Defendant U.S. National Bank (the Bank) charges its checking account depositors a fee for processing nonsufficient fund (NSF) checks written on their accounts. Between 1973 and 1979, the Bank increased its NSF fee from $3 to $5 per check. Plaintiffs Lonnie and Teresa Best were among the Bank's depositors whose accounts were assessed NSF charges during this period. The Bests, individually and as representatives of a class of depositors, brought this action to recover the charges. They contend that the Bank's NSF fees were unlawful because the fees greatly exceeded the Bank's costs for processing NSF checks.
The Bests alleged six claims for relief, three of which were certified by the circuit court as class actions. Only the claims certified as class actions are at issue here. Those claims are (1) that the Bank breached its obligation to set NSF fees in good faith, (2) that its NSF fees were unconscionable and (3) that its NSF fees were an unlawful penalty for breach of contract. On the penalty and breach of good faith claims, the circuit court certified a plaintiff class comprising all natural persons who had nonbusiness checking accounts with the Bank and who paid NSF charges totaling $6 or more between May 31, 1973, and May 30, 1979. On the unconscionability claim, the court certified a plaintiff subclass comprising class members who opened checking accounts with the Bank on
The circuit court granted the Bank's motion for summary judgment on the class claims and entered final judgment dismissing those claims.
Before discussing the depositors' breach of good faith claim, we will briefly address their penalty and unconscionability claims.
The depositors claim that the Bank's NSF fees were unlawful penalties for breaches of the depositors' express or implied contractual agreements not to write NSF checks. We agree with the Court of Appeals that the depositors did not present any evidence from which a trier of fact could infer the existence of such an agreement. See 78 Or. App. at 4-10, 714 P.2d 1049. There being no agreement, there could be no unlawful penalty for breach of the agreement.
The depositors claim that the Bank's NSF fees were unconscionable because the fees were greatly in excess of the Bank's costs for processing NSF checks. The doctrine of unconscionability, however, is largely inapplicable to this case, and, to the extent that it may apply, we conclude that the fee set by the Bank was not unconscionable.
Unconscionability is a legal issue that must be assessed as of the time of contract formation. W.L. May Co. v. Philco-Ford Corp., 273 Or. 701, 707, 543 P.2d 283 (1975). Thus the doctrine applies to contract terms rather than to contract performance. The only contract term relevant to NSF fees was a statement in the preprinted "account agreement" signed by the depositors when they opened their accounts: "This account is subject to Bank service charges existing at any time." The parties agree that "service charges" included NSF fees. The specific fee charged, then, was not part of the depositors' agreement with the Bank; rather, the fee was set by the Bank as part of its performance of the account agreement. The unconscionability doctrine is inapplicable to the amount of the fee.
If the depositors were or should have been aware of the fee amounts and tacitly agreed to the amounts through failing to close their accounts, see Part II, infra, they could challenge the agreements as unconscionable. Summary judgment on their unconscionability claim, however, would still be appropriate.
Although the depositors assert that the Bank's NSF fees were two or three times the Bank's NSF processing costs, the fees were relatively small and were similar to NSF fees charged by other banks. Moreover, apart from the adhesive nature of the account agreement, the record reflects few indicia of one-sided bargaining. The depositors could close their accounts at any time and for any reason. There is no evidence that the depositors were not of ordinary intelligence and experience. There is also no evidence that the Bank obtained any agreement from the depositors through deception or any other improper means. The circuit court's grant of summary judgment on the depositors' unconscionability claim was proper.
The depositors claim that the Bank had an obligation to set its NSF fees in good faith and that it breached this obligation by
Nothing in the depositors' account agreement with the Bank expressly limited the Bank's authority to set NSF fees. This court has long stated, however, that there is an obligation of good faith in the performance and enforcement of every contract. See, e.g., Comini v. Union Oil Co., 277 Or. 753, 756, 562 P.2d 175 (1977); Perkins v. Standard Oil Co., 235 Or. 7, 16, 383 P.2d 107 (1963); see also Restatement (Second) of Contracts § 205 (1979). This obligation limited the Bank's apparently unlimited authority to set NSF fees, and the depositors can recover for the breach of this obligation just as they could for the breach of any other contractual obligation.
The Bank and amicus curiae First Interstate Bank of Oregon argue that the doctrine of good faith is inapplicable because the depositors agreed to the NSF fees by maintaining their accounts, which they could close at any time.
Assuming that there was no agreement, the question before us is whether there is a genuine issue of material fact whether the Bank set its NSF fees in good faith.
