Sun River Cattle Co. v. Miner S Ban

• Court: Montana Supreme Court
• Decided: April 17, 1974
• Docket: 12511
• Status: Published

Opinion

No. 12511

I N THE SUPREME COURT O THE STATE O M N A A F F OTN

S N RIVER CATTLE CO., I N C . , a U C o r p o r a t i o n ; LOUIS SKAAR & SONS; and BRUCE E. BECK & SONS,

P l a i n t i f f s and A p p e l l a n t s ,

MINERS BANK O MONTANA N .A. F ,a Banking C o r p o r a t i o n ,

Defendant and Respondent.

Appeal from: D i s t r i c t Court o f t h e Second J u d i c i a l D i s t r i c t , Honorable James D. Freebourn, Judge p r e s i d i n g .

Counsel o f Record :

For A p p e l l a n t s :

C o r e t t e , Smith and Dean, B u t t e , Montana Kendrick Smith argued, B u t t e , Montana

For Respondent :

Alexander, Kuenning and Miller, G r e a t F a l l s , Montana P a u l D. Miller argued, Great F a l l s , Montana Henningsen, P u r c e l l and Genzberger, B u t t e , Montana

For Amici Curiae:

Wesley Wertz, Helena, Montana Turnage and McNeil, Polson, Montana Luxan, M u r f i t t and Davis, Helena, Montana

