This civil case involves a dispute between a bank and its borrower. We decide three questions: (1) Does the duty of good faith imposed by Article 9 of the Uniform Commercial Code (UCC), ORS chapter 79, displace the common law duty of good faith? (2) What is the standard of good faith that Article 9 of the UCC requires? (3) Was there sufficient evidence to support the verdict of the jury, which found a breach of the duty of good faith? We hold: (1) The duty of good faith imposed by Article 9 of the UCC displaces the common law duty of good faith. (2) With an exception not applicable in this case, Article 9 of the UCC requires only honesty in fact in the conduct or transaction concerned; that standard does not encompass commercial reasonableness or the broader concept of good faith under the common law. (3) There was sufficient evidence to support the jury's verdict on the claim of breach of the duty of good faith on one of the two theories presented, although the trial court's erroneous instruction on good faith requires a reversal and remand.
United States National Bank of Oregon (Bank) loaned money to Neal Boge. Bank brought this action to recover on promissory notes executed by Boge. He counterclaimed, asserting, among other things, that Bank had breached its duty to act in good faith. The jury awarded damages to Bank on its claim and greater damages to Boge on his counterclaim. The trial court entered judgment for Boge for the difference between the two amounts and for attorney fees.
Bank appealed to the Court of Appeals. Bank argued that the common law duty of good faith, which was the theory on which the trial court had instructed the jury, does not apply to transactions governed by Oregon's version of Article 9 of the UCC. Bank also argued that the trial court should have directed a verdict in its favor. The Court of Appeals disagreed with both points and affirmed the judgment. U.S. National Bank v. Boge, 102 Or.App. 262, 794 P.2d 801 (1990).
The Court of Appeals reasoned that ORS 71.1030 permits the application of the common law duty of good faith, because that "doctrine supplements, but is not inconsistent with the statutory standard" of good faith found in the UCC. 102 Or App at 270. The Court of Appeals also concluded that the evidence was sufficient to support the verdict in Boge's favor. 102 Or App at 267-68.
Bank petitioned for review, and we allowed the petition. We reverse the decision of the Court of Appeals and remand the case to the circuit court.
We view the evidence in the light most favorable to Boge with respect to the counterclaim, because he prevailed before the jury. Maine Bonding v. Centennial Ins. Co., 298 Or. 514, 523, 693 P.2d 1296 (1985). Boge is a dairy farmer in Tillamook County. On May 4, 1984, Bank loaned him money to buy cows from the Rileys, who also are dairy farmers. Boge granted Bank a security interest in the cows. The parties, and we, agree that the transaction between them (a "security agreement for farm loan") was a secured one that is governed by Article 9 of the UCC, ORS chapter 79.
Boge failed to pay his loan when it became due. On May 12, 1986, S.E. Springer, the manager of Bank's Tillamook branch, sent Boge a 10-day demand letter. That letter included the current payoff figure for Boge's loan and a daily interest figure. When Boge did not make full payment within the 10 days, the Tillamook branch sent his loan file to the Portland branch's "Special Assets Group," which handles foreclosures.
On May 29, 1986, the Rileys tentatively agreed to buy back the cows and then resell them to Boge. The Rileys intended by that means to refinance Boge's purchase and allow him to pay his indebtedness to Bank. Boge had the right under ORS 79.5060 to "redeem the collateral by tendering fulfillment of all obligations secured by" it. Before the Rileys would refinance the cows, however, they wanted to be assured that they could obtain clear title. Boge and the Rileys went to Springer's office. Boge asked for the payoff figure on his loan and for his loan documents. Springer responded that the file was in Portland and that he could not furnish the information immediately.
In the next day or two, Bank demanded that Boge surrender the cows by June 5, 1986. On June 4, Bank's lawyer sent copies of the loan information to Boge's lawyer. Boge surrendered the cows on June 5. On June 6, the Tillamook branch sent Boge an additional set of his loan documents. The Rileys did not buy back Boge's cows, and Boge did not redeem them from Bank. Bank sold the cows at an auction in Portland on June 16.
