Can the implied covenant create obligations inconsistent with express contract terms? Snow v. Chartway Federal Credit Union Explained

In Snow v. Chartway Federal Credit Union, the Utah Court of Appeals addressed whether the implied covenant of good faith and fair dealing can create obligations that contradict express contractual terms. The court’s ruling provides important guidance for practitioners handling contract disputes involving real estate transactions.

Background and Facts

Scott Snow obtained a construction loan secured by a trust deed on his Highland property. After experiencing payment difficulties, Snow approached the lender about loan assumption possibilities. Heritage West Federal Credit Union (later acquired by Chartway) allegedly provided terms for assumption but then changed those terms when Snow presented a qualified buyer. Chartway subsequently refused Snow’s tender of a deed in lieu of foreclosure and initiated foreclosure proceedings. Snow sued for breach of the implied covenant of good faith and fair dealing and negligent infliction of emotional distress.

Key Legal Issues

The central issue was whether Chartway’s alleged promise to allow loan assumption created an enforceable obligation under the implied covenant of good faith and fair dealing, despite the promissory note’s express provision that assignments required Chartway’s approval. The court also addressed whether Snow stated a viable claim for negligent infliction of emotional distress based on the foreclosure process.

Court’s Analysis and Holding

The court applied the fundamental principle that the implied covenant “may not be invoked if it would create obligations inconsistent with express contractual terms.” The promissory note explicitly stated that assignments required Chartway’s approval and contained no language obligating the lender to negotiate new terms or accept assumptions. The court found that Snow failed to identify any written document satisfying the statute of frauds that modified the note or created new obligations.

Regarding the emotional distress claim, the court held that Chartway’s conduct was privileged because it merely insisted upon its legal rights under the contract. The court noted that lenders cannot be subjected to tort liability for the natural distress suffered by borrowers facing foreclosure when the lender is simply pursuing agreed-upon collateral.

Practice Implications

This decision reinforces that the implied covenant cannot override express contractual provisions. Practitioners should carefully analyze whether claimed obligations exist independently of the written contract and satisfy applicable writing requirements. When dealing with real estate modifications, ensure compliance with the statute of frauds through properly executed written agreements. The ruling also demonstrates the difficulty of succeeding on emotional distress claims when defendants act within their contractual rights, even if those actions cause genuine distress to the plaintiff.