Submitted: arch 18, 1974

Decided : @R 1 7 ~ 4 Filed : fiw?17'lW#. ,.. a ?, r b , i PER CURIAM: This appeal was o r i g i n a l l y heard on November 27, 1973; an opinion issued January 14, 1974; a rehearing was granted and argued. This opinion replaces t h a t appearing i n 31 St.Rep. 44. This -is a case involving three separate p l a i n t i f f s and s i x separate checks. The p l a i n t i f f s a r e c a t t l e r a i s e r s and brought t h i s action t o recover $74,868.02, plus i n t e r e s t which represents the t o t a l of the s i x checks drawn by Schumacher's Nw Butte Butchering, hereinafter referred t o as Nw Butte, e e on i t s account a t Miners Bank of Montana, hereinafter referred t o a s Miners. One check was payable t o Bruce Beck & Son, two t o Louis Skaar & Sons, and t h r e e t o Sun River Cattle Co., who will be referred t o hereinafter, respect- ively, a s Beck, Skaar and Sun River individually and a s p l a i n t i f f s c o l l e c t i v e l y . Each of the checks was accepted by the p l a i n t i f f payees i n payment f o r c a t t l e sold and delivered t o Nw Butte. e A summary of the history of a l l s i x checks is a s follows: The Beck check dated April 28, 1970, was f o r t h e amount of $12,478.63. This check was sent by Beck's bank t o Miners, stamped "Paid", run through Nw e Butte's checking account and deducted from the balance on May 11, 1970, (a Monday). The check was reversed and added t o the balance on May 13, 1970, and returned t o Beck's bank f o r i n s u f f i c i e n t funds. The check was s e n t back t o Miners, stamped "Paid", run through Nw Butte's checking account, deducted e from the balance on May 20, 1970, reversed on May 21 , 1970, and returned t o Beck's bank f o r i n s u f f i c i e n t funds. I t was then returned t o Miners "for collection" June 4, 1970, received by Miners on June 8 , 1970, and retained by Miners u n t i l July 7 , 1970, when i t was returned t o Beck's bank. The f i r s t Skaar check, dated April 14, 1970, was f o r t h e amount of $11,514.74. This check was s e n t by Skaar's bank t o Miners, stamped "Paid", run through New Butte's checking account, deducted from the balance on April 27, 1970, reversed April 28, 1970, and added t o t h e balance and returned t o Skaar's bank f o r i n s u f f i c i e n t funds on April 28, 1970. The check was s e n t back t o Miners, run through Nw Butte's checking account and deducted from e the balance on May 11 , 1970, reversed and added t o balance May 13, 1970, and returned t o Skaar's bank f o r i n s u f f i c i e n t funds. I t was returned by Skaar's bank "for collection'' on May 15, 1970, received by Miners on May 18, 1970, and retained by Miners u n t i l July 27, 1970, when i t was returned t o S k a a r ' s bank. The second Skaar check, dated May 4, 1970, was f o r t h e amount of $12,434.26. This check was s e n t by Skaar's bank t o Miners, stamped "Paid", run through New B u t t e ' s checking account, deducted from the balance on May 12, 1970, reversed on May 13, 1970, and added t o the balance and returned t o Skaar's bank f o r i n s u f f i c i e n t funds. The check was returned by Skaar's bank t o Miners " f o r c o l l e c t i o n " , received by Miners on May 20, 1970, and retained by Miners u n t i l July 27, 1970, when i t was returned t o Skaar's bank. The f i r s t Sun River check, dated April 27, 1970, was f o r the amount of $12,882.57. This check was deposited in the F i r s t National Bank of Great F a l l s on April 28, 1970, and s e n t t o Miners. I t was stamped "Paid May 1 , 1970", run through Nw B u t t e ' s checking account and deducted May 1 , 1970, e (a Friday). The check was reversed and added t o the balance on May 4 , 1970, (a Monday) and returned t o F i r s t National Bank of Great F a l l s . The check was s e n t back t o Miners "for collection" on May 8 , 1970, received by Miners on May 11, 1970, and has never been returned. The second Sun River check, dated May 4, 1970, i n t h e amount of $13,114.23, and the t h i r d Sun River check, dated April 1 , 1970, (although t h e invoice f o r this load of c a t t l e i s dated April 28, 1970) i n t h e amount of $12,443.59, were both s e n t t o Miners d i r e c t l y "for c o l l e c t i o n " . The second check was s e n t on May 6 , 1970, and received by Miners on May 7 , 1970, and the t h i r d was s e n t on May 12, 1970, and received by Miners May 13, 1970. These checks have never been returned. None of the checks have been paid. In 1962 the original transaction between Miners and New Butte took place when Miners loaned New Butte some $289,500. In 1968 refinancing of New Butte became necessary in an amount i n excess of Miners' lending capacity. Refinancing was carried out w i t h two separate loans. One was f o r $200,000 w i t h Miners having a 30% participation and the remaining 70% spread among seven sister banks. The other was f o r $100,000, 90% of which was guaranteed by the Small Business Administration (hereinafter referred t o a s SBA). The loans were made t o provide working c a p i t a l , and t o comply w i t h federal regulations a s t o slaughterhouses . Miners f i l e d financing statements w i t h the county c l e r k of S i l v e r Bow County and the secretary of s t a t e . A l i s t of equipment was attached t o t h e statement f i l e d with the secretary of s t a t e ; no such l i s t was attached t o the one f i l e d with the county c l e r k and recorder. N amounts being secured o a r e shown on the statements but Mr. Pitts, Miners1 president a t the time, s t a t e d t h a t they were designed t o cover both loans. Nitness P i t t s t e s t i f i e d t h a t the l i e n of the $200,000 loan was f i r s t as t o a l l equipment b u t t h a t the $100,000 loan was f i r s t a s t o the accounts receivable and inventory. Miners a l s o took mortgages securing t h e $200,000 loan a s follows: mortgage on New B u t t e ' s plant and a mortgage from Harold F. Schumacher and Loretta Schumacher covering thei r home and personal property. Securing the $100,000 loan Miners took a mortgage from New Butte t o Miners covering t h e plant and equipment and a mortgage from the Schumachers covering