Richard Kinzel v. Bank of America
850 F.3d 275
| 6th Cir. | 2017Background
- In April 2008 Richard Kinzel exercised FUN stock options, incurring taxes and borrowing ~$7.68M from Merrill Lynch under a Loan Management Account (LMA) secured by pledged securities (including the FUN shares).
- The LMA granted Merrill Lynch a continuing first-priority lien and "ultimate control" of the Securities Account and allowed Merrill Lynch, in its "sole discretion and without prior notice," to liquidate collateral upon any of twelve "remedy events."
- Merrill Lynch monitored loan-to-value (LTV) internally and sent warnings as FUN fell in 2008–09; it set internal triggers (including a $7.00 per share trigger) though those thresholds were not in the contract.
- FUN fell sharply; when FUN closed at $6.99 on March 2, 2009 Merrill Lynch began liquidating shares on March 3, selling 167,900 shares that day to pay down the loan. Kinzel later repaid the loan in full.
- The Kinzels sued (claims included breach of contract and breach of the covenant of good faith and fair dealing). The district court denied leave to file a third amended complaint asserting a contract claim and, after a bench trial, entered judgment for Merrill Lynch on the good-faith claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether leave to amend to plead a breach-of-contract claim should have been allowed (i.e., whether Merrill Lynch breached the LMA by liquidating without demanding repayment) | Kinzel: LMA's Clause 7 permitting liquidation without demand is invalid or displaced by Utah UCC notice/default rules; Merrill Lynch breached by liquidating without a prior demand required by Clause 5 | Merrill: Clause 7 unambiguously authorized discretionary liquidation without demand; UCC §9-611 applies only after default and excludes commercially traded securities; no contractual breach occurred | Denied. Amendment would be futile. Utah law and the contract allowed discretionary liquidation; UCC notice provision did not bar Clause 7. |
| Whether Merrill Lynch breached the implied covenant of good faith and fair dealing by liquidating FUN shares when Kinzel was trying to cure/pay down the loan | Kinzel: Merrill Lynch acted in bad faith (liquidated despite efforts to repay, below internal 70% LTV warnings, and after a one-cent breach of a $7 trigger) | Merrill: Exercise of contractual discretion was within the parties' allocation of risk; no contractual standard (70% LTV or $7) limited Merrill's discretion; decision was reasonable given market collapse and sole remaining collateral was volatile FUN stock | Affirmed for Merrill. Under Utah law the covenant does not create independent duties; discretionary decisions are measured by objective reasonableness and Merrill's conduct fell within contemplated discretion. |
Key Cases Cited
- United States ex rel. Bledsoe v. Community Health Sys., 342 F.3d 634 (6th Cir.) (standard of review for denial of leave to amend)
- Greenberg v. Life Insurance Co. of Virginia, 177 F.3d 507 (6th Cir.) (de novo review where denial is based on futility/motion-to-dismiss standard)
- Blue Cross & Blue Shield Mutual v. Blue Cross & Blue Shield Ass'n, 110 F.3d 318 (6th Cir.) (appellate review deference to district court factual findings)
- Young Living Essential Oils v. Marin, 266 P.3d 814 (Utah 2011) (description of Utah implied covenant of good faith and fair dealing)
- Markham v. Bradley, 173 P.3d 865 (Utah Ct. App. 2007) (when contract grants sole discretion without standards, covenant imposes objective reasonableness)
- Wood v. Lucy, Lady Duff-Gordon, 118 N.E. 214 (N.Y. 1917) (classic formulation of implied contractual obligations)