Mercantile-Safe Deposit & Trust Co. v. Delp & Chapel Concrete & Construction Co.

Couch, J., delivered the opinion of the Court. This appeal arises from a suit brought by appellees, Delp and Chapel Concrete and Construction Company (hereinafter D & C), a Maryland corporation, Andrew V. Caldwell, Jr., D & C’s trustee in receivership, R. John Chapel, Virginia Chapel, Logan Delp and Eulalia Delp, against appellant, Mercantile-Safe Deposit and Trust Company (hereinafter Mercantile). D & C’s declaration contained three counts. In Count One D & C sought recovery for Mercantile’s alleged wrongful dishonor of twelve checks drawn on D & C’s checking account with Mercantile.

In Count Two the corporation and the individuals sought recovery for Mercantile’s alleged conversion of the funds in the checking account. In Count Three all appellees sought recovery for Mercantile’s alleged malicious interference with their business. Both compensatory and punitive damages were claimed in each count. Mercantile counterclaimed against D ³⁶ & C and the individuals for the balance due it on an unpaid debt of D & C. Prior to trial, Mercantile moved to dismiss the individual plaintiffs from Counts Two and Three; the motion was denied without prejudice.

The case proceeded to trial before a jury in the Circuit Court for Baltimore County, during which a timely motion for a directed verdict was made at the close of plaintiffs’ case, and renewed at the close of all the evidence. These were also denied. The jury returned a verdict for D & C on Count One (wrongful dishonor), awarding compensatory damages of $9,343.60 and punitive damages of $25,000.00. The verdict on Count Two (conversion) was returned in favor of all the appellees.

Each appellee, excluding Logan Delp, whose absence during the trial led the trial court to rule that he was not entitled to punitive damages, was awarded both compensatory and punitive damages on Count Two. Mercantile prevailed on Count Three (malicious interference with business) and upon its counterclaim. Contented with the verdicts on Count Three and the counterclaim, Mercantile concerns itself in this appeal only with the judgments resulting from the verdicts rendered against it on Counts One and Two. No cross appeal has been filed by appellees.

The events leading up to this appeal began in January of 1974 when John R. Chapel, general manager of D & C, met with Frank Musotto, a commercial loan officer with Mercantile, in order to arrange financing for the fledgling corporation. 1 Chapel was given various forms to fill out. Upon D & C’s opening of a checking account with Mercantile and the signing of personal guarantees by John and Virginia Chapel and Logan and Eulalia Delp, Mercantile approved D & C’s request for an unsecured line of credit and agreed to lend D & C a maximum of $10,000.00 on this line of credit. D & C also obtained two secured installment loans from Mercantile. The first was a $2,100.00 loan for a station wagon, secured by the vehicle; the loan was dated February 21,1974.

On August 2, 1974 D & C borrowed $7,000.00 to purchase equipment. This loan was secured by the equipment. The ³⁷ obligations under these loans were met by D & C without incident. The line of credit transactions are the source of the present conflict.

Mercantile made twelve advances under its terms to D & C between March 5 and September 14,1974. The majority of the notes were paid or formally renewed on or before the date of maturity, with the exception of the following notes: the note of April 17 was paid one day late (due April 30 and paid May 1); the note of May 7 was paid four days late (due June 6 and paid June 10); and the note of May 20 was paid seven days late (due June 3 and paid June 10). The last note, dated September 14 and due on October 14 (the actual due date was Sunday, October 13, 1974) was not paid on the due date. John Chapel testified at trial that he requested of Mercantile and received an oral two week extension of the due date until October 31.

The existence of the extension was disputed by the testimony of the Mercantile officers, but the jury apparently accepted Mr. Chapel’s version. Nonetheless, it was undisputed at trial that D & C failed to pay the September 14 note upon the extended due date, October 31. Frank Musotto, the commercial loan officer in charge of D & C’s account, reviewed the terms of the September 14 note on November 4,1974 and, relying upon a cross-default clause contained in it, decided to charge the D & C checking account for the principal and interest of the September 14 note and the remaining balances on the two installment loans. The cross-default clause of the September 14 promissory note states as follows: “Upon the happening of any of the following events, each of which shall constitute a default hereunder, all liabilities of each maker to bank shall become immediately due and payable: (a) failure of any obligor ... to perform any agreement hereunder, to pay interest hereon promptly when billed, or pay any other liability whatsoever to bank when due;...(d)... the insolvency of any obligor.” Mr. Musotto stated two reasons for the decision to set off the loans against the checking account: the first, of course, was ³⁸ the overdue status of the September 14 note; the second reason given by Musotto was information he received from D & C’s insurance agent that the corporation was going out of business.

This last point was disputed at trial by the insurance agent, who testified he recalled no phone conversations with Musotto between October 14 and November 4. Having decided to exercise the set-off rights embodied in the note, Musotto directed both the Commercial Loan and the Installment Loan Departments, on November 4, to charge D & C’s checking account with the balances on the September 14 note and the two installment loans; the charges, to the extent funds were available, were made the same day. 2 Musotto further authorized that D & C’s checking account be “frozen” or placed “on status” until the charges were paid. According to the Mercantile officer’s testimony, the “freezing” of the account meant that checks could not be routinely paid; the account would have to be handled on an individual basis rather than by computer. The actions taken by Mercantile on November 4 resulted in nine checks drawn against the D & C account being returned unpaid and the funds applied to the installment loans instead.