t h e i r home and personal property. In each instance the mortgage securing the $200,000 loan was f i l e d first. None of these mortgages has been foreclosed. Miners a l s o f i l e d a s e c u r i t y agreement w i t h the r e g i s t r a r of motor vehicles securing the $200,000 loan and a l s o took an assignment on Schumacherls l i f e insurance a s security f o r the $200,000 loan. The policies were cashed f o r the cash value. In December of 1969, Nw Butte closed down i t s operation f o r financial e reasons. Operations were resumed i n January 1970. A t this time a financing firm, Doug1 a s Guardian, with i t s program of warehousing r e c e i p t s and accounts receivable financing became involved i n cooperation w i t h Miners and New Butte. Advances by Miners under the warehouse recei pts plan approximated $390,000. The amounts advanced by Miners under the accounts receivable financing exceeded $400,000. The warehouse r e c e i p t s program s t a r t e d January 15, 1970, and ended May 22, 1970; the accounts receivable financing covered a period from January 30, 1970, t o May 11, 1970. During the f i r s t seven months of 1970, t h e New Butte checking account was overdrawn i n amounts ranging from nominal t o as much a s $55,000 f o r a l l but 87 of those days. A of May 18, 1970, the $700,000 loan was current in payments. s All payments on t h e $200,000 were made currently through May 28, 1970. On June 2, 1970, the SBA took over the a s s e t s of t h e business. Neither loan was i n d e f a u l t a t t h a t time. On May 29 and June 1 , 1970, Miners' president, P i t t s , debited the Mw Butte account f o r $12,000 and $9,000 and credited those amounts e t o t h e $100,000 S A loan. B P i t t s admitted t h a t he was looking c a r e f u l l y t o the account on May 29, 1970, so t h a t he could put i n the withdrawal s l i p f o r $12,000 and be sure t h a t Miners got ahead of anybody e l s e . He s t a t e d t h a t he personally handled t h e withdrawal. A t o t h e $9,000 withdrawal, P i t t s t e s t i f i e d t h a t he kept s t r i c t s watch of the account and when t h e r e was enough deposited, he personally p u t in a withdrawal s l i p . On June 18, 1970, Miners credited the $200,000 loan w i t h $4,602, which represented 30% of the t o t a l of $15,342 a s the r e s u l t of a s a l e of equipment by New Butte. The proceeds were not deposited i n Nw e B u t t e ' s account but were applied d i r e c t l y t o the $200,000 loan and t h a t c r e d i t was enough t o discharge i n advance the principal and i n t e r e s t f o r s i x months. There was no foreclosure of the s e c u r i t y i n t e r e s t s nor were the proceeds of the s a l e s placed i n t o New Butte's account. The bank in this instance knew of the condition of the account of New Butte, i t had intimate knowledge of the transactions, i t was the "on the ground" representative of the s i s t e r banks who shared in the loan and i t had more than t h e usual normal i n t e r e s t i n t h e a c t i v i t i e s of Nw Butte. e P l a i n t i f f s brought this action against New Butte and Miners t o re- cover the amounts of the checks plus i n t e r e s t and damages. After a t r i a l without a jury in the second judicial d i s t r i c t , Judge James D . Freebourn presiding, found for the p l a i n t i f f s against Nw Butte and found against the e p l a i n t i f f s and f o r defendant Miners. P l a i n t i f f s appeal t h a t part of the judgment which exculpated Miners. P l a i n t i f f s present f i v e issues f o r review, which are summarized as follows: (1) Whether Miners i s l i a b l e f o r holding the Beck check and the f i r s t Skaar check past the midnight deadline provided f o r in section 87A-4-302, R.C.M. 1947, and ( 2 ) whether Miners i s l i a b l e f o r holding a l l s i x of the checks past the midnight deadline as provided for in the s t a t u t e . Plaintiffs' remaining issues involve the question of good f a i t h , which the d i s t r i c t court specifically found was exercised by Miners in i t s dealings with p l a i n t i f f s . The question of good f a i t h will be considered in connection with p l a i n t i f f s ' f i r s t two issues. This case involves sections of the Uniform Commercial Code enacted in T i t l e 87A, R.C.M. 1947. The issues presented by p l a i n t i f f s are of f i r s t impression t o t h i s Court, and there are few cases in other jurisdictions which have construed the e f f e c t of the sections of the Uniform Commercial Code which are determinative of the issues presented f o r review. .- T .- (: $',,iicilh( P l a i n t i f f s ' f i r s t and second issues r a i s e questions concerning-ectio 4 of the Uniform Commercial Code. (Hereafter, references to the Uniform Com- mercial Code will be made by the section number only; the t i t l e number will be omitted). Generally p l a i n t i f f s argue that Miners i s l i a b l e for the face amount of the checks f o r not complying with what i s commonly referred to as the "mid- night deadline" rule. Defendant argues t h a t with respect to the f i r s t issue section 4-108 i s an exception to section 4-302 and with respect to the second issue section 4-103 i s an exception t o section 4-302 and under these sections Miners i s not l i a b l e . I n i t i a l l y , w will generally discuss the construction e of section 4-302, which provides: "In the absence of a valid defense such as breach of a presentment warranty (subsection (1) of section 87A- 4-207), settlement effected or the l i k e , i f an item i s presented on and received by a payor bank the bank i s accountabl e for the amount of "(a) a demand item other than a documentary d r a f t whether properly payable o r not i f the bank, in any case where i t i s not a l s o the depositary bank, r e t a i n s the item beyond midnight of t h e banking day of r e c e i p t without s e t t l i n g f o r i t o r , regardless of whether i t i s a l s o t h e depositary bank, does not pay o r return the item o r send notice of dishonor u n t i l a f t e r i t s midnight deadline; o r * * *." The 'hidnight dead1 i n e u i s midnight of t h e banking day following t h e ,.--<

