## Facts

- Richard Seidenberg and Eric Raymond founded and owned two employee-benefits brokerage firms that marketed and sold employee health-benefit plans.
- In 1997, they sold all stock in the firms to Summit Bank in exchange for shares of Summit’s parent company; a portion of shares was placed in escrow as security for unknown or undisclosed liabilities.
- The transaction contemplated that plaintiffs would remain with the business and that their future compensation and contingent earn-out would depend on the firms’ growth within Summit’s employee-benefits line.
- Plaintiffs alleged Summit represented it would actively support and expand the employee-benefits business and that Summit’s cooperation was necessary for plaintiffs to realize the agreed compensation structure.
- Plaintiffs alleged that after closing Summit failed to provide promised support, diverted or withheld resources, and deliberately impeded the business’s growth to deprive plaintiffs of contingent compensation.
- Plaintiffs further alleged Summit never intended to support the business, but intended to acquire the firms and later replace plaintiffs with Summit personnel.
- The parties resolved disputes concerning the express terms of their commercial transaction, leaving a claim for breach of the implied covenant of good faith and fair dealing.

## Issues

1. Whether the pleaded facts stated a claim that Summit breached the implied covenant of good faith and fair dealing in performing and exercising discretion under the parties’ agreements.
2. Whether plaintiffs’ sophistication, representation by counsel, and equal bargaining power precluded an implied-covenant claim.
3. Whether the parol evidence rule barred reliance on extrinsic evidence to prove bad faith and frustrated reasonable expectations supporting an implied-covenant claim.

## Decision

- The Appellate Division reversed the Rule 4:6-2(e) dismissal and reinstated the complaint.
- The court held the second amended complaint adequately pleaded a breach of the implied covenant based on alleged bad-faith conduct that thwarted plaintiffs’ contractual expectations tied to compensation.
- The court rejected the view that equal bargaining power, sophistication, and counsel categorically bar implied-covenant claims.
- The court held the parol evidence rule did not bar use of extrinsic evidence to substantiate reasonable expectations and alleged bad-faith performance for an implied-covenant theory.
- The matter was remanded for further proceedings because the bad-faith inquiry was fact-intensive and premature for resolution on the pleadings.

## Legal Principles

- Every contract under New Jersey law contains an implied covenant of good faith and fair dealing requiring that neither party act to destroy or injure the other party’s right to receive the contract’s benefits.
- A claim may arise from bad-faith performance, including misuse of contractual discretion or other conduct that frustrates the contract’s purposes, even absent a violation of an express term.
- On a Rule 4:6-2(e) motion, courts must accept pleaded facts as true, give plaintiffs all reasonable inferences, and dismiss only in rare cases when no claim is stated under any reasonable reading.
- The implied covenant applies regardless of the parties’ sophistication or relative bargaining power.
- Extrinsic evidence may be considered to prove reasonable expectations and bad-faith performance consistent with, rather than contradictory to, the written agreement; the parol evidence rule is not a categorical bar to an implied-covenant claim.

## Conclusion

The Appellate Division held that allegations that Summit intentionally withheld support and impeded business growth to defeat plaintiffs’ contingent compensation plausibly stated a breach of the implied covenant of good faith and fair dealing, and that neither equal bargaining power nor the parol evidence rule justified dismissal at the pleading stage.


Seidenberg v. Summit Bank, 791 A.2d 1068 (N.J. Super. Ct. App. Div. 2002)