Scott Stainless Steel, Inc. v. NBD Chicago Bank

• Decision Date: 07 September 1993
• Docket Number: No. 1-92-0196,1-92-0196
• Citation: 253 Ill.App.3d 256,625 N.E.2d 293,192 Ill.Dec. 333
• Parties: , 192 Ill.Dec. 333, 24 UCC Rep.Serv.2d 609 SCOTT STAINLESS STEEL, INC., an Illinois Corporation, Plaintiff-Appellant, v. NBD CHICAGO BANK, an Illinois Banking Corporation, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 293

625 N.E.2d 293

253 Ill.App.3d 256, 192 Ill.Dec. 333,

24 UCC Rep.Serv.2d 609

SCOTT STAINLESS STEEL, INC., an Illinois Corporation Plaintiff-Appellant, v. NBD CHICAGO BANK, an Illinois Banking Corporation, Defendant-Appellee.

No. 1-92-0196.

Appellate Court of Illinois First District, First Division.

Sept. 7, 1993.

Office of Alan O. Amos & Associates, P.C., Chicago (Marilyn Martin, of counsel), for plaintiff-appellant.

Office of Schopf & Weiss, Peter V. Baugher, Chicago (Bradley P. Nelson, of counsel), for defendant-appellee.

Presiding Justice MANNING delivered the opinion of the court:

This is an appeal by plaintiff Scott Stainless Steel corporation from a judgment of the circuit court granting summary judgment in favor of defendant NBD Bank Chicago and against plaintiff. Plaintiff sought to recover $18,223.54 from defendant based on the theory that the bank had wrongfully set-off its account in that amount. For the following reasons we affirm:

The record reveals that about April 11, 1989 plaintiff, Scott Stainless Steel Corporation (Scott), was a steel distributor. Larry Scott, an attorney, was a shareholder and also vice president of Plaintiff. Plaintiff maintained its corporate bank account with NBD Chicago Bank. NBD Chicago is owned by NBD Illinois, which is in turn owned by NBD Bancorp. NBD Bancorp also owns NBD Detroit.

On April 11, 1989 plaintiff received an order from Natco, one of its customers, for 20,000 pounds of steel. Natco maintained a running account with plaintiff, but agreed to pay in advance of shipment for its order placed April 11, 1989. On May 3, 1989 Natco gave plaintiff a check for $24,300 to pay for the order. This check numbered 1885 was drawn on NBD Detroit, which was Natco's bank. On May 4, 1989 Scott presented the check for payment at a branch office of NBD Detroit and was advised that the check would not be honored. The following day Scott presented the check again, but it was not honored for the second time.

On May 8, 1989, Scott contacted his bank, defendant NBD Chicago, and was advised to deposit the check for collection, which he did. On May 16, 1989, Scott spoke with Natco's president who advised him that there were sufficient funds in the account to cover the check. On that same date Natco placed a stop payment order on that check. Natco also wired an amount of at least $24,300 to NBD Detroit for deposit into its checking account, but because of the late arrival of the wire transfer the monies were not deposited on that date.

On May 18, 1989, NBD Detroit consulted with its legal department and determined that the stop payment order from Natco was received within time for the bank to act on it, and the bank decided to honor the stop payment request. On May 19, 1989, NBD Detroit notified Scott that it would honor Natco's stop payment order. At Scott's request, the president of defendant entered into negotiations with NBD Detroit seeking to have NBD Detroit deny the stop payment and credit Scott's account.

NBD Detroit and defendant entered into an agreement whereby NBD Detroit would honor the check if defendant agreed to indemnify NBD Detroit if Natco challenged the payment and NBD Detroit asked for the return of the money. This agreement between NBD Detroit and NBD Chicago was an oral agreement. Defendant then advised plaintiff that as a condition precedent for payment of the check, plaintiff would have to enter into an indemnification agreement with it. On May 22, 1989, plaintiff drafted an indemnification agreement and sent it to defendant. The agreement stated:

"Scott Stainless Steel, Inc. fully indemnifies NBD Chicago against any and all loss NBD Chicago may incur by reason of that certain check No. 1885 from Natco Alloys Inc. in the amount of twenty-four thousand, three hundred dollars ($24,300) drawn on the NBD Bank in Taylor, Michigan, account # 53906-64. In the event said check is ever challenged and NBD Chicago must pay any amount to NBD Detroit for said check, Scott Stainless Steel, Inc. will reimburse NBD Chicago for the amount it must Pay NBD Detroit."

