412
Chapter 24
The Function and Creation of
Negotiable Instruments
Case 24.1
C.A.7 (Ill.),2010.
Reger Development, LLC v. National City Bank
592 F.3d 759
United States Court of Appeals,
I. Background
This is a diversity case governed by Illinois law. For the purposes of this appeal, defendants-appellees accept as true the
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 413
allegations contained in appellant’s complaint. Plaintiff-appellant Reger Development, LLC (“Reger Development”) is an Illinois
limited liability company involved in real estate development. Kevin Reger is Reger Development’s principal and sole member.
Defendant-appellee National City Bank (“National City”), was headquartered in Cleveland, Ohio, at the time this lawsuit
commenced and had lent money to Reger Development for several previous projects. In June 2007, National City offered the
company a line of credit to fund potential development opportunities. On June 25, 2007, Kevin Reger met with Erica Duncan, a
National City representative, to discuss the loan. At some point, when Reger asked about changing the terms of the arrangement,
Duncan responded that the documents National City provided were nonnegotiable. Reger Development then executed the form
contract, which was structured as a promissory note (“Note”) coupled with a commercial guaranty by Kevin Reger in his individual
…
FAILURE TO PAY ON DEMAND. Notwithstanding any other provision set forth in this Note, if (a) any principal owing under this
Note remains unpaid after Lender shall have given Borrower notice of demand for payment thereof or after the commencement
of any proceeding under any bankruptcy or insolvency laws by or against Borrower or (b) any accrued Interest under this Note
remains unpaid after the due date of that Interest, then, and in each such case, all unpaid principal of this Note shall bear
The Note proceeds to reference payment on lender’s demand several times in other provisions. It also features a “NO
COMMITMENT” clause that states: “NOTWITHSTANDING ANY PROVISION OR INFERENCE TO THE CONTRARY, LENDER
SHALL HAVE NO OBLIGATION TO EXTEND ANY CREDIT TO OR FOR THE ACCOUNT OF BORROWER BY REASON OF
THIS NOTE.” The contract then includes integration language defining it as the final and complete agreement between parties. The
Note is governed by federal and Illinois law, to the extent the former does not preempt the latter. Language above the signature
line specifies in capital letters that the borrower has read and understood the terms of the document. Reger Development paid a
Development did not agree to the requests. The bank acknowledged that Reger Development was not in default but stated that
“there is a possibility that we may demand payment of the line.”
Reger Development then filed a complaint in Illinois state court accusing National City of breaching the terms of the Note. The
company also alleged that National City used the form promissory note contracts to perpetuate a fraudulent scheme in which the
bank fooled people into taking out loans by concealing the fact that the principal could be called on demand. Appellee removed the
414 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
motion to reconsider.
II. Discussion
[1][2][3][4] We review the district court’s grant of a motion to dismiss under Fed.R.Civ.P. 12(b)(6) de novo.
Tamayo v. Blagojevich,
526 F.3d 1074, 1081 (7th Cir.2008). When evaluating the sufficiency of the complaint, we construe it in the light most favorable to
the nonmoving party, accept well-pleaded facts as true, and draw all inferences in her favor.
Id.
We review the district court’s denial
of Reger Development’s motion for reconsideration for abuse of discretion and reverse “only if no reasonable person could agree
with that decision.”
Schor v. City of Chi.,
576 F.3d 775, 780 (7th Cir.2009). In his jurisdictional statement, Reger Development
announces that it is appealing both the district court’s decision to dismiss its original complaint and the district court’s subsequent
denial of Reger Development’s motion for reconsideration. However, as the appellee points out, the remainder of Reger
Development’s brief never identifies the standard of review for a district court’s 59(e) ruling, mentions the denial, or makes any
substantive arguments that would require us to examine that decision. We treat this silence as a waiver of Reger Development’s
right to contest the 59(e) ruling, though we note that the switch in posture changes nothing about the outcome of this appeal.
A. Reger Development’s Breach of Contract Claim
[8][9][10] Under Illinois law, a plaintiff looking to state a colorable breach of contract claim 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.”
W.W. Vincent & Co. v. First Colony Life Ins. Co.,
351 Ill.App.3d 752, 286 Ill.Dec. 734, 814 N.E.2d 960, 967
(2004). We construe contracts by giving their unambiguous terms clear and ordinary meaning,
Reynolds v. Coleman,
173
Ill.App.3d 585, 123 Ill.Dec. 259, 527 N.E.2d 897, 902 (1988), in an effort to determine the parties’ intent.
Harrison v. Sears,
Roebuck & Co.,
189 Ill.App.3d 980, 137 Ill.Dec. 494, 546 N.E.2d 248, 253 (1989). During our review, we do not look at any one
contract provision in isolation; instead, we read the document as a whole.
