## Facts

- Raymond and Audrey Badgett operated a dairy farm and financed it through Security State Bank starting around 1980–81, borrowing about $476,000 to refinance and obtain operating funds.
- The bank used agricultural loan notes with one-year call or maturity dates but multi-year amortization, and the parties commonly “re-examined” and “reworked” the debt annually.
- The parties repeatedly restructured the Badgetts’ obligations, including a major 1984 restructuring tied to the Badgetts’ initial decision to exit dairy operations and liquidate assets.
- In 1985 the Badgetts decided to continue dairy operations; on September 5, 1985, the parties executed a new $1,050,000 note and loan agreement secured by livestock, equipment, inventory, and junior liens on real property.
- After renewed financial difficulties, the Badgetts again decided to exit the dairy business and sought to enter a federal dairy termination program, expecting proceeds would reduce or satisfy debt.
- The Badgetts alleged the bank refused to adequately consider restructuring proposals intended to facilitate program participation, misrepresented their proposals to the bank’s loan committee, and then foreclosed.
- The trial court granted summary judgment dismissing the Badgetts’ damages claims, granted summary judgment on the bank’s counterclaims for amounts due, and entered a foreclosure decree.

## Issues

1. Whether the implied duty of good faith and fair dealing, informed by the parties’ course of dealing, could require the bank to fairly consider restructuring proposals associated with the borrowers’ exit plans and federal program participation.
2. Whether genuine issues of material fact existed as to the scope of any such good-faith duty, breach, and causation, precluding summary judgment for the bank.

## Decision

- The Court of Appeals reversed summary judgment dismissing the Badgetts’ damages claims and remanded for trial.
- The court held the record raised material fact disputes about the scope of the bank’s good-faith obligations given repeated prior restructurings and yearly re-examination practices.
- The court stated it was not imposing a legal duty to modify the loan agreement; the bank remained free to reject modifications, but its handling of the proposals could still be evaluated for good faith.
- The court’s ruling left the bank’s foreclosure-related relief subject to further proceedings to the extent dependent on the resolved claims.
- Subsequent history: the Washington Supreme Court later reversed and reinstated the trial court’s dismissal and foreclosure decree, rejecting the Court of Appeals’ expanded view of the good-faith duty.

## Legal Principles

- Every contract imposes an obligation of good faith and fair dealing in performance and enforcement; in secured lending transactions, UCC good-faith concepts may inform that obligation.
- A course of dealing may create triable questions about what constitutes good-faith performance when a party exercises contractual discretion in an ongoing commercial relationship.
- Recognizing a good-faith obligation to consider proposals differs from imposing a duty to accept or implement contract modifications; refusal to modify may still be contractually permitted.
- Summary judgment is improper when the evidence permits competing inferences about duty, breach, and proximate cause tied to the parties’ conduct and expectations.

## Conclusion

The Court of Appeals held that the parties’ history of annual reworking and repeated restructurings created triable fact issues as to whether the bank acted in good faith when it declined to restructure and allegedly mishandled the borrowers’ proposals, requiring reversal of summary judgment and remand for trial, though the decision was later reversed on further review.


Badgett v. Security State Bank, 786 P.2d 302 (Wash. Ct. App. 1990)