Business Law Breakdown: Enforcing Promissory Notes and Mortgages After Limitations Expire

The topic for today is the revival of a promissory note, and a lien, security interest, or mortgage associated with it after the expiration of the statute of limitations.

What Is A Statute Of Limitations?

All civil claims are subject to some form of limitation, which are set by the legislature through statute. What does a “statute of limitations” mean? It means that after the expiration of a certain amount of time, the ability to pursue a claim for damages is barred by the statute of limitations.

For example, in an automobile collision, in Texas, the statute of limitations is two years. So, if the injured person fails to file a lawsuit within two years of the accident, that claim is typically going to be barred by limitations.

When Is A Statute Of Limitations Applicable?

In the instance of a promissory note (a promissory note is an agreement to pay back money that gets borrowed or loaned), the statute of limitations in Texas is typically four years. Promissory notes are often accompanied by some sort of security interest, in either real estate or a car. For example, if you borrow money to buy a car then you’ll grant security interest in the car you buy so that if you don’t pay the lender can repossess the car on the security interest.

If the loan is not paid back by the maturity date, then the statute of limitations begins to run. If four years from that maturity date passes and the lender has not yet filed a lawsuit to collect the amount owed under the promissory note, then the statute of limitations can bar the collection of that note and the security interest that accompanies that note can also be unenforceable as a result of the expiration of limitations on the promissory note.

For example, a mortgage on a house might become unenforceable and a foreclosure might be prevented if the statute of limitations runs out on the underlying promissory note.

Restarting or Extending the Limitations Period: The Promissory Note

In Texas, however, there are circumstances where the examination of the lender’s records might provide an extension, essentially the ability to enforce and collect the debt that might otherwise be barred by limitations. An example of this might be a check written after the maturity date that has in the memo line the loan number written on it and is signed by the borrower. A court might say that this is an acknowledgement of the debt—signed by the borrower—and it doesn’t contain anything repudiating the obligation. So, this could be treated by the court as an acknowledgement of the debt, and then a new statute of limitations period of four years might run from the date of that check.

Similarly, a letter from the borrower to the lender, saying something to the effect of “I know I owe this money and I can’t pay it back right now” would potentially also be treated as an acknowledgement of the debt by a court and again restart the running of a four year limitations period.

Restarting or Extending the Limitations Period: Interest

If a debt has expired by limitations, and then is acknowledged and a new limitations period begins to run, the courts may also allow any existing security interest to be enforced because of the acknowledgement. So, if the lien or the security interest is barred because of limitations on the underlying promissory note, the acknowledgement can then revive the ability to enforce that security interest.

This is an important tool for lenders who may have neglected to enforce their rights, but in their paperwork, they may discover something that assists them in enforcing rights that might otherwise have expired.

For more information on this topic, contact our office today.