At trial, Boge contended that Bank had acted in bad faith when it refused to provide him with his loan information on May 29, 1986, and instead proceeded swiftly to foreclose. Boge produced evidence that his loan information was readily available to Springer by computer on May 29. Boge also produced evidence that Springer was hostile to him and wanted to foreclose on
Bank moved for a directed verdict on Boge's claim for breach of the duty of good faith, arguing that there was no evidence to support a verdict for Boge. The trial court denied the motion. Bank renewed its theory in a motion for judgment notwithstanding the verdict. The trial court also denied that motion.
Having denied Bank's motion for a directed verdict, the trial court gave this instruction on good faith:
The trial court derived that instruction from Restatement (Second) of Contracts § 205 comment d (1979), which this court cited with approval in Best v. U.S. National Bank, 303 Or. 557, 563, 739 P.2d 554 (1987).
Bank excepted on the grounds that the UCC provides the exclusive standard of good faith for this transaction and that the instruction went beyond the UCC standard. Bank also requested an instruction, which the trial court rejected, that good faith means honesty in fact.
We first consider whether the UCC's provisions concerning good faith in a secured transaction displace the common law's implied duty of good faith, which is reflected in the trial court's instruction. ORS 71.2030 provides: "Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance or enforcement." ORS 71.2010 provides in part:
ORS 79.1050(4) makes that definition of good faith applicable to ORS chapter 79,
The parties agree that Bank was required to perform and enforce the contract, to perform its statutory duties, and to enforce its statutory rights, with the good faith specified by ORS 71.2010(19). What they disagree about is whether that is the exclusive standard for Bank's conduct. The common law duty of good faith requires that parties act in an objectively reasonable manner in the performance and enforcement of their contracts. See Best v. U.S. National Bank, supra, 303 Or. at 561-66, 739 P.2d 554 (discussing cases and Restatement).
As noted above, ORS 71.1030 provides that, "[u]nless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity * * * shall supplement its provisions." Bank argues that the particular provisions of the UCC concerning good faith in a secured transaction displace the implied common law duty of good faith; Boge argues that the common law duty supplements the UCC duty. The question is one of statutory construction. The legislature was free to displace the common law duty of good faith. Our task is to determine whether it did.
Boge argues that this court already answered the question in his favor in Best v. U.S. National Bank, supra. The issue in Best was whether the trial court had erred in granting summary judgment for the bank on the plaintiffs' claims that the bank had breached its obligation to set checking account customers' nonsufficient fund (NSF) fees in good faith, that the NSF fees were unconscionably high, and that the NSF fees were an unlawful penalty for breach of contract. 303 Or. at 559, 739 P.2d 554. This court did not cite the UCC anywhere in its opinion. With respect to the duty of good faith, this court wrote:
In deciding whether there was a genuine issue of material fact concerning the bank's good faith in setting NSF fees, this court then cited and discussed common law sources. 303 Or. at 562-64, 739 P.2d 554.
In Best v. U.S. National Bank, supra, whether the UCC duty of good faith displaced the common law duty of good faith in contracts governed by the UCC was not at issue. Even though the UCC governs some aspects of the relationship between a bank and its depositors, see ORS chapter 74 (bank deposits and collections), Best was not a UCC case. Nothing in ORS chapter 74 addresses the limitations on a bank's discretion to set NSF fees. Consequently, this court was not called on to decide what the UCC's duty of good faith means or how it relates to the common law duty of good faith in situations to which the UCC applies. Although the statement in Best that "there is an obligation of good faith in the
The UCC does not state expressly whether, in secured transactions, ORS 71.2010(19) (which is incorporated in Article 9 by ORS 79.1050(4)) displaces the common law's implied duty of good faith. Neither does any legislative history bear directly on the point. There are, however, four indicators of the legislature's intent to displace the common law: the terms, structure, purposes, and history of the pertinent provisions of the UCC.
First, the terms of the pertinent statutes suggest an intent to displace the common law duty of good faith. The common law implies a duty of good faith by which to measure the parties' performance and enforcement of contract terms. ORS 71.2010(19) describes the obligation of good faith by which to measure the parties' performance or enforcement of contract terms. The subject matter is thus identical with respect to the performance or enforcement of contract terms — the standard of good faith. On that subject, the statutory definition is complete on its face.
