Bank of America, N.A. v. C.D. Smith Motor Company, Inc.

This is a contract case which, among other things, involves the interpretation of our Uniform Commercial Code, particularly Ark. Code Ann. §§ 4-1-205 and 4-2-202 (Repl. 2001), the Code's course-of-dealing provisions. We also take jurisdiction of this appeal because it requires the court's interpretation of Ark. Code Ann. § 16-64-130 (Supp. 2001), as to when punitive damages can be awarded in a contract case involving a financial institution.

Appellee C.D. Smith Motor Co., Inc. (C.D. Smith)1 was a used-car dealer in Pine Bluff, and had established a recourse-financing relationship over the years with Bank of America, N.A., and its predecessor banks.2 In the years 1996-1997, C.D. Smith sold approximately seventy percent of its cars through recourse financing, whereby it would guarantee the car purchaser's financing. About thirty to thirty-five percent of C.D. Smith's recourse financing was done through Bank of America.3 C.D. Smith sold a small percentage of its cars through non-recourse financing when a purchaser's credit was sufficient and C.D. Smith was not required to sign the note.

On November 12, 1996, C.D. Smith and the Bank signed a Recourse Chattel Paper and Security Agreement, which included a $2.3 million recourse-financing limit, which reduced an earlier limit set at $4 million. Over the years, C.D. Smith and the Bank had developed various procedures by which they carried out these recourse-financing agreements. Under one such practice, the Bank would attempt to collect on accounts that were less than sixty days delinquent, and it provided a list of those accounts to C.D. Smith, so that C.D. Smith couldassist in the efforts to collect the delinquencies. The Bank also notified C.D. Smith of any bankruptcy filings by delinquent loan-account holders, so that C.D. Smith could file a claim with the bankruptcy court.

After having signed the November 12, 1996, one-year agreement, the Bank sent a letter on February 13, 1997, advising C.D. Smith that, effective April 1, 1997, it would no longer offer recourse financing. The Bank also notified C.D. Smith that it would cease the practice of providing weekly delinquency lists, as had been done in the past. By letter dated March 7, 1997, the Bank informed C.D. Smith that the collection operations of the Bank were being moved to St. Louis, and the delinquency list accompanying the Bank's letter would be the last.

After the Bank discontinued recourse financing to C.D. Smith, C.D. Smith sized down its business and made some unsuccessful efforts to obtain recourse financing with other banks. C.D. Smith's business failed and closed in September 1997. On October 22, 1997, C.D. Smith filed suit against the Bank, asserting the Bank had breached the parties' November 12, 1996, agreement. The Bank answered, admitting liabilityfor breach of contract, but it denied having caused any damages arising from its breach. Prior to trial, on December 3, 2001, the Bank filed a motion in limine requesting the trial court to exclude all evidence pertaining to any alleged custom and usage or course of dealing between C.D. Smith and the Bank. At a hearing on December 5, 2001, the trial court ruled that the course-of-dealing evidence was relevant to determine C.D. Smith's damages and denied the Bank's pretrial motion.

The parties tried their case on December 5, 6, 7, and 8, 2001, and the jury found in C. D. Smith's favor, awarding it $1,066,000 in damages. The court fixed post-judgment interest at 6.25%, denying C.D. Smith's request that 10% interest be imposed. The trial court had earlier denied C.D. Smith's request that it be awarded punitive damages. The court concluded the matter by awarding C.D. Smith attorneys' fees in the amount of $252,605.29.

The Bank filed two post-judgment motions requesting relief from the jury award, but the court denied them. The Bank then filed a timely direct appeal raising three principal points for reversal:

(1) The trial court erred in allowing C.D. Smith to introduce parol evidence pertaining to the parties' course of dealing when considering their November 12, 1996, agreement.

(2) C.D. Smith failed to show the "tacit agreement" required for an award of consequential damages.

(3) C.D. Smith failed to show any damages were caused by the Bank's breach.

C.D. Smith filed a cross-appeal, contending the trial court erred (1) in ruling the Bank was not subject to punitive damages, and (2) in fixing post-judgment interest at 6.25% instead of 10%.

The Bank's initial argument submits several reasons why the trial court should have excluded evidence of the parties' prior course of dealings. First, the Bank contends course-of-dealing evidence was inadmissible because the parties' written agreement included an explicit merger provision. That merger clause provided as follows:

This Agreement contains all the terms of the Chattel Paper purchase agreement between the parties, and noother statement or agreement shall have any force or effect. Borrower [Smith] agrees that he is not relying on any representation or agreement regarding the purchase of Chattel Paper except those contained in this Agreement.