i e ' day of the r e c e i p t of t h e item by the payor bank. Section 4-104'(h). A payor bank i s a bank by which an item i s payable a s drawn o r accepted. Section 4-105(b). There i s no question b u t t h a t Miners i s t h e payor bank. .'* ) The checks involved herein a r e demand items. Section 4-10P(g) and section 3-104(1) and ( 2 ) . Section 4-302 was construed in the case of Rock Island Auction Sales v . Empire Packing Co., 32 I11.2d 269, 204 N.E.2d 721, 18 ALR.3d 1'368, where the I l l i n o i s court held t h a t the word "accountable" in the s t a t u t e i s synonymous with "1 i a b l e " . W agree. e Essentially, section 4-302 says t h a t i n the absence of a valid de- fense, a demand item, retained beyond thellnidnight deadlineUby the payor bank without e i t h e r paying, returning, o r giving notice of dishonor renders the payor bank l i a b l e t o the payee f o r the face amount of the item. In addition, there i s a fundamental requirement of good f a i t h under the s p e c i f i c provision of section 1-201(19), which reads as follows: "'Good f a i t h ' means honesty in f a c t i n the conduct o r transaction concerned. Furthermore, 1-203 provides: "Every contract o r duty w i t h i n this a c t imposes an obligation of good f a i t h i n i t s performance o r enforcement." P l a i n t i f f s ' f i r s t issue concerns the Beck check dated April 28, 1970, and the f i r s t Skaar check dated April 14, 1970. These checks were submitted a s cash items t o Miners on May 11, 1970, and were not returned u n t i l May 13, 1970. P l a i n t i f f s contend t h a t because of the delay t h a t Miners violated t h e ('midnight deadline" r u l e . Facts not heretofore s e t f o r t h relevant t o t h i s issue and undisputed a r e a s follows: The Computer Corporation of Montana, a data processing company, i s a wholly owned subsidiary of Bancorporation of Montana which processed checks f o r eleven banks i n the Bancorporation chain, including Miners. Items t o be processed f o r Miners a r e sent t o Computer Corporation i n Great F a l l s by armored c a r between 5:00 p.m. and 6:00 p.m. of the day of r e c e i p t and a r e usually back a t Miners by 8:00 a.m. the following morning. The checks norm- a l l y reach Great F a l l s about 10:30 p.m. On May 11, 1970, the day on which Miners received the checks under discussion, the armored car broke down and did not reach Computer Corporation u n t i l 1:30 a.m. the morning of May 12, 1970. Ordinarily the work on Miners' checks would have been processed by 11:30 p.m.; the checks would have s t a r t e d back t o Butte by armored c a r a t 4:00 a.m. and have reached Miners a t 7:00 a.m. On the morning of May 12, 1970, the computer malfunctioned, and t h e checks which would have normally been returned t o Miners on the morning of May 12, 1970, did not a r r i v e u n t i l 2:30 p.m. t h a t afternoon. Ken Mahle, vice-president of Miners a t the time of the t r i a l , outlined t h e procedures which were followed each day a f t e r the r e c e i p t of the checks from the Computer Center. H could not, however, t e s t i f y a s t o e what occurred on May 12, 1970. There was no testimony a s t o what a c t u a l l y happened on the day a f t e r the checks were received by Miners. Miners contend t h a t i t i s t h i s type of s i t u a t i o n which section 4-108(2) was intended t o cover. Section 4-1 08(2) provides: "Delay by a c o l l e c t i n g bank o r payor bank beyond time l i m i t s prescribed o r permitted by t h i s a c t o r by instructions i s excused i f caused by interruption of communication f a c i l i t i e s , suspension of payments by another bank, war, emergency conditions or other c i r - cumstances beyond the control of the bank provided i t exercises such di 1igence a s the circumstances require. " The Official Code Comment on t h i s point s t a t e s : "4. Subsection ( 2 ) i s another escape clause from time l i m i t s . This clause operates not only with respect t o time l i m i t s imposed by the a r t i c l e i t s e l f b u t a l s o time l i m i t s imposed by special i n s t r u c t i o n s , by agreement o r by Federal Reserve regulations o r operating l e t t e r s , clearing house r u l e s o r t h e l i k e . The l a t t e r time 1imits a r e 'permitted' by the Code. This clause operates, however, only i n the types of s i t u a t i o n specified. Examples of these s i t u a t i o n s include bl izzards , floods, or hurricanes, and other 'Act of God' events or con- d i t i o n s , and wrecks or disasters, interfering w i t h mails; suspension of payments by another bank; abnormal operating conditions such as substantial increased volume or substantial shortase of ~ersonneldurins war or ." emergency situations When' delay i s sought t o be excused under t h i s subsection the bank must 'exercise such d i l i - gence as the circumstances require' and i t has the burden of proof." (Emphasis supplied.) 