U.S. Nat. Bank of Oregon v. Boge

• Decision Date: 25 July 1991
• Citation: 814 P.2d 1082,311 Or. 550
• Parties: , 15 UCC Rep.Serv.2d 24 UNITED STATES NATIONAL BANK OF OREGON, a national banking association, Petitioner on review, v. Neal J. BOGE, Respondent on review, Martin BOGE, Defendant, v. J.M. CROWLEY, Third-Party Defendant. CC 86-2083, CA A50913, SC S37348.
• Court: Oregon Supreme Court

Page 1082

814 P.2d 1082

311 Or. 550, 15 UCC Rep.Serv.2d 24

UNITED STATES NATIONAL

BANK OF OREGON, a national banking association, Petitioner on review, v. Neal J. BOGE, Respondent on review, Martin BOGE, Defendant, v. J.M. CROWLEY, Third-Party Defendant.

CC 86-2083, CA A50913, SC S37348.

Supreme Court of Oregon,

In Banc.

Argued and Submitted Dec. 5, 1990.

Decided July 25, 1991.

Gregory A. Chaimov, of Miller, Nash, Wiener, Hager & Carlsen, Portland, argued the cause for petitioner on review. With him on the petition was James N. Westwood, Portland.

Clayton C. Patrick, Salem, argued the cause for respondent on review. With him on the response to the petition was William D. Brandt, Salem.

John A. Bryan and James L. Murch, of Sherman, Bryan, Sherman & Murch, Salem, filed a brief on behalf of amici [311 Or. 551-A] curiae Oregon Bankers Ass'n and American Bankers Ass'n.

Phil Goldsmith, Portland, filed a brief on behalf of amicus curiae Oregon Trial Lawyers Association.

GRABER, Justice.

This civil case involves a dispute between a bank and its borrower. We decide three questions: (1) Does the duty of good faith imposed by Article 9 of the Uniform Commercial Code (UCC), ORS chapter 79, displace the common law duty of good faith? (2) What is the standard of good faith that Article 9 of the UCC requires? (3) Was there sufficient evidence to support the verdict of the jury, which found a breach of the duty of good faith? We hold: (1) The duty of good faith imposed by Article 9 of the UCC displaces the common law duty of good faith. (2) With an exception not applicable in this case, Article 9 of the UCC requires only honesty in fact in the conduct or transaction concerned; that standard does not encompass commercial reasonableness or the broader concept of good faith under the common law. (3) There was sufficient evidence to support the jury's verdict on the claim of breach of the duty of good faith on one of the two theories presented, although the trial court's erroneous instruction on good faith requires a reversal and remand.

United States National Bank of Oregon (Bank) loaned money to Neal Boge. Bank brought this action to recover on promissory notes executed by Boge. He counterclaimed, asserting, among other things, that Bank had breached its duty to act in good faith. The jury awarded damages to Bank on its claim and greater damages to Boge on his counterclaim. The trial court entered judgment for Boge for the difference between the two amounts and for attorney fees.

Bank appealed to the Court of Appeals. Bank argued that the common law duty of good faith, which was the theory on which the trial court had instructed the jury, does not apply to transactions governed by Oregon's version of Article 9 of the UCC. Bank also argued that the trial court should have directed a verdict in its favor. The Court of Appeals disagreed with both points and affirmed the judgment. U.S. National Bank v. Boge, 102 Or.App. 262, 794 P.2d 801 (1990).

ORS 71.1030, which is a provision of the UCC, provides:

"Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions."

The Court of Appeals reasoned that ORS 71.1030 permits the application of the common law duty of good faith, because that "doctrine supplements, but is not inconsistent with the statutory standard" of good faith found in the UCC. 102 Or App at 270. The Court of Appeals also concluded that the evidence was sufficient to support the verdict in Boge's favor. 102 Or App at 267-68.

Bank petitioned for review, and we allowed the petition. We reverse the decision of the Court of Appeals and remand the case to the circuit court.

We view the evidence in the light most favorable to Boge with respect to the counterclaim, because he prevailed before the jury. Maine Bonding v. Centennial Ins. Co., 298 Or. 514, 523, 693 P.2d 1296 (1985). Boge is a dairy farmer in Tillamook County. On May 4, 1984, Bank loaned him money to buy cows from the Rileys, who also are dairy farmers. Boge granted Bank a security interest in the cows. The parties, and we, agree that the transaction between them (a "security agreement for farm loan") was a secured one that is governed by Article 9 of the UCC, ORS chapter 79. ¹

Boge failed to pay his loan when it became due. On May 12, 1986, S.E. Springer, the manager of Bank's Tillamook branch, sent Boge a 10-day demand letter. That letter included the current payoff figure for Boge's loan and a daily interest figure. When Boge did not make full payment within the 10 days, the Tillamook branch sent his loan file to the Portland branch's "Special Assets Group," which handles foreclosures.