In support of its argument that the course-of-dealing evidence should not have been admitted, the Bank cites a court of appeals case, Hagans v. Haines, 64 Ark. App. 158, 984 S.W.2d 41 (1998), wherein that court reversed a trial court's decision to permit parol evidence regarding an oral rental agreement, even though the parties' written rental agreement contained a merger clause. That clause provided that the written agreement contained the entire understanding and agreement between the parties, and the written agreement superceded all prior or contemporaneous agreements, representations, and understanding, and no oral representation or statement shall be considered a part of the written agreement.

Despite the Bank's reliance on Hagans, that case offers little help in the instant case because that decision did not involve the Uniform Commercial Code. Here, C.D. Smith and theBank executed the November 12, 1996, agreement captioned "Recourse Chattel Paper and Security Agreement," whereby the Bank retained security interests governed by the Code. Under the Code, a writing intended to be the parties' final expression of their agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement, but "may be explained or supplemented by course of dealing." See § 4-2-202(a) (emphasis added). Ark. Code Ann. § 4-1-205 (Repl. 2001), in relevant part, defines course of dealing as follows:

(1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

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(3) A course of dealing between parties . . . give[s] particular meaning to and supplement[s] or qualif[ies] terms of an agreement.

(4) The express terms of an agreement and an applicable course of dealing or usage of trade shallbe 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[.]

(Emphasis added.)

Citing Precision Steel Warehouse, Inc. v. Anderson-Martin Machine Co., 313 Ark. 258, 854 S.W.2d 321 (1993), the Bank urges that, as long as the parties' November 12, 1996, agreement was unambiguous, any evidence related to course of dealing is irrelevant and, therefore, inadmissible. The Bank further submits that the rule precluding course-of-dealing evidence to interpret an unambiguous contract is one aspect of the parol-evidence rule, which provides that "a written contract merges, and thereby extinguishes, all prior and contemporaneous negotiations, understandings, and verbal agreements on the same subject." See Ultracuts, Ltd. v. Wal-Mart Stores, Inc., 343 Ark. 224, 33 S.W.3d 128 (2000). Additionally, the Bank argues that C.D. Smith admitted by stipulation that the course-of-dealing evidence was not intended to interpret unambiguous terms contained in their agreement, and since such parol evidence does not interpret anexisting word or term in the agreement, it fails to qualify as a "course of dealing." On this point, however, we quickly note that, although C.D. Smith stipulated that the parties' collection practices were not contained in their contract, it did not concede the Bank did not have the obligation to provide the delinquency lists under a "course of dealing." Finally on this point, the Bank, relying on § 4-2-202(a) and (b), submits that, while the parties' agreement may be explained or supplemented by course of dealing and evidence of consistent additional terms, such evidence is inadmissible if the court finds the parties intended the writing to be a complete and exclusive statement of the terms of their agreement. The Bank concludes that the merger clause clearly reflects the parties' intention at that time to have the written agreement serve as the complete and exclusive statement. We must disagree.

We first point out that, in arguing that course-of-dealing evidence may not be used to interpret an unambiguous agreement which has a merger clause, the Bank relies on the Ultracuts and Hagans cases. However, both cases are non-Uniform Commercial Code cases and did not involve or discuss parol andcourse-of-dealing evidence, which may be allowed under circumstances described by the Code in §§ 4-1-205 and 4-2-202.

In their treatise on the Uniform Commercial Code, Professors James J. White and Robert S. Summers considered merger clauses and the parol-evidence rule by reviewing the Code language contained in § 2-202, and concluded such statutory language does not bar all evidence extrinsic to a writing already in evidence. 1 White & Summers, Uniform Commercial Code § 2-12, at 104 (4th ed. 1995). For example, a court may decide that the writing is a final written expression of some terms, but not a "complete and exclusive" statement of all terms, and admit evidence of "consistent additional terms." Id. Similarly, our court has stated that a course of dealing that explains or supplements a contract is competent evidence of the parties' intent and can become a part of a contract. Precision Steel Warehouse, 313 Ark. at 266 (citing § 4-2-202(a)).

