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What to Know about Good Faith or Bad Faith – an illustrated easy guide

What to Know about Good Faith or Bad Faith – an illustrated easy guide

Good Faith Is Business

What Does Good Faith Mean?

 

Attorney Thomas Howard has helped clients for years enforce their rights under contracts.  And each and everyone of those contracts had something in common – but it was not a term written into any of the contracts.

Every contract contains an implied promise.  The implied covenant of good faith and fair dealing is what makes business work.  It requires people to deal with one another fairly.  Businesses and people can trust each other to enter into contracts because good faith requires them to help them get the benefit of their bargain.

Thomas Howard has helped countless businesses and people with their contracts, below he explains good faith in an easy to understand and Illustrated way.   You can call him at (309) 740-4033.

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The Duty of Good Faith & Fair Dealings

Any party to a contract has an unwritten duty to help the other party obtain the benefit of their end of the bargain.  A benefit of the bargain is what you get out of the deal.  Let’s take a quick second to explain the very basics of what forms a contract.

A contract had 3 basic elements

Contract Basics Offer Consideration Acceptance

  • Offer & Acceptance: This is what you buy. Pizza, coffee, plumbing, Netflix, or even legal services.  The offer is what the seller in the contract brings to the table.  It brings the buyer in the door.  The Buyer is accepting the offer.
  • Consideration: This is often money.  In the picture, the coffee is $3.50.  The consideration is two-way, however.  The offer is a consideration as well.  The pizza is half the deal, so is the NetFlix subscription.  Very often the consideration is goods or services in exchange for payment of money.
  • Meeting of the Minds: This is the most complex of the three basic contract elements, and where Good Faith resides.  The intent of the parties to the contact is important. Both intended to get what is called the “benefit of their bargain.” This means you do not get tricked into the deal. You are not making a mistake regarding the terms of the contract.

Meeting of the Minds and Good Faith

Would you enter into a deal to buy a house if you knew every time it rains the basement floods with 3 feet of water?  Perhaps you would if you negotiate a discount for installing a dewatering system.

But would you buy the house with the leaky basement if you did not know about it?  That’s where people get into trouble because they feel as if they are tricked. 

They lacked the requisite meeting of the minds on the deal because if the buyer knew about the basement flooding, he never would have purchased the house.  That is a lack of meeting of the minds that gets to the heart of contract formation.

What if the seller knows about the water in the basement, and lies on the disclosures and says that to the best of his knowledge there is no water in the basement? 

That is fraud, a/k/a bad faith.  The Seller lying about the leaky basement injured the Buyer.  The Buyer can sue the seller for fraud and recover the damages.  The damages would be the cost of repairing the leaky basement.

Interference in the Contract – Bad Faith

The “duty of good faith and fair dealing requires the party vested with contractual discretion not to injure other parties to the contract by action or omission and not to act inconsistently with other parties’ rights.” Id, citing Brzozowski v. Northern Trust Co., 248 Ill.App.3d 95 (1993).

Sometimes contracts have certain rights that may spring into effect.  These are called contingencies. For example, take your employer’s stock price.

Imagine your job has a contract to that will pay you a bonus if you do a great job and the stock price rises above $100.  If that happens, your employer will pay you one-million dollars.

one million dollars

You have 3 months to get the stock price above $100, and you’re doing amazing!  But your company does not want to pay you. They notice that your contract requires their help. 

Instead of helping you maximize profits, the company sits back and waits and takes no action. If the company does not do their part, you will fail and not get your bonus.

The duty of good faith and fair dealing requires the company to help you hit your target when they must cooperate to do so. The company cannot interfere, not help, and put you in a position to fail, then say you did not earn your bonus. 

That is performing the contract opportunistically to deprive you of your one million dollars.

Good Faith Case Law Round up

  1. A party cannot take advantage of a condition precedent the performance of which he has helped render impossible. Barrows v. Maco, Inc., 94 Ill.App.3d 959, 966 (1st 1981).
  2. Bad faith, or opportunistic advantage-taking, is the lack of cooperation depriving the other contracting party of his reasonable expectation. Hentze v. Unverfehrt, 237 Ill. App.3d 606,(1992).
  3. A party that participated in the hinderance of the condition, and they may not now claim the benefit of the failure of the required event. Yale Development Co. v. Oak Park Trust & Savings Bank, 26 Ill.App.3d 1015 (2nd 1975).

Good Faith Means You Do What You Promised

To conclude, good faith helps our economy have trust in the trillions of dollars of contracts that we depend on in our daily lives. 

As the American Bar Association said in their blog,

The theory behind this principle is that a party cannot interfere with or fail to cooperate with your performance and then complain about it.

From the pension funds, to pizza orders, and everything in between, all depend on good faith and fair dealing in their contracts.

So if you ever get the advice to take a dive, or to not perform your end of the bargain – you may have to explain to the person that you have a duty of good faith and fair dealing to live up to your end of the bargain.

You may also want to avoid doing business with them. 

If you have a contract dispute, call our offices at (309) 740-4033.

 

A commercial loan workout attorney with over ten years experence – Thomas Howard answers your questions in the video below.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.

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Commercial Mortgages

Commercial Mortgages

16

July, 2018

.

Thomas Howard

Follow on Social Media

Commerical mortgages are the quintessential secured transaction for business lending.

The main collateral for many people and businesses is the real estate it owns.

A commercial mortgage is a grant of a security interest on a parcel of the business’ real estate.

Commercial mortgages allow for greater rights for the bank as compared to residential mortgages, which have greater consumer protections at both state and federal levels.