3 Anderson, Uniform Commercial Code 191 . The effect of section 4-108(2) i s t o excuse a payor bank from the standard of s t r i c t accountability of section 4-302 and t o hold i t t o a stan- dard of "di 1igence as the ci rcumstances require". Under section 4-1 08(2) there must be a showing t h a t the circumstances were beyond the control of the bank and that the bank exercised such diligence as the circumstances require. As the Official Code Comment s t a t e s , the burden i s on the bank. The d i s t r i c t court found that Miners' f a i l u r e t o pay o r return the checks or t o give notice of dishonor within the prescribed time was due t o circumstances bqond i t s control. The d i s t r i c t court also found t h a t Miners exercised the required di 1igence and that no evidence was introduced showing that Miners failed t o exercise due care. The evidence as t o the events in question i s undisputed. This Court i n In r e Wadsworth's Estate, 92 Mont. 135, 150, 11 P.2d 788 stated: " * * * B u t where, as here, there i s no dispute as t o the f a c t s , t h i s court i s in as favorable a position in applying the law as the d i s t r i c t court, and in such instances will not hesitate t o do so. (Citing author- i t y . ) And a judgment or order unsupported by the evi- dence will be reversed on appeal to t h i s court. (Citing authority.)" The only evidence produced by Miners was what the ordinary operating procedures were. As w have heretofore stated, Miners had more than the usual normal e i n t e r e s t in the a c t i v i t i e s of Nw Butte. e I t necessarily follows t h a t under the circumstances of t h i s case that the degree of diligence required under 4-108(2) i s greater than under normal circumstances. Miners argues t h a t the testimony of Mahle as t o normal operating procedures constitutes a showing of due diligence. While there may be in- stances where a showing as t o what occurs on a normal operating day may c o n s t i t u t e a showing of diligence under circumstances where the delay i s s i m i l a r a s t o the one i n the i n s t a n t case, t h i s case is n o t one of those instances. Miners' i n t e r e s t i n New Butte was more than usual, and a show- ing of diligence by Miners required more than testimony a s t o what the normal operating procedures were. Miners' burden under the circumstances of this case i s g r e a t e r f o r t h e reason t h a t i t s r e l a t i o n s h i p and i n t e r e s t i n New Butte was s i g n i f i c a n t l y more than ordinary. Miners did not meet i t s burden a s imposed by section 4-108(2). Under the exception of section 4-108(2) the bank must show: ( 1 ) A cause f o r the delay; (2) t h a t the cause was beyond the control of t h e bank; and ( 3 ) t h a t under the circumstances the bank exercised such diligence a s required. In the absence of any one of these showings, the excuse f o r the delay will not apply, and the bank will be held l i a b l e under the provisions of section 4-302. Since Miners d i d not meet i t s burden, i t i s therefore l i a b l e f o r the face amount of the Beck check and the f i r s t Skaar check under the s t r i c t accountabil i t y r u l e of section 4-302. Having i l l u s t r a t e d t h a t Miners had more than a normal i n t e r e s t i n the a c t i v i t i e s of Nw Butte and t h a t the exception of 4-108(2) i s not appli- e cable herein, we now consider p l a i n t i f f ' s second issue which concerns a l l s i x checks. For the reason t h a t we have found in considering p l a i n t i f f ' s issue No. 1 t h a t 1 i a b i l i t y attached a s t o the Beck check and the f i r s t Skaar check a s of May 13, 1970, under section 4-302, our consideration of the second issue will be w i t h reference t o the remaining four checks. The second Skaar check and the f i r s t Sun River check were ultimately s e n t t o Miners " f o r c o l l e c t i o n " . The second and t h i r d Sun River checks were s e n t d i r e c t l y t o Miners f o r collec- tion. The second Skaar check was received by Miners on May 20, 1970, and re- tained u n t i l July 27, 1970, a period of more than two months. The three Sun River checks were never returned by Miners. P l a i n t i f f s contend t h a t Miners, the payor bank, may not become a c o l l e c t i n g bank and therefore, cannot take a check f o r collection and hold t h e same beyond the regular midnight deadline. P l a i n t i f f s r e l y upon the following cases: In Rock Island the s e l l e r of c a t t l e received the buyer's $14,706.90 check on the same day. On t h a t day the s e l l e r deposited the check in s e l l e r ' s bank and i t was received by the payor bank on Thursday, three days l a t e r . The buyer's account in the payor bank was inadequate t o pay the check, and the payor bank, relying on the buyer's assurances t h a t additional funds would be deposited, held the check until the following Tuesday, when i t marked the check "not sufficient funds", placed i t in the mail t o a Federal Reserve Bank and sent notice of dishonor by telegram t o the Federal Reserve Bank. The court held the payor bank 1 iable f o r the amount of the i tem under section 4-302. Section 4-302 was also involved in the case of Farmers Coop. Live- stock M k t . v. Second Nat. Bank, 427 S.W.2d 247 (Ky. 1968). The buyer's alleged agent signed a d r a f t in the amount of $7,687.01 payable t o the s e l l e r . The instrument was drawn on the defendant bank and contained the notation "'To (be) Charged to Acct. of Robert Martin"'. I t was deposited with Northwestern Bank and sent by Northwestern d i r e c t to defendant bank on October 1 , with an accom- panying l e t t e r . The l e t t e r , among other things, stated: "'We enclose f o r collection * * *' " 'Wire non-payment of i tems $1,000.00 o r over. ' " 'Please send us your d r a f t . ' "'Please wire i f unpaid upon a r r i v a l , b u t hold f o r payment with advice to us. * * *"I

