Perdue v. Crocker National Bank

Opinion

Plaintiff filed this class action to challenge the validity of charges imposed by defendant Crocker National Bank for the processing of checks drawn on accounts without sufficient funds. (The parties refer to such checks as NSF checks and to the handling charge as an NSF charge.) He appeals from a judgment of the trial court entered after that court sustained defendant’s general demurrer without leave to amend.

On July 3, 1978, plaintiff filed suit on behalf of all persons with checking accounts at defendant bank and a subclass of customers who have paid NSF charges to the bank. 1 The complaint first alleges a contract under which the bank furnishes checking service in return for a maintenance charge. 2 It then asserts that “It is the practice of defendants to impose and collect a unilaterally set charge for processing checks presented against plaintiffs’ accounts when such accounts do not contain sufficient funds to cover the amount of the check.” “Defendants have at various times unilaterally increased the NSF charge to an amount the defendants deemed appropriate, without reference to any criteria, and defendants imposed and collected the said in *921 creased amount without any explanation or justification by defendants to plaintiffs.” At the time of filing of the suit, the charge was $6 for each NSF check, whether the check was honored or returned unpaid, even though “the actual cost incurred by the defendants in processing an NSF check is approximately $0.30.”

The bank requires each depositor to sign a signature card which it uses “to determine and verify the authenticity of endorsements on checks.” In extremely small (6 point) type, the signature card states that the undersigned depositors “agree with Crocker National Bank and with each other that. . . this account and all deposits therein shall be . . . subject to all applicable laws, to the Bank’s present and future rules, regulations, practices and charges, and to its right of setoff for the obligations of any of us.” The card does not identify the amount of the charge for NSF checks, and the bank does not furnish the depositor with a copy of the applicable bank rules and regulations. 3

On the basis of these allegations, plaintiff asserts five causes of action: (1) for a judicial declaration that the bank’s signature card is not a contract authorizing NSF charges; (2) for a judicial declaration that such charges are oppressive and unconscionable; (3) to recover damages for unjust enrichment derived from the bank’s collection of illegal NSF charges; (4) to enjoin alleged unfair and deceptive practices—the bank’s failure to inform customers of the contractual nature of the signature card, and its practice of waiving NSF charges as to certain preferred customers; and (5) to recover the difference between the NSF charges and defendant’s actual expenses in processing NSF checks on the theory that the charges represent an unreasonable attempt to fix liquidated damages.

Defendant filed general and special demurrers to each of the asserted causes of action. The superior court sustained the general demurrers and, taking notice of the fact that plaintiff had filed three previous complaints in another action raising similar issues, 4 denied leave to amend. Plaintiff appeals from judgment for defendant.

*922 Plaintiff’s third alleged cause of action is derivative; its charge of unjust enrichment depends upon a finding pursuant to some other cause of action that the NSF charges were invalid or excessive. This cause of action raises no issues for decision in the present appeal. The other four alleged causes of action, however, present independent and substantial issues, We review each in turn, applying the established principle that a demurrer “admits the truth of all material factual allegations in the complaint . . .; the question of plaintiff’s ability to prove those allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 496 [86 Cal.Rptr. 88, 468 P.2d 216]; Committee on Children's TV, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213-214 [197 Cal.Rptr. 783, 673 P.2d 660].)

I. Plaintiff’s first cause of action: whether the signature card is a contract authorizing NSF charges.

The complaint alleges that “The signature card prepared by the defendants does not identify the amount of any charge to be paid by the plaintiffs for processing NSF checks and is not an agreement for such payment. The card does not constitute mutual assent to NSF charges in any particular sum or at all and accordingly is not a contract conferring authority to do the acts complained of herein.” “Based upon the language of the signature card, the plaintiffs believed and expected that the signature card was intended as a handwriting example for purposes of identification and verification only.” Plaintiff therefore seeks a judicial declaration “as to whether the signature card is a valid or enforceable contract and ... a lawful basis for the imposition of the NSF charge.”