About May 26, 1989, plaintiff's checking account with defendant was credited in the amount of $24,300. About June 22, 1989 NBD Detroit received notice from Natco's attorney that Natco was challenging the bank's payment of the $24,300 check. From June 22 through August 25, 1989, Natco continued to request that NBD Detroit return the funds to its account. After consulting with its legal staff, NBD Detroit determined that it should return some of the amount credited to plaintiff's account, and after being advised by Natco that an amount of $6,076.46 was owed to plaintiff, NBD Detroit returned $18,223.54 to Natco's account. NBD Detroit notified defendant that it had returned that amount to Natco's account and that pursuant to their oral indemnification agreement, NBD Detroit would debit defendant's account for the $18,223.54 paid out to Natco. Defendant then exercised it rights under the written indemnification agreement between defendant and plaintiff and debited plaintiff's account to recover the amount paid out to NBD Detroit.

On May 22, 1990, plaintiff filed an amended complaint alleging that defendant breached its contractual relationship with plaintiff by debiting plaintiff's account. Defendant filed an answer admitting that plaintiff had funds on deposit with the bank but denied a breach of the contractual relationship. Defendant alleged that an indemnification agreement existed between plaintiff and defendant by which it was entitled to debit plaintiff's account. Defendant also raised as affirmative defenses pursuant to the indemnification agreement it was entitled to recover the monies and that under section 4-407 of the Uniform Commercial Code (Ill.Rev.Stat.1989, ch. 26, par. 4-407) it had a right of subrogation.

On September 6, 1991, plaintiff filed a motion for summary judgment alleging that defendant could not support its affirmative defense of subrogation because no evidence had been supplied to show the threshold requirements for subrogation under the UCC and because no evidence had been introduced to show that the defendant was more than a volunteer with respect to its claim as subrogee. Plaintiff further alleged that the indemnification agreement was unenforceable under the UCC, and that it had not been given an opportunity to investigate and rebut the claims of Natco before the account was debited. On October 15, 1991, defendant filed a cross-motion for summary judgment supported by depositions of two witnesses who testified to the existence of the indemnification agreement.

On December 16, 1991, after hearing argument in support of the motions for summary judgment, the court granted defendant's motion and denied plaintiff's motion and plaintiff appealed.

On appeal plaintiff argues that the trial court erred in denying its motion for summary judgment and entering summary judgment in favor of defendant.

Plaintiff first asserts that the trial court erred in granting summary judgment in favor of defendant because the indemnification agreement violates the Uniform Commercial Code (Ill.Rev.Stat.1989, ch. 26 et seq.). Specifically plaintiff contends that the indemnity agreement did not address the requirements of Article 4. Plaintiff alleges that the effect of the indemnification agreement was to vary the language and intent of sections 1-203 and 4-103(1) of the Code.

Section 1-203 reads:

"Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement."

Section 4-103(1) states:

"The effect of the provisions of this Article may be varied by agreement except that no agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable."

Plaintiff asserts that under section 4-103(1), a bank may not attempt by contract to immunize itself from the terms of a Code provision or to disclaim responsibility for its own lack of good faith or failure to exercise ordinary care. Plaintiff maintains that any agreement that attempts altogether to release a bank from its obligations under the Code is an agreement that varies the terms of the Code. (Available Iron & Metal Co. v. First National Bank (1977), 56 Ill.App.3d 516, 13 Ill.Dec. 940, 371 N.E.2d 1032.) Plaintiff contends that the indemnity agreement in the instant case violated the intent of section 4-103(1) and was thus unenforceable.

The clear language of section 4-103(1) authorizes a bank to enter into an agreement with its customers that modifies the provisions of Article 4 of the Code. The only limitations placed upon any such agreement is that the bank may not disclaim responsibility for its own lack of good faith or failure to exercise ordinary care. Here, the indemnification agreement between plaintiff and defendant provided that defendant would be entitled to full indemnification from plaintiff for any and all loss incurred by defendant for payment of the $24,300 to Natco. The agreement provided two conditions precedent be met before the indemnification occurred: (1) that Natco challenge the payment made by NBD Detroit; and that (2) NBD Chicago pay any amount of the $24,300 to NBD Detroit.

The evidence in the record supports the fact that Natco challenged the payment that NBD Detroit made to plaintiff. Christine Rueff stated in her affidavit that on or shortly after June 22 1989, NBD Detroit received notice from Natco's attorney demanding the return of the $24,300, and threatening to sue if the funds were not immediately returned. Further, on August 25, 1989 NBD Detroit returned $18,233.54 to Natco's account and requested that NBD Chicago honor the indemnification agreement by returning that same amount to NBD...