The instrument was received by defendant bank on October 4 , and although there were s u f f i c i e n t funds in Martin's account t o pay the check, defendant bank had not been authorized by Martin to make payment, so no charge was made to his account. No wire was sent to Northwestern as Northwestern had requested. On October 6 , Northwestern called the defendant bank and "'was told t h a t Martin had not come into the bank to authorize payment of the instrument in question. 'I' I t was undisputed t h a t the defendant bank had f a i l e d t o take action before the "midnight dead1 inel'. There was a dispute as t o whether the instrument was a "check" or a "draft". The Court said t h a t t h i s was an immaterial distinction and t h a t the important question was whether the instrument was a demand item referred t o - 11 - in section 4-302(a). The Court quoted the definition of an "i tem", and said a demand item would obviously be one on demand, and held the instru- ment i n t h i s case was a demand item. The Court also held t h a t the de- fendant bank was clearly the "payor" bank and clearly l i a b l e f o r the amount of the item. The defendant bank contended that i t was a collecting bank because the l e t t e r accompanying the d r a f t contained the words, "'We enclose f o r collection ** *I1', and the defendant bank treated the item a s a col lection item. In t h i s regard, the Court on page 250 said: " * * * The use of the term 'collection' in the l e t t e r certainly cannot be said t o have destroyed the statutory scheme governing the collection process. The l e t t e r also said 'Please wire i f unpaid upon arrival I . This d r a f t was presented f o r payment. (Had appel l ee wired as instructed, i t would have discharged i t s duty as the payor bank and subsequent action t o s e t t l e t h i s account would have been . governed by other considerations ) With respect to how appellee treated t h i s item, w can only say that i t took e the risk of loss by f a i l u r e to comply with the law. * * *"