The cases unanimously agree that a signature card such as the Crocker Bank card at issue here is a contract. “The bank is authorized to honor withdrawals from an account on the signatures authorized by the signature card, which serves as a contract between the depositor and the bank for the handling of the account.” (Blackmon v. Hale (1970) 1 Cal.3d 548, 556 [83 Cal.Rptr. 194, 463 P.2d 418]; Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 811-812 [148 Cal.Rptr. 22, 582 P.2d 109, 7 A.L.R.4th 642].) Other California decisions (see Hoffman v. Security Pacific Nat. Bank (1981) 121 Cal.App.3d 964, 969 [176 Cal.Rptr. 14]; Larrus v. First National Bank (1954) 122 Cal.App.2d 884, 889-890 [266 P.2d 143]) and decisions of other states (see, e.g., In re Estate of Cilvik (1970) 439 Pa. 522 [267 A.2d 836, 838, fn. 2]) also view the signature card as a contract.

Plaintiff does not seriously dispute this proposition. His complaint alleges that the depositors “agreed to pay [the bank’s] maintenance charge ...” in return for checking privileges, and one could infer that they agreed to do *923 so by affixing their signatures to the card. Complaints filed by plaintiff in an earlier action stated expressly that the signature card was a contract. 5

Plaintiff argues, however, that even if a signature card is a contract to establish a checking account, it is not a contract authorizing NSF charges. He contends that the contract is illusory because it permits the bank to set and change the NSF charges at its discretion, and without assent from the customer except such as may be inferred from the fact that the customer does not cancel his account after the bank posts notice of its rates. 6

Plaintiff relies on the rule that “[a]n agreement that provides that the price to be paid, or other performance to be rendered, shall be left to the will and discretion of one of the parties is not enforceable.” (Automatic Vending Co. v. Wisdom (1960) 182 Cal.App.2d 354, 357 [6 Cal.Rptr. 31].) That rule, however, applies only if the total discretion granted one party renders the contract lacking in consideration. (See ibid.) If there are reciprocal promises, as in the present case, the fact that the contract permits one party to set or change the price charged for goods or services does not render the contract illusory. Thus in Cal. Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474 [289 P.2d 785, 49 A.L.R.2d 496], the court upheld a contract permitting the buyer of sugar beets to set the price to be paid. The buyer did not have arbitrary power, the court explained, because “where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.” (P. 484; see Automatic Vending Co. v. Wisdom, supra, 182 Cal.App.2d 354, 358 and cases there cited; cf. Civ. Code, § 1611; Cal. U. Com. Code, § 2305; 1 Corbin, Contracts (1963 ed.) § 98.) Likewise, “a contracting party’s discretionary power to vary the price or other performance does not render the agreement illusory if the party’s actual exercise of that power is reasonable.” (Powell v. Central Cal. Fed. Sav. & Loan Assn. (1976) 59 Cal.App.3d 540, 549 [130 Cal.Rptr. 635], italics original; see Vanguard Investments v. Central Cal. Fed. Sav. & Loan Assn. (1977) 68 Cal.App.3d 950, 958 [137 Cal.Rptr. 719]; Frankini v. Bank of America (1939) 31 Cal.App.2d 666, 676 [88 P.2d 790].)

*924 The recent decision in Lazar v. Hertz Corp. (1983) 143 Cal.App.3d 128 [191 Cal.Rptr. 849], offers an analogy to the present litigation. Hertz’ car rental agreement permitted it to determine unilaterally the price charged for gas used to fill the tanks of returned rental cars. Plaintiff’s suit alleged that Hertz fixed unreasonably high prices, in breach of its duty of good faith and fair dealing. Discussing this cause of action, the court said that “[t]he essence of the good faith covenant is objectively reasonable conduct. Under California law, an open term in a contract must be filled in by the party having discretion within the standard of good faith and fair dealing.” (P. 141.)

