Loan Scenario Norwest Bank Had Been Lending

Loan Scenario

Norwest Bank had been lending money to Tresch to run a dairy farm. The balance due the bank after several years was $147.000; the loan agreement stated that Tresch would not buy any new equipment in excess of $500 without the express consent of the bank. Some time later, Tresch applied to the bank for a loan of $3,100 to purchase some equipment. The bank refused to make the loan because it did not believe the new equipment would correct the condition for which it would be bought and would not result in significant additional income. Tresch then sued the bank, claiming that its refusal to make the loan was a breach of the implied covenant of good faith and fair dealing. Decide.

Although, in this case the lender is accused of acting in bad faith against the bank that gave him the loan, really it seems as if it is he who is acting bad faith. Tresch is apparently pursuing a loan policy that is not in his best interests of fulfilling his contractual obligation to pay his initial loan off, as if he wishes to drive himself further into debt to avoid having to pay back the sum in question. All loan agreements contain an implied obligation applicable to both parties of good faith and fair dealing, thus when a loan is made, this implied obligation means that the lender cannot simply look for reasons not to pay and the party who is being lent to must do all he can to pay back the loan.

In good faith, bank must make a thorough investigation of the claim for the loan and must consider all reasons and circumstances that might support the claim for a loan. Additionally, it must give as much consideration to the financial interest of the lending party as it gives to its own financial interest. But this does not mean that it has to give the loan automatically. If a bank refuses to pay a loan that was agreed upon according to contractual terms, this could give rise to a bad faith claim. ("Bad Faith," 2004)

Bad faith claims are most often made against insurance companies, such as when the claim that the company has breached its implied obligation of good faith and fair dealing. "If the company is found to have acted in bad faith in its handling of a claim, the insured is entitled to all damages resulting from that action, including certain types of damages that would not be available just for breach of contract. In cases of extreme or outrageous misconduct by an insurance company, the insured also may be entitled to receive punitive damages." ("Bad Faith," 2004)

However, in this case, there seems to be no bad faith, rather before the loan was first made the bank made arrangements to protect itself from potential losses. Only if one side intentionally or expressly fails to stick to his/her/its part of the bargain, there is a breach. A breach in a contract occurs when one party to a contract makes it impossible for the other parties to the contract to perform, in other words, that without the loan the dairy farm will fail and thus the initial purpose of the loan is moot -- the bank would be thus causing the farm to fail to collect on its initial sum. A breach can also be alleged when party to the contract does something against the intent of the contract. But in this case the initial terms set suggest that the bank was aware things could fall through regarding the farm. True, a breach occurs most often when a party absolutely refuses to perform the contract, the bank expressly gave itself the right of refusal. (When Does a Breach of Contract Occur? 2004)