The purpose of the good faith doctrine is to prohibit improper behavior in the performance and enforcement of contracts. Because the doctrine must be applied to the entire range of contracts, definitions of good faith tend to be either too abstract or applicable only to specific contexts. For this reason, Professor Summers has argued that good faith should be conceptualized as an "excluder," by which he means that good faith should be defined only by identifying various forms of bad faith. Summers, The General Duty of Good Faith — Its Recognition and Conceptualization, 67 Cornell L Rev 810 (1982); see also Summers, "Good Faith" in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va L Rev 195, 199-207 (1968). This is also the approach adopted by the Restatement (Second) of Contracts § 205 (1979):
Restatement (Second) of Contracts § 205, comment a (1979).
Restatement (Second) of Contracts § 205, comment d (1979).
This does not mean that decisions as to what constitutes bad faith must be ad hoc and standardless. Without attempting to give positive content to the phrase "good faith," it is possible to set forth operational standards by which good faith can be distinguished from bad faith within a particular context. Professors Summers and Burton, although in substantial disagreement with each other, have proposed such standards. See Summers, supra, 67 Cornell L Rev at 823-24; Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv L Rev 369 (1980).
This court also has not attempted to set forth a comprehensive definition of good faith. But in line with the Restatement and traditional principles of contract law, the court has sought through the good faith doctrine to effectuate the reasonable contractual expectations of the parties. See Comini, 277 Or. at 756-57, 562 P.2d 175; Perkins, 235 Or. at 15-17, 383 P.2d 107. When one party to a contract is given discretion in the performance of some aspect of the contract, the parties ordinarily contemplate that that 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. Id.; see also Burton, supra.
To illustrate, in Comini the defendant oil company had a contractual right to disapprove the plaintiff distributor's transfer of the distributorship. This court concluded that the right was intended by the parties to protect the oil company's legitimate business interests in its distribution system. Comini, 277 Or. at 756, 562 P.2d 175. Thus the oil company could, consistent with its obligation to perform in good faith, reject a transfer to someone inexperienced in the oil business and even reject a transfer to an experienced distributor when it had decided to consolidate the distributorship with another distributorship. Id. at 756-57, 562 P.2d 175. But the oil company would have performed in bad faith if, for example, it had rejected a transfer in order to retaliate against the distributor for some reason. Similarly, the parties to an employment contract generally contemplate that an employer may use its discretion to fire an at-will employee if the employer is dissatisfied with the employee's performance or if the employee's services are no longer required. The parties do not ordinarily contemplate, however, that the employer may fire the employee in order to deprive the employee of benefits to which the employee would otherwise have become entitled if the employment had continued. An employer who does the latter breaches its obligation to perform in good faith. State ex rel Roberts v. Public Finance Co., 294 Or. 713, 719 n. 4, 662 P.2d 330 (1983); cf. Swanson v. Van Duyn Choc. Shops, 282 Or. 491, 494, 579 P.2d 239 (1978).
In this case, the Bank had the contractual discretion to set its NSF fees. Under Comini and Perkins that discretion had to be exercised within the confines of the reasonable expectations of the depositors. It is therefore not necessarily sufficient, as the Bank contends, that the Bank acted honestly in setting its NSF fees or that its fees were similar to those of other banks. Undoubtedly, parties to a contract always expect that the other party will perform the contract honestly and, where the performance of a commercial enterprise is at issue, ordinarily expect that it will do so in a commercially reasonable manner. But the reasonable expectations of the parties need not be so limited.
When a party has the contractual right to specify a price term, the term specified may be so high or low that the party will be deemed to have acted in bad faith regardless of the reasonable expectations of the other party. In this respect the good faith and unconscionability doctrines tend to run together. In general, however, whether a specified price violates the obligation of good faith should be decided by the reasonable contractual expectations of the parties. In this instance we conclude that the Bank's NSF fees were not so high as to be evidence of bad faith for that reason alone.
Nevertheless, we believe that there is a genuine issue of material fact whether the Bank set its NSF fees in accordance with the reasonable expectations of the parties. The record shows that when the depositors opened their accounts, the only account fees that would ordinarily be discussed would be the Bank's monthly and per check charges, if any. The sole reference to NSF fees was contained in the account agreement signed by the depositors, which obligated them to pay the Bank's "service charges in effect at any time." Because NSF fees were incidental to the Bank's principal checking account fees and were denominated "service charges," a trier of fact could infer that the depositors reasonably expected that NSF fees would be special fees to cover the costs of extraordinary services. This inference could reasonably lead to the further inference that the depositors reasonably expected that the Bank's NSF fees would be priced similarly to those checking account fees of which the depositors were aware — the Bank's monthly checking account service fees and per check fees, if any. By "priced similarly," we mean priced to cover the Bank's NSF check processing costs plus an allowance for overhead costs plus the Bank's ordinary profit margin on checking account services.
