Wrongfully Dishonored Checks. Robert Parrett was the principal shareholder, president, and chief operating officer of P & P Machinery, Inc, a farm machinery business located in Nebraska. On March 1, 1984, Parrett signed and delivered a check from P & P

Question

Machinery to a South Dakota firm. The check was dishonored by the bank even though P & P Machinery had sufficient funds in its account to cover the check. In addition, Parrett had a long-standing relationship with the bank as personal guarantor of corporate obligations to the bank and had never had any previous problems with the bank. As a result of the dishonored check, Parrett was charged with felony theft in South Dakota and extradited for trial in South Dakota. On learning that the bank had dishonored the check erroneously, the trial court dismissed the charge against Parrett. Parrett sued the bank for damages. The trial court held that Parrett had no standing to sue the bank because he was not the bank's "customer"—the corporation was. Will the appellate court agree that Parrett lacked standing to sue the bank? Discuss fully.

Answer 1

Wrongfully dishonored checks
No. The appellate court held that Parrett, who had personally guaranteed corporate obligations to the bank, was a bank "customer" and, as such, had standing to sue the bank for the wrongful dishonor of the check. Under UCC 4-402, "A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item." The purpose of UCC 4-402 is to hold banks accountable for wrongful dishonors of their customers' checks. To interpret the word "customer" to exclude partners and corporate shareholders at all times and in all circumstances was to misread the statute and its intent. Here, "the parties' business re-lationship, which included Parrett's personal guaranty for P & P Machinery's obligations to the bank, was such that it was foreseeable that dishonoring the corporation's check would reflect directly on Parrett. . . . Since the consequences of the wrongful dishonor fell upon Parrett, it would elevate form over substance to say that he was not the bank's ‘customer' within the meaning of [UCC] 4-402." (This case was decided before the revisions to Articles 3 and 4, but the result would likely be the same under those revisions.)