Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 10

FACTS In 1991, Ad Barnes and Elaine Barnes (Barnes) executed a promissory note for $200,000 to Sovran Bank, N.A. (Sovran). The note was executed on a standard form and a box marked payable ''on demand'' was checked. There was no set time for repayment, only a provision requiring monthly payments of interest. NationsBank of Virginia, N.A. (NationsBank) became the successor by merger to Sovran and is now the holder of this note. By a letter dated February 17, 1993, NationsBank made a demand for payment on the note. Barnes did not make payment and NationsBank brought this action to recover payment. NationsBank filed a motion for partial summary judgment on the issue of liability. Barnes argued that NationsBank must make a showing of good faith before it may demand payment on the note.
DECISION Decision for NationsBank.
OPINION Horne, J. The factual question still in dispute concerning the 1991 Note is whether it is a demand note. Plaintiff argues that the language of the note is unambiguous and is clearly a demand note. Defendants argue that the detailed enumeration of events constituting default is inconsistent with a demand note. Thus, a standard of good faith must be applied before a demand for accelerated repayment can be made.
[U.C.C.] § 1-203 establishes a general duty of good faith in every contract governed by the Commercial Code. Under any contract providing for accelerated payment at will, § 1-208 states that the option is to be exercised only in the good faith belief that the prospect of payment or performance is impaired. However, the Official Comment to this section indicates that it is not applicable to a demand instrument.
[U.C.C. Revised § 3-108(a)] states that a note is payable ''on demand'' if it says it is payable on demand or states no time for payment. In this case, the 1991 *** Note is a standard form with different forms of repayment set out on the first page. The box marked payable ''on demand'' has been checked in this instance. There is no time set for repayment, only a provision requiring monthly payments of interest.
It is the court's opinion that the 1991 Note is unambiguous and is clearly a demand note. Thus, Plaintiff is under no obligation to show good faith before requesting payment on the note. Since demand has been made by Plaintiff, Defendants are liable. Thus, Plaintiff is entitled to summary judgment on the issue of liability under the 1991 Note.
INTERPRETATION An instrument payable on demand must be paid upon the holder's request.
ETHICAL QUESTION Did NationsBank act in good faith? Explain.
CRITICAL THINKING QUESTION Do you agree with the court's decision? Explain.