Check Reporting Services, Inc v. Michigan National Bank-Lansing

Citations: 478 N.W.2d 893; 191 Mich. App. 614Docket: Docket 115949

Court: Michigan Court of Appeals; October 22, 1991; Michigan; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Check Reporting Services, Inc. (CRS) appealed a circuit court order that granted Michigan National Bank-Lansing (MNB) summary disposition and dismissed CRS's complaint. MNB had provided CRS with a payable through draft agreement to facilitate check processing, where CRS purchased consumer checks from merchants, allowing those merchants to draw discounted amounts from a draft account. Due to delays in check processing, the check purchase account often showed a negative float, prompting MNB to extend an unsecured line of credit starting at $50,000 in June 1984, later increased to $300,000, to cover potential overdrafts. A security interest was granted by CRS over its accounts and assets, with specific conditions outlined for default and remedies available to MNB. Despite CRS's significant business growth in 1985, which created a potential negative float of $1 million to $1.5 million, the court affirmed the dismissal of CRS's complaint while also addressing MNB's cross-appeal regarding costs and sanctions.

CRS acknowledged that by October 1985, its check purchase account frequently experienced negative balances and overdrafts, despite having a fully extended credit line. CRS was aware of MNB's discomfort regarding its financial management, particularly its failure to accurately track daily net positions. A meeting on October 23, 1985, addressed MNB's concerns, leading to a demand that CRS halt signing new customers until it resolved its overdraft issues. Throughout November and December 1985, CRS' account was overdrawn thirteen times, with additional overdrafts occurring into January 1986.

In a January 17, 1986 meeting, MNB presented a 'requirements letter' due to ongoing overdrafts and insufficient capitalization. MNB's demands included immediate steps to eliminate the overdraft by January 31, daily reconciliation reports, full coverage of the credit line with net drafts receivable, and submission of monthly balance statements and proforma income statements by specified deadlines. CRS' CEO, William Gerlach, deemed the January 31 deadline impossible and indicated challenges in providing the required reports. CRS mentioned a potential $500,000 capital injection through the sale of controlling shares to Paul Quinn, but this sale never materialized, nor was written confirmation provided.

From February 13 to 20, 1986, MNB and CRS held several meetings where MNB's attorney conveyed that the continuation of the loan relationship would be evaluated daily. During these discussions, MNB learned CRS had nearly $960,000 in returned checks, which CRS initially agreed to surrender but later refused. On February 14, MNB withheld payment on drafts to allow CRS to deposit funds to cover an overdraft of $318,653. By February 18, MNB returned drafts due to an overdraft of $5,774.51, although a majority of drafts received that day were paid. MNB continued to hold new drafts to assist CRS in raising its account balance.

On February 19, the bank received additional drafts totaling $309,849.08, while CRS had a balance of $172,183.32 in uncollected funds. MNB informed CRS it would hold these drafts. The following day, MNB received additional drafts worth $164,766.85, with CRS’ check purchase account showing a balance of $352,110.46, also in uncollected funds. Due to CRS' repeated defaults, MNB demanded payment of CRS' promissory note, accelerated the term loan, and exercised its right of setoff against the check purchase account. All drafts presented between February 18 and 20, totaling $649,540.60, were returned unpaid marked 'NSF'. Subsequently, CRS filed a seven-count complaint against MNB and Michigan National Corporation on September 30, 1986, alleging lender liability, including breach of good faith, fraud, wrongful dishonor, negligence, conversion, defamation, and interference with business relationships. Defendants moved for summary disposition, which the trial court granted on February 22, 1989, dismissing all counts. CRS appealed, arguing the trial court erred in dismissing its lender liability claim, asserting that the obligation of good faith applies to demand instruments and claiming MNB's actions constituted fraud. The trial court dismissed the good faith issue under MCR 2.116(C)(8) and the fraud claim under MCR 2.116(C)(10). MCR 2.116(C)(8) assesses the legal sufficiency of the claim based solely on pleadings, while MCR 2.116(C)(10) evaluates factual support for the claim, requiring the opposing party to provide specific evidence demonstrating a genuine issue for trial. CRS cited MCL 440.1203, which imposes a good faith obligation on all contract performance and enforcement within the code.

