How Long Does a Bank Have to Bring a Collection Action Against a Debtor in Default?
f you asked most lawyers in Kentucky how long they have to file a collections suit against a debtor in default on a promissory note, they’d tell you “fifteen years.” After all, a note is a contract, a debtor’s default is a breach, and KRS 413.090(2) provides that the statute of limitations for breach of contract claims is fifteen years. Right?
Perhaps not. The Kentucky Supreme Court’s recent opinion in Community Financial Services Bank v. Stamper held that the answer—as is often the case in law—is: “it depends.”
The facts of Stamper are pretty straightforward. In 1997, Ronny Stamper executed a promissory note and security agreement in favor of Community Financial Services Bank and in exchange for a loan. By its terms, the note matured on April 25, 2002. Stamper defaulted sometime before the maturity date, and the Bank notified him that he had until September 15, 2000, to pay the loan off. The Bank, however, made little effort to collect on the loan until it filed a collections against Stamper on January 25, 2016.
The circuit court entered judgment in favor of the Bank. From the circuit court’s perspective, the Bank’s cause of action accrued on April 25, 2002—i.e., the maturity date. As a result, the Bank initiated its collection action with the fifteen-year statute of limitations period for breach of contract claims. And given that Stamper had admitted that he defaulted on the loan, the disposition was simple: the Bank wins.
On appeal, the parties agreed that the Bank had fifteen years from the note’s maturity date to initiate its suit, but vigorously disputed the precise date on which the note matured. Stamper contended that the note matured on September 15, 2000 (the date the Bank called the loan), while the Bank maintained that the note matured on April 25, 2002.
In an interesting turn of events, the Kentucky Court of Appeals (“KCA”) agreed with the Bank that the note matured on April 25, 2002, but nonetheless held that the suit was untimely. According to the KCA, the note qualified as a negotiable instrument subject to the six-year statute of limitations period set out in KRS 355.3-118. Thus, though neither party argued the applicability of the six-year limitations period set out in KRS 355.3-118, the KCA reversed the judgment in favor of the Bank.
The Kentucky Supreme Court (“KSC”) agreed to hear the case. In its opinion, it characterized the dispositive issue as whether the note qualified as a negotiable instrument—i.e., an instrument containing (among other things) “an unconditional promise to order or pay a fixed amount of money.” KRS 355.3-104. If so, the six-year limitations period applied, and the Bank’s collections action was untimely. And if not, the fifteen-year period applied.
The Bank, argued that the note was non-negotiable because it did not evidence an “unconditional promise.” The reason? Because the “rights or obligations with respect to the promise” in the note were “stated in another record”—principally, other loan documents.
The KSC disagreed. As a matter of first impression, the KSC reasoned that a note which merely references other loan documents (such as a security agreement or mortgage) evidences an “unconditional promise” to pay, while a note that is “subject to” or governed by” extrinsic documents does not. Because the note at issue merely referenced a security agreement, it qualified as a negotiable instrument. Thus, the Bank only had six years from the maturity date to file a collection action on the note. Since it filed its collections action about fourteen years after the note matured, its suit was untimely. The upshot? The Bank could not collect on the loan.
Stamper serves as a reminder that loan document language can have a significant impact on a lender’s ability to collect. Had the note in Stamper been “subject to” or “governed by” the security agreement and other loan documents, it would have been non-negotiable, and the Bank’s collections action would have been timely.
So, what do your loan documents say? Do they need to be reviewed or updated in light of Stamper? If so, the experienced attorneys at Kerrick Bachert, PSC are here to help. Give us a call at 270-715-2410, and ask for Scott Bachert, Natalie Feldman, or Alex Thomason.