## Facts

- Car Mart Auto Group, Inc. (Car Mart) operated an automobile resale business and relied on The Union Bank Company (Union Bank) for financing from 2005 through 2010.
- Union Bank extended multiple loans to support Car Mart’s operations, including inventory financing (floorplan-type lending) and financing connected to construction of a new sales facility.
- The debt was evidenced by four promissory notes containing cognovit provisions (authorizing judgment upon default) and providing that the notes were payable in full on Union Bank’s demand.
- Union Bank alleged problems in the lending relationship, including that Car Mart sold vehicles “out of trust” and failed to remit proceeds or handle titles as required when vehicles subject to the bank’s interest were sold.
- In early 2010, Union Bank demanded payment on the notes and filed suit in the Putnam County Court of Common Pleas against Car Mart and its owner, Stephen Craig Nienberg.
- Union Bank’s complaint asserted six counts: four counts for amounts due on the notes, a claim for unjust enrichment, and a request for appointment of a receiver to oversee Car Mart’s remaining business and assets.
- Car Mart and Nienberg filed counterclaims asserting (1) breach of a duty of good faith based on Ohio’s UCC good-faith statutes (including R.C. 1301.304 and R.C. 1301.309) and the bank’s enforcement of the demand notes, and (2) “lender liability” under an instrumentality theory, claiming Union Bank so controlled Car Mart that Car Mart functioned as the bank’s instrumentality.
- On the control theory, Car Mart pointed to bank involvement in the financing relationship, including practices such as requiring periodic re-floorplanning to address aging inventory and other measures the borrower characterized as operational control.
- Union Bank moved for summary judgment on the counterclaims, and the trial court granted the motion.
- Car Mart and Nienberg appealed the summary judgment ruling to the Court of Appeals of Ohio, Third Appellate District.

## Issues

1. Do Ohio’s UCC good-faith provisions (including R.C. 1301.304 and R.C. 1301.309) limit a lender’s contractual right to demand payment on a true demand note, such that the lender must show a good-faith belief that repayment is impaired before calling the note?
2. Did Car Mart present sufficient evidence of lender domination and control to create a genuine issue of material fact on an instrumentality-based lender-liability claim against Union Bank?

## Decision

- The appellate court affirmed the trial court’s grant of summary judgment to Union Bank on both counterclaims.
- The court held that the UCC duty of good faith does not restrict a lender’s right to call a demand note; a demand note may be called at any time, for any reason or no reason, consistent with its terms.
- The court rejected Car Mart’s attempt to use R.C. 1301.304 and R.C. 1301.309 to impose an impairment-of-prospect requirement on Union Bank’s decision to demand payment under the demand notes.
- The court also concluded that Car Mart failed to produce evidence showing the type of pervasive, day-to-day operational control necessary to treat the borrower as the lender’s instrumentality.
- The court noted that the instrumentality doctrine is typically used by third-party creditors to reach a controlling entity, and Car Mart’s attempt to assert the doctrine affirmatively against its own lender did not fit the doctrine’s usual application.

## Legal Principles

- A true demand note is payable when demanded, and—absent additional contractual limits—a lender may call it at any time, with or without stating a reason.
- Ohio’s UCC good-faith provisions (including R.C. 1301.304 and R.C. 1301.309) impose a standard for performance and enforcement of obligations, but they do not rewrite the express “payable on demand” term of a demand instrument.
- The UCC obligation of good faith does not create an automatic, free-standing borrower damages claim based solely on the lender’s decision to enforce demand notes according to their terms.
- Instrumentality-based lender liability requires evidence of extraordinary control—control so complete that the borrower’s separate decision-making is effectively displaced—together with misuse of that control in a way that causes injury.
- Lender actions commonly associated with protecting collateral and managing credit risk (monitoring, requiring reporting, conditioning advances, and similar oversight) generally do not, without more, amount to the domination required for instrumentality liability.
- Summary judgment is appropriate where the borrower’s evidence shows, at most, ordinary lender oversight and enforcement of express contract rights, rather than facts supporting a legally recognized lender-liability theory.

## Conclusion

The court affirmed summary judgment for Union Bank because Ohio’s UCC good-faith statutes did not limit the bank’s contractual right to call demand notes, and Car Mart’s evidence did not support an instrumentality theory of lender liability based on domination or wrongful control.


Union Bank v. Car Mart Auto Group, Inc., 2012 WL 6571042 (2012)