Isaac v. American Heritage Bank and Trust Co., 81SC302

• Decision Date: 09 January 1984
• Docket Number: No. 81SC302,81SC302
• Citation: 675 P.2d 742
• Parties: 37 UCC Rep.Serv. 1253 James B. ISAAC and Cash Cattle Co., a Partnership, Petitioners, v. AMERICAN HERITAGE BANK AND TRUST CO., a Colorado corporation, Respondent.
• Court: Colorado Supreme Court

Page 742

675 P.2d 742

37 UCC Rep.Serv. 1253

James B. ISAAC and Cash Cattle Co., a Partnership, Petitioners, v. AMERICAN HERITAGE BANK AND TRUST CO., a Colorado

corporation, Respondent.

No. 81SC302.

Supreme Court of Colorado,

En Banc.

Jan. 9, 1984.

Howard J. Alpern, Isaac, Johnson & Alpern, Colorado Springs, for petitioners.

Otto K. Hilbert, Colorado Springs, for respondent.

DUBOFSKY, Justice.

We granted certiorari to review the judgment of the Court of Appeals in American Heritage Bank and Trust Co. v. Isaac, 636 P.2d 1296 (Colo.App.1981), which held that a bank customer may not recover for his bank's improper payment of a draft unless the customer proves that the bank's action caused his loss. We affirm the judgment of the Court of Appeals.

James B. Isaac (Isaac), defendant-petitioner, and Mikle Sadler (Sadler) formed a partnership, Cash Cattle Co., to buy and sell cattle. On June 30, 1977, the partners executed a $102,000 note payable to American Heritage Bank and Trust Company (Bank), plaintiff-respondent. The proceeds of the note were credited to the partnership account in the Bank and were to be used to purchase cattle. The partners also signed an authorization which permitted the Bank "to accept and pay checks or drafts drawn upon any or all bank accounts ... standing in the name of said copartnership...." (Emphasis added.) The partnership name used in the authorization was "Cash Cattle Co.," and the authorization was to remain in effect unless amended in writing by both partners.

Sadler was the managing partner. He authorized all the transactions of the partnership in buying and selling cattle. Drafts drawn on the partnership and payable through the Bank were used to purchase the cattle. Whenever a draft was delivered to the Bank for payment, the Bank would telephone Sadler and receive his express approval before paying the draft. Isaac was the non-operating partner. He received the monthly bank statements, and the Bank relied on his financial statement when it made the loan to the partnership.

In January 1978, Sadler, his wife and another person had Articles of Incorporation filed with the Secretary of State of Texas for a corporation named "Cash Cattle Company." There is no evidence that this corporation ever functioned. Shortly after these Articles were filed, the Bank was presented over several days with four drafts drawn on "Cash Cattle Company, Inc." in the total amount of $85,430.30. In accordance with its usual practice, the Bank contacted Sadler, and he approved the payment of these drafts from the Cash Cattle Co. partnership account. It is unclear whether the Bank advised Sadler of the "Inc." reference or merely told him the amount of the drafts and to whom they were to be paid. In March, 1978, the partners executed another note to the Bank in the amount of $59,510.06.

On June 9, 1978, the Bank brought suit on the promissory notes, which were in default. Isaac claimed in defense that the Bank had caused him loss in the amount of the four drafts drawn on Cash Cattle Company, Inc., but paid from the Cash Cattle Co. partnership account. He asserted that the partnership records revealed that 180 cattle, worth approximately $90,000, were unaccounted for, and that the payment of the "Inc." drafts caused this loss. Isaac also made various cross-claims against Sadler for mismanagement and fraud. The Bank argued that the partnership suffered no loss from the payment of the "Inc." drafts because the cattle purchased with the "Inc." drafts were invoiced on the partnership records.

Sadler defaulted at trial. The district court entered judgment against Sadler and Isaac in the amount of $103,195.07, representing unpaid principal and interest on the notes, and $6,600 stipulated attorney fees. In addition, the court ruled that the Bank improperly charged against the partnership account the drafts drawn on Cash Cattle Company, Inc., because payment was made without the consent and authority of Isaac. Therefore, the court allowed Isaac a set-off of $85,430.30. In the district court's opinion, Sadler used the money for his own purposes. The court also held that Isaac did not prove his cross-claims against Sadler.

The Court of Appeals agreed that the Bank failed to exercise ordinary care in debiting the drafts drawn on Cash Cattle Company, Inc. However, the Court of Appeals reversed Isaac's set-off because there was insufficient evidence in the record to establish that the payment of the "Inc." drafts proximately caused Isaac's loss.

