K.M.C. Co. v. Irving Trust Co.

K.M.C. Company (K.M.C.) (plaintiff) was in the wholesale and retail grocery business. In 1979, K.M.C. entered into a revolving credit agreement with a bank called Irving Trust Company (Irving) (defendant). To secure the financing, K.M.C. gave Irving a security interest in its accounts receivable and inventory. Under the agreement, Irving retained discretion to withhold additional financing, and all monies loaned were repayable on demand. On March 1, 1982, without any prior notice, Irving refused K.M.C.’s request for additional money even though the loan balance would remain within the specified credit limit. K.M.C.’s business subsequently collapsed. Consequently, K.M.C. sued Irving for breach of contract. K.M.C. contended that Irving’s refusal without notice constituted a breach of the implied covenant of good faith and fair dealing. Irving contended that it refused to loan the requested money as a reasonable exercise of its discretion under the agreement in good faith. A jury trial occurred. At trial, Irving’s representative testified that Irving typically continued to extend financing when it was adequately secured. During trial, Irving’s counsel conceded that Irving was adequately secured. Further, K.M.C. put forth evidence to show that a personal conflict arose between Irving’s loan officer and a K.M.C. representative. The magistrate judge instructed the jury that there is an implied obligation of good faith in every contract and that the obligation may have required Irving to notify K.M.C. before withholding additional financing unless Irving’s refusal was made in good faith in the reasonable exercise of its discretion. The jury ruled for K.M.C. On appeal, Irving argued that the jury instructions misstated the contractual obligations, that K.M.C. failed to show Irving acted in bad faith, and that the jury’s verdict went against the weight of the evidence.