SHAWMUT BANK, N.A. vs. ALLEN MILLER & another. [Note 1]

WILKINS, J. The Millers, guarantors of a note given to the Framingham Trust Company, which has since merged into the plaintiff bank (bank), appeal from a judgment on the note entered against them following allowance of the bank's motion for summary judgment and the dismissal of the Millers' counterclaim. [Note 2] We transferred the Millers' appeal to this court on our own motion and now affirm the judgment. [Note 3]

In May, 1987, Miller Furs, Inc., executed a revolving note payable to the plaintiff bank's predecessor. [Note 4] The note states that Miller Furs promises "to pay, on demand to the [bank] or order . . . an amount not to exceed [$1,000,000]." The Millers each individually guaranteed the obligations of Miller Furs to the bank. For the purposes of this appeal, the obligations of the Millers and the rights of the bank against them are the same as the obligations of Miller Furs and the rights of the bank against Miller Furs.

The dispute focuses on the question whether the bank must have been acting in good faith when, in July, 1990, it demanded payment of the note. Because of language in the loan documents, which we shall set forth subsequently, the Millers argue that the note is not a demand note, that the bank had to be acting in good faith in calling the note, and

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that, because there are disputes of material fact as to the bank's good faith, summary judgment should not have been granted in the bank's favor. We conclude that the note is a demand note, that the bank agreed to a limitation on the rights that it otherwise would have had as the holder of a straightforward demand note, but that the bank may prevail on summary judgment because it does not matter whether the bank was or was not acting in good faith in deciding to demand payment of the balance due on the note.

The note is a demand note at least because it is an instrument in which no time for payment of principal is stated. See G. L. c. 106, Section 3-108 (1990 ed.) ("[i]nstruments payable on demand include . . . those in which no time for payment is stated"). [Note 5] The label "demand note" can be somewhat misleading, a sort of tolerated mislabeling, because it is the general rule that a note unconditionally payable on demand is payable immediately without demand. See G. L. c. 106, Section 3-122 (1) (b) (1990 ed.) ("[a] cause of action against a maker or an acceptor accrues . . . in the case of a demand instrument upon its date or, if no date is stated, on the date of issue"); 13 Mass. Gen. Laws Ann. 450, Massachusetts Code Comment (West 1990) ("demand is unnecessary"); 2 U.L.A. 407, official comment 1 (Master ed. 1991) ("generally accepted rule that action may be brought on a demand note immediately upon issue, without demand"); Cantor v. Newton, 4 Mass. App. Ct. 686, 691 (1976); Jenkins v. Karlton, 329 Md. 510, 517 (1993). Thus, the general rule is that a holder of a demand note properly may bring suit on the note without first demanding payment of the balance due on the note (Cassiani v. Bellino, 338 Mass. 765, 767 [1959]) and also may on its own motion set off the balance due under

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the demand note against the maker's unencumbered assets in the bank's possession (see Krinsky v. Pilgrim Trust Co., 337 Mass. 401, 405 [1958]). Not only is the balance due on a traditional demand note collectible without demand, but also a holder of such a note may determine to collect the balance due for any reason, good or bad. Good faith is not a condition of a holder's decision to collect the amount due on a demand note. See, e.g., Mirax Chem. Prods. Corp. v. First Interstate Commercial Corp., 950 F.2d 566, 570 (8th Cir. 1991); Kham & Nate's Shoes No. 2, Inc. v. First Bank, 908 F.2d 1351, 1357-1358 (7th Cir. 1990); Taggart & Taggart Seed, Inc. v. First Tenn. Bank, 684 F. Supp. 230, 235-236 (E.D. Ark. 1988), aff'd, 881 F.2d 1080 (8th Cir. 1989); Spencer Cos. v. Chase Manhattan Bank, N.A., 81 B.R. 194, 199 (D. Mass. 1987); Pavco Indus., Inc. v. First Nat'l Bank, 534 So. 2d 572, 577 (Ala. 1988); Flagship Nat'l Bank v. Gray Distrib. Sys., Inc., 485 So. 2d 1336, 1340 (Fla. Dist. Ct. App. 1986); Fulton Nat'l Bank v. Willis Denney Ford, Inc., 154 Ga. App. 846, 848 (1980); Waller v. Maryland Nat'l Bank, 95 Md. App. 197, 216-217 (1993); Simon v. New Hampshire Sav. Bank, 112 N.H. 372, 375 (1972). Cf. Westinghouse Credit Corp. v. Hall, 144 B.R. 568, 576 (S.D. Ga. 1992). These opinions reject any claim that G. L. c. 106, Section 1-208 (1990 ed.), imposes a duty of good faith in the enforcement of the obligation of a demand note. [Note 6] The official comment to Section 1-208 makes clear that Section 1-208 was not intended to apply to demand notes. "Obviously this section has no application to demand instruments or obligations whose very nature permits call at any time with or without reason. This section applies only to an agreement or to paper which

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in the first instance is payable at a future date." [Note 7] 1 U.L.A. 152, official comment (Master ed. 1991).

