Indiana Commercial Foreclosure Law

Indiana’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years

Lenders filing loan enforcement cases in Indiana should know that their actions may be time-barred if not filed within six years. 

What is a “statute of limitations”?  When trying to describe general legal concepts, I often turn to (what else?) Black’s Law Dictionary:

Statute of limitations.  A statute prescribing limitations to the right of action on certain described causes of action . . . that is, declaring that no suit shall be maintained on such causes of action . . . unless brought within a specified period of time after the right accrued.  Statutes of limitation . . . are such legislative enactments as prescribe the periods within which actions may be brought upon certain claims or within which certain rights may be enforced.

Basically, a statute of limitations is a deadline to file a lawsuit. 

2 statutes – 6 years.  The Indiana Code’s provisions applicable to statutes of limitation include Ind. Code § 34-11-2-9 “Action upon promissory notes, bills of exchange, or other written contracts for payment of money:”

An action upon promissory notes . . . or other written contracts for the payment of money executed after August 31, 1982, must be commenced within six (6) years after the cause of action accrues.

Indiana’s version of the Uniform Commercial Code, specifically Chapter 3.1 “Negotiable Instruments,” has a similar provision at I.C. § 26-1-3.1-118 “Action to enforce obligation of party--”:

(a)  Except as provided in subsection (e) [not applicable], an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.

Both statutes seemingly apply to promissory notes, although as noted in my January 16, 2008 post, not all notes are negotiable instruments under the UCC.  While the two different statutes create some confusion as to which statute applies and when, both statutes fortunately have a six-year limitations period – a “distinction without a difference” kind of situation. 

The complicator - accrual.  Although Indiana law may be clear as to when the limitation period ends (six years), the more difficult issue surrounds when the limitation period begins.  What event, date, etc. causes the statute of limitations to start running?  Based upon my limited research for this post, there is not a readily-available, crystal-clear answer to the question. 

The “after the cause of action accrues” language in I.C. § 34-11-2-9 has been, and continues to be, subject to debate in all sorts of cases.  That language usually refers to the date the plaintiff knew or should have known it had a cause of action (i.e. a known default).  Here, the law is complicated by the fact that most promissory notes contain “no waiver” clauses, which serve to negate what could be various default-related triggers. 

I.C. § 26-1-3.1-118(a) is a little more clear, however, and suggests the applicability of a couple of different accrual dates:  either (1) the date of maturity or (2) the date of acceleration. 

The basics.  Although I have not comprehensively researched Indiana law on the subject, I think it’s safe to say that, generally, the day after the note’s maturity date usually will be the first day of the six-year limitations period.  If, however, the lender accelerated the note, then the date of acceleration may trigger the limitations period.  Of course there are many circumstances that might call for a different result.  The primary purpose of today’s post simply was to address the six-year time period and advise lenders and their counsel that, normally, you’ve got six years to initiate a promissory note enforcement action.  Given the negative consequence of an untimely lawsuit (i.e. loss of the case), it is good practice to be conservative in calculating deadlines of this type.

Promissory Note = Negotiable Instrument

On November 13, 2008,  the United States District Court for the Northern District of Indiana in United States of America v. Lockett, 2008 U.S. Dist. LEXIS 92998 (Lockett.pdf) granted summary judgment in favor of lender in a straightforward promissory note default case.  Lockett provides a nice primer on Indiana’s basic rules surrounding promissory notes and the evidentiary hoops through which a lender must jump in order to obtain a summary judgment in federal court.

Federal court summary judgment standard.  The procedural standard for summary judgments in Indiana’s federal courts is different from Indiana’s state courts.  Without going into detail, the movant’s initial procedural burden is easier to meet in federal court.  For those interested, here is the procedural standard as articulated in Lockett:

Summary judgment is appropriate when “the pleadings, depositions, answers to the interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.”  Fed. R. Civ. P. 56(c).  In deciding whether a genuine issue of material fact exists, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.”  No genuine issue of material fact exists when a rational trier of fact could not find for the nonmoving party even when the record as a whole is viewed in the light most favorable to the nonmoving party.  A nonmoving party cannot rest on mere allegations or denials to overcome a motion for summary judgment; “instead, the nonmovant must present definite, competent evidence in rebuttal.”  Specifically, the nonmoving party must point to enough evidence to show the existence of each element of its case on which it will bear the burden at trial. 

