Contract Law - The Duty of Good Faith Does Not Apply To The Bank's Decision To Call A Loan

In Reger Development, LLC v. National City Bank, No. 09-2821, the Seventh Circuit affirmed the dismissal of the Borrower's complaint against its Lender.

Reger Development alleged that it was an Illinois limited liability company involved in the development of real estate. On June 25, 2007, Reger's Principal, Kevin Reger, met with National City and executed loan documents for a revolving line of credit in the amount of $750,000. The terms of the note allowed National City to demand payment at will. Reger Development made all interest payments that were due and owing.

On August 18, 2008, National City asked Reger to pay down $125,000 towards the principal of the line of credit, which Reger did the next business day.

On September 9, 2008, National City requested that Reger "term out" $300,000 of the Note by having one of Kevin Reger's other businessess agree to take out a three-year loan in that amount secured by a second mortgage on some real estate. National City also notified Reger that it would be reducing the amount of available credit on the line of credit to between $400,000 and $500,000.

According to the complaint, Kevin Reger expressed surprise at these developments and asked if the bank would "call the line of credit if Reger Development did not agree to the requests." Opinion at 5.

Reger Development then filed a complaint alleging that (a) National City breached the contract; and (b) National City engaged in a fraudulent scheme to deceive "people into taking out loans by concealing the fact that the principal could be called on demand." Opinion at 5. Reger Development initially filed the case in the State Court, but it was removed to the Northern District of Illinois by National City.

The district court dismissed the Complaint for failure to state a cause of action.

Under Illinois law a plaintiff alleging a breach of contract must allege four elements: "(1) the existence of a valid and enforceable contract; (2) substantial performance by the plaintiff; (3) a breach by the defendant; and (4) resultant damages." Opinion at 7 (quoting W.W. Vincent & Co. v. First Colony Life Ins. Co., 814 N.E.2d 960, 967 (Ill. App. Ct. 2004). As the Court noted, "during our review we do not look at any one contract provision in isolation; instead, we read the document as a whole." Opinion at 8.

Reger Development argued that Illinois law holds that "a covenant of fair dealing and good faith is implied into every contract absent express disawoval." Opinion at 8, citing Foster Enterprises, Inc. v. Germania Federal Savings and Loan, 421 N.E.2d 1375, 1380 (Ill. App. 1981).

According to the Seventh Circuit, Reger Development's claim had a fatal flaw, namely "the duty to act in good faith does not apply to lenders seeking payment on demand notes." Opinion at 8 (citing N.W.I. Int'l, Inc. v. Edgewood Bank, 684 N.E.2d 401, 409 (Ill. App. Ct. 1997).

Thus, Reger Development could not claim that National City acted in bad faith in calling the loan. "Viewed as a whote in the light most favorable to the nonmoving party, the Note before us is plainly a demand instrument entitling National City to collect its loan whenever it wants." Thus, the demand for repayment was not a breach of contract and Reger Development could not allege a breach of contract by National City.

Comment: in the author's experience it is almost impossible to challenge bank forms and demand notes. This case illustrates that principal. Those who sign such documents need to read them and understand them.

Edward X. Clinton, Jr.
Copyright 2010