Of course, the common law did not address the standard by which to measure parties' performance or enforcement of statutory duties or rights under the UCC. ORS 71.2030, however, treats contracts and statutes as being parallel: "Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance or enforcement." (Emphasis added.) Accordingly, ORS 71.2030 suggests that the statutory definition of good faith is meant to be both uniform and complete. Identity of subject and completeness of expression do not foreclose supplementation, but they do suggest that the legislature has spoken fully on the topic. See Seattle-First Nat'l Bk. v. Ore. Pac. Ind., 262 Or. 578, 580-81, 500 P.2d 1033 (1972) (purpose of Article 9 of UCC to regulate completely certain types of conduct "would be blunted if the rules created by some precode decisions and not expressly provided for in the statutory scheme were nevertheless grafted onto the Code by implication"); Evans Products v. Jorgensen, 245 Or. 362, 372, 421 P.2d 978 (1966) (prior cases concerning priority between secured party with "floating lien" and supplier of raw materials to debtor no longer apply; "[t]he purpose and effectiveness of the UCC would be substantially impaired if interests created in compliance with [Article 9] UCC procedures could be defeated by application of the equitable doctrine of unjust enrichment").
Boge argues that the terms of the UCC — specifically, ORS 71.1030 — contemplate that the common law duty of good faith would continue to apply to secured transactions. He seeks to distinguish Seattle-First Nat'l Bk. v. Ore. Pac. Ind., supra, and Evans Products v. Jorgensen, supra, on the ground that they involved "very specific provisions of the common law * * * [and] equally specific UCC provisions to the contrary." The test of ORS 71.1030, however, is not the narrowness or detail of the rule of law at issue. Rather, the test is whether the principles of law and equity have been "displaced by the particular provisions of the Uniform Commercial Code" that are under consideration. ORS 71.1030. We agree with the commentator who wrote: "Perhaps the best and most `simplistic' way to look at ORS 71.1030 is to apply it to fill in the gaps but not to replace the existing structure set forth in other specific [Uniform Commercial] Code sections that have problem-solving effects." 1 H. Bailey, Oregon Uniform Commercial Code 13, § 1.6 (2d ed 1990). To borrow Bailey's phrasing, ORS 71.2010(19) has a "problem-solving effect," and ORS 71.2010(19) leaves no logical gap in the UCC, which would need to be filled by some other source of law. See also Hillman, Construction of the Uniform Commercial Code: UCC Section 1-103 and "Code" Methodology, 18 BC Indus & Com L Rev 655, 691-92 (1977) (role of UCC § 1-103 is to fill gaps).
Second, the structure of the UCC suggests that the statutory definition is meant to displace the common law definition. Different sections of the UCC contain different
Those differences in statutory wording demonstrate a conscious legislative choice to select a particular definition of good faith — and no other — in each Article or section of the UCC. See Oregon Business Planning Council v. LCDC, 290 Or. 741, 749, 626 P.2d 350 (1981) (where legislature includes express provision in one statute, but omits such provision in another statute, it may be inferred that the omission was deliberate). When the legislature meant to have a transaction governed by a standard of good faith in addition to honesty in fact, it said so. It did not say so for this kind of transaction. The use of a higher standard in only one section of Article 9, ORS 79.3180(2), but not in the remainder of Article 9, shows a conscious legislative choice specifically within Article 9.
Third, displacement of the common law duty of good faith serves the purposes of the statute. The legislature has specified the underlying purposes and policies of the Uniform Commercial Code. ORS 71.1020 provides in part:
Those purposes are served if the statutory duty of good faith displaces the common law duty.
The statutory definition standing alone is simpler and clearer than it would be if it were supplemented by the common law. Our interpretation has the potential to promote certainty in the conduct of commercial transactions.
In addition, exclusivity of the statutory duty of good faith would promote uniformity and certainty in the law. All states that enact the UCC definition of good faith have the same statutory standard, while they may have divergent, or no, common law standards concerning the good faith performance and enforcement of contracts.
