Beskrone et al v. KORE Capital Corporation
Filing
23
MEMORANDUM OPINION. Signed by Judge Maryellen Noreika on 3/25/2024. (dlw)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re:
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MOON GROUP, INC., et al.,
Debtors.
DON A. BESKRONE, Chapter 7 Trustee of
MOON GROUP, INC., et al.,
Appellants,
v.
KORE CAPITAL CORPORATION,
Appellee.
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Chapter 11
Bankr. No. 21-11141 (JKS)
(Jointly Administered)
Adv. No. 21-51176 (JKS)
C.A. No. 23-620 (MN)
MEMORANDUM OPINION
Ricardo Palacio, Gregory A. Taylor, ASHBY & GEDDES, P.A., Wilmington, DE; Philip S. Rosenzweig,
Genevieve S. McCormack, William C. Katz, SILVERANG, ROSENZWEIG & HALTZMAN, LLC, King of
Prussia, PA – Attorneys for Appellant, Don A. Beskrone, Chapter 7 Trustee of Moon Group, Inc., et
al.
Michael G. Busenkell, GELLERT SCALI BUSENKELL & BROWN, LLC, Wilmington, DE; David S.
Musgrave, GORDON FEINBLATT LLC, Baltimore, MD – Attorneys for KORE Capital Corporation.
March 25, 2024
Wilmington, Delaware
NOREIKA, U.S. District Judge
Pending before the Court is the appeal by Don A. Beskrone (“the Trustee”), Chapter 7 Trustee
of Moon Group, Inc. and its affiliated chapter 7 debtors (together, “the Moon Entities” or “the
Debtors”) from the Bankruptcy Court’s September 30, 2022 Order (Adv. D.I. 81; D.I. 1-3) 1 (“the
Interlocutory Order”) and accompanying Opinion, Beskrone v. KORE Capital Corporation (In re
Moon Grp., Inc.), 2022 WL 4658615 (Bankr. D. Del. Sept. 30, 2022) (“the Opinion”). The appeal
arises in an adversary proceeding against appellee KORE Capital Corporation (“KORE”), alleging
various causes of action based on KORE’s refusal to fund advances to the Moon Entities under a
“lockbox” line of credit agreement, 2 which resulted in the Moon Entities’ inability to fulfill customer
contracts or operate their businesses, and preceded their subsequent bankruptcy. The Interlocutory
Order granted, in part, a motion for judgment on the pleadings in favor of KORE with respect to seven
of the eight counts of the amended complaint (Adv. D.I. 12) (“the Amended Complaint”). The
accompanying Opinion determined, among other things, that the loan agreement provided KORE
with sole discretion in making advances; that Kore’s refusal to advance funds did not prevent the
Moon Entities from performing their obligations under the loan agreement; and that breach of the
implied duty of good faith and fair dealing is not an independent cause of action under applicable
Maryland law. In re Moon Grp., 2022 WL 4658615, at *5 n.36; *9-10.
The Trustee sought leave to appeal the Interlocutory Order pursuant to Federal Rule of
Bankruptcy Procedure 8004(a) on the basis that the implied duty of good faith and fair dealing, as
recognized under Maryland law, imposes a heightened duty of care on lockbox lenders based upon
1
The docket of the chapter 7 cases, captioned In re Moon Grp., Inc, et al., 21-11140 (JKS), is
cited herein as “B.D.I.
.” The docket of the adversary proceeding, captioned Beskrone
v. KORE Capital Corp., Adv. No. 21-51176 (JKS), is cited herein as “Adv. D.I. __.”
2
Lockbox financing arrangements are also referred to as “factoring agreements” or “blocked
accounts.”
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their control over their borrower’s cash flows. (Misc. No. 22-470, D.I. 1). The Trustee argued that
federal courts confronted with similar “lockbox” lender agreements have held that the good faith
standard limits the lender’s discretion to cut off the financial lifeline of funding advances without
notice. This Court accepted the interlocutory appeal for review on the basis that the issue had not yet
been addressed by a court in this District, and the three federal courts to consider such a lockbox
lending arrangement reached a different conclusion than the Bankruptcy Court reached here. In re
Moon Grp., 2023 WL 3848338 (D. Del. June 6, 2023). Because there is no genuine issue of material
fact as to whether KORE breached the express terms of the lending agreement, and because Maryland
law does not recognize a separate cause of action for breach of the implied duty of good faith and fair
dealing, the Court must affirm this aspect of the Interlocutory Order.