On certiorari review, Isaac argues that the Court of Appeals improperly substituted itself as a finder of fact; that the Bank is liable for improperly paying the "Inc." drafts under both negligence and contract principles; that when a bank charges an item not properly payable against an account, the customer is entitled to have the account recredited without a showing of proximate cause; and that the Court of Appeals erred in affirming the district court's award of attorney fees. We disagree and hold that Isaac failed to carry his ultimate burden of proving that he suffered a loss as a result of the Bank's improper actions. Therefore, we affirm the judgment of the Court of Appeals.

I.

The issue before us is how liability is established when a bank charges against a customer's account an item that is not properly payable. ¹ The majority opinion of the Court of Appeals emphasizes common-law negligence principles. We think the better approach is through the Uniform Commercial Code (U.C.C.), codified in Colorado at sections 4-1-101, et seq., C.R.S. and 1982 Supp. Article 4 of the Code governs bank deposits and collections and provides the framework for analysis.

The U.C.C. does not state specifically the customer's remedy for his bank's improper payment of a draft, but the customer's right to demand that the bank recredit his account may be implied from section 4-4-401(1), C.R.S., which provides:

As against its customer, a bank may charge against his account any item which is otherwise properly payable from that account....

The negative implication that a bank may not charge against an account an item that is not properly payable is clear. In such a case the customer may demand that his account be recredited. See G & R Corporation v. American Security & Trust Co., 523 F.2d 1164 (D.C.Cir.1975); Ford Motor Credit Co. v. United States Automobile Ass'n, 11 U.C.C. Rep.Serv. 361 (N.Y.Civ.Ct.1972); Cincinnati Insurance Company v. First National Bank of Akron, 63 Ohio St.2d 220, 407 N.E.2d 519 (1980); J. White & R. Summers, Uniform Commercial Code 657, § 17-3 (1980). In most cases a customer demand is all that should be necessary. The question thus raised is whether a customer has an absolute right to recrediting, or whether the bank may assert defenses. The facts of this case demonstrate that a bank should not be required to automatically recredit its customer's account in all circumstances.

The district court and the Court of Appeals held that the Bank's improper payment of the "Inc." drafts was a failure to exercise due care. Section 4-4-103(5), C.R.S., establishes the amount a customer may recover when a bank improperly handles an item:

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....

Comment 6 to section 4-4-103 provides additional guidance:

Of course, it continues to be necessary under subsection (5) as it has been under ordinary common law principles that, before the damage rule of the subsection becomes operative, liability of the bank and some loss to the customer or owner must be established.

This language indicates that the customer must establish that he suffered a loss resulting from the bank's action. We agree.

One of the basic principles of law is that a party may not recover damages if he has not suffered an injury. "To warrant the recovery of damages, there must be both a right of action for a wrong inflicted by the defendant and damage resulting to the plaintiff therefrom. Wrong without damage, or damage without wrong, does not constitute a cause of action." 22 Am.Jur.2d Damages § 2 (1965). It is fundamental that the claimant must also establish that the loss was caused by the party being sued. "[B]efore damages can be awarded to a claimant he must establish that the damages he seeks are traceable to and are the direct result of the wrong sought to be redressed." Runiks v. Peterson, 155 Colo. 44, 45, 392 P.2d 590, 590 (1964).

We note, however, that the Supreme Court of Ohio, in Cincinnati Insurance Co. v. First National Bank of Akron, 63 Ohio St.2d 220, 407 N.E.2d 519 (1980), held that U.C.C. § 4-103(5) ² does not apply to situations where a bank charges an item not properly payable. Cincinnati Insurance involved the payment of checks lacking necessary endorsements. The court said: "The trial court's ... reliance on [U.C.C. § 4-103(5) ] was misplaced. That section's specific reference to 'ordinary care' manifests an intent that it relate only to a negligence-type action and not one based on the duty imposed upon the bank under [U.C.C. § 4-401] to only pay 'properly payable' items of its customer." 407 N.E.2d at 523. It is unclear what the court meant by a "negligence-type action." ³ We believe that bank payment of an item not properly payable may be characterized as negligence because a contract may be breached by a failure to exercise ordinary care. See Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041 (Colo.1983); W. Prosser, The Law of Torts § 92 at 616-18 (4th ed. 1971).

Relying on Cincinnati Insurance, Isaac asserts that by improperly paying an item a bank breaches its contract with its customer and, therefore, the bank must recredit the customer's account without regard to whether the customer has suffered a loss. While it is true that an improper payment is a breach of contract, the asserted...