Swiden Appliance & Furniture, Inc. v. National Bank of South Dakota, East Branch

• Decision Date: 31 October 1984
• Docket Number: No. 14047,14047
• Citation: 357 N.W.2d 271
• Parties: 39 UCC Rep.Serv. 1739 SWIDEN APPLIANCE & FURNITURE, INC., Plaintiff and Appellant, v. NATIONAL BANK OF SOUTH DAKOTA, EAST BRANCH, Defendant and Appellee.
• Court: South Dakota Supreme Court

Page 271

357 N.W.2d 271

39 UCC Rep.Serv. 1739

SWIDEN APPLIANCE & FURNITURE, INC., Plaintiff and Appellant, v. NATIONAL BANK OF SOUTH DAKOTA, EAST BRANCH, Defendant and Appellee.

No. 14047.

Supreme Court of South Dakota.

Argued Oct. 27, 1983.

Decided Oct. 31, 1984.

John E. Burke, Sioux Falls, for plaintiff and appellant; John F. Gridley, III, Sioux Falls, on brief.

Steven W. Sanford of Cadwell, Sanford & Deibert, Sioux Falls, for defendant and appellee.

MORGAN, Justice.

This appeal is from an action brought by Swiden Appliance & Furniture, Inc. (Swiden) against National Bank of South Dakota in Sioux Falls, East Branch (Bank), on alternative counts of negligence and breach of contract. A jury returned a verdict for Bank and Swiden appeals. We affirm.

Alick Swiden is the principal owner of Swiden, a "one man operation." He has been in business and sold goods through retail installment sales contracts since 1937. Between 1937 and 1974, Swiden sold consumer paper to several different banks. In January of 1974, Swiden began selling consumer paper in the form of its retail installment sales contracts to Bank because, according to Swiden, Bank agreed to provide certain collection services. Two documents outlined the parties' relationship.

The parties initially signed a Reserve Agreement under which Bank purchased all acceptable retail installment sales contracts that Swiden offered. This agreement provided for two bookkeeping accounts which could be debited when Bank withdrew funds from Swiden's checking account to make up for payments it did not receive from Swiden's retail installment sales contract customers. When Bank purchased Swiden's contracts, it paid an amount equal to the principal due on the installment sales contract, less an amount paid into the Holdback Reserve Account, directly into Swiden's checking account. ¹ The amount paid into the Holdback Account was separately agreed to between the parties and varied on each sale. The Holdback Account provided a bad debt reserve and was debited when a customer missed a payment.

Under the Reserve Agreement, Bank also set up a Differential Reserve Account. At the time of individual sales, Bank paid a percentage of the interest, or the financing charge due on each retail installment sales contract, into Swiden's checking account and credited the Differential Reserve. When a customer paid off a contract early, the amount of the unearned interest refund was debited to this reserve account. On a monthly basis, Bank received a percentage of the interest not paid into the Differential Reserve account over the life of the contract in consideration for its purchase of the paper. Once a year, Bank was to pay Swiden the amount by which the Differential Reserve exceeded fifteen percent of the total balance outstanding on all notes.

The Reserve Agreement allowed Bank to withhold payments to Swiden from either reserve account if Swiden was in any way indebted to Bank at the time of settlement, and to apply the reserves against any debt Swiden owed Bank. Swiden also agreed that if installments on any contract sold to Bank continued in default for ninety days it would repurchase the contract for an amount equal to the unpaid balance, less any unearned discount. Under the final relevant portion of the reserve agreement, Swiden waived his right to notice of nonpayment, repossession, and all other notices to which he was entitled by law.

The relationship between Swiden and Bank was further set out in a document entitled "Dealer Guaranty of Individual Retail Installment Contract." Swiden filled out and signed a separate individual guarantee for each retail installment sales contract that he sold to Bank. Under these agreements, Swiden unconditionally guaranteed that his customer would pay "each and every installment ... when due" and in the event of default Swiden was responsible, upon Bank's demand, for payment of any amount due. Bank could re-draw upon Swiden's checking account for the amount advanced to Swiden on that particular contract and debit one of the bookkeeping accounts, the Differential Reserve Account or the Holdback Reserve Account, as provided under the initial reserve agreement in the event a customer defaulted. Swiden agreed to pay immediately upon demand and waived the right to require Bank to proceed against his customer or the merchandise. Swiden's obligation under the individual guarantees was unconditional, unqualified, and continued until the individual installment sales contract was fully paid.