Because the benefits to a holder of a demand note are well-recognized, it is understandable that the bank argues that the case may be disposed of simply by the fact that the note says that it is payable on demand and is a demand note under the provisions of the Uniform Commercial Code. Equally understandable is the Millers' attempt to demonstrate that the note is not a pure demand note which became due and payable when it was issued, and that, when the bank decided to demand payment, it could do so only if it were acting in good faith. It is true that a note stating that it is due and payable on demand, when read in conjunction with other provisions in the note or other loan documents, might

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in fact be payable on demand only if the maker defaults on an obligation stated in the loan documents. See Bank One v. Taylor, 970 F.2d 16, 31-32 (5th Cir. 1992); Reid v. Key Bank, 821 F.2d 9, 13-14 (1st Cir. 1987). Compare Diversified Foods, Inc. v. First Nat'l Bank, 605 A.2d 609, 614 n.6 (Me. 1992) (note states that default conditions do not change demand nature of note); Simon v. New Hampshire Sav. Bank, 112 N.H. 372, 374 (1972) (provision explicitly preserving right to demand payment at any time prevents provisions for installment payments of debt from converting demand note to installment note).

In support of their position, the Millers point first to language in the revolving note. The revolving note provides that, upon certain events occurring, [Note 8] the bank at its option could determine that the note "shall become and be due and payable forthwith without demand, notice of nonpayment, presentment, protest or notice of dishonor" (emphasis supplied). As we have said, if this note is a garden variety demand note, it became due and payable at its inception, and no demand was needed to make it due and payable. The note's supplemental language thus would be superfluous if in all instances the note were due and payable without demand. We should not deny parties a right to bargain that a note will be due and payable only on the making of a demand except in certain stated circumstances. See Spencer Cos. v. Chase Manhattan Bank, 81 B.R. 194, 198 (D. Mass. 1987). We therefore, give effect to this supplemental language, and conclude that the note was due and payable only on demand, unless one of the stated conditions obviating demand were to occur. Although the bank's rights under the note were, therefore, less robust than they would have been under a simple demand note, we see no reason to conclude that the supplemental language in the note altered the traditional rule that good

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faith is not a necessary component of a holder's decision to collect the balance due on a demand note. Cf. Nation, Recognition and Enforcement of Demandable Notes, 23 UCC L.J. 51, 77-78 (1990).

In their argument that the note is not a demand note, the Millers turn next to language in a security agreement that Miller Furs executed at the same time that the note and personal guaranties were executed. The security agreement, expressed in a printed document prepared by the bank, provides that, upon the happening and continuance of certain events or conditions, the "Bank may declare all of the Obligations to be immediately due and payable." Here the bank indicated through its standard form of security agreement that the balance on the revolving note would be due and payable only if one of the events or conditions listed as a default in the security agreement were to occur. This provision in the security agreement certainly reinforces the provision in the note that the note is not due and payable in all instances without demand. One default condition stated in the security agreement is "default in the payment or performance of any of the Obligations or of any covenant or liability contained . . . in any note evidencing any of the Obligations." Thus, any failure to perform an obligation contained in any associated note would be a default under the security agreement, making all obligations under the note immediately due and payable. See Waller v. Maryland Nat'l Bank, 95 Md. App. 197, 223 (1993) (failure to meet demand for payment of note was default under security agreement). A failure to pay the note's balance due on demand, of course, would be a failure to perform an obligation under the note. Consequently, for the purposes of this case, the security agreement in effect made no change in the rights and obligations of the parties already expressed in the note. The note remained a demand note but due and payable only upon a demand actually being made. The parties made no agreement, however, that modified the general rule that good faith is not an essential element

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of a holder's decision to demand payment of the amount due on a demand note. [Note 9]

The Millers make a general claim that certain actions of the bank, taken collectively, were "so malevolent and deplorable" as to bar the bank from recovering on their guaranties. As we have said, the bank's good faith was not required in deciding to demand payment of the note. Nor is there any basis for recognizing some equitable protection for the Millers so as to render the demand ineffective. The summary judgment record is barren of any evidence tending to show the bank's post-demand bad faith in the fixing of, and insisting on, the terms under which the bank required payment of the Millers' obligation under the note. We, therefore, need not consider whether good faith is a necessary element of the setting of the terms of a demand for payment when dealing with a demand note having the special qualities of the note in this case.

Judgment affirmed.