In the instant case, we conclude that the trial court did not err in finding that the parties' November 12, 1996, agreement and its merger clause did not preclude course-of-dealing evidence, because the collection practices theyadopted did not contradict the terms of the parties' agreement; rather, their collection practice merely supplemented their agreement. In other words, the Bank's provision of the delinquency lists to C.D. Smith was such a well-established "sequence of previous conduct between the parties" that it could "fairly be regarded as establishing a common base of understanding for interpreting their expressions and other conduct." See § 4-1-205(1).

The record reflects that Richard Wilson, C.D. Smith's son-in-law, testified that he was C.D. Smith's collection agent, and that he had been working with the Bank on collections since 1977. Wilson further testified that he had received a letter from Dwayne Johnson, the Bank's vice president of commercial lending, saying that the Bank would not provide any more delinquency lists as of April 1997.

C.D. Smith clearly showed that it and the Bank had been engaging in these collection practices for twenty years, and C.D. Smith relied on these collection practices as the basis for keeping its accounts and collections current. This practice was not inconsistent with the contract. Indeed, the parties' engaging in this practice furthered the purpose ofthe parties' agreement. Under the terms of the agreement, C.D. Smith "unconditionally guarantee[d] the payment in full and performance of all obligations of each of the Account Debtors4 under the Chattel Paper." The Agreement further provided the following:

Upon any event of default under the Chattel Paper by the Account Debtor which is not cured within ninety (90) days or if the Account Debtor shall fail to make on the scheduled due date the installment payments due under the Chattel Paper on three consecutive months even if such default is cured within ninety (90) days, Borrower [C.D. Smith] shall, within five (5) days of demand by Bank, pay to Bank the unpaid balance owing on the Chattel Paper as of the date Borrower repurchases it from Bank (the "Repurchase Price").

The Bank's practice of providing its delinquency reports to C.D. Smith enabled Smith to "get on top of" its collections more efficiently, which in turn facilitated Smith's ability toperform its duties under the contract. We hold the trial court did not err in determining that this twenty-year-long "sequence of previous conduct" could "fairly . . . be regarded as establishing a common basis of understanding" between Smith and the Bank, and therefore the court did not err in admitting evidence of this course of dealing. Although the Bank also argues that such evidence was highly prejudicial and confusing to the jury, we note the obvious, that any competent evidence tending to prove the Bank's actions had breached the parties' agreement and caused C.D. Smith damages, would be prejudicial. However, we cannot agree that the trial court abused its discretion in determining such course-of-dealing evidence was more probative than prejudicial.

The Bank's next point for reversal is that C.D. Smith's damages were all consequential, but Smith failed to offer proof supporting such damages. The Bank claims -- and C.D. Smith does not dispute -- that all damages awarded in this case were consequential. Consequential damages are those damages that do not flow directly and immediately from the breach, but only from some of the consequences or results of the breach. See Dawson v. Temps Plus, Inc., 337 Ark. 247, 987S.W.2d 722 (1999). Here, the damages received by C. D. Smith consist of $1.066 million for its lost profits or for the loss of its business. The parties agree that both forms of damages are consequential in nature, and any such damages would have been an indirect consequence of the Bank's termination of the parties' agreement and C.D. Smith's loss of a source of financing. See Smith v. Walt Bennett Ford, Inc., 314 Ark. 591, 864 S.W.2d 817 (1993) (holding that lost profits are well recognized as a type of consequential damages).

The Bank first cites Morrow v. First National Bank, 261 Ark. 568, 550 S.W.2d 429 (1977), where this court, relying on Hooks Smelting Co. v. Planters Compress Co., 72 Ark. 275, 79 S.W. 1052 (1904), noted it had adopted what is known as the "tacit-agreement test" for the recovery of consequential damages for a breach of contract. By that two-prong test, the plaintiff must prove more than the defendant's mere knowledge that a breach of contract will entail special damages to the plaintiff; it must also appear that the defendant at least tacitly agreed to assume responsibility. Id. In discussing the rationale of the tacit-agreement test, the Morrow courtrelied heavily on the Hooks Smelting decision, which held as follows:

It seems then that mere notice is not always sufficient to impose on the party who breaks a contract damages arising by reason of special circumstances, and the reason why this is so was referred to in a recent decision by the supreme court of the United States. In that case Mr. Justice Holmes, who delivered the opinion of the court, after remarking that one who makes a contract usually contemplates performance, not a breach, of his contract, said: "The extent of liability in such cases is likely to be within his contemplation, and whether it is or not, should be worked out on terms which it fairly may be presumed he would have assented to if they had been presented to his mind."

Globe Refining Co. v. Landa Oil Co., 190 U.S. 540 (1903).