Early in the Swiden-Bank relationship, in fact by November of 1974, it became apparent that the default and delinquent payment rates on Swiden installment contracts were significantly higher than the same rates on other dealer contracts Bank purchased. Bank stopped purchasing Swiden's contracts in 1978 because of the unusually high rate of default. Bank continued servicing the previously purchased contracts until the last was paid off in February of 1980. At that time, the balances in Swiden's bookkeeping accounts were applied against an unrelated loan obligation Swiden owed Bank and Swiden's bookkeeping accounts were closed.

Toward the end of the relationship, Swiden discovered that Bank had not reassigned some contracts Swiden had repurchased under the recourse provisions of the agreement. At least one had been marked paid and mailed to the retail customer by Bank. In addition, the statute of limitations had run on several contracts, precluding collection.

Swiden commenced this action against Bank for breach of contract and negligence claiming (1) that Bank had agreed to collect the contracts but had not informed him it was not doing so, and (2) that Bank had marked contracts paid and returned them to customers. Bank's answers assert the affirmative defenses of estoppel, ratification, contributory negligence, and failure to mitigate. At trial, Swiden's theory changed. At the close of Swiden's case-in-chief, the complaint was amended to conform to the proof. The amended complaint alleged that Bank breached its contracts with Swiden by failing to follow normal standards of the banking industry and that Bank negligently violated banking industry standards. Damages were alleged in the amount of $29,452. At trial, Swiden moved for directed verdict after its evidence was presented. The motion was denied and the case was submitted to the jury. A verdict was rendered for Bank. Swiden moved for judgment non obstante veredicto or, in the alternative, for a new trial. These motions were also denied and Swiden appeals from the judgment and denial of the motions.

Swiden frames the issues as follows: Is Bank liable to a seller/guarantor of a conditional sales contract for damages when Bank takes seller/guarantor's money to pay the contract under recourse and guarantee agreements, marks the contracts paid, and either sends them to the debtor or fails to reassign them to the seller/guarantor? Bank frames the issues as follows: Was the evidence introduced by Swiden and Bank such that reasonable minds could not draw differing inferences and conclusions as to whether (a) Bank breached the contract with Swiden or was culpably negligent for failure to return to Swiden certain installment sales contracts, (b) Bank's conduct was a proximate cause of damage claimed by Swiden, and (c) Swiden was contributorily negligent?

Bank's conduct is the sole issue on this appeal, in that both allegations of Swiden's amended complaint, breach of contract and negligence are based on Bank's alleged failure to follow normal accepted standards of the banking industry. We will, however, consider the allegations separately.

In support of his breach of contract argument, Swiden first cites SDCL 57A-1-205(3) ² for the proposition that only contracts formed between the parties was later supplemented and qualified through normal custom and usage in the trade and through a specific course of dealing between Swiden and Bank. The breach of contract question thus centers around the form of the contract as well as the express terms of the two agreements. The existence and scope of a trade usage or course of dealing are questions of fact to be determined by the fact finder. Superior Foods, Inc. v. Harris-Teeter Super Markets, 288 N.C. 213, 217 S.E.2d 566 (1975). The jury did not find a usage of trade that superseded the original agreement in this case. In any event, obligations created under course of dealing and usage of trade are subordinate to any terms of an express agreement with which the parties' conduct or a trade usage disagree. SDCL 57A-1-205(4); see United States v. E.W. Savage & Son, Inc., 343 F.Supp. 123 (D.S.D.1972) (decided under South Dakota law that writings control over usage of trade or course of dealings). In this case, the written contract is embodied in the Reserve Agreement and the separate dealer guarantees of individual retail installment contracts. SDCL 57A-1-205(4) provides:

(4) The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade. (Emphasis supplied.)

Under the Reserve Agreement and the individual guarantees, Swiden was "unconditionally," "absolutely," and "unqualified[ly]" obligated to pay Bank the amount of any defaulted or delinquent installments. The Reserve Agreement subordinated Swiden's right to the fund in his checking account that was related to the balance of the Reserve Accounts to Bank's right to set off for any indebtedness, direct or indirect, that Swiden owed Bank. Missed and delinquent installment payments guaranteed by Swiden under the recourse clause and indemnity clause thus became an indebtedness to Bank that could properly be offset and deducted from Swiden's accounts under the terms of the...