Business Law Journal

California’s Fourth District Court of Appeal recently addressed an important statute of limitations issue for lenders and borrowers, holding that a qualifying partial payment made before the limitations period expires can restart the clock on a promissory note even when the payment is made by a third party on the debtor’s behalf.  Thus, the factfinder must decide whether the payments had that effect rather than disposing of the case on summary judgment.

 Procedural History

 MLA Capital and the Alvarezes sued Linda for breach of the promissory notes and common counts. Linda moved for summary judgment or, in the alternative, summary adjudication, contending that the claims were barred by the applicable statutes of limitations.

The trial court granted summary judgment without identifying the limitations period applicable to each cause of action. The trial court concluded that because Linda neither knew of nor directed the entity that made the payments, no triable issue of material fact existed as to whether those payments tolled or restarted the limitations periods. The Court of Appeal reversed, holding that triable issues precluded summary judgment, and directed the trial court to enter a new order denying Linda’s motion and the case must proceed to further litigation.

Facts

Charles and Linda Keagle borrowed $250,000 from MLA Capital in 2007 and $200,000 from the Alvarezes in 2008 to finance a restaurant venture in Corona. They failed to make payments or repay either loan upon maturity in 2012 or 2013. MLA Capital and the Alvarezes did not accelerate the Promissory Notes and did not sue the Keagles.

In 2016, Charles explained to MLA Capital that the Keagles incurred legal expenses unrelated to the Promissory Notes and were required to make settlement payments to their former business partner. Charles proposed making payments starting December 2018.

Beginning in August 2018, C&C Organization, a company related to the Keagles’ restaurant businesses, began making monthly payments to both lenders and continued doing so through March 2020, notwithstanding Charles’s death in September 2019.  One such payment, a check signed by Charles, included the notation “Note principal reduction.”

MLA Capital and the Alvarezes sued Linda in February 2022, after C&C Organization stopped making payments, and she failed to satisfy the outstanding indebtedness.

Holding

 The Court of Appeal held that MLA Capital’s and the Alvarezes’ claims were governed by the six-year statute of limitations under California Uniform Commercial Code section 3118, rather than the general four-year period applicable to written contracts under Code of Civil Procedure section 337, because section 3118 specifically governs actions to enforce notes payable at a definite time.

The Court also held that Code of Civil Procedure section 360 applies to claims governed by Commercial Code section 3118, finding that a qualifying partial payment made before the limitations period expires can restart the limitations period.

Analysis

The Six Year Statute of Limitation applied here

The Court of Appeal identified and analyzed each applicable statute of limitation to plaintiffs’ causes of action and found that the six-year statute of limitations set forth in California Uniform Commercial Code section 3118 (a) controlled because it was more recent and more specific to the facts here.

The Court further held that the same six-year period applied to the causes of action for common counts because the common counts claims were derivative of the plaintiffs’ claim for breach of the promissory notes.

Partial payments can restart the clock regardless of who makes the payments

Plaintiffs argued that partial payments by C&C Organization restarted the statute of limitation period. The Court agreed. Under Code of Civil Procedure section 360, a qualifying partial payment of principal or interest on a promissory note can constitute an acknowledgment of the debt and start a new limitations period. The Court rejected Linda’s argument that a separate signed writing was required.

Most importantly, the Court rejected Linda’s argument that the payment must be made personally by the debtor. Under California law, Code of Civil Procedure section 360 may apply where payment is made by a third-party agent authorized to act on the debtor’s behalf.

Because C&C Organization’s payments continued through March 2020, the Court concluded that, if ultimately proven to be authorized partial payments, they could have restarted the six-year limitations period.

Key Takeaways

 The decision is relevant for lenders, borrowers, and title professionals handling distressed real estate debt.

• The expiration of the statute of limitation may not be determined simply by looking at the maturity date of the note.  Partial payments made before the expiration may restart the clock.
• Lenders should not assume that an old note is time-barred without reviewing the payment history.
• Any payments made by the borrower, whether directly or through a third party, may have significant consequences in connection with the statute of limitations.

If you have any legal issues relating to the payment of a loan, please contact the authors of this article or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for assistance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

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