Opinion ID: 5047
Heading Depth: 1
Heading Rank: 5

Heading: the demand provisions

Text: MBank was also found liable for its failure to act in good faith when it accelerated the Jaguar and yacht loans. It is undisputed that immediately after the interpleader action was settled, MBank demanded full payment on all four of Taylor's outstanding loans even though she was current on both the Jaguar and yacht notes. At trial, MBank offered no evidence that Taylor was in default of any provision of these two loan agreements or that her payments on the secured loans were delinquent or past due. Instead, MBank argued unsuccessfully that because these promissory notes were demand notes, that it could demand payment at any time with or without reason. The FDIC, on appeal, raises a similar contention and urges us to reverse the damage award on the basis the trial court erroneously submitted an instruction on good faith.15 In 15 This instruction provided as follows: Special Issue No. 7 Do you find from a preponderance of the evidence that MBank failed to act in good faith in connection with its banking transactions with Taylor? Answer yes or no to (a) and (b): (a) Comite accounts: Yes (b) Acceleration of the Jaguar and boat loans: Yes You are instructed that good faith means honesty in fact in the conduct or transaction concerned. The test for good faith is the actual belief of the party in question and not the reasonableness of that belief. You are also instructed that in order to find that MBank breached a duty to act in good faith you must 28 support of this argument, the FDIC relies upon the good faith provisions of the Tex. Bus. & Com. Code Ann. § 1.208 (Vernon 1968), as interpreted by the Official Comment to that section. Section 1.208, which governs the application of the good faith requirement to acceleration clauses, states that a term providing that one party may accelerate payment at will or when he deems himself insecure shall be construed to mean that he shall have the power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The Official Comment to section 1.208 notes the following exception: Obviously this section has no application to demand instruments or obligations whose very nature permits call at any time with or without reason. We begin, therefore, with an examination of the loan documents to determine whether they clearly gave MBank complete discretion to demand payment at any time with or without cause. Taylor executed two promissory notes in favor of MBank for the purchase of a Jaguar automobile and a Sea Ray yacht. Except for the installment payment amounts and maturity date, the two promissory notes contain virtually identical provisions. Each note contains a monthly payment schedule, an acceleration clause and a demand clause. The demand clause states that this obligation is, as an alternative to the above-recited payment schedule, due and payable on demand. A similar demand provision is recited on the reverse side of the note. The notes also find that the failure or failures to act in good faith, if any, were the natural, probable and foreseeable consequences of MBank's actions. 29 contain an acceleration clause. Under the acceleration clause, the bank is entitled, at its option, to accelerate the unpaid principal balance and accrued interest if default occurs in the punctual payment of any installment of principal or interest, . . . or upon the occurrence of a default under the terms of any and all agreements or instruments securing . . . the indebtedness, or if at any time the [bank] . . . deems itself insecure. In addition to the default provisions contained in the acceleration clause, the bank's security agreements and mortgage securing the debt list various events of default which could result in the bank declaring the entire obligation immediately due and payable. The FDIC argues that the demand feature permitted MBank to demand payment at any time with or without reason. The only Texas case cited by the FDIC on this point is Conte v. Greater Houston Bank, 641 S.W.2d 411 (Tex. App.--Houston [14th Dist.] 1982, writ ref'd n.r.e.). In Conte, the court was faced with a promissory note which provided that payment was due ON DEMAND, BUT IF NO DEMAND IS MADE: principal and interest shall be due and payable in monthly installments . . . . Id. at 412. The maker of the note argued that since the bank accepted monthly installment payments without demanding payment before they were due, the bank no longer retained the right to make a demand under the demand clause. The court rejected this argument stating that it was proper to construe the note 'payable, at the convenience of the holder, either on demand or in installments . . . .' Id. 30 at 418, quoting C & Z, Inc. v. Oklahoma Tax Comm'n, 459 P.2d 601 (Okl. 1969). Despite some similarity between Conte and the present case, there are important differences. Unlike the present situation, there is no indication that the note in Conte contained an acceleration clause. It also does not appear that the note was accompanied by an underlying security agreement or included terms which would modify the right of demand. Here, in contrast, the existence of explicit conditions of default in the acceleration clause, as well as the related security agreements, shows a clear intention that the note be payable on demand only in the event Taylor failed to meet the installment obligations or the obligations imposed by the security agreements. In construing a similar loan agreement, the court in Reid v. Key Bank of Southern Maine, Inc., 821 F.2d 9, 14 (1st Cir. 1987) noted that: The presence of such conditions in both documents indicates that the agreement could not simply be terminated at the whim of the parties; rather, the right of termination was subjected to various limitations. The detailed enumeration of events that would render the note payable on demand, or which would put Reid in default, shows the qualified and relative nature of any demand provision. As applied to the facts of this case, we find the Reid decision persuasive. Demand instruments, by definition, are payable on demand and are considered due immediately when executed. Leinen v. Buffington's Bayou City Service, Co., 824 S.W.2d 682, 684 (Tex. App.--Houston [14th Dist.] 1992, no writ); Davis v. Dennis, 448 S.W.2d 495, 497 (Tex. Civ. App.--Tyler 1969, no writ). If a demand obligation was indeed intended, as 31 suggested by the FDIC, the conditions for acceleration stated in MBank's agreements with Taylor would be meaningless. The bank could simply demand payment immediately regardless of whether any of the specified default conditions occurred. This does not appear to be the reasonable intent and expectations of the parties. In fact, the former president of MBank, Ed Evans, testified at trial that the bank could not simply demand payment on an unreasonable basis, but was obligated to consider, in good faith, all the facts and circumstances before accelerating the note. Based upon the testimony and our reading of the loan documents, we determine that although these notes profess to be demand instruments, a fair reading of the notes and related security agreements demonstrates an intention that these installment notes be payable on demand only in the event of default. This construction comports with the common expectation that a promissory note with an installment feature and an acceleration clause is a time obligation and that the bank does not have the right to demand payment in absence of default. For the reasons stated, we find under the facts of this case that the trial court's instruction on good faith was proper.