General Motors Acceptance Corp. v. Central National Bank of Mattoon

Bob Smith Oldsmobile-Cadillac-GMC, Inc. (the dealership), a car dealership, had a wholesale security agreement with General Motors Acceptance Corp. (GMAC) (plaintiff). GMAC loaned the dealership money to buy new vehicles, in which GMAC then had a security interest. The dealership sold the vehicles to customers and transferred the sales contracts to GMAC. GMAC allowed the dealership’s owner, Bob Smith, to write sight drafts from a GMAC account for the dealer’s share of the sales contract. GMAC had a right of setoff and could reclaim the sales contract’s full amount if the dealership owed GMAC money. Central National Bank of Mattoon (the bank) (defendant) held the dealership’s checking account, financed its used-car inventory, and made other loans to the dealership and Smith personally. From January to October 1979, the bank made several misrepresentations to GMAC concerning the dealership and Smith’s financial condition, which was rapidly deteriorating. In late October, the bank told GMAC that some checks from the dealership to GMAC were being returned but promised they would be paid on November 1. Beginning October 30, the bank refused to honor $313,078.88 in checks from the dealership to GMAC. GMAC meanwhile honored $113,235.95 in sight drafts to the dealership between October 30 and November 6. GMAC then terminated the dealership’s credit line and stopped honoring sight drafts. The dealership failed, and GMAC sued the bank for fraud. GMAC claimed that if not for the bank’s misrepresentations, GMAC would have terminated Smith’s sight-drafting privileges and exercised its setoff rights by October 30. The bank argued that GMAC should have known about the dealership’s poor financial condition based on other information. The trial court found fraud by the bank and awarded GMAC $113,235.95 in damages for the honored sight drafts beginning October 30, despite finding GMAC did not prove the dealership owed GMAC money at the time, as well as $313,078.88 for the unpaid checks. The bank appealed, arguing in part its misrepresentations were not the proximate cause of GMAC’s loss, which was the economy and GMAC’s own negligence.