As previously noted, there are
no specific consequences stated in the Uniform Commercial Code for a failure to
act in good faith. Further the comments are explicit that the failure to act in
good faith does not create an independent cause of action. Rather, the
comments tell us that the failure to act in good faith is a breach of contract
and may impair certain remedies of any party who acts in bad faith.
It is my belief that someone
engaging in dishonesty or in violation of reasonable commercial standards of
fair dealing must be held accountable, particularly, when the conduct in
question rises (or sinks—depending on how one views this)--to a level that
merits independent consequences. Fortunately, a number of courts have
agreed with this assessment, and have provided an amazing leverage point in bad
faith commercial transactions, by finding intolerable levels of bad faith to
give rise to punitive damages. Before discussing one of these cases, I
want to emphasize the obvious—he or she who is able to get a claim for punitive
damages past the motion stage has dramatically changed the dynamics of any
litigation, for it is no longer a question of a calculable downside in losing.
The potential impact of losing when punitive damages are in play creates a
whole new ballgame.
I experienced this reality in a
letter of credit case many years ago. The bank involved had colluded with
its client so that the latter got an injunction against the bank’s paying under
the letter of credit. There were no grounds for that injunction; it was
simply a ploy to avoid payment under the letter of credit, which was being used
in connection with a large construction project in Orlando Florida. This
conduct was so egregious, and so undermined the integrity of the letter of
credit, that I plead punitive damages, which had not previously been awarded in
a letter of credit case. After argument on the matter, the Judge
understood the importance of letters of credit as a financing mechanism, and
allowed the motion for punitive damages to stay in the case. The result was a
settlement for the full amount of the letter of credit, less one hundred
dollars. Opposing counsel admitted that it was the punitive claim which
induced settlement.
As stated, at the time of the
foregoing lawsuit there was no case law to draw from under the UCC to support
the punitive damage claim. That no longer is the case, as there are now
several cases decided under the Uniform Commercial Code which have granted
punitive damages for a lack of good faith. They are in the minority as
most of the cases talking about damages for lack of good faith echo the
comments quoted above—no cause of action for a breach of the duty of good faith.
However, these cases offer
support for the concept of punitive damages for a lack of good faith.
Further, as noted in a previous post, the uniformity provision gives these
cases impact in all jurisdictions. I believe those courts who find punitive damages
allowable have reached the correct result. The fact that these cases
exist allows me to illustrate a point. There is one of two likely reasons
a court reaches a result with such far reaching implications.
First, and less likely, the Judge is UCC expert and understands the overall
purposes and flow of the Code and what it takes to make it work. Second,
the more likely, is that the attorney for the plaintiff presented compelling
arguments to the Court, which were based upon a thorough understanding of the
Uniform Commercial Code, and which allowed the Court to see the big
picture. Which takes me back to the concept of investing in your brain:
the level of understanding necessary to operate at the highest level is
available to anyone willing to put in the work.
In First Nat. Bank in Libby
v. Twombly, 213 Mont. 66, 689 P.2d 1226 (1984) there was a very
small promissory note involved--$4,000 which was owed to the bank by the
Twombly’s. Ultimately, the bank accelerated payment on the note, and the
amount owed to the bank was off set against Twombly’s account with no effort by
the bank to contact Twombly. Bank personnel disregarded Twombly’s verbal
agreement with another bank officer regarding payment on the note. Twombly’s
punitive damage claim was dismissed in the trial court because, according to
that court, punitive damages cannot be awarded in a breach of contract case.
The Montana Supreme Court quoted
the general obligation of good faith under Section 1-203 [now Section 1-304].
The court further noted the good faith obligation regarding acceleration under
Section 1-208 [now Section 1-309]. In reversing the trial court’s
dismissal of the punitive damage claim, the Court stated:
"When the duty to exercise good faith
is imposed by law rather than the contract itself, as in Gates v. Life of Montana Ins. Co.,
205 Mont. 304, 668 P.2d 213
(1983) the breach
of that duty is tortious. Therefore, punitive damages are recoverable if the Bank's conduct is sufficiently
culpable." First National Bank
at 1230.
There are few things that will
change the dynamics of a lawsuit like a punitive damage claim which gets past
the motion stage. The level of uncertainty dramatically rises since the
downside is no longer calculable. The rule of reason tends to envelop the
situation and a favorable settlement much easier to obtain.
I emphasize this is not about
making up bad faith claims. It is about addressing them forcefully when
your client has been mistreated and using the full extent of the law to achieve
a just result for your client.
Note to our loyal readers and
followers worldwide:
There will be no post on May 7, 2015. I have been asked to render a UCC
opinion in a very short amount of time on a case, which will require a total
commitment through the end of the week. I invite our viewers to browse all of
the creative Instagrams by Conner Kempe, sure to bring a smile even with no
blog to read.
For more information on the author and book,
please visit ucc-madeeasy.com.
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