On May 29, 1986, the Rileys tentatively agreed to buy back the cows and then resell them to Boge. The Rileys intended by that means to refinance Boge's purchase and allow him to pay his indebtedness to Bank. Boge had the right under ORS 79.5060 to "redeem the collateral by tendering fulfillment of all obligations secured by" it. Before the Rileys would refinance the cows, however, they wanted to be assured that they could obtain clear title. Boge and the Rileys went to Springer's office. Boge asked for the payoff figure on his loan and for his loan documents. Springer responded that the file was in Portland and that he could not furnish the information immediately.

In the next day or two, Bank demanded that Boge surrender the cows by June 5, 1986. On June 4, Bank's lawyer sent copies of the loan information to Boge's lawyer. Boge surrendered the cows on June 5. On June 6, the Tillamook branch sent Boge an additional set of his loan documents. The Rileys did not buy back Boge's cows, and Boge did not redeem them from Bank. Bank sold the cows at an auction in Portland on June 16. ²

At trial, Boge contended that Bank had acted in bad faith when it refused to provide him with his loan information on May 29, 1986, and instead proceeded swiftly to foreclose. Boge produced evidence that his loan information was readily available to Springer by computer on May 29. Boge also produced evidence that Springer was hostile to him and wanted to foreclose on his loan. Boge asserted that Bank's actions caused his refinancing agreement with the Rileys to fail, which, in turn, caused him to lose his dairy business.

Bank moved for a directed verdict on Boge's claim for breach of the duty of good faith, arguing that there was no evidence to support a verdict for Boge. The trial court denied the motion. Bank renewed its theory in a motion for judgment notwithstanding the verdict. The trial court also denied that motion.

Having denied Bank's motion for a directed verdict, the trial court gave this instruction on good faith:

"Now, the Defendant Neal Boge has alleged that U.S. Bank breached the implied covenant of good faith on or about May 30th, 1986, the day on which Mr. Boge requested to see his loan documents. Mr. Boge has alleged that the bank officers did not act in good faith on that day and that the bank's lack of good faith prevented Mr. Boge from obtaining financing to pay off his debt to the bank. If Defendant Neal Boge proves that the officers of U.S. Bank did not act in good faith toward him on the day that he requested to see his loan documents, then before Mr. Boge can recover any damages, he must prove that the bank's alleged bad faith was the cause for his failure to fully pay off his debt to the bank and to retain or gain possession of the cows. Even if the bank officers acted in bad faith, Mr. Boge is entitled to damages on his claim only if he proves that he would have paid the full amount of the debt by June 16th, 1986, the date of the sale of the cows.

"Now I further instruct you that there is an obligation of good faith in the performance and enforcement of every contract. The purpose of the good faith doctrine is to prohibit improper behavior in the performance and enforcement of contracts. The phrase "good faith" is used in a variety of contexts and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. Subterfuges and evasions violate the obligation of good faith and performance even though the actor believes his conduct to be justified, but the obligation goes further. Bad faith may be overt or may consist of inaction and fair dealing may require more than honesty. When one party to a contract is given discretion in the performance of some aspect of the contract, the parties ordinarily contemplate that the discretion will be exercised for particular purposes. If the discretion is exercised for purposes not contemplated by the parties, the party exercising discretion has performed in bad faith." (Emphasis added.)

The trial court derived that instruction from Restatement (Second) of Contracts § 205 comment d (1979), which this court cited with approval in Best v. U.S. National Bank, 303 Or. 557, 563, 739 P.2d 554 (1987).

Bank excepted on the grounds that the UCC provides the exclusive standard of good faith for this transaction and that the instruction went beyond the UCC standard. Bank also requested an instruction, which the trial court rejected, that good faith means honesty in fact.

We first consider whether the UCC's provisions concerning good faith in a secured transaction displace the common law's implied duty of good faith, which is reflected in the trial court's instruction. ORS 71.2030 provides: "Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance or enforcement." ORS 71.2010 provides in part:

"Subject to additional...