I.
BACKGROUND
A.
The Parties
The Moon Entities, a centuries-old business, operated several business lines: a wholesale tree
and shrubbery nursery; a commercial landscape maintenance and site management company; and a
landscape construction business. The Moon Entities serviced large commercial contracts, primarily
on a seasonal basis, which is a cash-intensive business model. Given this kind of work, the Moon
Entities carried substantial accounts receivable, which from time to time, resulted in cash flow
shortages when awaiting remittances from customers. The Moon Entities required a substantial line
of credit to ensure adequate cash flow.
KORE provides lines of credit secured primarily by accounts receivable, as well as “factoring”
loans. KORE borrows capital from other lenders, earning a profit from the margin between the rate
at which it borrows these funds and the higher rate at which it lends them.
One of the Moon Entities – Moon Landscaping, Inc. (“MLI”) – was a party to a master service
agreement with StoneMor Operating LLC (“the StoneMor Agreement”) the terms of which would
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have extended through December 31, 2024. StoneMor is a leading owner and operator of cemeteries
and funeral homes, and, prior to this dispute, the Moon Entities’ largest customer.
B.
The “Lockbox” Loan Agreement
Although the Moon Entities had two existing loan facilities secured by certain of the Moon
Entities’ real and personal property, the cyclical cash flow needs as a result of the seasonality of their
businesses required additional liquidity. On May 15, 2020, the Moon Entities entered into a revolving
credit agreement with KORE (“the Revolving Credit Agreement”). Under the Revolving Credit
Agreement, KORE may advance funds to the Moon Entities based on invoices issued by the Moon
Entities to their customers for services rendered. The Revolving Credit Agreement, along with all
the loan modifications thereto, are collectively referred to as the “Loan Agreement.” The line of
credit under the Loan Agreement was secured by a security interest in the Moon Entities’ accounts
receivable. The amount that the Moon Entities were permitted to draw from the line of credit was
based upon a percentage of the Moon Entities’ then outstanding accounts receivable. KORE initially
agreed to advance the Moon Entities 80 percent of the receivables for customers other than StoneMor,
but only 35 percent of the StoneMor receivables.
The Loan Agreement contemplates that the Moon Entities’ receivables would be paid by
customers directly to KORE through a “lockbox” financing arrangement. Under this arrangement,
the Moon Entities were in the position of asking KORE for all funding, as all of their accounts
receivable were paid into the lockbox operated by KORE. In turn, KORE generally advanced funds
(not exceeding the above-noted percentages) to meet the Moon Entities’ short-term cash flow needs.
Thus, the Moon Entities’ ability to pay its debts as they came due was wholly dependent upon KORE
making advances under the Loan Agreement. Section 2.1 of the Loan Agreement provides, in part:
2.1 Credit Facility. At Borrower’s request during the Term of this
Agreement, Lender in its sole discretion may make Advances to
Borrower, subject to receipt of such financial information as Lender
shall require and as otherwise provided in this Agreement.
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(Amended Complaint, Ex. 1 at § 2.1 (emphasis added)). Section 2.3 of the Revolving Credit
Agreement provides, in part:
2.3 Adjustments. Lender shall determine the amount that may be made
available to Borrower under the [Revolving] Credit Facility based on
the most recent Accounts Reporting Certificate delivered to Lender in
accordance with this [Revolving Credit] Agreement and such other
information as may be available to Lender.
(Id. § 2.3) (emphasis added). The Revolving Credit Agreement contained the following termination
provision:
[I]f the Lender exercises its discretion to cease making Advances under
this Agreement and no Event of Default has occurred and is continuing,
Borrower may terminate this Agreement by delivering 10 days written
notice to Lender and, in such event, Borrower shall not be liable to
Lender for any Termination Fee.
(Id. at § 10.12 (emphasis added)). The Moon Entities and KORE modified the terms of the Revolving
Credit Agreement through four written agreements, the most recent of which was executed a few
weeks before the alleged breaches occurred, to increase both the credit limit and the percentage of
StoneMor receivables relative to which KORE would make advances. In each modification, the
Moon Entities: (i) ratified and confirmed that the loan documents continued to be in full force and
effect except as otherwise modified in that particular agreement, (ii) agreed that the loan documents
were fully enforceable against the Moon Entities, and (iii) agreed that no amendments or waivers
were effective unless set forth in a signed writing. (See e.g., Amended Complaint, Ex. 6, Waiver/Loan
Modification Agreement, dated June 28, 2021, §§ 7, 9(v), 11).
