Opinion ID: 387913
Heading Depth: 2
Heading Rank: 1

Heading: The Implied Covenant of Fair Dealing

Text: 129 As we understand New York law, every contract governed by the laws of that State necessarily contains an implied-by-law covenant to act fairly and in good faith in the course of performing the contract. E. g., Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 68, 385 N.E.2d 566, 569, 412 N.Y.S.2d 827, 830 (1978); Van Gemert v. Boeing Co., 520 F.2d 1373, 1383-85 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), appeal after remand, 553 F.2d 812, 815 (2d Cir. 1977) (applying New York law). The panel that first heard this case thought the Indenture to be ambiguous on the question of the conversion rights remaining with the holders of Debentures after a merger, and held that the evidence produced by Broad prior to the directed verdict raised a jury question as to whether Broad and the Trust Company had dealt fairly and in good faith with the holders of Debentures in the light of that ambiguity. 614 F.2d at 429-30. Having reached a different conclusion than the panel did on the ambiguity issue, we are compelled to a different result on the good faith and fair dealing issue as well. 130 We note first that this implied covenant of good faith and fair dealing cannot give the holders of Debentures any rights inconsistent with those explicitly set out in the Indenture. (W)here the instrument contains an express covenant in regard to any subject, no covenants are to be implied with respect to the same subject .... Burr v. Stenton, 43 N.Y. 462, 464 (1871). It is ... well established in New York that, where the expressed intention of contracting parties is clear, a contrary intent will not be created by implication. Neuman v. Pike, 591 F.2d 191, 194 (2d Cir. 1979) (citing and applying New York law). The covenant is breached only when one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other. Collard v. Incorporated Village of Flower Hill, 75 A.D.2d 631, 632, 427 N.Y.S.2d 301, 302 (2d Dep't 1980). The mere exercise of one's contractual rights, without more, cannot constitute such a breach. See Mutual Life Insurance Co. v. Tailored Woman, Inc., 309 N.Y. 248, 254, 128 N.E.2d 401, 403 (1955). 131 Broad relies here, as he did in the district court and before the panel, on the Van Gemert case cited above. The issue in that case was whether holders of Boeing debentures received adequate notice of the redemption of the debentures to allow them a meaningful opportunity to exercise the debentures' conversion feature. The Van Gemert I court held that although Boeing had formally complied with the notice provisions in the governing indenture, merely placing those provisions in the indenture was an inadequate means of apprising the holders of debentures of what notice would be given in the event of a redemption call. Absent more specific warning on the face of the debentures or elsewhere that the debentures could be called upon the minimal notice provided in the indenture, the court held that the reasonable expectations of the holders of debentures as to notice would be protected. 520 F.2d at 1383-85. The court stressed that (t)he debenture holder relies on the opportunity to make a proper conversion on due notice. Any loss occurring to him from failure to convert, as here, is not from a risk inherent in his investment but rather from unsatisfactory notice procedures. Id. at 1385. In explaining the basis for its holding in the earlier appeal, the Van Gemert II court described its earlier decision as merely appl(ying) the settled principle, 'that in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ....'  553 F.2d at 815 (quoting Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 167 (1933); elipsis inserted by the Second Circuit). 132 We do not find the Van Gemert opinions of particular relevance to the case at bar. 26 The loss, if any, suffered by the holders of Debentures was certainly not the result of unsatisfactory administrative procedures in the Indenture; rather, this case turns on the question of substantive rights that are basic to the nature of the contract. The risk of merger was inherent in the investment made by the holders of Debentures. Rockwell and the Trust Company did nothing that could be described as destroying or injuring the right of the other party to receive the fruits of the contract, because under our holding in part II of this opinion, supra, the benefits that the holders of Debentures received were all the rights to which they were contractually entitled. Indeed, had Rockwell conferred on the holders of Debentures rights significantly greater than those set out in the Indenture, it might have faced claims by its own shareholders for waste and corporate mismanagement. We believe this case to be governed by the other New York cases we have cited above. See also Levine v. Chesapeake & Ohio Railroad Co., 60 A.D.2d 246, 248-50, 400 N.Y.S.2d 76, 78-79 (1st Dep't 1977) (no actionable unfairness in defendants' conduct, which eliminated public market for railroad's common stock, into which plaintiffs' bonds were convertible). As a matter of law, given our interpretation of the Indenture and the testimony concerning the conduct of the defendants (viewed in the light most favorable to Broad), we hold that the defendants did not violate the covenant of good faith and fair dealing that is implied into the Indenture under New York law. Accordingly, we affirm the judgment of the district court with respect to this claim.