As an attorney I can attest to the meaning of bad faith. In every contractual transaction, whether written or oral, follows an implied covenant of good faith and fair dealing. While this is a legal term, the meaning is far from hypertechnical. It is a general assumption of the law of contracts, that people will act with basic honesty and honor, and deal in a reasonable and fair manner. Bad faith can consist of acts such as breaking one's word, using shifty means to avoid obligations, claiming technical excuses for breaching a contract, or using the specific words of the contract to refuse to perform something which the surrounding circumstances of that contract and/or the mutual understanding of the parties at the time of the contract were clearly to the contrary.
I would say, without commenting on anything else, that Russ acted in bad faith in not returning the unused portion of the funds in this situation, especially given fact that the nature of the original contract was oral and no battle of forms, blueprints, signatures or boilerplate language took place.