C.
KORE’s Refusal to Fund the Line of Credit
Notwithstanding these modifications, the Amended Complaint asserts that the time period
between the Moon Entities’ request for funding and KORE’s advances expanded, exacerbating the
Moon Entities’ liquidity issues. (Amended Complaint ¶ 31). In July 2021, KORE demanded that the
Moon Entities engage a financial “cash flow consultant,” selected by KORE, at the Moon Entities’
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expense, and they declined. (Id. ¶¶ 32-37). Around the same time, the Amended Complaint asserts,
the outstanding principal balance of the line of credit was approximately $5 million, while the Moon
Entities’ accounts receivable totaled approximately $9 million; accordingly, the Amended Complaint
contends, KORE was oversecured. (Id. ¶ 36).
On or about July 10, 2021, KORE refused to fund the next draw on the line of credit. (Id.
¶ 45). Upon KORE’s denial of funding, the Moon Entities anticipated failing to make payroll, which
would have caused a default under the StoneMor Agreement. To avoid such a default, the Moon
Entities requested StoneMor pay its upcoming invoice directly to the Moon Site Entities. (Id.)
On July 16, 2021, KORE issued a Notice of Default to the Moon Entities. (Id. ¶ 47). In
response, the Moon Entities asserted that the declaration of default was invalid and that KORE
breached the Agreement first by refusing and/or failing to fund the next draw. (Id. ¶ 49). On
July 23, 2021, KORE filed a complaint in confession of judgment against the Moon Entities, as well
as a receivership action seeking imposition of a receivership over the Moon Entities. (Id. ¶ 55). In
addition, KORE filed a civil suit against StoneMor first in the Court of Common Pleas of Bucks
County, Pennsylvania, and then in United States District Court for the Eastern District of
Pennsylvania. (Id. ¶ 59). KORE’s civil suit against StoneMor alleges a cause of action for breach of
contract based on KORE’s contention that it “stands in the shoes of [the Debtors] with respect to
StoneMor’s obligations to pay [pre-petition] amounts due to Moon” and that StoneMor breached its
contract with the Debtors by making three pre-petition payments to the Debtors rather than to KORE.
(Id. ¶ 61). KORE has continued to prosecute its civil suit against StoneMor even after receiving
payment in full. (Id. ¶¶ 65, 69).
D.
The Bankruptcy Cases
The Moon Entities filed voluntary chapter 11 petitions on August 12, 2021. The Trustee
asserts that the Moon Entities’ ability to quickly secured debtor-in-possession financing demonstrated
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that, had KORE provided good faith notice and a reasonable opportunity to refinance, the Moon
Entities’ business would not have been destroyed. The Debtors’ cases were later converted to cases
under chapter 7 of the Bankruptcy Code.
On September 17, 2021, Debtors paid KORE
$5,455,456.13, representing one hundred percent (100%) of the principal and interest due to KORE
on the line of credit, subject to a reservation of rights with respect to the matters complained of in the
Adversary Proceeding.
The Amended Complaint includes the following claims: (i) breach of contract, (ii) breach of
implied duty of good faith and fair dealing, (iii) tortious interference with contract, (iv) common law
fraud, (v) fraudulent misrepresentation, (vi) promissory estoppel, and (vii) violation of the automatic
stay. Prosecution of the Amended Complaint was assumed by the Trustee upon conversion of the
cases. KORE’s answer contains a counterclaim seeking various fees – including overadvance fees,
diversion of payment fees, field examination expenses, bond charges, termination fee, consulting fees,
wire fees, and legal fees and expenses – which, as of September 27, 2021, totaled approximately
$727,000, exclusive of interest. (Adv. D.I. 13 at 14).
E.