Unfortunately, few courts have addressed whether the UCC displaces the common law duty of good faith. Three cases have considered similar questions, with varying results. In U.S. v. H & S Realty Co., 837 F.2d 1 (1st Cir 1987), the First Circuit examined whether the Maine UCC's definition of good faith as "honesty in fact" incorporated the broader meaning of good faith set forth in Restatement (Second) of Contracts § 205. The court applied the "honesty in fact" standard, but it provided no helpful analysis and did not answer conclusively the question that we address in the present case. In Watseka First Nat. Bank v. Ruda, 135 Ill.2d 140, 142 Ill.Dec. 184, 552 N.E.2d 775 (1990), the Illinois Supreme Court discussed the effect of UCC § 1-103 on the Illinois UCC's "honesty in fact" definition of good faith, in the context of an insecurity clause under UCC § 1-208.
There are a number of cases, however, that have considered an analogous problem: whether to apply only the "honesty in fact" standard of Article 9 of the UCC to a secured transaction that involves a merchant. Most courts have refused to import the "objective" good faith standard from Article 2 into Article 9 transactions. Wainwright Bank v. Railroadmens Federal Sav., 806 F.2d 146, 150 n. 4 (7th Cir.1986); Frank Davis Buick v. First Alabama Bank, 423 So.2d 855, 858 (Ala. Civ. App. 1982); Sherrock v. Commercial Credit Corporation, 290 A.2d 648, 650-51 (Del. Super. 1972); Massey-Ferguson, Inc. v. Helland, 105 Ill.App.3d 648, 61 Ill.Dec. 142, 434 N.E.2d 295, 297 (1982); Rigby Corp. v. Boatmen's Bank and Trust Co., 713 S.W.2d 517, 527 (Mo. App. 1986). The Delaware court wrote that "`honesty in fact' means what it says, and there is no room for judicial interpretation." Sherrock v. Commercial Credit Corporation, supra, 290 A.2d at 650-51. By analogy, there is no room to import an "objective" good faith standard from the common law into Article 9 transactions.
Although the decisions to date have not achieved uniformity, few jurisdictions have faced squarely the question that we consider here. The most closely related cases contain little or no useful reasoning. We believe that our interpretation has the potential to promote uniformity, because of the lack of contrary precedent and because of the relative uniformity of the analogous cases concerning merchants who enter into secured transactions.
Fourth, the history of the UCC supports exclusivity of the statutory duty. UCC § 1-201 contains the definition of good faith. The 1950 draft of the UCC did not contain a separate standard of good faith for merchants. Subsequent drafts provided that "good faith includes the observance by a person of the reasonable commercial standards of any business or trade in which he is engaged." On the recommendation of the American Bar Association's Section on Corporation, Banking, and Business Law, however, the drafters revised the general definition to require only honesty in fact. Bracher, The Legislative History of the Uniform Commercial Code, 58 Colum L Rev 798, 812 (1958).
See also Szabo v. Vinton Motors, Inc., 630 F.2d 1, 4 (1st Cir.1980) (purpose of Official Comments is to promote uniform construction of UCC).
We conclude that the statutory duty of good faith found in ORS 71.2010(19) and made applicable to secured transactions by ORS 79.1050(4) displaces the common law duty of good faith, in transactions to which ORS chapter 79 applies.
Boge argues that the trial court's instruction, which stated that "fair dealing may require more than honesty," is consistent with the UCC, as well as with the common law. This court stated in Community Bank v. Ell, 278 Or. 417, 428, 564 P.2d 685 (1977), however, that:
As one commentator has phrased it:
Cases from other jurisdictions also apply a subjective standard of good faith to Article
In contrast, the common law standard of good faith is an "objective" one that considers the reasonable expectations of the parties. It may, as the trial court instructed, "require more than honesty." See Best v. U.S. National Bank, supra, 303 Or. at 562-65, 739 P.2d 554 (doctrine protects reasonable expectations of the parties to a contract); Comini v. Union Oil Co., 277 Or. 753, 756, 562 P.2d 175 (1977) (defendant could not arbitrarily refuse to approve a sale where no legitimate business interests of consequence to it would be served); Perkins v. Standard Oil Co., 235 Or. 7, 15-17, 383 P.2d 107 (1963) (parties to a contract ordinarily contemplate that discretion in performance will be exercised for particular purposes); Restatement (Second) of Contracts comments a and d § 205 ("good faith" requirement excludes a variety of types of conduct that violate community standards of decency, fairness, or reasonableness; actor may violate the obligation of good faith even though he or she believes conduct to be justified).
