Utah Supreme Court
Can the implied covenant of good faith and fair dealing create new contractual obligations? Brown v. Moore Explained
Summary
Plaintiffs purchased a failing savings and loan with the understanding that net worth certificates from the Utah Industrial Loan Guaranty Corporation would satisfy capital requirements. When the ILGC became insolvent and DFI seized Western Heritage, plaintiffs sued for breach of the implied covenant of good faith and fair dealing. The court granted summary judgment for DFI.
Analysis
Background and Facts
In 1984, Kent Brown and Larry Hendricks purchased Western Heritage Thrift and Loan, a failing savings institution losing $30,000 monthly. The purchase required $550,000 in new capital plus $2 million in net worth certificates from the Utah Industrial Loan Guaranty Corporation (ILGC), which the Department of Financial Institutions (DFI) would recognize as capital equivalents for regulatory purposes. Western Heritage began showing profits ahead of schedule, but in 1986, the ILGC became insolvent. DFI subsequently seized the ILGC and no longer allowed Western Heritage to count the net worth certificates toward capital requirements, making it a failing institution subject to seizure.
Key Legal Issues
The central issue was whether DFI breached the implied covenant of good faith and fair dealing by discontinuing recognition of the net worth certificates when the ILGC became insolvent. Plaintiffs argued DFI had an obligation to continue recognizing the certificates for a period sufficient to allow them to recoup their investment, while DFI contended its only contractual obligation was approving the ownership transfer.
Court’s Analysis and Holding
The Utah Supreme Court applied the principle that the implied covenant of good faith and fair dealing cannot establish new, independent rights or duties not agreed upon by the parties. The court examined both express contractual provisions and the course of dealings between the parties. Finding no express obligation for DFI to recognize net worth certificates regardless of ILGC’s solvency, and no representations suggesting DFI assumed that risk, the court held DFI did not breach the covenant. The court distinguished United States v. Winstar, noting that case involved express governmental promises about regulatory capital treatment.
Practice Implications
This decision reinforces that the implied covenant of good faith and fair dealing serves to protect the parties’ reasonable expectations under existing contractual terms, not to create new obligations. Practitioners should ensure that contracts involving regulatory compliance explicitly address contingencies like changes in regulatory conditions or the insolvency of supporting entities. The court’s emphasis on the parties’ limited contacts and lack of express representations highlights the importance of thorough documentation during contract negotiations.
Case Details
Case Name
Brown v. Moore
Citation
1998 UT
Court
Utah Supreme Court
Case Number
No. 970394
Date Decided
December 11, 1998
Outcome
Affirmed
Holding
DFI had no express or implied obligation to continue recognizing net worth certificates toward capital requirements regardless of the ILGC’s financial condition, and the course of dealings between the parties did not reveal any obligation that would support a breach of the implied covenant of good faith and fair dealing.
Standard of Review
Correctness for summary judgment rulings, according no deference to the trial court’s legal conclusions
Practice Tip
When drafting contracts involving regulatory compliance, include express provisions addressing what happens if regulatory conditions or supporting entities change, as courts will not imply such protections under the covenant of good faith and fair dealing.
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