The Interlocutory Order
On March 2, 2022, KORE moved for judgment on the pleadings with respect to the Amended
Complaint, arguing that it had unfettered discretion to exit the lockbox lending arrangement based on
the plain language of the Agreement. (Adv. D.I. 26). Because there is an implied duty of good faith
and fair dealing, the Trustee argued in opposition, the lender does not have unfettered discretion to
exit the lockbox line of credit; rather, the lender has an obligation to provide the borrower with
reasonable notice and opportunity to refinance the debt. (See id. at 13-18). The Trustee asserted that,
in the very few times that a federal court has considered a lockbox line of credit financing
arrangement, that court has imposed upon the lockbox lender an obligation not to exit the line of
credit without notice, but rather to give the borrower a window in which to refinance, because the
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lender controls the borrower’s liquid assets. (See id.). The Trustee cited three cases in support of his
position: K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 759 (6th Cir. 1985); Quality Automotive Co. v.
Signet Bank/Maryland, 775 F. Supp. 849, 853 (D. Md. 1991); and In re Bailey Tool & Mfg. Co., 2021
WL 6101847 (Bankr. N. D. Tex. Dec. 23, 2021).
The Bankruptcy Court rejected the Trustee’s argument, distinguishing the cases on which he
relied, and holding that the “sole discretion” language in the Loan Agreement gave KORE unfettered
discretion to make or withhold advances and exit the Loan Agreement at any time. In re Moon Grp.,
2022 WL 4658615, at *9. As the Bankruptcy Court further explained, Maryland law governs the
Agreement, and while Maryland law recognizes the implied duty of good faith and fair dealing
(including in the lending context), Maryland courts have clarified that this duty does not obligate a
party to take affirmative actions that it is clearly not required to take under the contract. See id.
“KORE had broad contractual authority to withhold advances. Consequently, Counts I-VI and Count
VIII in the Amended Complaint are barred as a matter of law, and judgment on the pleadings will be
entered in favor of KORE on those counts.” Id. at *1. 3
On October 14, 2022, the Trustee filed his Notice of Appeal, together with his motion for
leave to appeal the Interlocutory Order. (Misc. No. 22-470, D.I. 1). The Court granted leave on
June 6, 2023. (Id., D.I. 9). The merits of the appeal are fully briefed. (D.I. 18, 19, 20). The Court
did not hear oral argument because the facts and legal arguments are adequately presented in the
briefs and record, and the decisional process would not be significantly aided by oral argument.
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With respect to Count VII, alleging that KORE’s post-petition pursuit of StoneMor violates
the automatic stay under § 362 of the Bankruptcy Code, the Bankruptcy Court found “as a
matter of law that Kore did not violate the automatic stay by pursuing its contractually granted
claims against StoneMor.” In re Moon Grp., 2022 WL 4658615, at *20. But because “it is
plausible that Kore’s pursuit of the Excess Estate Funds is a violation of the automatic stay,”
the Bankruptcy Court denied the motion for judgment on the pleadings “as to Count VII as to
the Excess Estate Funds and will not dismiss Count VII of the Amended Complaint as a matter
of law.” Id.
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II.
JURISDICTION AND STANDARD OF REVIEW
The Court has jurisdiction to hear an appeal, with leave of court, from interlocutory orders
and decrees, pursuant to 28 U.S.C. § 158(a)(3).
Federal Rule of Civil Procedure 12(c) provides that, “[a]fter the pleadings are closed – but
early enough not to delay trial – a party may move for judgment on the pleadings.” Fed. R. Civ. P.
12(c). On appeal, the standard of review for a motion for judgment on the pleadings under Rule 12(c)
is plenary. See Jablonski v. Pan Am. World Airways, Inc., 863 F.2d 289, 290 (3d Cir. 1988). Under
Rule 12(c), “judgment will not be granted unless the movant clearly establishes that no material issue
of fact remains to be resolved and that he is entitled to judgment as a matter of law.” Society Hill
Civic Ass’n v. Harris, 632 F.2d 1045, 1054 (3d Cir. 1980) (internal quotation marks and citation
omitted). In considering a motion for judgment on the pleadings, a court is required to “view the facts
presented in the pleadings and the inferences to be drawn therefrom in the light most favorable to the
nonmoving party.”
Id. (quoting 5 C. Wright & A. Miller, FEDERAL PRACTICE AND
PROCEDURE § 1368 at 690 (1969) (footnotes omitted)).
III.
DISCUSSION
Although the Bankruptcy Court examined and applied the language contained in the Loan
Agreement, the Trustee argues, the Bankruptcy Court erred by treating the Loan Agreement like any
other lending agreement. As the Trustee explains, the key risk of a loan with a lockbox mechanism
is that “the [lender’s] failure to advance funds would have left the borrower without any operating
capital unless he could have secured alternative financing.” (D.I. 18 at 10 (quoting Shaughnessy v.