The nine checks were as follows: Check No. Amount Dated Payee 1002 208.24 10-31 John Chapel 855 15.00 10-31 John Chapel 1000 35.02 10-31 Virginia Chapel 854 50.00 10-31 Logan Delp 1003 228.29 10-31 Logan Delp 841 206.12 10-21 Eulalia Delp 1001 65.21 10-31 R. Leopold 998 73.32 10-31 V. Leopold 993 134.82 10-24 M. Shaw ³⁹ These returned checks were stamped with a red box marked “NSF” and bore an additional handwritten notation “account closed”. All of the above checks were either paid the second time presented or were replaced with new checks to the payees which were paid when presented. Three other checks, listed below, were presented later in November and returned marked “NSF” but not “account closed”. Check No. Amount Dated Payee 842 8,247.58 10- 23 IRS 863 18.63 11- 18 American Radio Telephone 864 30.80 11-19 Postmaster Chapel learned of Mercantile’s charges against the account on November 5 when he called Blake Hampson, an employee of the bank who worked under the supervision of Musotto, to request an extension of the September 14 note.

Hampson informed him of the set off of the note and the two installment loans and that checks were being returned. Hampson met with Chapel and the corporation’s attorney, Robert Powell, at Powell’s office on November 11 or 12. D & C acknowledged the propriety of the $3,575.83 set off (promissory note) but requested that the amount charged to pay off the two installment loans, $5,337.79, be reversed. Chapel and Powell were concerned that an outstanding check payable to the IRS for withholding taxes in the amount of $8,247.58 would not be honored upon presentment.

Mercantile, without conceding any error, agreed to reinstate the two installment loans and return $5,337.79 to the corporation’s account. On November 21, 1974, D & C’s account was credited with $5,337.79. Appellant raises a multitude of issues on appeal which we shall address selectively: “I. Was it error to submit the question of interpretation of written contracts to the jury? A. Was the bank entitled as a matter of law to setoff defaulted debts against the plaintiff corporation’s checking account pursuant to the corporation’s written contracts with the bank? ⁴⁰ B. If a factual question was presented, was it error to refuse to instruct: (1) that parties are bound by the terms of written contracts (including terms which define ‘default’)?

(2) that upon default as defined in the written contracts a bank may legally setoff against the debtor’s checking account?

II

Was it error to permit the plaintiff corporation (and individual plaintiffs not customers of the bank) to recover punitive damages: (1) where the bank, in asserting its legal rights, relied on the terms of the written contracts? (2) where the court refused to instruct the jury that if defendant acted in reliance on written documents and asserted its legal rights, no malice could be inferred? (3) where there was insufficient evidence to sustain a finding of actual malice?

III

In a wrongful dishonor suit: A. Was it error to permit the jury to find that under the facts before it the checks were wrongfully dishonored? B. Was it error to permit the jury to award compensatory damages where no injury or damages were proved? C. Was it error to refuse to instruct the jury on how to measure damages for wrongful dishonor?

IV

Was it error to permit the individual plaintiffs to sue the bank for an alleged conversion of the corporation’s checking account funds? A. Was it error to permit individuals who have no property interest in the funds ⁴¹ allegedly converted to bring the conversion suit? B. Was it error to permit the individuals to recover in the conversion action by virtue of being named as payees on some of the returned checks? V. Was it error to refuse to instruct the jury on how to measure damages in the conversion action?

VI

Was it error to permit plaintiffs to obtain multiple recoveries for one loss?” Mercantile’s Decision to Set Off the Three Obligations Against D & C’s Checking Account A fundamental question going to the heart of the appellees’ allegations of wrongful dishonor and conversion must be answered first before the propriety of the trial court’s submission of Counts One and Two to the jury can be considered. The question is this: Whether Mercantile was entitled as a matter of law to set off defaulted debts against D & C’s checking account pursuant to D & C’s written contracts with Mercantile and, as a result, did the trial court err in failing to grant Mercantile’s motion for directed verdict. Since we shall conclude that the motion for directed verdict should have been granted, we need not discuss the propriety of the trial court’s instructions to the jury. The interpretation of a written contract, as a general matter, is a question of law for the court.

See University National Bank v. Wolfe, 279 Md. 512 , 521 n. 7, 369 A.2d 570 (1977); Allen Engineering Corp. v. Lattimore, 235 Md. 182, 187 , 201 A.2d 13 (1964); Severin v. Green, 166 Md. 305, 307 , 170 A. 731 (1933); see generally, 5 M.L.E., Contracts, § 153 (1960). The terms of a written contract, however, may be modified or waived by the subsequent conduct of the parties. University National Bank v. Wolfe, supra at 523; Sullivan v. Mosner, 266 Md. 479, 491 , 295 A.2d 482 (1972) (subsequent oral agreement). Whether the subsequent conduct of the parties amounts to a modification or waiver of their contract, in this instance the terms controlling the due date of the ⁴² September 14 note, is generally a question to be decided by the trier of fact.

University National Bank v. Wolfe, supra at 523; Hoffman v. Glock, 20 Md. App. 284, 289 , 315 A.2d 551 (1974). The question, then, reduces itself to one of whether there was any evidence of subsequent conduct which presented a factual issue of modification or waiver of the written terms of the September 14 note. We conclude that there was not. Appellees argue that there was ample evidence that a modification and/or waiver occurred with respect to the default term in the line of credit loan.

The evidence they cite is Mr. Chapel’s testimony that in the past, two week extensions for payment due on the loan had been granted orally. According to appellees, the record of line of credit notes, which shows notes paid after the due date, supports their theory of modification. Mr. Chapel also testified that he was granted an oral extension on the note due October 14 to October 31. He further stated that he had always received written notice of the past due status of a note and that in this particular instance he did not.

While the evidence of an extension of the due date to October 31 was contradictory, there was no dispute that October 31 came and went without payment of the note by D & C. The line of credit transactions reveal no basis for the appellees’ contention that two week oral extensions had been granted in the past, and upon the passage of that period a further grace period was granted. As set forth previously, there were three notes