We conclude that plaintiff here is not entitled to a judicial declaration that the bank’s signature card is not a contract authorizing NSF charges. To the contrary, we hold as a matter of law that the card is a contract authorizing the bank to impose such charges, subject to the bank’s duty of good faith and fair dealing in setting or varying such charges. Plaintiff may, upon remand of this case, amend his complaint to seek a judicial declaration determining whether the charges actually set by the bank are consonant with that duty.

II. Plaintiff’s second cause of action: whether the bank’s NSF charges are oppressive, unreasonable, or unconscionable.

Plaintiff’s second cause of action alleges that the signature card is drafted by defendant bank which enjoys a superior bargaining position by reason of its greater economic power, knowledge, experience and resources. Depositors have no alternative but to acquiesce in the relationship as offered by defendant or to accept a similar arrangement with another bank. 7 The complaint alleges that the card is vague and uncertain, that it is unclear whether it is intended as an identification card or a contract, that it imposes no obligation upon the bank, and permits the bank to alter or terminate the relationship at any time. 8 It then asserts that “The disparity between the actual cost to defendants and the amount charged by defendants for processing an NSF check unreasonably and oppressively imposes excessive and unfair liability upon plaintiffs.” Plaintiff seeks a declaratory judgment to determine the rights and duties of the parties.

Plaintiff’s allegations point to the conclusion that the signature card, if it is a contract, is one of adhesion. The term contract of adhesion “sig *925 nifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” (Neal v. State Farm Ins. Co. (1961) 188 Cal.App.2d 690, 694 [10 Cal.Rptr. 781]; Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 817 [171 Cal.Rptr. 604, 623 P.2d 165].) The signature card, drafted by the bank and offered to the customer without negotiation, is a classic example of a contract of adhesion; the bank concedes as much.

In Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, we observed that “To describe a contract as adhesive in character is not to indicate its legal effect. ... [A] contract of adhesion is fully enforceable according to its terms [citations] unless certain other factors are present which, under established legal rules—legislative or judicial—operate to render it otherwise.” (Pp. 819-820, fn. omitted.) “Generally speaking,” we explained, “there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or ‘adhering’ party will not be enforced against him. [Citations.] The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or ‘unconscionable.’ ” (P. 820, fns. omitted.) 9

In 1979, the Legislature enacted Civil Code section 1670.5, which codified the established doctrine that a court can refuse to enforce an unconscionable provision in a contract. 10 Section 1670.5 reads as follows: “(a) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract *926 without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. [1] (b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination. ”

In construing this section, we cannot go so far as plaintiff, who contends that even a conclusory allegation of unconscionability requires an evidentiary hearing. We do view the section, however, as legislative recognition that a claim of unconscionability often cannot be determined merely by examining the face of the contract, but will require inquiry into its setting, purpose, and effect, Plaintiff bases his claim of unconscionability on the alleged 2,000 percent differential between the NSF charge of $6 and the alleged cost to the bank of $0.30. 11 The parties have cited numerous cases on whether the price of an item can be so excessive as to be unconscionable. The cited cases are from other jurisdictions, often from trial courts or intermediate appellate courts, and none is truly authoritative on the issue. Taken together, however, they provide a useful guide to analysis of the claim that a price is so excessive as to be unconscionable.

To begin with, it is clear that the price term, like any other term in a contract, may be unconscionable. (Patterson v. Walker-Thomas Furniture Co. (D.C.Ct.App. 1971) 277 A.2d 111, 113 and cases there cited (fn. 6); see Central Budget Corp. v. Sanchez (1967) 53 Misc.2d 620 [279 N.Y.S.2d 391, 392]; Merrel v. Research & Data, Inc., (1979) 3 Kan.App.2d 48 [589 P.2d 120, 123] (dictum); Vom Lehn v. Astor Art Galleries, Ltd. (1976) 86 Misc.2d 1 [380 N.Y.S.2d 532, 541].) Allegations that the price exceeds cost or fair value, standing alone, do not state a cause of action. (Morris v. Capitol Furniture Co. (App.D.C. 1971) 280 A.2d 775 [100 percent markup over cost]; Patterson v. Walker-Thomas Furniture Co., supra, 277 A.2d 111, 114 [price alleged to be in excess of fair value]; Bennett v. Behring Corp. (S.D.Fla. 1979) 466 F.Supp. 689, 696-698 [price in excess of value].) Instead, plaintiff’s case will turn upon further allegations and proof setting forth the circumstances of the transaction.

