Cengage Advantage Books: Business Law Today, The Essentials 10th Edition by Roger LeRoy Miller

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Reger Development, LLC v. National City Bank
FACTS Kevin Reger is the principal and sole member of Reger Development, LLC. Reger Development borrowed funds from National City Bank for several projects. National City then offered the company a line of credit to finance potential development opportunities, and Reger Development signed a promissory note requiring it to "pay this loan in full immediately upon Lender's demand."
About a year later, the bank asked Reger Development to pay down some of the loan and stated that it would be reducing the amount of cash available through the line of credit. Kevin Reger "expressed surprise" at these developments and asked if the bank would call in the line of credit if Reger Development did not agree to the requests. The bank said that there was a possibility that it would demand payment of the credit line. Reger Development then sued National City, alleging that the bank had breached the terms of the note. A federal district court granted the bank's motion to dismiss, and Reger Development appealed. The main question before the court was whether the note entitled National City to demand payment from Reger Development at will.
ISSUE Was a note for a line of credit that stated it was a promissory note, but required the borrower (Reger Development) to pay the loan on the lender's demand, a demand instrument ?
DECISION Yes. The federal appellate court affirmed the district court's dismissal of Reger Development's complaint. The promissory note was a demand instrument, and thus National City had the right to collect payment from Reger Development at any time on demand.
REASON The appellate court reasoned that although a covenant of fair dealing and good faith is implied in every contract, "the duty to act in good faith does not apply to lenders seeking payment on demand notes." Reger alleged that National City had arbitrarily and capriciously demanded payment, even though Reger was not in default, and that National City had unilaterally changed the fundamental terms of the contract. The appellate court, however, pointed out that explicit contract language set forth the lender's right to demand payment at any time. National City had the "right to collect scheduled monthly interest payments and [did] not deviate from the structure of a demand note."
CRITICAL THINKING-Ethical Consideration In its opinion, the court pointed out "the duty to act in good faith does not apply to lenders seeking payment on demand notes." Why is this so?