Mark Twain State Bank, 715 S.W.2d 944, 953 (Mo. Ct. App. 1986))). Unique among lending
arrangements, these potentially predatory loans endow lenders with the “sudden, effective
strangulation of [the borrower]’s economic lifeline[.]” Id. (quoting Canterbury Realty & Equipment
Corp. v. Poughkeepsie Sav. Bank, 135 A.D.2d 102, 105 (N.Y. App. Div. 1988)). In failing to consider
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the unique nature of lockbox lending agreements, the Trustee argues, the Bankruptcy Court dismissed
the principle embraced by other courts in the special circumstances of a lockbox financing
arrangement: that such an arrangement – which uniquely enables the lender to drain the borrower of
all liquid capital – is suffused with a duty on the part of the lender to maintain the lending relationship
while the borrower obtains alternate financing. (See id. at 11, 23-25). As framed by the Trustee, the
issue on appeal is whether a lender in those circumstances has unfettered discretion to exit the lockbox
line of credit, or whether the lender has an obligation to provide the borrower with reasonable notice
and an opportunity to refinance the debt. (See id.)
Conversely, KORE argues “[t]here is no allegation that KORE breached the terms and
conditions of the Loan Agreement,” and because Maryland does not recognize breach of the implied
duty of good faith and fair dealing as an independent cause of action, judgment on the pleadings was
properly granted in its favor with respect to Counts I-VI and VIII. (D.I. 19 at 2; see 14-20).
A.
There Is No Material Issue of Fact as to Whether KORE Breached An Express
Term of the Loan Agreement
The Bankruptcy Court held that there was no material issue of fact as to whether KORE
breached any express term of the Loan Agreement. As discussed further below, a consideration of
this issue is required to determine the issue for which leave to appeal was granted. KORE argues that
all of its actions were expressly allowed under the Agreement. The Agreement gives KORE broad
discretion over whether to fund advances to the Moon Entities. (Loan Agreement § 2.1 (“Lender in
its sole discretion may make Advances to Borrower . . .”) (emphasis added)); Loan Agreement § 2.3
(“Lender shall determine the amount that may be made available to Borrower under the Credit
Facility . . .”). The Loan Agreement further states: “Notwithstanding the foregoing, if Lender
exercises its discretion to cease making Advances under this Agreement and no Event of Default has
occurred and is continuing, Borrower may terminate this Agreement by delivering 10 days written
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notice to Lender and, in such event, Borrower shall not be liable to Lender for any Termination Fee.”
(Loan Agreement § 10.12).
The Amended Complaint asserts that Section 2.1 of the Agreement obligates KORE to fund
any advances once the Moon Entities furnish requested financial information, and that KORE failed
to honor this obligation without justification. (Amended Complaint, ¶ 79). Section 2.1 of the
Agreement, however, provides: “At Borrower’s request during the Term of this Agreement, Lender
in its sole discretion may make Advances to Borrower, subject to receipt of such financial information
as Lender shall require and as otherwise provided in this Agreement.” (Loan Agreement, § 2.1
(emphasis added)). According to KORE, “there is no reasonable way to read that provision as
obligating KORE to fund advances to the Moon Entities, such that KORE’s refusal to do so would
trigger a default under the Loan Agreement.” (D.I. 19 at 11). The Court agrees.
The Amended Complaint further asserts that KORE improperly refused to fund an advance
(thereby breaching the Loan Agreement) on the mistaken premise that the Moon Entities had
exceeded the credit limit under the Loan Agreement. (Amended Complaint ¶¶ 77-78). This
argument, however, overlooks the plain language of Section 2.1 of the Loan Agreement, which
affords KORE the authority to determine whether to fund advances in its sole discretion. The Trustee
has cited no written modification that changed the discretionary funding of advances. Accordingly,
such an exercise of discretion, whatever its motivation, cannot be a breach of contract.