The courts look to the basis and justification for the price (cf. A & M Produce Co. v. FMC Corp., supra, 135 Cal.App.3d 473, 487), including *927 “the price actually being paid by . . . other similarly situated consumers in a similar transaction.” (Bennett v. Behring Corp., supra, 466 F.Supp. 689, 697, italics omitted.) The cases, however, do not support defendant’s contention that a price equal to the market price cannot be held unconscionable. While it is unlikely that a court would find a price set by a freely competitive market to be unconscionable (see Bradford v. Plains Cotton Cooperative Assn. (10th Cir. 1976) 539 F.2d 1249, 1255 [cotton futures]), the market price set by an oligopoly should not be immune from scrutiny. Thus courts consider not only the market price, but also the cost of the goods or services to the seller (Frostifresh Corporation v. Reynoso (1966) 52 Misc.2d 26 [274 N.Y.S.2d 757]; Toker v. Westerman (1970) 113 N.J.Super. 452 [274 A.2d 78]), the inconvenience imposed on the seller (see Merrel v. Research & Data, Inc., supra, 589 P.2d 120, 123), and the true value of the product or service (American Home Improvements, Inc. v. MacIver (1964) 105 N.H. 435 [201 A.2d 886, 889]).

In addition to the price justification, decisions examine what Justice Weiner in A & M Produce called the “procedural aspects” of unconscionability. (See A & M Produce Co., supra, 135 Cal.App.3d at p. 489.) Cases may turn on the absence of meaningful choice (Patterson v. Walker-Thomas Furniture Co., supra, 277 A.2d 111, 113 and cases there cited), the lack of sophistication of the buyer (compare Geldermann & Co., Inc. v. Lane Processing, Inc. (8th Cir. 1975) 527 F.2d 571, 576 [relief denied to sophisticated investor]) with Frostifresh Corporation v. Reynoso, supra, 274 N.Y.S.2d 757 [relief granted to unsophisticated buyers]) and the presence of deceptive practices by the seller (ibid.; Vom Lehn v. Astor Art Galleries, Ltd., supra, 380 N.Y.S.2d 532).

Applying this analysis to our review of the complaint at hand, we cannot endorse defendant’s argument that the $6 charge is so obviously reasonable that no inquiry into its basis or justification is necessary. 12 In *928 1978 $6 for processing NSF checks may not seem exorbitant, 13 but price alone is not a reliable guide. Small charges applied to a large volume of transactions may yield a sizable sum. The complaint asserts that the cost of processing NSF checks is only $0.30 per check, which means that a $6 charge would produce a 2,000 percent profit; even at the higher cost estimate of $1 a check mentioned in plaintiff’s petition for hearing, the profit is 600 percent. 14 Such profit percentages may not be automatically unconscionable, but they indicate the need for further inquiry. 15

Other aspects of the transaction confirm plaintiff’s right to a factual hearing. Defendant presents the depositor with a document which serves at least in part as a handwriting exemplar, and whose contractual character is not obvious. The contractual language appears in print so small that many could not read it. State law may impose obligations on the bank (e.g., the duty to honor a check when the account has sufficient funds (Allen v. Bank of America, supra, 58 Cal.App.2d 124, 127)), but so far as the signature card drafted by the bank is concerned, the bank has all the rights and the depositor all the duties. The signature card provides that the depositor will be bound by the bank’s rules, regulations, practices and charges, but the bank does not furnish the depositor with a copy of the relevant documents. The bank reserves the power to change its practices and fees at any time, subject only to the notice requirements of state law.

