Bank of Sun Prairie v. CNC Drywall, Inc. (WI)

Summary: In Wisconsin, if a party exercises its right as authorized in a contract, the party does not breach a statutory duty of good faith.

 

Bank of Sun Prairie v. CNC Drywall, Inc., No. 2012AP2074, 348 Wis.2d 264 (Wis. Ct. App. 2013).

 

Facts: CNC Drywall, Inc. (CNC) executed a promissory note to the Bank of Sun Prairie (Bank). The note provided that the Bank could declare CNC in default if CNC’s liabilities exceeded its assets or CNC failed to make payment when due. The note did not have a notice provision nor did it preclude the Bank from declaring an event a default even if it did not do so in the past. The note further specified that, in the event of a default, the Bank could demand accelerated payment or set off the debts against CNC’s deposits at the Bank.

CNC did not miss a payment, and the Bank had knowledge that CNC’s liabilities exceeded its assets when it issued the loan. Within one year, however, the Bank declared CNC in default based on CNC’s negative equity and its delinquencies in paying its suppliers. Without prior notice, the Bank demanded immediate repayment in full, froze CNC’s bank deposits, and demanded CNC’s customers to pay directly to the Bank.

The Bank filed a suit for a judgment of foreclosure and replevin. CNC counterclaimed, alleging breach of contract and bad faith. The circuit court granted summary judgment to the Bank and dismissed CNC’s counterclaim. CNC appealed.

 

Holding: Affirmed. The question on appeal was whether the Bank breached a statutory duty of good faith. Under the Uniform Commercial Code, Wis. Stat. § 409.607(3)(a) (2011–12), every contract subject to the Code, including the note in this case, needs to be performed in good faith. The appellate court concluded that the Bank did not breach its obligation of good faith because the Bank acted pursuant to the contract.

Citing a Sixth Circuit case that ruled that the UCC duty of good faith may have required prior notice notwithstanding the terms of the note, CNC argued the question should have been submitted to a jury. The Sixth Circuit case, however, is not binding on Wisconsin courts. The general principle in Wisconsin, based on multiple Wisconsin cases, was that so long as a party acts as authorized in a contract, the party does not act in bad faith. Because CNC did not point out a single action taken by the Bank that was not authorized under the contract, the Bank did not act in bad faith.

 

Opinion Year: 
2013
Jurisdiction: 
Wisconsin
Tags: 
By: ATG Underwriting Department | Posted on: Mon, 03/16/2015 - 4:11pm