## Facts

- Paul and Mary Reid maintained a multi-year lending relationship with a Maine bank (later succeeded by Key Bank) to finance Paul Reid’s painting business.
- In March 1979, the bank and Reid executed a $25,000 commercial credit agreement, used largely to finance a particular housing project job.
- In mid-May 1979, the bank’s loan officer informed Reid by telephone that no further advances would be made under the agreement.
- The bank claimed it also sent a letter stating it would no longer honor overdrafts and suggesting Reid restructure his debts elsewhere; Reid denied receiving the letter.
- After the cutoff, the parties’ relationship deteriorated; the bank stopped honoring overdrafts and applied funds (including check proceeds) against Reid’s loan obligations.
- Reid’s business failed and he incurred substantial financial consequences.
- The Reids sued on multiple theories; a jury found for the Reids only on breach of the implied covenant of good faith and fair dealing, awarding compensatory and exemplary damages, and rejected other claims including racial discrimination.
- The district court set aside the exemplary damages award; both sides appealed.

## Issues

1. Whether Maine law permits a finding that a lender breached the implied covenant of good faith and fair dealing when it cut off advances under a credit agreement containing “on demand” language.
2. Whether exemplary (punitive) damages are recoverable for breach of the implied covenant where the only liability found is contract-based and no independent tort is established.

## Decision

- The First Circuit affirmed the judgment for the Reids on breach of the implied covenant of good faith and fair dealing and left the compensatory damages intact.
- The court held that “on demand” credit terms do not eliminate the obligation to exercise contractual discretion in good faith.
- The court affirmed striking the exemplary damages award because Maine law does not allow punitive-type damages for a contract breach absent an independent tort or other recognized basis.
- The court otherwise affirmed the defense verdicts and dismissals on the remaining claims.

## Legal Principles

- Maine contract law recognizes an implied covenant of good faith and fair dealing that governs performance and enforcement of contractual rights.
- A lender’s contractual power to terminate or call credit “on demand” must still be exercised in good faith and consistent with reasonable expectations created by the parties’ course of dealing.
- Evidence such as abrupt termination, unclear or ineffective notice, and conduct worsening a borrower’s position without fair warning can support a finding of bad faith.
- Under Maine law, exemplary (punitive) damages are generally unavailable for contract-based claims, including implied-covenant claims, unless liability rests on an independent, actionable tort (or another established punitive-damages ground).

## Conclusion

The court upheld a jury finding that the bank acted in bad faith when it terminated and administered a commercial credit arrangement despite demand language, but it disallowed exemplary damages because the verdict rested solely on a contract-based implied-covenant theory without a tort finding.


Reid v. Key Bank of S. Me., Inc., 821 F.2d 9 (1st Cir. 1987)