor until the debt...