Waller v. Md. Nat'l Bank - 95 Md. App. 197, 620 A.2d 381 (1993)

Rule:

The duty of implied good faith and fair dealing duty simply prohibits one party to a contract from acting in such a manner as to prevent the other party from performing his obligations under the contract. Thus, the duty of good faith merely obligates a lender to exercise good faith in performing its contractual obligations; it does not obligate a lender to take affirmative actions that the lender is clearly not required to take under its loan documents.

Facts:

Earthtech is a Maryland corporation with technical expertise in earth measurement systems. In the early 1980s, Earthtech sought to develop two pieces of sophisticated equipment. In order to achieve this goal, Earthtech required additional working capital. On 16 February 1983, Earthtech obtained a loan from MNB for $ 50,000 evidenced by a Revolving Note which provided for a continuing line of credit. This Revolving Note also stated that it was payable "on demand." This note was executed by Earthtech's officers: Waller, President; John Millhiser, Vice-President; and Jeffrey Bloom, Vice-President. Each officer also personally and unconditionally guaranteed payment of Earthtech's obligations to MNB. On 20 May 1983, Earthtech obtained a second loan for $ 5000 from MNB. This loan was evidenced by an Installment Note and was payable in thirty-five equal monthly installments. Things were running smoothly until late April 1984 when Earthtech requested an additional loan from MNB to cover its May payroll. MNB denied Earthtech's request. Subsequently, during the afternoon of 30 April 1984, Gary Tyrrell, an MNB officer, arrived at Earthtech's offices and requested that Earthtech's officers execute indemnity deeds of trust (IDOTs) on their residences in favor of MNB. Earthtech's officers were surprised and reminded Tyrrell that MNB already possessed adequate security for its loans. The officers refused to sign the IDOTs and, after much discussion, Tyrrell agreed to return the next morning in order to give the officers additional time to consider MNB's request. The following day, 1 May 1984, Tyrrell arrived at Earthtech's offices by mid-morning and immediately presented Earthtech's officers with a letter demanding repayment of the outstanding balance on the Revolving Note. Earthtech was unable to meet this demand. As a consequence, on 9 May 1984, MNB advised Earthtech that it was also in default of the Installment Note because it included a cross default provision, which provided that a default by Earthtech under any agreement with MNB could result in default under all agreements between Earthtech and MNB. MNB, therefore, was invoking its right under the agreement to accelerate and demand payment of the outstanding principal and accrued interest of the Installment Note. On 7 June 1984, MNB filed confessed judgment actions against Earthtech and its officers. Subsequently, Earthtech and MNB entered into a Workout Agreement. Under the Workout Agreement, Earthtech agreed to repay the full balance of the outstanding loans by mid-October 1984. In return, MNB agreed to dismiss the confessed judgment actions. For some reason, not clear from the record extract, the Workout Agreement was never signed by both parties, but they operated as if the agreement had full effect. Earthtech voluntarily accelerated the repayment period and MNB was repaid in full by 21 August 1984. Approximately three weeks later, on 13 September 1984, MNB dismissed the confessed judgment actions. MNB, however, had actually been overpaid by $ 582.31. The overpayment was remitted to Earthtech on 12 September 1984. In addition, MNB did not release a $ 433.57 balance in Earthtech's corporate account until 26 September 1984. Earthtech and Waller filed a six count complaint against MNB for breach of contract and unfair dealings, among others. MNB filed a motion to dismiss and a motion for summary judgment, which were granted in separate turns.

Issue:

Did MNB breach its duty of good faith in the performance of the contract by engaging in collection activities prior to demanding repayment?

Answer:

No.

Conclusion:

Earthtech and MNB entered into a loan agreement on 2 February 1983 that was evidenced by the Revolving Note. The clear and unambiguous language of the Revolving Note provides, in pertinent part: “ON demand, the Undersigned (whether one or more than one) promises (jointly and severally, if more than one) to pay to the order of MARYLAND NATIONAL BANK (the "Bank") the principal sum of Fifty thousand and 00/100 Dollars (the "Principal Sum") or so much thereof as shall have been actually advanced by the Bank to the Undersigned . . . . “ The Revolving Note was clearly a demand note or loan. Section 3-108 of the Commercial Law Article states, in part, that a demand note is one "in which no time for payment is stated." A demand note "expressly states that it is payable on demand, on presentation or at sight." A demand loan "may be called by lender at any time because there is no fixed maturity date." In addition, the circuit court had before it the deposition testimony of Waller and Earthtech's Vice-President Bloom, which indicated that they understood the terms and potential harshness of the Revolving Note. In addition, the Revolving Note executed by the parties states, in part: “Each obligor [Earthtech and Waller] . . . hereby waives demand, presentment for payment, protest, notice of dishonor and of protest . . .” Earthtech waived any requirement that MNB demand repayment prior to engaging in collection activities. Notwithstanding this waiver, Earthtech now seek to impose an obligation upon MNB that it did not assume under the Revolving Note. The Court, under the guise of an implied duty of good faith, refused to impose such an affirmative obligation upon MNB. The implied duty of good faith may not be used to extend or add to the obligations a party has accepted under a contract. MNB had no contractual obligation to demand payment from Earthtech before engaging in collection activities.