Financial Services Blog

Breach Of Contract And Fraud Claims Not Available Where Lender Attempts To Renegotiate Terms Of Demand Instrument

In Reger Development, LLC v. National City Bank, National City advanced Reger a line of credit fund potential development opportunities. 592 F.3d 759 (7th Cir. 2010). The contract documents stated that Reger would pay the loan in full immediately upon National City’s demand.

A year after Reger executed the contract, National City asked Reger to pay down the line of credit’s principal and then “term out” $300,000 of the note, which Reger did. National City then informed Reger that it was significantly reducing the cash available through the line of credit and that it might demand payment of the line. Reger filed suit for breach of contract and fraud.

The Seventh Circuit determined that no breach of contract occurred. It noted that while duty of good faith and fair dealing is implied into Illinois contracts, such a duty did not apply to lenders seeking payment on demand notes. The plain language of the contract allowing National City Bank to demand full payment of the line at will was not modified by the use of the terms “due date” and “default” elsewhere in the contract. The court distinguished cases from other jurisdictions that held specified events of default neutered contractual language describing a loan as payable on demand, in that the loan with National City did not have a payment schedule for the principal or an acceleration clause. It also found that National City’s decision to discuss a restructuring of the terms of credit was an alternative to the more draconian decision to demand payment of the entire loan provided by the terms of the contract. Reger was free to choose which path it wished to take and the giving of the choice by National City did not constitute a breach of contract.

The court also affirmed the dismissal of Reger’s fraud claim. It found that Reger failed to plead any intent to defraud by National City. The unambiguous language of the contract making it a demand instrument did not permit the court to find any intent. While intent can be proven with circumstantial evidence, the transactions are presumed to be fair and honest until shown otherwise. The court could not allow Reger to ignore the contents of the document and then claim that National City committed fraud by merely exercising its rights under the contract. As a result, the dismissal of the fraud claim as upheld.

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Jared M. Tully Jared Tully has extensive experience defending financial institutions in litigation involving claims of predatory lending and violation of the West Virginia Consumer Credit Protection Act and the Federal Fair Debt Collection Practices Act. Jared is also experienced in defending financial institutions in class action suits as well as defending insurance companies against claims of bad faith.

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