National Bank of Harvey v. Pauly, 9563

• Decision Date: 09 May 1979
• Docket Number: No. 9563,9563
• Citation: 280 N.W.2d 85
• Parties: The NATIONAL BANK OF HARVEY, a National Banking Association, Plaintiff and Appellee, v. Donald P. PAULY, d.b.a. Don Pauly Cheese, Inc., and Don Pauly Cheese, Inc., a Wisconsin Corporation, Defendant and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 85

280 N.W.2d 85

The NATIONAL BANK OF HARVEY, a National Banking Association Plaintiff and Appellee, v. Donald P. PAULY, d.b.a. Don Pauly Cheese, Inc., and Don Pauly Cheese, Inc., a Wisconsin Corporation Defendant and Appellant.

Civ. No. 9563.

Supreme Court of North Dakota.

May 9, 1979.

Lamb, Schaefer, McNair & Larson, Fargo, for plaintiff and appellee; argued by Leland M. Stenehjem, Jr., Fargo.

Schlosser & Schmitz, Bismarck, for defendant and appellant; argued by Orell D. Schmitz, Bismarck.

SAND, Justice.

The issue involved in this case concerns the admissibility of parol evidence to vary the terms of a written notation contained on the face of a check. The appellant, drawer of the check, argued it was error on the part of the trial court to allow the admission of parol evidence to establish an oral agreement varying the terms of a notation which stated the purpose for which the check was issued. We affirm.

The National Bank of Harvey, appellee, filed a summons and complaint on 3 August 1977 seeking judgment against Donald P. Pauly, individually, and Don Pauly Cheese, Inc., a Wisconsin corporation, for payment on a $30,000 promissory note plus interest. The defendant appellant answered, asserting as an affirmative defense that the note had been satisfied as evidenced by a draft on the account of Don Pauly Cheese, dated 26 July 1975 in the amount of $30,000 payable to the National Bank of Harvey. A bench trial was held on 7 April 1978. Findings of fact, conclusions of law, and order for judgment were filed by the district court dismissing as a party Donald P. Pauly individually, but otherwise ordering entry of judgment in favor of the National Bank of Harvey. Judgment was entered and Donald P. Pauly, individually, and Don Pauly Cheese, Inc., filed a timely notice of appeal from the judgment.

Donald P. Pauly (Pauly), a resident of Wisconsin engaged in the operation of a cheese manufacturing and wholesale business, became a principal stockholder, a member of the board of directors, and the president of Harvey Cheese, Inc. (a cheese manufacturing plant located in Harvey, North Dakota) in 1973. Don Pauly Cheese subsequently became the principal purchaser of the cheese products produced by Harvey Cheese.

In June 1975 Pauly concluded the financial future of Harvey Cheese did not warrant its continued operation and that the plant should be closed. He conveyed his plan to James Lewis, president of the National Bank of Harvey. Lewis requested, however, that he be given the opportunity, in the interests of the community, to attempt a reorganization with a continued operation of the plant. Pauly agreed to allow the continued operation of the plant but indicated a financial arrangement was necessary to solve the cash flow problem Harvey Cheese was experiencing.

In an effort to overcome the cash flow problem, Pauly and Lewis arrived at an arrangement whereby Harvey Cheese would receive faster payment for the cheese it shipped to Don Pauly Cheese. Prior to this agreement, Don Pauly Cheese generally issued payment for cheese purchased from Harvey Cheese only after it had received payment for the same cheese from its customers. As a result, approximately ten days would elapse between the time shipment was made from Harvey Cheese and payment was received by the same company. Under the new arrangement the National Bank of Harvey agreed to lend money to Don Pauly Cheese in exchange for promissory notes. Proceeds from the notes would be deposited directly, at the time of shipment, in the checking account of Harvey Cheese for payment of cheese shipped to Don Pauly Cheese. Don Pauly Cheese was to pay off the notes after it received payment for the cheese from its customers.

The first note issued under the new arrangement, in the amount of $25,000 was dated 5 June 1975 and had a due date of 1 August 1975. This note was paid for with a check dated 23 July 1975 carrying the notation, "REPAYMENT OF NOTE NO. 1." Another $25,000 promissory note dated 25 July 1975 and having a due date of 1 September 1975 was paid for by check dated 26 September 1975 carrying the following notation:

"principal 25,000.00 note

int. 388.36"

Both of the $25,000 notes were stamped "PAID" by the National Bank of Harvey and returned to Don Pauly Cheese.

The note in issue in this case, dated 27 June 1975, was in the amount of $30,000 and had a due date of 1 August 1975. The proceeds from this note as well as the two $25,000 notes were deposited directly into the Harvey Cheese checking account by the National Bank of Harvey at the direction of Pauly.

