In a case recently decided by the U.S. 7th Circuit Court of Appeals, the Court upheld that a bank was not liable for breach of contract or fraud for pointing out that the note was payable on demand to the borrower. In this case, a development company obtained a line of credit. The line of credit was a demand note, meaning that the bank could demand payment in full at any time of the outstanding balance. Although the note was not in default, the Bank asked the Borrower to term out a portion of the note with a loan to a related entity and to reduce the remaining availability on the line of credit. The Borrower was not expecting this request and asked about the consequences if it did not make these changes. The Bank responded by pointing out to the Borrower that this was a demand note and that it was possible that the Bank could demand payment in full at any time.
The Borrower responded by filing a lawsuit against the Bank for breach of contract alleging that the Bank acted arbitrarily and capriciously by demanding payment under the note even though the Borrower was not in default. The Borrower also alleged that the Bank unilaterally changed and attempted to change the essential terms of the contract. The Borrower also sued the Bank for fraud. While the note indicated in three separate places that it was payable on demand, the Borrower argued that two provisions of the note were inconsistent. The Borrower pointed to a provision that referred to default and “due date” and a provision that referred to the Borrower’s ability to prepay the note at any time. The Court was not convinced by the Borrower’s arguments and found that the language of the note was clear that it was a demand note and that the Bank was entitled to demand full payment at any time. The Court also upheld the dismissal of the fraud allegation on the basis that the Borrower did not allege any fraudulent intent on the Bank’s part.
This case highlights the importance of a Borrower understanding the terms of any loan that it enters into and understanding the nature of a demand note. Borrowers need to make sure that they read carefully and obtain assistance of counsel where needed before entering into any financial transaction.
Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com
Tags: breach of contract, demand note, laura scott, line of credit