In short, the bank structured a totally one-sided transaction. The absence of equality of bargaining power, open negotiation, full disclosure, and a contract which fairly sets out the rights and duties of each party demonstrates that the transaction lacks those checks and balances which would inhibit the charging of unconscionable fees. In such a setting, plaintiff’s charge that the bank’s NSF fee is exorbitant, yielding a profit far in excess of cost, cannot be dismissed on demurrer. Under Civil Code section 1670.5, the parties should be afforded a reasonable opportunity to present evidence *929 as to the commercial setting, purpose, and effect of the signature card and the NSF charge in order to determine whether that charge is unconscionable.

III. Plaintiff’s fourth cause of action: whether the bank has performed acts of unfair competition.

Business and Professions Code section 17200 defines “unfair competition” to include any “unlawful, unfair, or fraudulent business practice.” This language is intended to protect consumers as well as business competitors; its prohibitory reach is not limited to deceptive or fraudulent conduct but extends to any unlawful business conduct. (Committee on Children's TV, Inc. v. General Foods Corp., supra, 35 Cal.3d 197, 209-210; Stoiber v. Honeychuck (1980) 101 Cal.App.3d 903, 927 [162 Cal.Rptr. 194].)

The complaint charges two acts of unfair competition. First, it asserts that the “signature card is used in a manner which is unfair, deceptive and misleading, in that plaintiffs are led to believe that it is a signature card for identification purposes and the defendants treat the signature card, without disclosure of said fact, as the legal authority to impose the NSF charge on plaintiffs’ checking accounts.” Second, it asserts that “defendants arbitrarily and capriciously waive the NSF charge for preferred or commercial accounts,” thus shifting the costs of processing NSF checks from those preferred customers to others whose accounts are charged.

Neither allegation is clear and precise. After reading paragraph 38, we are uncertain whether plaintiff contends that the signature card itself is deceptive, or whether he contends that the bank employs misrepresentations or other deceptive practices in presenting the card to the depositor. If the latter is plaintiff’s contention, the complaint should set out the challenged representations or practices.

It is, of course, clear that if plaintiff can show that the card or the manner in which it is presented to the customer is deceptive and misleading, he can prove a cause of action for unfair competition. Since he seeks only injunctive relief under this cause of action, he need not show that he himself was misled; he need only prove that “members of the public are likely to be deceived.” (Chern v. Bank of America (1976) 15 Cal.3d 866, 876 [127 Cal.Rptr. 110, 544 P.2d 1310]; Committee on Children’s TV, Inc. v. General Foods Corp., supra, 35 Cal.3d 197, 211.) Thus the defect in plaintiff’s allegation is not one of substance, but only of lack of certainty. Such a defect would not justify the sustaining of a demurrer without leave to amend. (Minsky v. City of Los Angeles (1974) 11 Cal.3d 113, 118 [113 *930 Cal.Rptr. 102, 520 P.2d 726]; La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 876 [97 Cal.Rptr. 849, 489 P.2d 1113].)

Plaintiff’s assertion in paragraph 39 that the bank arbitrarily waives NSF charges for some customers contains a more serious defect. Although price discrimination is often unlawful, depending upon the context of the act and the intent of the perpetrator (see the Unfair Practices Act, Bus. & Prof. Code, § 17000 et seq.), “arbitrary” price discrimination in itself is not necessarily illegal. This defect is one of substance; while plaintiff’s accusation in paragraph 38 of deceptive and misleading practices describes acts of unfair competition, albeit in very general terms, his accusation of arbitrary waiver of NSF charges does not.

Plaintiff could amend his complaint to add particulars which would show that the bank’s discriminatory waiver of NSF charges violated some legal requirement. We are disturbed, however, that plaintiff has never advanced any theory under which the waiver would constitute unfair competition. Plaintiff has argued only that the waiver of NSF charges as to some customers shifts the processing costs to others. Even if true, that allegation would not suffice to prove unfair competition.

