Opinion ID: 1153673
Heading Depth: 2
Heading Rank: 4

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

Text: (14a) 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.... (15) By these allegations, plaintiff seeks to invoke the rule that a contractual provision specifying damages for breach is valid only if it represent[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] (14b) 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. [¶] 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 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 the like, but it is not limited to the amount which a bank could recover in a suit for breach of contract. We conclude that the court correctly sustained the demurrer to plaintiff's fifth cause of action without leave to amend.