Reid v. Key Bank of Southern Maine, Inc., s. 86-1820
| Decision Date | 10 June 1987 |
| Docket Number | 86-1864,Nos. 86-1820,s. 86-1820 |
| Parties | 3 UCC Rep.Serv.2d 1665 Paul REID and Mary J. Reid, Plaintiffs, Appellants, v. KEY BANK OF SOUTHERN MAINE, INC., Defendant, Appellee. Paul REID and Mary J. Reid, Plaintiffs, Appellees, v. KEY BANK OF SOUTHERN MAINE, INC., Defendant, Appellant. |
| Court | U.S. Court of Appeals — First Circuit |
John S. Campbell with whom Richard E. Poulos and Daniel G. Lilley, Portland, Me., were on brief, for plaintiffs, appellants.
Jules L. Mogul with whom Edward W. Gould and Gross, Minsky, Mogul & Singal, Bangor, Me., were on brief, for defendant, appellee.
Before CAMPBELL, Chief Judge, BOWNES and SELYA, Circuit Judges.
Plaintiffs Paul and Mary J. Reid brought a seventeen-count action in United States District Court for the District of Maine against Key Bank of Southern Maine, Inc., defendant. Plaintiffs alleged various federal and state claims resulting from the actions of Depositors Trust Co. of Southern Maine (Depositors), Key Bank's predecessor in interest. The suit grew out of the circumstances surrounding the termination by Depositors of plaintiffs' credit arrangement with it. A jury trial resulted in a verdict for plaintiffs on one of the counts and an award of damages. Both parties have appealed.
In mid-1975, Paul Reid approached Depositors to obtain financing for the establishment of a painting business. From 1976 through 1979, Depositors granted Reid a series of loans which Reid used for the operation of his business, Pro Paint and Decorating. During this period, Peter H. Traill was the loan officer responsible for Reid's accounts, Marco F. DeSalle was the president of the bank, and Henry Lawson was, for a time, an assistant vice-president.
On March 2, 1979, Reid and Depositors entered into a $25,000 commercial credit agreement. The agreement was variously explained at trial as a "line of credit" and an "incomplete loan." However defined, it was the largest amount of credit Depositors had yet extended to Reid. Reid sought the credit primarily to finance work he was performing at the Bucksport Housing Project for Nickerson & O'Day, Inc., a general contractor.
In mid-May, 1979, Traill telephoned Reid and informed him that Depositors would not grant him any further advances under the March agreement. Reid had thought at the time that this halt of further advances might only be temporary. Defendant claimed that Traill sent Reid a follow-up letter on May 18, 1979, stating that Depositors would no longer honor overdrafts on Reid's accounts and suggesting that Reid restructure his debts with another lender. Reid denied receiving the letter and alleged that it was never, in fact, sent to him.
On May 29, 1979, Nickerson & O'Day sent a check to Depositors as payment for Reid's work at the Bucksport Housing Project. The check was for $6,507.90. It was made out to Depositors and to Pro Paint pursuant to an agreement between Depositors and Reid whereby Reid assigned his accounts receivable to Depositors as security for the March loan. Depositors credited $2,500 to the account of Pro Paint and applied the remaining $4,007.90 to offset part of the outstanding balance on Reid's March loan. Reid claimed that Depositors undertook this action without his authorization.
Reid claimed that another check was also inappropriately handled by Depositors. He testified that on June 8, 1979, he gave Traill a check for an amount somewhere between eleven and fifteen thousand dollars. Reid contended that this check represented the proceeds for work he performed at Brunswick Naval Air Station. He alleged that Depositors converted the check and used it to offset part of the balance on the March loan. Defendant strongly contested this claim and implied at trial that the check in question existed only in Reid's imagination.
On September 20, 1979, Reid received a past-due notice on the March loan. The notice requested payment of $694.84 in interest and stated that the payment had been due on September 5, 1979. Reid testified that this was the first notice he had received concerning the March loan.
On November 5, 1979, Depositors repossessed Reid's personal automobile and one of his vans. Reid discovered one of the vehicles in a lot and attempted to drive it away. He testified that he did not know it had been repossessed and thought it had been stolen. On a complaint by Lawson, Reid was arrested in connection with this incident and was placed for a time in jail.
Reid's business collapsed and he lost his four vehicles and his home. On November 7, 1979, Reid filed a Chapter 13 bankruptcy proceeding which was converted to a Chapter 11 proceeding in January, 1980. Mrs. Reid suffered emotional problems and drug dependency. The couple separated for a period of a year and a half.