In conclusion, the superior court properly sustained a demurrer to plaintiff’s fourth cause of action, but erred in denying leave to amend. Plaintiff should be permitted to amend to set out the alleged deceptive practices employed by defendant. The trial court would be within its discretion in denying leave to amend to claim unlawful discrimination in waiving NSF charges, but since plaintiff must be allowed to amend on the deceptive practices issue, the court may choose to permit amendment as to the waiver issue as well.

IV. Plaintiff’s fifth cause of action: whether the bank’s charge for NSF checks is an unlawful penalty.

Paragraph 42 of the complaint states that “[c]ausing NSF checks to be presented for payment is a breach by plaintiffs of their contractual obligations to defendant . . . .” The NSF charge collected by defendants, however, “is a penalty and is not imposed to compensate defendants for damages incurred by plaintiffs’ breach,” and therefore violates Civil Code sections 1670 and 1671. The complaint concludes that “[p]laintiffs are entitled to recover the difference between the unlawful charges collected and defendants’ actual damages . . . .”

By these allegations, plaintiff seeks to invoke the rule that a contractual provision specifying damages for breach is valid only if it “repre *931 sent[s] the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.” (Better Food Mkts. v. Amer. Dist. Teleg. Co. (1953) 40 Cal.2d 179, 187 [253 P.2d 10, 42 A.L.R.2d 580]; Garrett v. Coast & Southern Fed. Sav. & Loan Assn., supra, 9 Cal.3d 731, 739.) An amount disproportionate to the anticipated damages is termed a “penalty.” A contractual provision imposing a “penalty” is ineffective, and the wronged party can collect only the actual damages sustained. 16

Two Court of Appeal decisions have addressed plaintiff’s contention and concluded that the writing of an NSF check is not a breach of contract, and thus the fee charged for processing the check is not a penalty. 17 In Hoffman v. Security Pacific Nat. Bank (1981) 121 Cal.App.3d 964, 968-969 [176 Cal.Rptr. 14], the court said that “[p]laintiff argued, and attempted to prove, that the depositors entered into a covenant not to write NSF checks when they executed signature cards .... Plaintiff attempted to show that industry custom prohibited the writing of overdrafts without prior agreement and that the depositors’ promise to pay a service charge for any NSF check contained an implied covenant not to write such checks, ft] Plaintiff failed to establish any such custom or any agreement on the depositors’ part not to write overdrafts. Moreover, statutes governing the obligations of banks and their depositors, which are incorporated into and become part of the contract between a bank and its depositors [citations], treat an overdraft as an application for advance credit rather than as a breach of an express or implied covenant. California Uniform Commercial Code section 4401 specifically authorizes a bank to pay overdrafts and to charge customers’ accounts to recover amounts paid, even when payments result in overdrafts on the account. While a bank has a statutory obligation to honor any check drawn by a depositor for an amount not exceeding the *932 balance in his account, and while the depositor has a contractual obligation to pay a service charge when he presents a NSF check, the depositor has no statutory or contractual obligation to refrain from drawing checks for amounts in excess of the balance in his account. (Cal. U. Com. Code, § 4401.)” (Pp. 968-969; accord, Shapiro v. United California Bank (1982) 133 Cal.App.3d 256, 262 [184 Cal.Rptr. 34].)

We cannot entirely agree with Hoffman and Shapiro that the contract between the bank and the depositor treats an overdraft as an application for advance credit. The contract in fact is silent on the characterization of an NSF check, and the bank is aware that a depositor often writes overdrafts in the mistaken belief that he has, or will have, sufficient funds to cover the check, and without any intent to apply for credit. 18 We agree with those decisions, however, that because the depositor has never agreed to refrain from writing NSF checks, the writing of such a check is not a breach of contract. The fee that the bank may charge for processing such a check is limited by principles of good faith, reasonableness, unconscionability, and