MCL 440.1203's application is clarified in MCL 440.1208, which addresses the right to accelerate at will, noting that this provision does not apply to demand instruments, which can be called at any time without reason. Courts in various states have ruled that the obligation of good faith does not pertain to demand instruments. In contrast, the case of KMC Co, Inc v Irving Trust Co is distinguished from the current matter, as CRS had control over funds and the discretion to deposit customer checks, unlike KMC’s blocked account arrangement. MNB was not fully secured on the loan agreements with CRS and had issued a notice requiring strict compliance and refusing further credit, which differs from Irving Trust's refusal to provide financing up to the agreed limit. MNB also formally 'called' the loan, which was not the case in KMC. Therefore, the Sixth Circuit's statement regarding demand provisions as acceleration clauses is deemed non-binding in this context. CRS’s lender liability claim based on good faith was dismissed under MCR 2.116(C)(8). Additionally, CRS's claim of fraudulent representations by MNB was dismissed for lack of supporting documentary evidence, affirming that mere allegations without evidence do not establish a genuine issue of material fact. Thus, the summary disposition of CRS's lender liability claim was appropriately granted.

CRS contends that the trial court incorrectly dismissed its wrongful dishonor claim, asserting that the defendants unlawfully refused to honor drafts on February 20, 1986, despite having funds available. The trial court dismissed this claim under MCR 2.116(C)(10), citing three reasons: (1) CRS' default was evidenced by a lack of evidence to the contrary and admissions by CRS; (2) honoring the drafts would have resulted in a significant overdraft; and (3) the agreements allowed MNB to return drafts lacking sufficient collected funds. Wrongful dishonor claims are contingent upon the absence of justified dishonor, and CRS did not provide proof of collected funds in its account at the time of dishonor. The court noted confusion about the account balance but reaffirmed that MNB's right to return drafts justified the dismissal.

Furthermore, CRS claimed MNB failed to exercise ordinary care in handling dishonored drafts. However, the court found that MNB had discretion under the loan agreement to withhold payment on drafts lacking sufficient funds and had acted to give CRS time to accumulate funds, which constituted ordinary care. Consequently, the court upheld the summary disposition of this claim.

Lastly, CRS argued the trial court erred in dismissing its conversion claim, which requires an obligation for the defendant to return specific funds. Since MNB retained the right of setoff for CRS' obligations, the claim failed because MNB acted within its legal rights in using the funds from the check purchase account.

For MNB to set off CRS' check purchase account funds against CRS' debt, four conditions must be established: (1) the funds were CRS' property, (2) held in a general account without restrictions, (3) the debt was due at the time of setoff, and (4) mutuality existed between CRS and MNB regarding the debt and account funds. The record confirmed these conditions, and CRS did not provide evidence to create a material question of fact regarding MNB's right to the setoff. Consequently, CRS' conversion claim was rightfully dismissed under MCR 2.116(C)(10).

Regarding the defamation claim, CRS alleged that collected funds were in its account; however, evidence showed the balance was composed of uncollected funds. MNB was justified in not honoring drafts due to insufficient collected funds, leading to proper dismissal of this claim as well.

CRS' claims of interference with business relations were similarly dismissed, as they relied on the previously discussed issues related to account funds and wrongful dishonor. CRS failed to cite authority to support this claim, resulting in abandonment on appeal. Additionally, new issues raised in CRS’ reply brief were not considered since they were not properly presented.

On cross-appeal, defendants contended that the trial court erred in denying costs without providing reasons. MCR 2.625(A)(1) mandates reasons for denying costs, which the trial court did not comply with. The ruling is affirmed regarding the summary disposition but remanded for the trial court to either provide reasons for denying costs or to consider the defendants’ renewed motion for costs. The court does not retain jurisdiction on this matter.