Statutes of limitations can stop many legal challenges dead in their tracks. Whether through misplaced documentation, an overflowing backlog, or a host of other reasons, lenders can sometimes be left holding the bag when it comes to unpaid loans or promissory notes. But is an expired statute of limitations *always* a hard and fast deadline? Richards Rodriguez & Skeith partner Clark Richards breaks it down below.
What is a Statute of Limitations and What Does it Mean?
Many clients ask us about the possibilities of reviving promissory notes and liens or security interests for an associated mortgage after the expiration of the statute of limitations. In a nutshell, a statute of limitations says that after the expiration of a specified amount of time, the ability to pursue a claim is barred. All civil claims are subject to some form of limitations, which are set by the legislature through statute.
For example, when it comes to automobile collisions in Texas, the statute of limitations to claim damages is two years. If an injured person fails to file a lawsuit within two years of the accident that injured them, the claim is typically going to be barred by limitations. This prevents actions by bad actors claiming damages decades after an incident whereby the verifiability of damages may be impossible to prove one way or the other.
The Pitfalls of Elapsed Promissory Notes
By the same token, the statute of limitations in Texas for promissory notes is typically four years. Simply put, a promissory note is an agreement to pay back money that gets borrowed or loaned. Promissory notes are often accompanied by some form of security interest in either real estate or valuable personal property like a car. If someone borrows money to buy a car, then they are granting a security interest in the car to the lender. This legally grants the lender legal authority to repossess the car on the security interest if the borrower doesn’t make their payments.
However, as we noted above, there is a time limit within the law for the lender to proceed on this course. If the loan is not paid back by the maturity date, then the time granted by the statute of limitations begins to tick. If four years from that maturity date has passed, 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. Not only that, but the security interest that accompanies that note can also be unenforceable as a result of the expiration of limitations on the promissory note. Even a mortgage on a house might become unenforceable and foreclosure might be prevented if the statute of limitations has expired on the underlying promissory note.
Expired Statute = Lost Cause? Not So Fast
But this doesn’t always mean the end of the line. In Texas, there are circumstances where an examination of the lender’s records might provide an extension to enforce and collect the debt that might otherwise be barred by limitations. Here’s an example of how that might work: let’s say that the lender has in their possession a check from the borrower written after the loan’s maturity date. The check’s memo line contains the loan number, the check is signed by the borrower, and it is not accompanied by anything repudiating the borrower’s obligation. From this action, the court could potentially rule that this is an acknowledgment of the debt. If so, they may grant a new statute of limitations period of four years, starting 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” may also be treated as an acknowledgement of the debt by a court and restart the 4-year limitations period. In addition, if a debt has expired due to limitations and is then acknowledged and a new limitations period begins to run, courts may also allow any existing security interest to be enforced because of the acknowledgement. If the lien or the security interest was initially barred because of limitations on the underlying promissory note, the court may rule that the acknowledgement is sufficient to revive enforcement of that security interest.
Leave No Stone Unturned
As you can see, researching these possibilities is an important tool for lenders who may have neglected to enforce the full scope of their rights. It is possible that a careful analysis of the borrower’s loan paperwork may lead to a discovery that allows you to pursue rights that you may have initially believed to be expired. If you are unsure whether your business has done all it can to maximize your promissory note rights under the law, Richards Rodriguez & Skeith’s commercial litigation attorneys may be able to assist. Please contact us today to discuss your options with a member of our team!