Martindell v. Lake Shore Nat’l Bank,
15 Ill.2d 272, 154
N.E.2d 683, 689 (1958).
attempting to change the fundamental terms of the Contract Documents without Reger Development’s consent.” Reger
Development attempts to substantiate the first part of the breach claim by pointing to several provisions in the Note that it believes
to be fundamentally inconsistent with the nature of a demand instrument. These include the “INTEREST AFTER DEFAULT”
provision, which reads, in relevant part, “[u]pon default, including failure to pay upon final maturity, the interest rate on this Note
shall be increased by adding a 2.000 percentage point margin;” the prepayment clause, which allows the borrower to pay down “all
due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make
payments of accrued unpaid Interest.” Both its content and placement (immediately following the “payment” and “variable interest
rate” clauses) are innocuous. The language merely reinforces National City’s right to collect scheduled monthly interest payments
and does not deviate from the structure of a demand note.
Reger Development does cite to decisions from other jurisdictions holding that specified events of default may neuter contractual
provision would indeed cast doubt on the intent of the parties to create a callable loan for the reasons Reger Development set
forth-if the lender can demand full payment at any time, it wouldn’t need to “accelerate” the loan maturity-but these concerns can’t
gain traction without support from contractual language. As described above, mere references to due dates do not suffice.
[13] Similarly,
Reid
dealt with a case where the lender’s president testified that a “demand” term in a clause demanding a fixed–
sum payment did not mean what it said in the context of provisions conditioning such accelerated payments and enumerating
to term out part of the line of credit, but National City did not actually impose any unilateral changes on the appellant. Rather, the
bank presented Reger Development with two options: live by the terms of the Note and face the possibility of a call on the loan, or
agree to restructure the terms of credit. The second alternative required appellant’s consent, as stated in the governing contract.
The bank’s decision to hold off on taking full advantage of its legitimate powers until it could discuss less painful possibilities with
its customer is not an impermissible threat and cannot give rise to any suit for breach. Reger Development’s lone citation for the
(1982).
[15] Appellant asserts that
The Contract Documents show that National City engaged in a scheme to defraud Reger Development … when National City
drafted the purposefully ambiguous and misleading Promissory Note and other Contract Documents, which National City
intended all along to call “on demand,” but about which National City intentionally and fraudulently gave a much different
Case 24.2
37 Kan.App.2d 890, 159 P.3d 1042 Briefs and Other Related Documents
Court of Appeals of Kansas.
FOUNDATION PROPERTY INVESTMENTS, LLC, Appellee,
v.
CTP, LLC, Appellant.
No. 96,697.
May 25, 2007.
JJ. GREEN, J. CTP, LLC (CTP) appeals from a summary judgment granted in favor of Foundation Property Investments, LLC
(Foundation) in Foundation’s action to foreclose a promissory note between it and CTP. This litigation arises out of a loan made by
Foundation to CTP. CTP signed a promissory note for the loan. After receiving 10 late payments from CTP, Foundation
accelerated the note and sued to recover the entire balance owed on the note. The ultimate question is whether Foundation
waived its right to accelerate the promissory note by accepting late payments from CTP. Because we determine that Foundation
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 417
order of Foundation Property Investments, L.L.C., the sum of Ninety Six Thousand Dollars ($96,000.00) with interest thereon from
April 26, 2004, payable monthly at the rate of Five and Three Quarters Percent (5.75%) per annum as follows: “Six Hundred
Seventy Three Dollars and Fifty Four Cents ($673.54) including interest, on or before the 1st day of June, 2004, and Six Hundred
Seventy Three Dollars and Fifty Four Cents ($673.54) including interest, on or before the 1st day of each and every month
thereafter until June 1, 2009 when all sums due hereunder are due and payable in full. “Interest shall first be deducted from the
payment and any balance shall be applied on principal. “Principal and interest not paid when due shall draw interest at the rate of
history of the payments is as follows:
Payment Due
Date
Date Payment
Received
June 1, 2004
June 1, 2004
July 1, 2004
July 1, 2004
August 1, 2004
July 28, 2004
September 1,
2004
September 1, 2004
October 1,
2004
October 4, 2004
November 1,
2004
November 29,
2004
December 1,
2004
December 3, 2004
January 1,
2005
January 7, 2005
February 1,
2005
February 18, 2005
March 1, 2005
March 11, 2005
April 1, 2005
May 23, 2005
May 1, 2005
May 23, 2005
June 1, 2005
June 15, 2005
July 1, 2005
July 15, 2005
In a letter dated July 8, 2005, Foundation’s counsel wrote a letter to CTP’s manager. The letter stated that the note was in default
and that Foundation was “exercising its option to declare all of the unpaid principal and interest immediately due and payable.”
