Mitchell Buick & Oldsmobile Sales, Inc. v. McHenry Sav. Bank

• Decision Date: 08 October 1992
• Docket Number: No. 2-91-1314,2-91-1314
• Citation: 601 N.E.2d 1360,176 Ill.Dec. 662,235 Ill.App.3d 978
• Parties: , 176 Ill.Dec. 662, 19 UCC Rep.Serv.2d 518 MITCHELL BUICK and OLDSMOBILE SALES, INC., Plaintiff-Appellee, v. McHENRY SAVINGS BANK, Defendant-Appellant.
• Court: United States Appellate Court of Illinois

Page 1360

601 N.E.2d 1360

235 Ill.App.3d 978, 176 Ill.Dec. 662,

19 UCC Rep.Serv.2d 518

MITCHELL BUICK and OLDSMOBILE SALES, INC., Plaintiff-Appellee, v. McHENRY SAVINGS BANK, Defendant-Appellant.

No. 2-91-1314.

Appellate Court of Illinois Second District.

Oct. 8, 1992.

Ronald E. Shadle, Paul M. Orenic, Cappetta & Shadle, Oakbrook Terrace, for McHenry Sav. Bank.

Michael F. Kukla, Michael F. Kukla, Ltd., Crystal Lake, for Mitchell Buick & Oldsmobile.

Justice UNVERZAGT delivered the opinion of the court:

Defendant, McHenry Savings Bank (McHenry), appeals the judgment of the circuit court for $10,000 in favor of plaintiff, Mitchell Buick & Oldsmobile Sales Inc. The parties agreed to vary the terms of the Uniform Commercial Code--Bank Deposits and Collections (Ill.Rev.Stat.1989, ch. 26, par. 4-101 et seq.) when McHenry agreed to hold a check for payment rather than dishonoring the check immediately. The issue on appeal is whether McHenry breached that agreement by refusing to pay plaintiff's check when the drawer deposited other checks into the account irrespective of whether the checks were ever collected.

At the trial, John A. Mitchell, president of plaintiff, testified that on July 10, 1989, Roger Little, as the owner of Masterson Motors, drew plaintiff a $10,000 check. According to the complaint, Masterson drew the check in return for the sale of plaintiff's used cars. Mitchell called Bud Adams at McHenry, where Masterson kept its account, to determine if the check was good. Adams told him that the check was not good. Mitchell asked if he could present the check to be held for collection and if there would be any drafts in front of plaintiff's check. Adams told Mitchell plaintiff's check would be in first place if it was presented immediately. Mitchell did not deposit the check with plaintiff's own bank but sent an employee to present it to McHenry. Mitchell testified that Adams told him that as soon as deposits added up to $10,000, the check would be paid. In return for holding the check for collection, plaintiff paid $7. The bank typed a receipt on a slip of paper labelled "COLLECTION ON [account number] PAYABLE TO MITCHELL BUICK & OLDSMOBILE SALES, INC." Mitchell repeated that Adams said that as soon as the deposits would equal the amount of the check it would be paid. The bank did not tell him that anyone would be paid ahead of plaintiff.

Mitchell then called Little and told him the check was not good. Little said that he would deposit over $50,000 in third-party checks into his account that afternoon. Little stopped at plaintiff's business on the way to the bank and showed Mitchell the checks. Later that afternoon, Mitchell called McHenry, and someone told him that the deposit had not yet been recorded. On July 24, McHenry returned the $10,000 check and a $7 refund. Mitchell called McHenry, and someone told him that the check was returned because Masterson's account was closed.

On cross-examination, Mitchell said that Adams' "exact words" were: "if Masterson Motors would deposit ten thousand or over, they would pay the check"; Adams did not say anything regarding whether the funds were actually collected.

Plaintiff called Brian T. Nash as its next witness. He was the manager of McHenry's checking department. McHenry's records showed a deposit of $53,262.54 into the Masterson Motors account on July 10, and this created an initial balance of $64,341.60. That day, the bank also charged the account $16,000 for a check which Little had drawn against the account for cash on June 16. McHenry had paid him $16,000, but the Federal Reserve Bank had returned the item as there were insufficient funds to cover that amount. McHenry also charged the account $20,000, representing another check, deposited June 15, that was returned for insufficient funds. These debits left a balance of $28,341.60.

