## Facts

- K.M.C. Co., a grocery wholesaler/retailer, entered a revolving credit agreement with Irving Trust Company in 1979, initially up to $3 million and later increased to $3.5 million.
- Irving held a security interest in K.M.C.’s inventory and accounts receivable and required K.M.C. to deposit all receipts into a bank-controlled “blocked account.”
- Because Irving controlled the blocked account, K.M.C. depended on Irving’s daily decisions to advance funds to meet operating needs.
- The agreement permitted Irving to demand repayment and gave Irving discretion to withhold advances, subject to a borrowing-base formula tied to inventory and eligible receivables.
- On March 1, 1982, K.M.C. requested an $800,000 advance that would have kept total borrowings just under the $3.5 million cap; Irving refused without prior notice.
- Evidence at trial supported that Irving was adequately secured at the time of refusal and that Irving typically advanced funds when adequately secured; K.M.C. also presented evidence suggesting non-commercial motives for the cutoff.
- K.M.C. claimed the sudden refusal, given Irving’s cash-control arrangement, precipitated K.M.C.’s business collapse.
- A jury trial was conducted before a magistrate judge with party consent; despite a contractual jury-trial waiver, the magistrate allowed a jury based on evidence the waiver would not be invoked absent fraud.
- The jury found Irving liable for breach of contract and awarded $7.5 million plus prejudgment interest; post-trial motions were denied.

## Issues

1. Whether a lender with contractual discretion to withhold advances and a demand feature nonetheless owed an implied duty of good faith that, under the circumstances, required reasonable notice before cutting off advances when the lender was adequately secured and knew the borrower depended on the credit line for operating funds.
2. Whether the consent-based civil trial authority of a magistrate judge under 28 U.S.C. § 636(c) is constitutional.
3. Whether the contractual jury-trial waiver was enforceable as “knowing and voluntary,” or whether it could be disregarded based on the parties’ dealings.
4. Whether the jury instructions on good faith, commercial reasonableness, and possible notice obligations were legally correct.
5. Whether the evidence, including expert damages testimony, was sufficient to support the verdict and the amount of damages.

## Decision

- The Sixth Circuit affirmed the judgment for K.M.C.
- The court held that the financing agreement was subject to an implied obligation of good faith, and the evidence permitted a finding that Irving breached that duty by abruptly refusing advances without notice while adequately secured and exercising cash-flow control through the blocked account.
- The court upheld the constitutionality of magistrate-conducted civil trials under § 636(c) when based on voluntary, informed consent with appellate review in an Article III court.
- The court upheld the magistrate’s refusal to enforce the jury-waiver provision because enforceability required a knowing and voluntary waiver and the evidence supported a finding that K.M.C. reasonably believed the waiver would not be invoked absent fraud.
- The court found no reversible error in the jury instructions and held the evidence supported causation and damages; expert testimony was sufficiently grounded, and the award was not clearly excessive.

## Legal Principles

- Every contract includes an implied duty of good faith in performance; contractual discretion must be exercised in good faith and in a commercially reasonable manner.
- In a revolving-credit relationship where the lender controls the borrower’s cash receipts through a blocked account and knows the borrower relies on advances for operating capital, good faith may require reasonable notice before terminating or refusing further advances, absent a good-faith basis for immediate cutoff.
- A contractual “on demand” feature and broad discretion clauses do not eliminate the implied obligation of good faith in performance.
- Contractual jury-trial waivers are enforceable only if knowing and voluntary; evidence about the parties’ understanding and representations can defeat enforcement.
- Consent-based magistrate civil trials under 28 U.S.C. § 636(c) are permissible where consent is voluntary and informed and Article III appellate review is preserved.

## Conclusion

The court affirmed a verdict finding that a secured revolving-credit lender that controlled a borrower’s cash flow through a blocked account could be liable for breach when it cut off advances without notice despite adequate security, because contractual discretion and demand terms remain constrained by the implied duty of good faith and commercial reasonableness.


K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752 (6th Cir. 1985)