(Indiana’s state court standard requires the movant to designate evidence that definitively negates each element of the nonmovant’s case.)

Promissory note, defined.  Judge Miller reminds us that a promissory note “is a negotiable instrument subject to Indiana’s version of the Uniform Commercial Code.  See, Ind. Code § 26-1-3.1-104.  In Indiana, the holder of a negotiable instrument (usually, a lender) may recover on the instrument simply by:

  producing the signed note, or a copy;
  proving that the note was executed; and
  showing that the note is due and unpaid.

See, I.C. § 26-1-3.1-308.  Typically, these matters easily are established by filing an affidavit from a lender representative.  At that point, the only way the defendant (the borrower) can avoid entry of judgment is to prove some defense to liability.  The potential defenses are too voluminous to list or discuss here, but they would involve, for instance, evidence that the borrower did not sign the note or that the borrower contests the amounts due. 

In Lockett, the borrower failed to refute any of the lender’s factual allegations and failed to raise any legal defense to negate her responsibility to pay the full amount of the loan.  The borrower, who was unrepresented in the litigation, simply expressed a desire to settle the debt.  Accordingly, the Court concluded that there were no genuine issues of material fact for trial and held that the holder of the note was entitled to a judgment as a matter of law in the amount requested.

The fundamentals.  The Lockett case warranted a short post to remind secured lenders and their counsel involved in Indiana commercial foreclosures of the basic proof needed to obtain a pre-trial disposition of the case through summary judgment.  For the Indiana lawyers who may be reading, Lockett would be a nice case to cite in a summary judgment brief involving a default on a promissory note.

Fried Tomato Grower, Part II: Lack of Consideration

Today’s post will explore the second, and successful, defense asserted by defendant Jackson, namely that the Note was unenforceable for lack of consideration.  Part I of my commentary about Jackson v. Luellen Farms discussed how the Indiana Court of Appeals arrived at its conclusion that Jackson could be personally liable on the Note.  Keep reading, however, to gain an understanding of the concept of “consideration,” particularly in situations involving antecedent debt, and how the Court ultimately ruled in Jackson’s favor.

Consideration, general rules.  Because the Court deemed the Note not to be a negotiable instrument, the UCC and specifically I.C. § 26-1-3.1-303(b) did not apply.  (Section 303 articulates what “consideration” is under the UCC.) 

For a contract to be valid, there must be an exchange of consideration, as noted by the Court in Jackson:

  Consideration is defined as ‘[s]omething of value (such
  as an act, a forbearance, or a return promise) received
  by a promisor from a promisee.’  ‘To constitute
  consideration, there must be a benefit accruing to the
  promisor or a detriment to the promisee.’

The plaintiff creditor, LFI, argued that there was consideration for the Note because of the unpaid balance owed by HPI to LFI at the time of the Note’s execution. 

Past consideration.  In fact, the Note was a promise by Jackson to pay an antecedent (prior) debt of a third party, HPI.  The Indiana Court of Appeals held that the promise was not enforceable because “past consideration” generally cannot support a new obligation or promise.  As stated by the Court, in Indiana:

  if a person has been benefitted in the past by some
  act or forbearance for which he incurred no legal
  liability and afterwards, whether from good feeling
  or interested motives, he makes a promise to the
  person by whose act or forbearance he has benefited,
  and that promise is made on no other consideration
  than the past benefit, it is gratuitous and cannot be
  enforced. 

Neither HPI nor Jackson received any benefit in exchange for the Note.  Jackson, personally, had no liability on the debt when he signed the Note – only HPI did.  There was no evidence that Jackson signed the Note in exchange for LFI’s promise to delay collection (forbear), in which case there would have been consideration.   

Valid guaranty?  LFI actually was angling to assert that the Note was a personal guaranty.  Under Indiana law, “it is not necessary for a guarantor to derive any benefit from the principal contract or the guaranty for consideration to exist.”  But, generally the guaranty must be made “at the time of the principal contract” (for example, when the tomatoes were delivered).  There are exceptions to this general rule, but none of them existed in Jackson.  There was, therefore, no legal consideration to support the alleged guaranty of HPI’s debt to LFI. 