The Reids, who are black, claimed that Depositors acted in bad faith to limit and then terminate their credit. They also claimed that Depositors' actions were motivated by racial prejudice. Defendant claimed that Depositors acted in good faith to secure its financial interests when it learned of Reid's personal difficulties and mismanagement of his business; it denied that its actions were racially motivated.
At trial, the district court directed a verdict for defendant on plaintiffs' claims for violations of the Fair Credit Reporting Act and for breach of fiduciary duties. Plaintiffs withdrew their claims for interference with contractual relations and wrongful dishonoring of checks. The jury found for defendant on plaintiffs' claims for violation of the express terms of the credit agreement, racial discrimination, two counts for infliction of emotional distress, and failure to comply with Article 9 of the Uniform Commercial Code. The jury found for plaintiffs on their pendent state claim for breach of the March loan agreement based on violation of an implied covenant of good faith and fair dealing. It awarded plaintiffs $100,000 in compensatory and $500,000 in exemplary damages; the exemplary damages award was struck by the court. Both parties have appealed. In Part II, we address defendant's arguments on appeal; in Parts III-VI we address those of plaintiffs.
Plaintiffs' recovery in contract was based on the theory that when Depositors, in May 1979, and thereafter, shut off Reid's credit and took steps to realize upon its collateral, it violated an implied covenant of good faith contained in the March loan agreement between plaintiffs and Depositors. The district court took as self-evident the proposition that Maine contract law required good faith performance. See generally Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369 (1980). The Uniform Commercial Code, as adopted by Maine, states: "Every contract or duty within this Title imposes an obligation of good faith in its performance or enforcement." 4 Me.Rev.Stat.Ann. tit. 11, Sec. 1-203 (1964). That this obligation carries with it a cause of action seems clear from another provision of the Code: "Any right or obligation declared by this Title is enforceable by action unless the provision declaring it specifies a different and limited effect." Id. at Sec. 1-106(2). See also Restatement (Second) of Contracts Sec. 205 (1979).
We interpret the Maine cases making reference to the general duty of good faith in light of this general acceptance of the principle. The Maine Supreme Judicial Court has explicitly recognized the U.C.C.'s "broad requirements of good faith, commercial reasonableness and fair dealing." Schiavi Mobile Homes, Inc. v. Gironda, 463 A.2d 722, 724-25 (Me.1983) (citing U.C.C. Secs. 1-203, 2-103 & 1-106, Comment 1). In addition, some aspects of the present case concern the handling of Reid's bank accounts with Depositors and would thus be governed by the standard of "good faith" and "ordinary care" under section 4-103 of the U.C.C. See C-K Enterprises v. Depositors Trust Co., 438 A.2d 262, 265 (Me.1981).
In Linscott v. State Farm Mutual Auto Ins. Co., 368 A.2d 1161 (Me.1977), the court discussed whether a duty of good faith existed between an insurer and a third-party tort claimant. The court stated that, while such a duty is "implicit" in the contract between an insurer and its insured, the essentially "adversary" relationship between an insurer and a third-party claimant precludes the finding of such an implicit duty in their dealings. Defendant would have us view the court's finding of a good faith duty between the insurer and the insured as exceptional; under defendant's interpretation, an "adversary" relationship, whether contractual or not, would have no good faith requirement.
We cannot agree with this reading of Linscott. The general principles of modern contract law, as embodied in Maine's Uniform Commercial Code and recognized in Schiavi, mandate that we interpret Linscott as finding no duty of good faith toward a third-party claimant primarily because of the absence of a contractual relationship. We view the Maine court as implicitly recognizing that contractual relationships of the present nature are governed by a requirement of good faith performance. We do not think that this duty to perform in good faith is altered merely by calling the contractual relationship "adversary."
Defendant next argues that a cause of action based on the duty is not generally accepted, even if the principle of good faith performance has been widely acknowledged. Defendant cites several cases finding no such cause of action in their jurisdictions. See, e.g., Management Assistance, Inc. v. Computer Dimensions, Inc., 546 F.Supp. 666 (N.D.Ga.1982), aff'd, 747 F.2d 708 (11th Cir.1984). These cases generally cite as their authority Chandler v. Hunter, 340 So.2d 818, 821 (Ala.App.1976), for the proposition that no jurisdiction has...
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