Amended Complaint further alleges that KORE assessed improper overadvance fees under
the Loan Agreement in an unspecified amount, including during the period from January 21, 2021
through February 20, 2021. (Amended Complaint, ¶¶ 146-150). The Moon Entities agreed, however,
on four separate occasions (including as recently as June 28, 2021) that all interest, fees and other
charges imposed and collected by KORE were valid, correct and proper, and complied in all respects
with the Loan Agreement. (See Loan Modification Agreement dated September 16, 2020, § 8(i);
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Forbearance/Loan Modification Agreement dated December 30, 2020, § 11(i); Second Loan
Modification Agreement dated May 24, 2021, § 8(i); and Waiver/Loan Modification Agreement dated
June 28, 2021, § 9(i)). The Moon Entities also agreed that they had violated the Loan Agreement’s
overadvance provision (Section 2.9) as recently as June 28, 2021. (See Waiver/Loan Modification
Agreement dated June 28, 2021, § 3).
The Bankruptcy Court properly held that there was no material issue of fact as to whether
KORE breached the express provisions of the Loan Agreement.
B.
Maryland Law Does Not Recognize Breach of the Implied Covenant of Good
Faith and Fair Dealing as an Independent Cause of Action
Contrary to KORE’s assertions, the Trustee’s primary argument is grounded in the contractual
nature of its relationship to KORE. The Trustee argues that the Bankruptcy Court improperly
disregarded the implied duty of good faith and fair dealing, which is recognized under Maryland law,
in granting judgment on the claims at issue.
The Trustee relies primarily on three cases, including In re Bailey Tool & Mfg. Co., 2021 WL
6101847 (Bankr. N.D. Tex. Dec. 23, 2021), which involved similar financing features, but also
additional allegations of bad faith including overreaching by the lender. In that case, Bailey Tools
and its affiliates each entered into a factoring agreement and a revolving inventory loan agreement
with lender Republic Business Credit. Id. at *6. The inventory loan agreements were, according to
their terms, each intended to be a revolving line of credit for the Bailey Tools’ working capital under
which Republic might make advances from time to time. Id. Republic’s collateral was to be not
merely “Inventory,” wherever located, but general intangibles, accounts, and proceeds. See id. at
*11-13. Republic failed to treat all of Bailey Tools’ accounts receivables as eligible for advances,
however, and did not advance the allowed 90 percent of the accounts receivable. See id. This caused
Bailey Tool to default on an installment plan to repay back county taxes, resulting in Republic
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declaring a default on the inventory loan agreements and factoring agreements. See id. at *13. Bailey
Tool declared bankruptcy and failed. The bankruptcy court held that:
Republic’s breaches of contract ultimately caused Bailey’s bankruptcy,
the associated destruction of Bailey’s enterprise value, and future as a
going concern. Republic’s material breaches of contract caused
substantial and lasting negative impacts on Bailey’s cash flows at a
time when Bailey’s very future was on the brink, and just as the
Company was anticipating a pivot to a likely lucrative ammunition
manufacture business model. It was reasonably foreseeable for a
factoring company dealing with distressed businesses to know and
understand that depriving a business of essential cash flow when at
its most dire position would cause lasting and permanent economic
losses. Bailey was no exception. As a result, Bailey was unable to
successfully transition or pivot its business to a more sustainable and
valuable ammunition manufacturing business.
Id. at *39 (emphasis added). The bankruptcy court found that by, among other things, “holding
monies that rightfully belonged to Bailey [Tool],” Republic breached of the duty of good faith and
fair dealing and awarded damages, including on account of the destruction of the legacy business.
The Trustee further relies on a Sixth Circuit decision, K.M.C. Co. v. Irving Tr. Co., 757 F.2d
752 (6th Cir. 1985), which addressed a more similar factual pattern. In that case, the borrower K.M.C.
Company, Inc., a wholesale and retail grocery business, sued lender Irving Trust Company for breach
of a financing agreement. Pursuant to the financing agreement, Irving agreed to extend K.M.C. up to
$3 million in credit, secured by K.M.C.’s accounts receivable and inventory in a lockbox or “blocked
account;” the availability of credit was determined by a borrowing base formula. See K.M.C.,
757 F.2d at 754. On March 1, 1982, Irving refused without notice to advance K.M.C’s request of
$800,000, even though the advance was available under the terms of the financing agreement. See
id. K.M.C. ultimately collapsed and sued Irving. A jury found that Irving breached the contract and
awarded K.M.C. $7.5 million in damages. Id. at 752. The Sixth Circuit affirmed the jury’s verdict,
holding that the requirement of good faith and fair dealing obligated Irving to give notice to K.M.C.