Too late.  The tomato grower lost the case for a lot of reasons, including most importantly the fact that Jackson, individually, did not promise to pay HPI’s debt at the time the tomatoes were delivered.  Even then, once HPI began having trouble paying LFI, there still could have been personal liability had Jackson signed the Note in exchange for LFI’s forbearance in collecting against HPI.  The Court said, “[t]he problem in Jackson is that neither Jackson nor [HPI] received anything of benefit pursuant to the Note.  Instead, the only party that benefitted from the Note’s execution was the promisee, LFI.  Although Jackson had some motive to sign the Note, the Note was not supported by consideration.  Under these circumstances, LFI may not enforce the Note against Jackson.” 

In most commercial cases, there will be appropriate and timely loan documentation.  So, the circumstances present in the Jackson case may not be common in the day-to-day operations of most commercial lending institutions.  If, however, you as a lender agree to forbear on a borrower’s debt and, as a part of that agreement, intend to obtain for the first time some kind of personal guaranty, make sure the loan documents are clear that the parties intend for there to be personal liability and that appropriate consideration (exchange of benefit) exists. 

Fried Tomato Grower, Part I: Personal Liability

Informalities in connection with loans often lead to costly results.  In Jackson v. Luellen Farms, 2007 Ind. App. LEXIS 2754 (JacksonOpinion.pdf), the Indiana Court of Appeals discussed in its December 12, 2007 opinion how a thirty-year business relationship turned into $200,000 in losses for a supplier of raw tomatoes.  This is the first of two posts that address the Jackson case and the efforts of a party owed money to collect an antecedent debt from an owner/operator of a corporation.  Advanced planning and documentation sometimes may be inconvenient, expensive or awkward, but it almost always can help protect lenders against financial losses. 

Context.  The plaintiff was LFI, a grower and supplier of tomatoes.  Defendant Jackson was the owner and operator of HPI, a corporation that purchased and canned tomatoes.  HPI often would not pay LFI on delivery but would wait until the first of the year.  In October, 1999, HPI owed LFI about $225,000 for tomatoes delivered in 1998 and 1999.  LFI evidently became nervous about getting paid, so for the first time the parties executed a Note to memorialize the amount owed.  HPI made some payments on the Note but ultimately went under, owing $2.5-$3.0 million dollars to various creditors.  LFI sought recovery from Jackson individually, and Jackson asserted two defenses:  (1) he was not personally liable on the Note because he signed in a representative capacity and (2) the Note failed for a lack of consideration.  I discuss the first defense in this post.

Was the Note a negotiable instrument?   A sub-issue was whether Indiana’s UCC, specifically I.C. § 26-1-3.1-402 dealing with negotiable instruments, applied.  (Typically, the UCC applies because most promissory notes meet the requirements of a negotiable instrument.)  If the UCC applied, the burden of proof was on Jackson to in essence prove a negative:  that both parties did not intend for him to be personally liable under the Note.  Was the document was in fact a “negotiable instrument” as defined in I.C. § 26-1-3.1-104?  The Court of Appeals concluded it was not, essentially because it purported to incorporate by reference the terms of a separate contract.  The Note not only referred to a non-existent mortgage but, more importantly, indicated that all agreements and covenants in that mortgage applied to the Note – a no-no under the UCC.  So, Jackson was not held to the heavy burden “to show that both parties to the Note intended that Jackson not make himself liable.” 

Contract law.  The issue of personal liability thus turned on the common law of contracts, not the UCC.  And, plaintiff LFI had the burden of proof.  In this scenario, courts apply a set of rules of construction and interpretation to arrive at a decision as to what the parties intended in the written document.  The Court weighed a plethora of details about the language in the Note and the circumstances leading up to its execution.  For example, after his signature, Jackson did not have the word “President.”  In the final analysis, the Court concluded that “based on the manner in which Jackson signed the Note and our consideration of the surrounding circumstances, we conclude that the Note evidences a promise on the part of Jackson to pay LFI the amount owed by [HPI].”  So, despite winning on the UCC/burden of proof issue, Jackson still got beat on his first defense.   

On the hook?  The Court’s conclusion in Jackson is favorable to Indiana creditors, particularly in the rare scenario where a Note does not constitute a negotiable instrument under the UCC.  Absent clear and unambiguous language and/or facts showing that the amount of money was owed solely by the corporate entity, owners purporting to sign in a representative capacity could be at risk.  In part II of this post, however, I’ll explain why the Indiana Court of Appeals ultimately found the Note to be unenforceable as to Jackson.  LFI won a battle, but lost the war.