Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 23

Reger Development, LLC v. National City Bank
United States Court of Appeals, Seventh Circuit, 592 F.3d 759 (2010).
www.ca7.uscourts.gov
FACTS Kevin Reger is the principal and sole member of Reger Development, LLC. National City Bank had loaned funds to Reger Development for several projects. In June 2007, National City offered the company a line of credit to finance potential development opportunities. Reger Development then executed a form contract, which was structured as a promissory note. One clause in the contract read, in part, "PAYMENT: Borrower will pay this loan in full immediately upon Lender's demand." Several other provisions of the note also referred to payment being made on the 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" about 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 line. Reger Development then sued National City in an Illinois state court, alleging that the bank had breached the terms of the note. National City removed the case to a federal district court based on diversity jurisdiction. The court granted the bank's motion to dismiss the complaint for failure to state a cause of action under which relief could be granted, 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 contract executed 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 U.S. Court of Appeals for the Seventh Circuit 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 Development alleged that National City had arbitrarily and capriciously demanded payment, even though Reger Development 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."
FOR CRITICAL ANALYSIS-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 ?