McHenry also called Nash to testify; McHenry no longer employed Adams. McHenry collected no funds on the Masterson account after July 10, 1989; the deposited checks bounced. On July 10, McHenry did not make any payments to anyone. The $16,000 item posted on July 10 was just a journal entry of an item that was paid a month earlier. The $20,000 debit reflected the return of an insufficiently funded check previously deposited. McHenry's records also showed that Masterson's account had a nominal $11,079.06 balance prior to July 10, when Adams told Mitchell there were no funds to pay the $10,000 check.

Nash attempted to testify with respect to the standard practice in accepting checks for collection, but plaintiff objected to the relevance of the testimony. Plaintiff contended that the standard practice was not relevant to the terms of the contract to which Mitchell had testified. The court sustained the objection because Adams could have deviated from the scope of his authority or from the standard practice by agreeing to some other kind of contract for collection of an item. However, the court permitted McHenry to make an offer of proof. Nash testified that the practice of McHenry was to pay only on collected funds, not deposited funds, when paying an item held for collection. McHenry did not pay the $10,000 check on July 10 despite the nominal $11,079.06 balance because that balance did not represent collected funds. Nash was not aware of any agreement ever made by McHenry of an agreement to pay on mere deposited funds.

The court entered judgment for plaintiff. The judge referred to his own experience that his bank as a courtesy permits him to write checks the day he deposits his State payroll check. The court noted that Mitchell's testimony was uncontroverted and found that McHenry should have paid the check.

The parties have addressed numerous issues arising from the above facts, and both counsel have done a commendable job in preparing their briefs. Although all the issues are interrelated because they all involve the proper interpretation of the parties' contract, McHenry makes the following arguments: (1) the terms of the Uniform Commercial Code were not varied by an agreement of the parties; (2) as a collecting bank, McHenry was the agent for plaintiff and did not become liable to it; (3) McHenry did not pay any other parties' checks before plaintiff's; (4) the judgment is against the manifest weight of the evidence; and (5) the trial court erred in refusing to consider the evidence of the ordinary practices of holding checks for collection.

Article IV of the Uniform Commercial Code (Code) governs the actions of banks in depositing and collecting checks. The purposes of the Code are to simplify, clarify, and unify the law governing commercial transactions, to permit the expansion of commercial practices through custom, usage and agreement of the parties, and to make the law among the various States uniform. (Ill.Rev.Stat.1989, ch. 26, par. 1-102(2).) However, the parties may vary the effect of the Code by agreement. Ill.Rev.Stat.1989, ch. 26, par. 4-103(1).

A payor bank may charge against a customer's account any item which is otherwise properly payable even though the charge creates an overdraft (Ill.Rev.Stat.1989, ch. 26, par. 4-401(1)), but a bank is not ordinarily liable to the payee of a check made by a drawer who has no funds on deposit to cover the check, even though the bank has previously honored overdrafts (Ill.Ann.Stat., ch. 26, par. 4-401, Illinois Code Comment, at 527 (Smith-Hurd 1963)). Subject to any right of the customer's bank to apply the credit to an obligation of the customer, a provisional credit given by a bank for an item deposited into an account becomes available for withdrawal as of right when the provisional settlement given by the collecting banks becomes final and the bank has had a reasonable time to learn the settlement is final. (Ill.Rev.Stat.1989, ch. 26, par. 4-213(4)(a).) The provisional settlement becomes "final" when the third-party or collecting bank pays the item in cash, posts the check to the drawer's account or does some other action deemed to make the settlement irrevocable. (Ill.Rev.Stat.1989, ch. 26, par. 4-213(1).) We note here that McHenry has cited section 4-213(6) (Ill.Rev.Stat.1989, ch. 26, par. 4-213(6); see Ill.Rev.Stat.1991, ch. 26, par. 4-215(f)), but that section applies only to the deposit of cash, which is final for withdrawal purposes the day following the deposit.

An application of these statutes to the facts before the court makes the meaning of these technical statutes clearer. We first note that "deposits" are not withdrawable; it is the credit resulting from the deposits which is withdrawable by the customer of the bank. A bank account is an intangible asset representing a bank's debt to its customer. When Masterson, the customer, deposited with McHenry the third-party checks for collection, McHenry gave a provisional credit to Masterson's account and sent the third-party checks to the Federal Reserve Bank for collection from the various banks from which those checks were drawn. McHenry received only a provisional settlement for those third-party funds, which could not become final until those other banks honored the checks. ...