Foundation demanded full payment of the note by July 31, 2005. In response, CTP’s counsel asserted that because Foundation
had continually accepted late payments, the parties had established a course of dealing permitting payments to be made beyond
their contractual due dates. On July 28, 2005, Foundation sued CTP to collect the full amount due under the note. CTP’s answer
alleged that Foundation had waived its right to accelerate the note due to its prior acceptance of late payments. Moreover, CTP
asserted that Foundation’s action was barred by the doctrines of estoppel, laches, and unclean hands. Foundation later moved for
418 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
matter of law. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in
favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come
forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the
dispute must be material to the conclusive issues in the case. On appeal, we apply the same rules and where we find reasonable
minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.” [Citations omitted.]’ ”
State
ex rel. Stovall v. Reliance Ins. Co.,
278 Kan. 777, 788, 107 P.3d 1219 (2005). The relevant facts in the present case are
uncontroverted. When there is no factual dispute, appellate review of an order regarding summary judgment is de novo.
Roy v.
Young,
278 Kan. 244, 247, 93 P.3d 712 (2004).
I.
Does Iowa Law Apply to the Present Case?
dispute because its manager, John Daniels, signed the note in Iowa. Daniels was the sole signatory on the note.
CTP’s
argument is flawed. The mere fact that the note was signed in Iowa does not mean that the contract was formed there. Closing for
the purchase of the truck stop, which was the subject of the loan secured by the note, occurred in Kansas. Daniels delivered the
note to Kansas for closing. The promissory note had no legal effect until the closing occurred. Additionally, CTP entered into a
management services agreement with Foundation Properties Corporation (FPC), a separate legal entity from plaintiff Foundation.
FPC was placed in charge of managing and operating the truck stop. While the promissory note is silent on the issue of which
state’s law governs, CTP’s management services agreement provided that the agreement be construed in accordance with Kansas
laws. CTP has failed to present sufficient facts which would warrant the application of Iowa law. As a result, the trial court properly
applied Kansas law in deciding the case.
II.
Did the Trial Court Err in Determining that Foundation had not Waived its Right to Accelerate the Promissory Note by
Repeatedly Accepting Payments after their Due Date?
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 419
Foundation’s attempts to analogize the anti-waiver language in
Freel
to the language in the present case, it is clear that the CTP
note did not contain a similar anti-waiver provision. Foundation argues that the provisions of the note should be strictly construed
against CTP, because it was the drafter of the note. Foundation also points to one of the note’s provisions: “Upon default in
payment of any interest, or any installment of principal, the whole amount then unpaid shall become immediately due and payable
at the option of the holder without notice.” Foundation argues that under this provision, CTP expressly waived demand of payment
and notice of nonpayment. Foundation’s arguments afford no basis for saying that it did not waive the condition of prompt payment
by routinely accepting late payments. There is no dispute that CTP drafted the note or that the language of the note allowed
Foundation to accelerate payment at its option, without notice to CTP. The fact that the note affords Foundation the option to
accelerate, however, does not mean that Foundation could not waive the acceleration clause, especially when the note does not
contain an anti-waiver provision. Consequently, the question that we must determine is whether Foundation waived the option to
accelerate based on its pattern of accepting late payments from CTP. CTP argues that Foundation’s acceptance of late payments
over 9 months’ time (October 2004-June 2005) established a course of dealing by which late payments would be accepted. Course
420 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
course of conduct, need only give reasonable notice that thereafter he will insist on strict performance of the contract. Further
defaults would entitle him to his foreclosure remedy.”). In the present case, there is nothing in the record to indicate that
Foundation ever objected to CTP’s late payments before the July 2005 letter stating that Foundation was exercising its option to
accelerate payment on the note. Foundation’s action of accepting late payments from CTP was inconsistent with its claim or right
such a contract exists, the party entitled thereto must assert his right promptly, and his acts relating thereto must be unequivocal,
and inconsistent with the continuance of the contract, or he will be held to have waived such right.”). Accordingly, the trial court
incorrectly determined that Foundation’s conduct did not constitute a waiver of its right of acceleration. Foundation, however,
suggests that CTP suffered no detrimental reliance because Foundation’s delay in accelerating the payment actually benefitted
CTP: the principal balance was less than it would have been had Foundation exercised the acceleration clause upon any of CTP’s
previous late payments. Nevertheless, CTP had reasonably relied on Foundation accepting late payments without exercising the
acceleration clause. Moreover, CTP will clearly suffer prejudice if forced to now pay the note in full. It would be inequitable to
permit Foundation to accelerate the entire note without Foundation first giving notice to CTP that Foundation would no longer