Miners asserts several reasons why i t i s not l i a b l e under section 4-302. The f i r s t of these i s that section 3-511 (4) excuses notice of dis- honor where a check has been presented t o the bank and payment refused a t l e a s t once before. Miners argues t h a t the "midnight deadline" rule does not apply and re1 i e s on Leaderbrand v . Central State Bank of Wichita, 202 Kan. 450, 450 P.2d 1. Section 3-511 (4) provides: "Where a d r a f t has been dishonored by nonacceptance a l a t e r presentment f o r payment and any notice of dis- honor and protest f o r nonpayment are excused unless i n the meantime the instrument has been accepted." The Kansas court in Leaderbrand held that under section 3-511, once notice of dishonor had been given, an additional notice of dishonor was not required. In Wiley v . Peoples Bank and Trust Company, 438 F.2d 513, the court rejected Leaderbrand and held section 3-511(4) inapplicable f o r the reason t h a t "acceptance appl ies only t o time items. I t has nothing t o do with demand items." Likewise, we hold t h a t section 3-511 (_4) i s inapplicable t o the checks under consideration herein, f o r section 3-51 l ( 4 ) does not apply t o demand items. Another reason contended by Miners takes into consideration the practice of submitting checks "for collection". I t i s Miners' position t h a t any obligation i t may have had t o observe the midnight deadline rule was negated under section 4-103 by specific agreement between the parties and by a general custom and practice within the banking industry f o r the handling of checks sent for collection. Section 4-103 provides in part: "Variation by aqreement--measure of damages--certai n action constituting ordinary care, [I) The e f f e c t of the provisions of t h i s chapter may be varied by agree- ment except t h a t no agreement can disclaim a bank's responsibility f o r i t s own lack of good f a i t h or f a i l - ure to exercise ordinary care or can limit the measure of damages f o r such lack or f a i l u r e ; b u t the parties may by agreement determine the standards by which such responsibility i s t o be measured i f such standards are not manifestly unreasonable. " ( 2 ) Federal Reserve regulations and operating l e t t e r s , clearinghouse rules, and the l i k e , have the e f f e c t of agreements under subsection (1 ), whether or not spec- i f i c a l l y assented t o by a l l parties interested in items hand1 ed. "(3) Action or nonaction approved by t h i s chapter or pursuant t o Federal Reserve regulations or operating l e t t e r s constitute the exercise of ordinary care and, in the absence of special instructions, action or nonaction consistent with clearinghouse rules and the 1ike or with a general banking usage not disapproved by t h i s chapter, prima facie constitutes the exercise of ordinary care. I' I t i s p l a i n t i f f s ' position that since the checks here are demand items any agreement t o vary the terms of section 4-302 i s d i r e c t l y contrary to the express terms of the instruments. While section 4-302 holds a payor bank s t r i c t l y l i a b l e , section 4-103 i s clearly designed to make an exception t o section 4-302 by agreement between the parties. As the Official Code Comment s t a t e s : " * * * Section 4-103 s t a t e s the specific rules for variation of Article 4 by agreement and also certain standards of ordi- nary care. In view of the technical complexity of the f i e l d of bank collections, the enormous number of items handled by banks, the certainty that there will be variations from the normal in each day's work in each bank, the certainty of changing conditions and the possi bi 1i t y of developing im- proved methods of collection to speed the process, i t would be unwise t o freeze present methods of operation by mandatory statutory rules. This section, therefore, permits within wide limits variation of provisions of the Article by agreement.'' 3 Anderson, Uniform Commercial Code 165. The question then becomes whether under the circumstances of the instant case there was an agreement between the parties excepting Miners from t h e s t r i c t l i a b i l i t y r u l e of 4-302. The d i s t r i c t court found t h a t a prior course of dealing between p l a i n t i f f s and Miners shows t h e existence of an agreement. The d e f i n i t i o n of an agreement a s used herein is found i n section 1-201(3) where i t s t a t e s : "'Agreement' means the bargain of the p a r t i e s i n f a c t a s found i n t h e i r language or by imp1 ication from other circumstances including course of dealing o r usage of trade or course of performance a s provided in t h i s a c t (sections 87~-1-205'and 87~-2-208): Whether an agree- ment has legal consequences is determined by the pro- visions of t h i s a c t , i f applicable; otherwise by the law of contracts (section 87A-1-103)." (Emphasis suppl ied. ) Section 1-205(1) provides as t o course of dealing: "A course of dealing i s a sequence of previous conduct between the p a r t i e s t o a p a r t i c u l a r transaction which is f a i r l y t o be regarded a s establishing a comon basis of understanding f o r interpreting t h e i r expressions and other conduct. "

