J.R. Hale Contracting Co., Inc. v. United New Mexico Bank at Albuquerque

Decision Date04 October 1990
Docket NumberNo. 17889,17889
Citation1990 NMSC 89,110 N.M. 712,799 P.2d 581
Parties, 13 UCC Rep.Serv.2d 53 J.R. HALE CONTRACTING CO., INC., a New Mexico corporation, Plaintiff-Appellant, v. UNITED NEW MEXICO BANK AT ALBUQUERQUE, f/k/a American Bank of Commerce, Defendant-Appellee.
CourtNew Mexico Supreme Court

RANSOM, Justice.

This suit involves the claimed wrongful acceleration of a $400,000 promissory note given by J.R. Hale Contracting Company (the company) to the United New Mexico Bank at Albuquerque. At a trial on the merits the district court granted the bank's motion for a directed verdict, finding that the acceleration was justified because an interest payment was twenty-three days past due when the decision to accelerate was made. The company appeals and we reverse, holding that a factual question exists on whether the bank is estopped from using the default clause in the contract in order to justify acceleration without prior notice and an opportunity to cure.

In addition to its defense under the default provision in the contract regarding past due payments, the bank relied upon an insecurity clause and asserted that the company had failed to make a prima facie showing that the bank lacked good faith in accelerating payment under that clause. We agree with the trial court that sufficient facts were introduced on this issue to raise a jury question. Therefore, denial of the bank's motion for a directed verdict on this basis was proper. We remand the cause for a new trial to encompass both the estoppel and lack of good faith issues. The company must prevail on both issues in order to recover on its claim for damages.

The company had been a customer of the bank for about eleven years prior to the circumstances that gave rise to this suit. During this period of time the company entered into numerous revolving credit notes with the bank in gradually increasing amounts. These notes routinely were renewed on or about the due date despite the fact that the company frequently was late a number of days or even weeks in making its payments. The bank seems not to have been troubled by the payments being past due and took no action in each instance other than possibly contacting the company to request that the payments be brought up to date. The company would send a check or the bank simply would deduct the payment from one of the company's accounts at the bank and send a notice of advice regarding the transaction.

The note at issue in this case was executed in November 1982 in the amount of $400,000. This was double the amount of any previous note. The first and only interest payment on the note was due March 1, 1983, and the note itself was due on July 31, 1983. The note provided that:

If ANY installment of principal and/or interest on this note is not paid when due ... or if Bank in good faith deems itself insecure or believes that the prospect of receiving payment required by this note is impaired; thereupon, at the option of Bank, this note and any and all other indebtedness of Maker to Bank shall become and be due and payable forthwith without demand, notice of nonpayment, presentment, protest or notice of dishonor, all of which are hereby expressly waived by Maker * * * *

Toward the end of February 1983, J.R. and Bruce Hale, on behalf of the company, approached the bank to borrow additional funds to cover contracting expenses associated with construction at the Double Eagle II Airport in Albuquerque. The existing $400,000 line of credit was fully drawn. Beginning in the first week in March, the Hales met with the bankers several times a week hoping to arrange for additional financing. The company had not made the March 1 interest payment on the existing loan. J.R. and Bruce Hale stated that no one ever contacted them concerning the delinquent payment and the matter never came up during the March meetings. J.R. Hale carried a blank check to these meetings for the purpose of making the interest payment but stated that he forgot to do so. He stated that on one occasion he called the bank officer assigned to his account and asked the officer to remind him at the next meeting and he would make the payment, but the officer had not done so. Apparently, it was necessary for the bank to calculate the interest payment in order to know the specific amount to be paid.

At the same time that the company was seeking to secure additional financing, the bankers had become concerned about the existing $400,000 loan. The financial statements that the company periodically supplied the bank indicated that the company had lost approximately $800,000 during the last six to seven months. While the Hales were under the impression that additional financing was in the works (a loan application to this effect had been prepared and had been taken to the loan committee for discussion), the bank seriously was considering calling in the company's existing obligations. This possibility never was communicated to the Hales as the bank wished them to remain cooperative. After a meeting on March 22 the bank requested and received from the Hales a list of customers for the undisclosed purpose of using it to collect directly the company's accounts.

The bank called a meeting on March 24 and presented the Hales with a letter stating that all amounts due on the $400,000 revolving line of credit were due and payable immediately. The grounds for the acceleration were stated to be that "The promissory note is in default due to your failure to pay the March 1, 1983 interest payment when due, and also due to the Bank's review of your financial situation which causes the Bank to believe that its prospect for receiving payment of the note is impaired." J.R. Hale produced a blank check and offered to pay the delinquent interest charges but the bank would not reconsider. The bank was able to collect the balance of the note with interest, $418,801.86, in about two weeks after exercising its right to set off the company's accounts at the bank and after receiving payments from the company's customers on their outstanding accounts.

As mentioned, the court directed a verdict for the bank stating that, although a jury issue existed regarding the bank's acceleration under the insecurity clause, none existed regarding the bank's right to accelerate payments under the interest default clause. The company claims on appeal, as it did before the trial court, that a jury issue existed on whether the bank had waived the interest default clause, or whether there was an implied modification of the note to require notice and demand prior to exercising the clause, or whether the bank was estopped to assert the clause. The bank answers that there was no evidence to show waiver, modification, or estoppel and, in any case, the entry of a directed verdict can be upheld under the insecurity clause since there was no genuine issue over the fact that the bank acted in good faith in concluding that its prospect for repayment was impaired.

Waiver, modification, and estoppel distinguished. The company's arguments regarding waiver, modification, and estoppel are intertwined and rely upon the same root proposition: that the conduct of the bank negated the express default provision in the note. The distinctions to be made in the application of these concepts, especially in that of waiver and estoppel, have not always been clear in our cases and some discussion on the point is warranted.

Professor Corbin states that waiver cannot be defined without reference to the particular circumstances to which it is being related, nor can one determine the legal effect of a "waiver" without knowing the facts the term is being used to describe. 3A A.L. Corbin, Corbin on Contracts Sec. 752 (1960). To illustrate the concept of waiver of contractual obligations or conditions, he presents the following example within the context of a land conveyance:

The vendor's "waiver" * * * is his own voluntary action; and in order to be legally effective, it is not necessary that the purchaser shall have given any consideration for it or shall have changed his position in reliance upon it. If the vendor offers to eliminate the condition in exchange for a requested consideration, and the purchaser gives that consideration, the case can still be described as a "waiver"; but it is also a modification by mutual agreement--by a substituted contract--a modification that is not subject to retraction by the vendor.

If the vendor requests and receives no consideration for his waiver, but, as he had reason to foresee, it causes the purchaser to change his position materially in reliance upon it, this too deprives the vendor of his power of retraction for, at the least, a reasonable time. The vendor is then said to be estopped; his own action can still be described as a "waiver", while the resulting action of the purchaser justifies the added description of estoppel.

Id. at Sec. 752 p. 481 (footnote omitted). As Professor Corbin also acknowledges, expressions or conduct that lead a party reasonably to believe that certain conditions or obligations will not be insisted upon may operate as a waiver, and courts will then speak in terms of estoppel as well as waiver. Id. at Sec. 754 p. 494-96. In this last situation, where one party has induced material changes of position in the other, a waiver of a contractual obligation or condition actually may not have been intended. There is no requirement that this be the case. While waiver depends upon what one himself intends to do, estoppel depends only upon what one's conduct has caused another party to do. Id. at Sec. 752 p. 481, n. 2. Professor Corbin also notes that a party may re-establish a condition or obligation that had been...

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