The Ground Rules

The basic ground rules for any workout plan are "good faith and fair dealing." These rules apply to both the lender and the dealer. This concept of good faith and fair dealing has its origins in the common law of many states, has been reiterated in the Uniform Commercial Code, the Restatement (Second) of Contracts and case law.

Uniform Commercial Code, Section 1-203:"Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." Restatement (Second) of Contracts, Section 205, Comment d.

"A complete catalogue of the types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power to specific terms, and interference with or failure to cooperate in the other party's performance."

It appears, however, that parties who enter into a contract in Texas should search for a theory other than good faith when seeking remedial help from a court. In English v. Fischer, 660 S.W. 521 (Tex. 1983), at 552, the court, when reviewing the concept of implied covenants of good faith and fair dealing, held:

". . . (It) is contrary to our well reasoned and long-established adversary system which has served us ably in Texas for almost 150 years.... The novel concept advocated by the courts below would abolish our system of government according to settled rules of law and let each case be decided upon what might seem `fair and in good faith,' by each finder of fact. This we are unwilling to do."

In our opinion, the best definition of how the parties involved in a workout situation should govern their conduct was handed down in a California appellate court decision, Rich & Whillock, Inc. v. Ashton Development, Inc., 157 Cal. App. 3d 1154 (1984), which involved a debtor taking advantage of a financially strapped creditor. In that case, the debtor, well aware of the creditor's financial problems and need for cash, gave the creditor the option to accept less money than it was legitimately owned and to sign a release for the balance, or to get nothing. The creditor accepted the money, signed the release and sued the debtor. In setting aside the release and allowing the creditor's suit, the court held, at page 1159:

"The underlying concern of the economic duress doctrine is the enforcement in the market place of certain minimal standards of business ethics. Hard bargaining, `efficient' breaches and reasonable settlements of good faith disputes are all acceptable, even desirable, in our economic system. That system can be viewed as a game in which everybody wins, to one degree or another, so long as everyone plays by the common rules. Those rules are not limited to precepts of rationality and self interest. They include equitable notions of fairness and propriety that preclude the wrongful exploitation of business exigencies to obtain disproportionate exchanges of value. Such exchanges make a mockery of freedom of contract and undermine the proper functioning of our economic system. The economic duress doctrine serves as a last resort to correct these aberrations when conventional alternatives and remedies are unavailing."

The Negotiations

If the workout team appears before the loan becomes "classified