Miners has attempted t o establish a course of dealing a s t o plain- t i f f Sun River and p l a i n t i f f Skaar because each had one check sent f o r collec- tion paid from the Nw Butte account a f t e r being held past the'hidnight dead- e line." The holding and paying of one check i s not s u f f i c i e n t t o form "a sequence of previous conduct" which is necessary t o e s t a b l i s h a course of deal ing . In addition, the Uniform Commercial Code does not contemplate that the course of dealing may c o n s t i t u t e the e n t i r e agreement, b u t merely gives meaning t o o r supplements the express terms of an e x i s t i n g agreement. See 1 Anderson, Uniform Commercial Code 175, 176. Miners could show b u t one previous transaction--clearly i n s u f f i c i e n t t o e s t a b l i s h a course of dealing. Miners also claims t h a t Sun River used i t s banker, Malcolm Adams of the F i r s t National Bank of Great F a l l s , as i t s agent and t h a t because Adams understood t h a t the check would be held by Miners t h a t t h i s constituted an agreement. This asserted agreement between Miners and Sun River i s ineffec- t i v e i n view of the f a c t of Miners' obvious lack of f a i r n e s s and t h e standard imposed upon i t by i t s own more than normal re1 ationship with New Butte. Contrary t o the d i s t r i c t c o u r t ' s finding of good f a i t h , i t i s t h i s Court's view t h a t Miners did not a c t in compliance with f a i r dealings contemplated by the Uniform Commercial Code. W present t h i s question; e How effective o r reliable may an agree- ment be, assuming there i s one, when the bank's president, himself, i s looking closely t o the account and withdraws money therefrom f o r purposes of applying the money t o a loan which i s not in default? I t i s true t h a t a bank may have the right of setoff or may pay checks in any order that i t chooses (section 4-303) or a secured party may upon default take possession of collateral with- out judicial process and dispose of i t in any commercially reasonable fashion (sections 9-503 and 9-504). Under the f a c t s here, however, Miners' ~ n i q u e position with relation t o Nw Butte establishes a standard of care greater e than under normal situations, and f o r any agreement to come within the excep- tion in t h i s case requires more than what Adams may have understood. In addi- t i o n , Miners cannot shield i t s e l f by asserting t h a t the alleged agreement i s an exception in l i g h t of i t s own lack of fairness. While Miners stood in an advantageous position with respect to i t s own i n t e r e s t s , these p l a i n t i f f s stood with no recourse whatsoever a f t e r having provided essential inventory, namely c a t t l e , f o r the operations of Nw Butte. e In i t s argument Miners also claims that oral notice of dishonor was given to p l a i n t i f f Skaar with respect to the check under consideration. Whereas, under sections 4-104(3) and 3-508, oral notice of dishonor may be sufficient t o meet the requirements of section 4-302, the circumstances here required more than oral notice. In one conversation that Skaar had with P i t t s on My 11, a 1970, Pitts indicated t h a t the checks would clear because things were looking better. P i t t s did indicate, however, that i t was going to take time. In view of what subsequently happened, any notice given t o Skaar o r purported agreement between Miners and Skaar under the f a c t s here are not sufficient t o release Miners from the s t r i c t l i a b i l i t y rule of 4-302. Defendant's final contention i s that s t r i c t compliance with section 4-302 i s also varied by custom and practice. The d i s t r i c t court found that the establ ished custom and practice followed by the banking industry in Montana in handling checks "for collection'' i n the absence of special instructions and writing i s t o hold the check f o r an a r b i t r a r y length of time. W have heretofore established t h a t there was no agreement between e the p a r t i e s which varied the provisions of section 4-302. In the absence of an agreement the s t r i c t l i a b i l i t y r u l e of section 4-302 applies. Custom and practice i s relevant under section 4-103C31, i f a t a l l , only w i t h res- pect t o the establishment of what standard c o n s t i t u t e s ordinary care. The standard of care imposed upon Miners in the i n s t a n t case was more than ordi- nary, and therefore, custom and practice a r e not relevant. Clearly, the four checks under consideration herein a r e subject t o the r u l e of section 4-302. Miners cannot now claim t h a t the s t a t u t e i s varied e i t h e r by agreement as provided i n 4-103 o r by custom and practice, p a r t i c u l a r l y where Miners has assumed a position i n r e l a t i o n t o i t s customer, Nw Butte, e which imposes a greater standard of care and responsibility than under normal situations. Miners cannot prevail in i t s argument when i t has demonstrated a disregard f o r good f a i t h deal i ngs contemplated by the Uniform Commerci a1 Code. For the foregoing reasons, the judgment of the d i s t r i c t court i s reversed.