Finally, assuming that the Bank's obligation of good faith required the Bank to set its NSF fees in accordance with its costs and ordinary profit margin, there was evidence that the Bank breached the obligation. The Bank's own cost studies show that its NSF fees were set at amounts greatly in excess of its costs and ordinary profit margin. Internal memoranda and depositions of Bank employees permit the inference that the Bank's NSF fees were set at these high levels in order to reap the large profits to be made from the apparently inelastic "demand" for the processing of NSF checks and in order to discourage its depositors from carelessly writing NSF checks. A trier of fact could find that both of these purposes were contrary to the reasonable expectations of the depositors when they agreed to pay whatever NSF fee was set by the Bank.
Because there are genuine issues of material fact with respect to the depositors' breach of good faith claim, the trial court erred in granting the Bank summary judgment on this claim.
The Bank nonetheless argues that the depositors' claims, even if valid, must be rejected because the Oregon law of contracts
Whether a federal law preempts state law is an issue of the interpretation of federal law. See Derenco v. Benj. Franklin Fed. Sav. and Loan, 281 Or. 533, 537-49, 577 P.2d 477 (1978). The present system of national banks was created by the National Bank Act of 1864, 13 Stat. 99 (codified as amended primarily at 12 U.S.C. §§ 21-216d). Congress devised the system during the Civil War to provide a national currency secured by a pledge of United States bonds, and national banks are considered instruments of the government for that purpose. See Davis v. Elmira Sav. Bank, 161 U.S. 275, 283, 16 S.Ct. 502, 40 L.Ed. 700 (1896). In addition, Congress created the Comptroller of the Currency to administer the act. 12 U.S.C. § 1. The Comptroller's responsibilities include prescribing rules and regulations to govern the operations of national banks. 12 U.S.C. §§ 1, 93a.
The Bank's obligation under Oregon law to set NSF fees in good faith is not in direct conflict with the federal law governing national banks. There is no federal requirement that national banks charge NSF fees, nor is there a federal statute or regulation that expressly permits national banks to set NSF fees in contravention of state law. Cf. Fidelity Federal Sav. & Loan Assn. v. de la Cuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982) (federal regulation preempted state limitations on the use of "due-on-sale" clauses where regulation expressly permitted federal savings and loans to use the clauses notwithstanding state law). Under section 8 of the National Bank Act (12 U.S.C. § 24), however, national banks have "all such incidental powers as shall be necessary to carry on the business of banking," including "receiving deposits." The Bank argues that the depositors' claims would impair the Bank's power to receive deposits by placing limits on its ability to charge fees for services, such as NSF check processing, associated with deposits.
We have no doubt that national banks have the power to set NSF fees, whether that power is ancillary to their power to receive deposits or stems from the general grant of "all such incidental powers as shall be necessary to carry on the business of banking." Moreover, because national banks are instruments of federal policy, it is clear that state limits on their power to set NSF fees may run afoul of federal policy and thereby be preempted. See, e.g., Franklin Nat'l Bank v. New York, 347 U.S. 373, 74 S.Ct. 550, 98 L.Ed. 767 (1954) (state law prohibiting the word "savings" in national bank advertising held preempted because prohibition interfered with the power to receive deposits).
Congress did not intend, however, that national banks would be regulated exclusively by the federal government. "[N]ational banks are subject to state laws, unless those laws infringe the national banking laws or impose an undue burden on the performance of the banks' functions."
In response to inquiries by Congress and national bank officials in the early 1960s, the Comptroller of the Currency took the position that bank account service fees were to be determined by individual banks on the basis of their costs and competitive position. The Comptroller has continued to adhere to this position. See 48 Fed Reg 54319 (December 2, 1983); 12 CFR § 7.8000 (1972); 12 CFR § 7.2 (1963). When bank service fees, including NSF fees, sharply increased during the 1970s, the fees came under attack through lawsuits and calls for legislative restrictions. Perhaps in response to these attacks, the Comptroller issued a detailed interpretive rule, which provides, in relevant part:
12 CFR § 7.8000 (1987).
48 Fed Reg 54319 (December 2, 1983).
When the interpretive rule was issued, it was unclear whether the Comptroller intended the rule itself to preempt state law. The Comptroller shortly thereafter amended the rule to clarify that the rule was not intended to preempt state law; rather the rule was intended only to express the Comptroller's position that "the comprehensive federal statutory scheme governing the deposit-taking function of national banks * * * preempts state laws that prohibit or limit the amount of a national bank's deposit account service charges." 49 Fed Reg 28238 (July 11, 1984).
