## Facts

- Raymond and Audrey Badgett, dairy farmers, borrowed substantial funds from Security State Bank beginning in 1981, including an intermediate-term loan with a one-year maturity subject to periodic review.
- In 1984, the Badgetts sought to exit dairying and negotiated a liquidation-related restructuring reflected in new loan and security documents.
- In 1985, the Badgetts decided to re-enter the dairy business and executed a written loan agreement and promissory note for $1,050,000, secured by livestock, equipment, inventories, and junior real-estate liens.
- In early 1986, the Badgetts proposed strategies to address their debt, including a proposal tied to participation in a federal dairy termination program; a bank loan committee declined to consider at least one such proposal.
- In April 1986, the Badgetts stopped making loan payments and later entered a written agreement to sell dairy assets to satisfy the debt.
- The Badgetts claimed the Bank breached the implied covenant of good faith and fair dealing by refusing to consider or accept restructuring proposals and by allegedly miscommunicating a proposal internally.

## Issues

1. Whether the implied covenant of good faith and fair dealing required the Bank to consider or accept restructuring or refinancing proposals when the loan documents imposed no such obligation.
2. Whether course of dealing or course of performance could expand the Bank’s contractual duties beyond the express terms of the written loan agreement to require negotiation or restructuring.

## Decision

- The Supreme Court of Washington reversed the Court of Appeals and reinstated summary judgment for the Bank.
- The court held the implied covenant of good faith and fair dealing did not impose an affirmative duty to restructure, renegotiate, or extend new credit absent a specific contractual term requiring such conduct.
- The court concluded course of dealing may aid interpretation of existing terms but cannot create new substantive obligations inconsistent with detailed written loan documents.
- Because the Badgetts’ claim depended on adding duties not found in the contracts, no genuine issue of material fact existed; foreclosure and dismissal of the borrowers’ claims were upheld.

## Legal Principles

- The implied covenant of good faith and fair dealing operates only in relation to the performance of specific contractual obligations; it is not an independent source of duties.
- Good faith cannot be used to add substantive terms, force contract modification, or override express rights stated in the contract.
- A party generally does not act in bad faith by exercising a right expressly permitted by the contract, even if the other party’s expectations are disappointed.
- Evidence of prior negotiations or industry practice may inform interpretation of ambiguous terms, but it does not create a duty to renegotiate or restructure when the contract is silent.

## Conclusion

The court confined the implied covenant of good faith and fair dealing to faithful performance of existing contract terms and rejected its use to require a lender to consider or accept restructuring proposals not required by the parties’ written loan agreements.


Badgett v. Sec. State Bank, 807 P.2d 356 (Wash. 1991)