Now, where the damages arise from special circumstances, and are so large as to be out of proportion to the consideration agreed to be paid forthe services to be rendered under the contract, it raises a doubt at once as to whether the party would have assented to such a liability had it been called to his attention at the making of the contract unless the consideration to be paid was also raised so as to correspond in some respect to the liability assumed. To make him liable for the special damages in such a case, there must not only be knowledge of the special circumstances, but such knowledge "must be brought home to the party sought to be charged under such circumstances that he must know that the person he contracts with reasonably believes that he accepts the contract with the special condition attached to it." In other words, where there is no express contract to pay such special damages, the facts and circumstances in proof must be such as to make it reasonable for the judge or jury trying the case to believe that the party at the time of the contract tacitly consented to be bound to more than ordinary damages in case of default on his part. [Citations omitted.]

Hooks Smelting, 72 Ark. at 286-87 (emphasis added).

In Hooks Smelting, the court reversed an award of damages to a cotton compress company alleged to have arisen out of the smelting company's failure to properly manufacture an engine part; the compress company had successfully argued that the smelting company's mistakes had caused the compress company to have to pay wages during a time when the compressing machine was not in working order, among other consequential damages. The court held that there had been no facts presented that would have demonstrated that the smelting company was aware of the special circumstances posed by the compress company, and there was nothing to prove that the smelter knew or should have known that, in the event it failed to carry out the contract, the compress company would reasonably expect it to make good on the special loss sustained.

Likewise, in Morrow, supra, this court affirmed a summary judgment in favor of a bank. Appellant Morrow had contacted the bank about renting a safety deposit box in order to securely house his extensive and valuable coin collection. Morrow testified that when he agreed to rent the boxes in June of 1971, he had explicitly informed the bank that he neededthe boxes by September 1, when his teenage son would leave for college. One or two bank employees promised to notify Morrow when the boxes became available. On September 4, someone broke into Morrow's house and stole a portion of his coin collection valuing $32,155.17. Morrow subsequently found out that the boxes had become available on August 30, but the bank employees "just didn't have time" to notify him.

Morrow sued the bank to recover the value of the stolen coins, alleging that the bank had failed to notify him when the boxes were ready. The trial court granted the bank's motion for summary judgment, and this court affirmed, concluding that there had been no proof to support a finding that the bank, in return for box rentals totaling $75, had effectively agreed to issue a burglary insurance policy to Morrow. "The bank's bare promise to notify the plaintiffs as soon as the boxes were available did not amount to a tacit agreement that the bank, for no consideration in addition to its regular rental for the boxes, would be liable for as much as $32,000 if the promised notice was not given." Morrow, 261 Ark. at 572.

Bank of America raises the same argument here, asserting that there was no testimony or evidence that it was made aware of any special damages -- such as going out of business --that would have resulted from a breach of the Agreement, nor was there any evidence that the Bank tacitly agreed to be liable for such consequential damages.

C.D. Smith counters the Bank's position and submits that Smith did present evidence that, under the facts and circumstances of this case, made it reasonable for the jury trying this dispute to believe that the Bank, at the time of their contract, tacitly consented to be bound to more than ordinary damages in case of a default on the Bank's part. C.D. Smith testified that, prior to the new November 12, 1996, agreement, Smith's recourse-financing limit was reduced by the Bank from $4 million to $2.3 million. In that agreement, the Bank also requested that C.D. Smith pay a 15% down payment, which Smith negotiated down to 10%. These new requirements gave Smith some serious concerns.

At trial, C.D. Smith was asked if he recalled what occurred on the day the Bank's vice president of commercial lending, Dwayne Johnson, brought the Bank's agreement forSmith's signature. Smith said that he signed the November 12, 1996, contract, and told Johnson, "If you don't honor that contract, I am going to hold the Bank responsible." Moreover, the Bank's president, David Moore, testified that he "believed Smith may have told Dwayne Johnson, upon signing the November 12, 1996, agreement, that [Smith] would look to the Bank for compensation if his business was destroyed." (Emphasis added.) Cf. Sager v. Jung & Sons Co., 143 Ark. 506, 220 S.W.801 (1920) (holding that evidence was sufficient to show that, at the time the parties entered into the contract, they contemplated that, unless a car load of coal was delivered by Jung & Sons, Sager would lose his rice crop for the season and thereby sustain large damages; therefore, this court concluded that Jung & Sons had consented to be bound for the special damages that would result to Sager as a result of Jung & Sons' failure to comply with the terms of the contract).

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