We conclude that, except as to transactions governed by ORS 79.3180(2), the UCC requires only "subjective" good faith — that is, "honesty in fact in the conduct or transaction concerned" — in transactions governed by ORS chapter 79. ORS 71.2010(19); ORS 79.1050(4). In the present case, the UCC does not require "fair dealing" or "more than honesty," as the trial court instructed. The instruction defining good faith was erroneous.
The next question to be answered is whether the erroneous instruction caused prejudice. If not, the error does not require reversal. Waterway Terminals v. P.S. Lord, 256 Or. 361, 370, 474 P.2d 309 (1970). See also Honeywell v. Sterling Furniture Co., 310 Or. 206, 211-12, 797 P.2d 1019 (1990) (principle applied to instruction that correctly described law but distracted jury from appropriate analysis of issue before it). Here, the trial court erroneously told the jury that, even if Bank acted honestly, more was required. There was evidence from which a jury could have found that Bank acted honestly in fact, as well as opposing evidence. The jury may have found that Bank acted honestly but that Boge should prevail nonetheless. The standard for Bank's conduct was the central issue to be decided. The error was prejudicial.
Ordinarily, after deciding that an erroneous instruction was prejudicial, we would reverse and remand for a new trial. In this case, Bank argues that it is entitled to a reversal without being subjected to a new trial, because there was no evidence from which a jury could have found in Boge's favor on his claim for breach of the duty of good faith. Boge presented evidence that Bank's employee harbored subjective ill will toward him. Boge also presented evidence of damages from his failure to redeem the cows. Bank argues that that evidence was insufficient to support the verdict, because Boge was using the duty of good faith improperly to add a substantive term to the parties' bargain and because he failed to prove causation.
In addition to proving ill will and damages, Boge also must have proved that his damages were caused by Bank's act
The obligation of good faith does not vary the substantive terms of the bargain or of the statute, nor does it provide a remedy for an unpleasantly motivated act that is expressly permitted by contract or statute. As this court noted in the common law context:
See also Garrett v. BankWest, Inc., 459 N.W.2d 833 (S.D. 1990) (bank breached no duty in refusing to loan borrower additional money to pay off debt to another lender, who was foreclosing); Federal Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706 (Tex. 1990) (bank breached no duty by failing to foreclose promptly); Bank of Hartland v. Arndt, 129 Wis.2d 411, 385 N.W.2d 219, 233 (1986) (UCC imposed no duty on bank to file a continuation statement; therefore, debtor's claim failed to establish statutorily required conduct to which a good faith obligation attached).
In arguing that the evidence was sufficient to create a jury issue as to good faith, Boge relies on two things. First, he points to evidence that Bank decided to foreclose promptly after his default and demanded that he surrender the collateral when Bank knew that he still hoped to redeem. Bank acted within its express rights under the contract and the UCC. For that reason, Bank's motive is irrelevant. "The obligation to act in good faith does not bar a party from enforcing whatever legal rights he possesses." 1 R. Anderson, Uniform Commercial Code § 1-203:11 at 381 (3d ed 1981). See also Bliss v. Southern Pacific Co., 212 Or. 634, 646, 321 P.2d 324 (1958) (in common law context, if an enforceable contract expressly creates rights or privileges, motive for exercising them is immaterial). Boge cannot recover on his theory that Bank breached the duty of good faith by enforcing its legal rights.
In addition, Boge points to evidence that Bank rudely refused to give him payoff information on May 29, in order to prevent him from paying off the notes. Boge testified that Bank prevented him from redeeming his cows by failing on May
The decision of the Court of Appeals is reversed. The judgment of the circuit court is reversed, and the case is remanded to the circuit court for further proceedings consistent with this opinion.
ORS 73.4190(3) provides:
ORS 75.1090(1) provides in part:
ORS 77.4040 provides in part:
ORS 78.3180 provides:
ORS 79.3180(2) provides in part:
The reason that the committee gave for recommending the deletion was as follows:
"(1) Honesty in fact.
"(2) Commercial decency.
"(3) Observance of reasonable commercial standards.
Committee on the Proposed Commercial Code, Section on Corporation, Banking, and Business Law of the American Bar Association, Report: Developments Since the September 1949 Report, 6 Bus Law 119, 127-28 (1951).
In Oregon, that section is codified as ORS 79.2080.