“Crucial to the court’s analysis,” the Trustee argues, “was the fact that all of K.M.C.’s receipts were
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placed into the blocked account, depriving K.M.C. of any working capital while any portion of the
line of credit was outstanding.” (D.I. 18 at 12-13). Indeed, the Sixth Circuit observed that the
interpretation urged by the lender in that case “would leave K.M.C.’s continued existence entirely at
the whim or mercy of [the lender], absent an obligation of good faith performance.” K.M.C., 757 F.2d
at 759. “Logically, at such time as [the lender] might wish to curtail financing K.M.C., as was its
right under the agreement, this obligation to act in good faith would require a period of notice to
K.M.C. to allow it a reasonable opportunity to seek alternate financing, absent valid business reasons
precluding Irving from doing so.” Id.
The Bankruptcy Court, in its thorough Opinion, considered the similar holdings in both Bailey
Tool and K.M.C. In re Moon Grp., 2022 WL 4658615, at *7-*9 & n.52. With respect to the latter,
the Bankruptcy Court correctly noted its abrogation by the Fourth Circuit in Marland v. Safeway,
Inc., 65 Fed. Appx. 442, 449 (4th Cir. 2003):
[I]n Marland v. Safeway Inc., the Fourth Circuit abrogated the holding
in K.M.C. Kore is correct that the implied duty of good faith and fair
dealing is not an unfettered obligation, nor an independent cause of
action under Maryland law, and Maryland courts have recognized that
this duty does not obligate a party to take affirmative actions that are
not required under the contract.
In re Moon Grp., 2022 WL 4658615, at *9 (citations omitted; emphasis added).
The Trustee acknowledges that “Maryland law governs the Line of Credit, and although
Maryland law recognizes the implied duty of good faith and fair dealing (including in the lending
context), courts have clarified that this duty does not obligate a party to take affirmative actions that
it is not clearly required to take under the contract.” (D.I. 18 at 14 (citing Marland, 65 Fed. Appx. at
449)). The Trustee disagrees, however, with the Bankruptcy Court’s determination that Marland
nullified K.M.C. because “the Marland holding did not address a lockbox or blocked account lending
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device.” (Id.). On appeal, the Trustee argues that the Bankruptcy Court’s characterization of Marland
failed to appreciate “the special chokehold affected by the lockbox lender.” (Id. at 14).
The Court agrees with the Trustee that Marland did not address the complexities of a lockbox
line of credit; indeed, it did not address a loan agreement at all. Under the terms of the Loan
Agreement, however, the Court is required to apply Maryland law, and no party has cited any other
authority holding that the implied duty of good faith and fair dealing is an independent cause of action
that may be asserted under Maryland law.
Quality Automotive Co. v. Signet Bank/Maryland, 775 F. Supp. 849, 853 (D. Md. 1991) is the
lone Maryland decision cited by the Trustee that recognized a separate cause of action for breach of
the implied duty of good faith and fair dealing. That case involved a lockbox loan of “up to
$2,000,000 [in] credit to be used for working capital, debt payment, and for financing the sale of
automobile parts on the automotive repair market.” Quality Automotive, 775 F. Supp. at 851. Plaintiff
alleged that the defendant lender terminated its line of credit to a borrower in retaliation for the
borrower doing business with a competitor bank, and “that the defendant breached a duty of good
faith with respect to the loan and security contract when it terminated [Plaintiff]’s line of credit and
stopped replenishing [Plaintiff]’s operating account.” Id. In response to the lender’s motion to
dismiss for failure to state a claim, the district court held that “the defendant [] had a duty to exercise
good faith with regard to notice when deciding to terminate the loan and security agreement.” 775 F.
Supp. at 853. The lender, however, prevailed at summary judgment, and the Fourth Circuit affirmed
the judgment. See Quality Automotive Co. v. Signet Bank Maryland, 983 F.2d 1057 (4th Cir. 1993)
(“We affirm the district court’s granting of summary judgment in favor of [the lender] on the grounds
that [plaintiff] failed to present any evidence upon which a reasonable jury could find that [the lender]
breached the term of its 1985 loan agreement.”).
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In Parker v. The Columbia Bank, 604 A.2d 521, 531 (1992), the Maryland Court of Special
Appeals explained that the implied duty of good faith did not require a lender to take an affirmative
action not otherwise required by the loan documents, calling into question Quality Automotive Co. A
1993 decision by the District of Maryland followed, holding that there is no separate cause of action
for breach of the duty of good faith and fair dealing under Maryland law. See Howard Oaks, Inc. v.