It should be noted at this point that the checking account maintained by Harvey Cheese with the National Bank of Harvey was the only relationship between the two businesses. Harvey Cheese was not indebted to the bank. The officers, shareholders and directors of the bank did not serve in a like capacity with Harvey Cheese at this time. Lewis, the bank president, testified the bank officers' involvement in the affairs of Harvey Cheese was only in the interest of the community rather than in any special interest of the bank.

On 26 July 1975 a check was drawn by Don Pauly Cheese on its account in Manitowoc, Wisconsin, in the amount of $30,000, naming the National Bank of Harvey as payee. This check, a copy of which appears below, was subsequently mailed to the National Bank of Harvey.

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

On 29 July 1975, while the $30,000 check was in transit and one day before it was received by the National Bank of Harvey, a conference call was conducted between two representatives of the bank, two representatives of the National Farmers Organization (NFO), and Pauly. The conference call was initiated by the NFO to discuss their accounts receivable with Harvey Cheese. The NFO was in urgent need of money to pay its producers for milk delivered to, but not paid for by Harvey Cheese.

At trial, the two representatives of the bank, and one of the representatives of NFO who participated in the conference call, testified that during the phone conversation Pauly stated, in effect, that a check was on its way to the National Bank of Harvey for payment of the $30,000 note but that the proceeds from the check should instead be deposited in the Harvey Cheese checking account for use in making payment to the NFO. Pauly testified that he did not authorize the deposit of the check in the Harvey Cheese bank account but rather stated, in effect, that a check was on its way to the bank in payment of the note, and that the bank could make its own loan to Harvey Cheese if it so desired. ¹

On 30 July 1975, the day following the conference call, the National Bank of Harvey received the $30,000 check and deposited the funds therefrom into the Harvey Cheese checking account. The bank thereafter requested payment on the $30,000 note, which request was denied by Don Pauly Cheese on the basis that payment, in the form of the $30,000 check, had been made. The suit before us followed.

The parties set forth the following issues on appeal:

(1) Was parol evidence varying the terms of the written notation contained on the check properly admitted;

(2) Are oral orders sufficient to vary the tender of a check.

Pauly contended a check is a contract in writing by which the drawer contracts with the payee that the bank, upon which the check is drawn, will pay to the payee or his order, the amount designated upon presentation. He asserted that the notation on the $30,000 check constituted a part of the written contract between the parties.

In support of his argument, Pauly cited the Texas decision of Coastal Plains Development Corporation v. Tech-Con Corporation, 531 S.W.2d 143 (Tex.App.1975) which stated:

"Tech-Con accepted the $6,300.00 check as written; it endorsed the check and retained the proceeds. Having accepted the benefits of such payment, it is deemed to have agreed to any conditions which are clearly shown by the draft to have constituted part of the agreement between the parties. Tech-Con was not authorized, without Coastal Plains' approval, to allocate such payment to any purpose other than that which may have been designated on the face of the draft. Stetson-Preston Co. v. H. S. Dodson & Co., 103 S.W. 685 (Tex.Civ.App., 1907, no writ). If the written terms of the draft expressly designated the purpose for which the payment was made, such designation, upon acceptance of the draft, became an integral part of the parties' agreement. Peavy-Moore Lumber Co., Inc. v. First Nat. Bank of Beaumont, 133 Tex. 467, 128 S.W.2d 1158 (Tex.Com.App., 1939); 11 Am.Jur.2d, § 69, p. 93." 531 S.W.2d at 146.

See also, Miller v. Draper, 34 Ohio Misc. 11, 63 Ohio Op.2d 64, 295 N.E.2d 438 (1972); Fleming v. Becker, 14 Ariz.App. 347, 483 P.2d 579 (1971); Aaronson v. McGowan, 181 Miss. 642, 180 So. 738 (1938); Anderson, 2 Uniform Commercial Code § 3-104:12.

Pauly argued the notation on the check was a contract completely unambiguous on its face as to its terms, and therefore could not be altered by parol evidence. ² Section 9-06-07, NDCC, states:

"The execution of a contract in writing, whether the law requires it to be written or not, supersedes all the oral negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument."

In this instance the check was made out before, and was in transit at the time, the telephone discussion took place which may not make the above statute fully applicable. But, be that as it may, Pauly contended, in effect, the parol evidence rule prevents the admission of parol evidence to show the parties intended the payment of the check to be for purposes other than that expressly designated by the face of the instrument. Thus, extrinsic evidence that the parties intended the proceeds be applied for some other purpose would be inadmissible, and even if admitted, would constitute no basis for the trial court's...