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Current Developments in the Commercial Divisions of the
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Posted: March 10, 2017

First Department Examines Scope of Covenant of Good Faith and Fair Dealing

On February 28, 2017, the First Department issued a decision in Transit Funding Associates, LLC v. Capital One Equipment Finance Corp., 2017 NY Slip Op. 01525, examining the scope of the covenant of good faith and fair dealing.

In Transit Funding Associates, the plaintiff, “a financing company that loaned money to Chicago taxi owners and drivers for the purchase of taxi medallions, entered into a commercial loan agreement with defendant lender.” The parties entered into a loan agreement” giving the plaintiff “an $80 million credit line. The agreement provided that” the defendant “would continue funding advances” “from time to time until the close of business on the Termination Date in such sums as” the plaintiff “may request.” The “general obligation of” the defendant “was substantially limited by section 2.1(g) of the loan agreement, which gave” the defendant “the complete authority to decline to advance funds.” The defendant later “began denying all loan advances, regardless of the creditworthiness or circumstances of particular medallion owners.” The plaintiff later brought an action against the defendant, including a claim for breach of the covenant of good faith and fair dealing. The First Department held that that claim should be dismissed, explaining:

In view of the provisions of the loan agreement expressly allowing Capital One to deny any requests for advances in its “sole and absolute discretion,” and specifically authorizing Capital One to deny any such requests for any reason, it cannot be said that Capital One violated the contract by failing to advance funds as requested, even if that decision put TFA out of business.

Although in New York, all contracts imply a covenant of good faith and fair dealing in the course of performance, the existence of the covenant cannot be relied on as grounds for [the plaintiff’s] action. The covenant of good faith and fair dealing cannot negate express provisions of the agreement, nor is it violated where the contract terms unambiguously afford [the defendant] the right to exercise its absolute discretion to withhold the necessary approval. Where a contract allows one party to terminate the contract in its sole discretion and for any reason whatsoever, the covenant of good faith and fair dealing cannot serve to negate that provision. Notably, where the parties intended to limit either party’s rights under the loan agreement so that they could only be exercised in good faith, they specifically included such language; for example, section 1.1 of the agreement allows [the defendant] to establish a valuation methodology “in its sole and absolute discretion exercised in good faith.” In contrast, the provision of section 2.1 authorizing [the defendant] to decline any request for an advance “in its sole and absolute discretion” lacks any such limitation requiring Capital One to act in good faith when doing so. Because [the defendant’s] complained-of conduct consists entirely of acts it was authorized to do by the contract, its alleged motivation for doing so is irrelevant. Simply put, an intent to put [the plaintiff] out of business cannot justify a lawsuit for a claimed breach of the covenant where the express provisions of the agreement allowed [the defendant] to act as it did.

(Internal quotations and citations omitted).

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