Drafting best practices for your commercial mortgages are discussed in the video below: be advised – the terms must be in the mortgage BEFORE the foreclosure begins to maximize recovery and control costs.

“A conspicuous Cross-Collateralization clause is only one part of it.”

Picture of Collateral with foreclosure risk

Here’s the bullet point take aways from the video above.

  • waiver of the right of redemption – very often lenders that do not get deep in the weeds of commercial lending for get this – looking at you credit unions –  While redemption cannot be waived by consumer mortgages (residential mortgages) commercial mortgages – but if it is just business – you get what you negotiate.
  • cross-collateralization languages why – to stave off a 2nd mortgage coming in and having its hand out when other debts secure your mortgage for more on this on our case law update series – PNB v. Banterra Bank. But we stress the 2 points any good cross-collateralization clause requires.  
    • conspicuous cross-collateral clause on the first page of the document that refers to all debt then or thereafter arising, related or unrelated to the mortgage debt;
    • Define indebtedness to include the note amount and all amounts that may be indirectly secured by the cross-collateralization provision.
  • Define maximum indebtedness of the mortgage to be twice the mortgage debt to add more strength to cross-collateralization clause.
  • Acceleration and deceleration clauses.  Our Section council was discussing this last meeting and some were of the opinion that if the bank permits the borrower to reinstate – bring the loan entirely current – it can do so, but there should be some modification that provides for such – in addition to any judicial finding that permits the reinstatement as a borrower only gets one – for 5 years from the date of the dismissal.
  • Link to the quoted material regarding recession risk related to rise in credit spread of investment grad bonds from Bloomberg.

16

July, 2018

.

Thomas Howard

Follow on Social Media

Commerical mortgages are the quintessential secured transaction for business lending.

The main collateral for many people and businesses is the real estate it owns.

A commercial mortgage is a grant of a security interest on a parcel of the business’ real estate.

Commercial mortgages allow for greater rights for the bank as compared to residential mortgages, which have greater consumer protections at both state and federal levels.

Drafting best practices for your commercial mortgages are discussed in the video below: be advised – the terms must be in the mortgage BEFORE the foreclosure begins to maximize recovery and control costs.

“A conspicuous Cross-Collateralization clause is only one part of it.”

Picture of Collateral with foreclosure risk

Here’s the bullet point take aways from the video above.

waiver of the right of redemption – very often lenders that do not get deep in the weeds of commercial lending for get this – looking at you credit unions –  While redemption cannot be waived by consumer mortgages (residential mortgages) commercial mortgages – but if it is just business – you get what you negotiate.

cross-collateralization languages why – to stave off a 2nd mortgage coming in and having its hand out when other debts secure your mortgage for more on this on our case law update series – PNB v. Banterra Bank. But we stress the 2 points any good cross-collateralization clause requires.  

conspicuous cross-collateral clause on the first page of the document that refers to all debt then or thereafter arising, related or unrelated to the mortgage debt;

Define indebtedness to include the note amount and all amounts that may be indirectly secured by the cross-collateralization provision.

Define maximum indebtedness of the mortgage to be twice the mortgage debt to add more strength to cross-collateralization clause.

Acceleration and deceleration clauses.  Our Section council was discussing this last meeting and some were of the opinion that if the bank permits the borrower to reinstate – bring the loan entirely current – it can do so, but there should be some modification that provides for such – in addition to any judicial finding that permits the reinstatement as a borrower only gets one – for 5 years from the date of the dismissal.

Link to the quoted material regarding recession risk related to rise in credit spread of investment grad bonds from Bloomberg.

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Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act

The Third District Appellate Court of Illinois handed down a new case that is of interest to secured lenders.

The case of Pluciennik v. Vandenberg provided the first time that Illinois applied the Uniform Fraudulent Transfer Act (UFTA) and its definition of “asset” on an encumbered piece of real estate.

Plaintiffs filed a UFTA action seeking to avoid transfers of three parcels of real estate from companies owned and managed by Defendant to companies held in irrevocable trusts for the benefit of his minor daughters. Valid mortgages encumbered all the real estate transferred.

The Trial Court erred in determining, as a matter of law, that the real estate were not assets under the UFTA because they were fully encumbered because no evidence of the fair market value of the real estate was considered in granting a motion to dismiss the UFTA complaint.

“that the fair market value of encumbered property that exceeds the value of a valid lien qualifies as an asset under Illinois’s Uniform Fraudulent Transfer Act. “

“that the fair market value of encumbered property that exceeds the value of a valid lien qualifies as an asset under Illinois’s Uniform Fraudulent Transfer Act. “

Picture of Collateral with low risk

Photograph by Lorem Ipsum via Stencil

The trail court made a mistake by not taking evidence on the fair market value of the real estate transferred.

As a result, there continued to be a material issue of fact as to the reasonable value of the properties and whether, in light of the fair market value, the properties were fully encumbered.

Therefore, Illinois law recognizes the value of the asset over and above the encumbrance upon it to be subject to the UFTA.

Look at the both the fair market value, and the payoff of the debt before determining if there is a UFTA claim.

Picture of Collateral with low risk

Photograph by Lorem Ipsum via Stencil

The trail court made a mistake by not taking evidence on the fair market value of the real estate transferred.

As a result, there continued to be a material issue of fact as to the reasonable value of the properties and whether, in light of the fair market value, the properties were fully encumbered.

Therefore, Illinois law recognizes the value of the asset over and above the encumbrance upon it to be subject to the UFTA.

Look at the both the fair market value, and the payoff of the debt before determining if there is a UFTA claim.