As an interpretive rule promulgated without notice and comment under 5 U.S.C. § 553, 12 CFR § 7.8000 does not have the force and effect of law. See Chrysler Corp. v. Brown, 441 U.S. 281, 312-16, 99 S.Ct. 1705, 60 L.Ed.2d 208 (1979). Nonetheless, an interpretive ruling "is entitled to deference unless it can be said not to be a reasoned and supportable interpretation of the act" upon which it is based. Whirlpool Corp. v. Marshall, 445 U.S. 1, 11, 100 S.Ct. 883, 63 L.Ed.2d 154 (1980); cf. Bureau of Alcohol, Tobacco & Firearms v. FLRA, 464 U.S. 89, 97-98 & n. 8, 104 S.Ct. 439, 78 L.Ed.2d 195 (1983) (courts should uphold reasonable and defensible constructions of an agency's enabling act but should not permit the unauthorized assumption by an agency of major policy decisions properly made by Congress).
We do not believe that the depositors' good faith claim is inconsistent with the Comptroller's interpretation of the National Bank Act. The Comptroller's interpretation would preempt only those "state laws which prohibit the charge assessed or limit or restrict the amount of that charge." 12 CFR § 7.8000(c) (1987) (emphasis added). The depositors' good faith claim, as it now stands, does none of these things. The Bank's obligation to set its NSF fees in good faith obviously does not prohibit it from charging NSF fees. In addition, the obligation does not of itself impose any particular limit on the amount that the Bank may charge. The obligation requires only that the Bank charge an amount that is within the reasonable expectations of the depositors. So long as the Bank takes steps to ensure that the amount is within those expectations, it could set the fee at any amount it wished. The obligation of good faith, then, does not limit the amount of the Bank's NSF fee, but only the contractual procedure by which it is set.
Given the historical application of state contract law to national banks, the Comptroller's interpretation would make little sense if it freed national banks from contractual limits on their ability to charge NSF fees. Contractual limits are essentially limits that national banks impose upon themselves. The state acts only to enforce the agreement of the parties. Of course, certain contract doctrines do more than this
We conclude that neither Congress nor the Comptroller has precluded the depositors' good faith claim as it now stands. What the National Bank Act forbids is state regulation of account service fees. It does not free national banks from state contract law that enforces only the reasonable contractual expectations of the bank and its depositors. This is not to say that the Comptroller could not preempt the application of state contract law to bank service charges if the Comptroller wished to do so. That issue, however, is not before us.
Amicus curiae First Interstate Bank asserts one other federal preemption ground that we shall briefly address. Amicus contends that this action interferes with the Comptroller's exclusive visitorial authority over national banks, see 12 U.S.C. §§ 481, 484, "because national bank records would be subject to inspection to see if NSF charges are `cost justified.'" Amicus does not suggest in what manner such an inspection would interfere with the Comptroller's visitorial authority under 12 U.S.C. § 481; no evidence has been presented that such inspections would impair the Comptroller's ability to examine the records of national banks.
Nevertheless, 12 U.S.C. § 484(A) provides that "[n]o national bank shall be subject to any visitorial powers except as * * * vested in the courts of justice * * *." Visitorial powers for purposes of section 484 are powers associated with inspections to ensure compliance with banking laws. See Guthrie v. Harkness, 199 U.S. 148, 157-59, 26 S.Ct. 4, 50 L.Ed. 130 (1905); State v. First Nat. Bank of Portland, 61 Or. 551, 557-60, 123 P. 712 (1912). Such inspections by state banking authorities may interfere with the Comptroller's duty to regulate national banks and may be prohibited by section 484. E.g., National State Bank, Elizabeth N.J. v. Long, 630 F.2d 981 (3d Cir.1980) (inspections by state banking authorities to ensure compliance with state "redlining" laws preempted). But see State by Lord v. First Nat. Bank of St. Paul, 313 N.W.2d 390 (Minn. 1981) (inspections by state banking authorities to ensure compliance with state escheat laws not preempted).
Any inspections or disclosures required by the depositors' action would not be an exercise of visitorial powers because these actions would not be for the purpose of regulation. Cf. Guthrie v. Harkness, supra, 199 U.S. at 158-59, 26 S.Ct. at 7-8 (stockholder's common law right to inspect the records of a national bank is not a visitorial power). Moreover, even if these actions could be characterized as an exercise of visitorial powers, section 484's exception for visitorial powers "vested in the courts of justice" would be applicable. Cf. id. at 159, 26 S.Ct. at 8 (stockholder's common law right to inspect the records of a national bank, even if a visitorial power, is within the exception for visitorial powers vested in the courts of justice).
The decision of the Court of Appeals is affirmed. The circuit court's judgment with respect to the depositors' breach of good faith claim is reversed, and the case is remanded to the circuit court for further proceedings consistent with this opinion.