Badgett v. Security State Bank

Brief Fact Summary.

Plaintiff obtained a loan from Defendant. Plaintiff tried to satisfy the loan owed to Defendant by submitting a proposal to the loan officer, indicating his desire to obtain money from DTP, a federal program. The loan officer informed the loan committee, and the loan committee refused to accept the proposal. Subsequently, Defendant denied the proposal. Plaintiff stopped making payments on the loan and entered into a written agreement with Plaintiff to satisfy the loan. Plaintiff filed suit claiming Defendant breach the duty of good faith and fair dealings. The trial court held for Defendant, dismissing Plaintiff’s complaint.

Synopsis of Rule of Law.

Parties may expand the scope of an obligation of good faith and fair dealings when the conduct of the contracting parties reasonably gives rise to such obligation.

Facts.

Plaintiff, Badgett, obtained a loan from Defendant, Security State Bank, to purchase dairy, and, thereafter, enter the dairy business. Five years later, Plaintiff chose to retire from the dairy business. Plaintiff participated in the Dairy Termination Program (DTP), a federally run program that paid dairy produced to refrain from engaging in the dairy business for five years. Plaintiff wanted to submit a bid with DTP to obtain $1,600,000, under the program. Plaintiff spoke with Defendant’s loan officer Joe Cookie, about his interest in participating in DTP. Further, Plaintiff stated he would use the proceeds from the program to pay back his $1,500,000 debt to Defendant. Cooke told Plaintiff he would submit the proposal to Defendant’s loan committee. Subsequently, the loan committee denied the proposal, and Plaintiff submitted an unsuccessful bid to DTP. About a month later, Plaintiff refrained from making payments on the loan owed to Defendant and entered a written agreement with Defendant to satisfy his debt. Thereafter, Plaintiff filed suit on the grounds that Defendant breached the implied duty of good faith and fair dealings when Defendant refused to consider Plaintiff’s proposal to DTP. Likewise, Plaintiff contends that Cooke misrepresented his proposal to the loan committee. Defendant filed a counterclaim to obtain the loan payments and foreclosure. The trial court held for Defendant and dismissed Plaintiff’s complaint. Plaintiff appealed.

Issue.

Whether parties may expand the scope of an obligation of good faith and fair dealings when the conduct of the contracting parties reasonably gives rise to such obligation.

Held.

Yes, parties may expand the scope of an obligation of good faith and fair dealings when the conduct of the contracting parties reasonably gives rise to such obligation.

Discussion.

An implied obligation of good faith and fair dealing may be expanded by reasonable conduct by the contracting parties that gives rise to such obligation, such as prior dealings. In this case, Plaintiff introduced evidence at trial that Plaintiff and Defendant have a six year business relationship. This action constitutes a course of dealing between the parties, giving rise to the obligation of good faith and fair dealings. Thus, Defendant had on obligation to consider Plaintiff’s proposal. Likewise, Plaintiff introduced evidence indicating that Cooke did not completely understand the proposal, causing a misrepresentation to the committee of Plaintiff’s proposal. Therefore, Defendant had an implied obligation to Plaintiff, and the decision of whether Defendant breached its duty of good faith and fair dealing to Plaintiff should have been presented to the jury.