Md. Nat’l Bank, 810 F. Supp. 674, 677 (D. Md. 1993). Subsequent cases agreed with Howard Oaks. 4
In 2003, the Fourth Circuit abrogated Quality Automotive Co. in holding that there is no separate
cause of action for breach of the duty of good faith and fair dealing. See Marland, 65 Fed. Appx. at
449.
The Trustee argues that “[w]hether the lockbox lender’s duty to deal in good faith with the
borrower by providing notice and an opportunity to refinance is enforced through an independently
pled cause of action or wrapped up in a breach of contract claim is mere semantics” and should not
detract from the principles set forth in Quality Assurance. (D.I. 18 at 14). But the parties cite no
cases addressing this proposition, and it seems at odds with the broad ruling of the Fourth Circuit.
See Marland, 65 Fed. Appx. at 449 (“We agree with the weight of this authority that no independent
cause of action of this type is recognized in Maryland.”).
Maryland case law supports KORE’s position that breach of the implied duty of good faith
and fair dealing merely supports a cause of action for breach of contract, “prohibit[ing] one party to
a contract from acting in such a manner as to prevent the other party from performing his obligations
under the contract.” Cutler v. Wal-Mart Stores, Inc., 927 A.2d 1, 11 (2007) (quoting Mount Vernon
Props., LLC v. Branch Banking and Trust Co., 907 A.2d 373, 381 (2006)). “The duty of good faith
4
See Swedish Civil Aviation Admin. v. Project Mgmt. Enters., Inc., 190 F. Supp. 2d 785, 794
(D. Md. 2002); Paramount Brokers, Inc. v. Digital River, Inc., 126 F. Supp.2d 939, 945 (D.
Md. 2000); Abt Assoc., Inc. v. JHPIEGO Corp., 104 F. Supp. 2d 523, 534 (D. Md. 2000);
Baker v. Sun Co. (R & M), 985 F. Supp. 609, 610 (D. Md. 1997).
15
merely obligates a lender to exercise good faith in performing its contractual obligations; it does not
obligate a lender to take affirmative actions that the lender is clearly not required to take under its
loan documents.” Parker, 604 A.2d at 531. Moreover, “[a]n implied duty of good faith cannot be
used to override or modify explicit contractual terms.” Riggs Nat. Bank of Washington, D.C. v. Linch,
36 F.3d 370, 373 (4th Cir. 1994); see Waller v. Maryland Nat’l Bank, 620 A.2d 381, 388 (“The
implied duty of good faith does not change the terms of the contract.”), vacated on other grounds,
631 A.2d 447 (Md. 1993); Bob Smith Automotive Group, Inc. v. Ally Financial Inc., 2016 WL
3613402, *8-9 (Md. App. 2016) (agreeing with Waller that the implied duty of good faith may not be
used to extend or add to the obligations a party has accepted under a contract).
It is not disputed that Maryland recognizes the implied duty of good faith and fair dealing in
the lending context. Under Maryland law, however, it appears that the implied duty of good faith and
fair dealing cannot protect a borrower unless, as Maryland courts have noted, it is express. See Baker,
985 F. Supp. at 610 (parties desiring additional protection from “bad faith” action not explicitly
addressed in the contract are free to place an express covenant of good faith in the contract). Thus,
in a lockbox lending arrangement where, as here, a lender may in its sole discretion stop advancing
funds, the borrower must bargain for protections such as notice. Absent such protections, under
Maryland law, a predatory lender may stop advancing funds at any time, cutting off the financial
lifeline of an otherwise viable business, even on a whim.
IV.
CONCLUSION
The reasoning set forth in K.M.C., Bailey Tool, and Quality Automotive Co. is persuasive. The
Court finds no basis, however, under Maryland law to hold that the Moon Entities are protected by
the implied duty of good faith and fair dealing, as there is otherwise no cause of action for breach of
contract, and no authority for the proposition that breach of the implied duty may be asserted as an
independent cause of action. For the foregoing reasons, the Court must affirm this aspect of the
16
Interlocutory Order. As this is the only aspect of the Interlocutory Order for which leave to appeal
was granted, any remaining arguments are not considered here. A separate Order shall be entered.
17
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