## Facts

- David H. and Tommie S. Smallman maintained a checking account at Home Federal Savings Bank of Tennessee.
- The Smallmans received and deposited a $703.87 check (drawn on an Alabama bank) on April 22, 1985, after selling business inventory to the drawer.
- The item was processed through intermediary banks; the payor bank refused payment for insufficient funds.
- During the return process, the original check was lost in the mail.
- On July 30, Home Federal received a photocopy of the check and notice it was being returned unpaid, without an explanation for the delay.
- A bank officer continued collection efforts, believing the problem was between banks, rather than promptly charging back and notifying the Smallmans.
- On August 30, Home Federal received a second notice explaining the delay resulted from the item being lost; the payor bank confirmed it would not honor the check due to insufficient funds.
- On September 5, Home Federal charged back $703.87 to the Smallmans’ account and prepared a dishonor notice.
- Before receiving the mailed notice, the Smallmans discovered their account balance was zero; they obtained actual notice on September 9.
- The charge-back caused 14 checks the Smallmans had written to be returned for insufficient funds, leading to claimed financial and reputational harm, including embarrassment and humiliation.
- A jury awarded $703.87 plus $30,000 in additional compensatory damages; the trial court directed a verdict for the bank on punitive damages and admitted evidence of the bank’s net worth.

## Issues

1. Whether the bank’s delayed charge-back and notice after learning of dishonor breached its duties to the customer and supported liability.
2. Whether the evidence supported compensatory damages for consequential injuries, including embarrassment and humiliation, arising from multiple returned checks.
3. Whether admitting evidence of the bank’s net worth and instructing on embarrassment/humiliation damages was error affecting the compensatory award.
4. Whether the evidence was sufficient to submit punitive damages to the jury under Tennessee standards.

## Decision

- The appellate court affirmed in part and reversed in part, remanding as necessary.
- The court upheld liability for the bank’s mishandling of the charge-back/notice and affirmed compensatory recovery for the loss and resulting harms, including the $703.87 item amount.
- The court held that embarrassment and humiliation may be recovered as compensatory damages in a wrongful dishonor-type setting when supported by proof and foreseeable from the bank’s conduct.
- The court upheld the directed verdict for the bank on punitive damages, concluding the proof showed negligence or poor judgment, not the level of culpability required for punitive recovery.
- The court addressed the limited relevance of net-worth evidence absent punitive damages and evaluated whether any error affected the compensatory award.

## Legal Principles

- A depositary/collecting bank’s right to charge back a dishonored item after provisional credit must be exercised with ordinary care, consistent with reasonable commercial standards, and with timely, adequate customer notice.
- When a bank’s delayed charge-back or inadequate notice foreseeably causes returned checks, the bank may be liable for proximately caused consequential damages.
- In wrongful dishonor or similar bank-customer disputes, injury to credit or reputation may support compensatory damages for embarrassment and humiliation if proved with competent evidence.
- Punitive damages require proof of intentional, malicious, fraudulent, reckless, or grossly culpable conduct; negligence and mistaken judgment are insufficient.
- Evidence of a defendant’s net worth is generally tied to punitive damages and has limited relevance to compensatory damages.

## Conclusion

The court held the bank responsible for losses caused by its delayed charge-back and notice, permitted recovery of compensatory damages including embarrassment and humiliation when supported by proof, and rejected punitive damages because the bank’s conduct did not meet Tennessee’s heightened culpability standard.


Smallman v. Home Fed. Sav. Bank of Tenn., 786 S.W.2d 954 (Tenn. Ct. App. 1989)