- Promissory Notes: Which Statute of Limitations Applies?
- September 15, 2017 | Author: Jack W. Hinneberg
- Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
In Ohio, actions on a written agreement, contract or promise must be brought within eight years after the cause of action accrued, pursuant to Ohio Revised Code (ORC) § 2305.06;1 but what about an action on a promissory note? Black's Law Dictionary defines a promissory note as "[a]n unconditional written promise, signed by the maker, to pay absolutely and in any event a certain sum of money either to, or to the order of, the bearer or a designated person." Because a promissory note is an "unconditional written promise . . . to pay," it could be logically assumed that it is subject to the eight-year statute of limitations set forth above. Unfortunately, this is not the case.
ORC § 1303.16, which is part of the Ohio Uniform Commercial Code (UCC) and generally adopts UCC § 3-118, makes clear that instruments that meet the requirements of a promissory note are subject to a shorter six-year statute of limitations. Specifically, an "action to enforce the obligation of a party to pay a note payable at a definite time shall be brought within six years after the due date or dates stated in the note or, if a due date is accelerated, within six years after the accelerated due date."2 In the case of a note payable on demand, "if demand for payment is made to the maker of a note payable on demand, an action to enforce the obligation of a party to pay the note shall be brought within six years after the date on which the demand for payment is made."3 Lastly, "if no demand for payment is made to the maker of a note payable on demand, an action to enforce the note is barred if neither principal nor interest on the note has been paid for a continuous period of 10 years."4
Keep in mind that the instrument's title is not the defining factor in deciding whether it will be subject to the six-year statute of limitations outlined in ORC § 1303.16 or the longer eight-year limitation provided by ORC § 2305.06. For instance, a written agreement simply titled "Loan Agreement" will be treated as a promissory note as long as it contains the elements of a negotiable instrument.
ORC § 1303.03(A), which generally adopts UCC § 3-104, makes clear that an instrument will be deemed to be a note as long as it: (1) contains an unconditional promise to pay a fixed amount of money with or without interest; (2) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (3) is payable on demand or at a definite time; and (4) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money. Of course, the instrument must also be signed by the maker.5
Once it is determined that the instrument meets the criteria of a negotiable instrument, the next step is to determine whether the note is payable at a definite time, such as an installment note, or payable on demand. If the note is payable at a definite time – for example, via 36 equal monthly installments of a certain amount – the statute of limitations will not begin to run until the date that the last payment is due, assuming that the due date has not been accelerated. Regarding acceleration, in applying UCC § 3-118, courts have noted that acceleration generally requires a separate act, aside from a mere failure to meet a due date, especially when there is language in the note that the lender may give notice of acceleration due to nonpayment.6 In the case of a note payable on demand, the statute of limitations simply starts running on the date that demand for payment is made.
With this in mind, it is imperative that Ohio commercial creditors understand whether they are holders of a promissory note, or are simply parties to a written contract. If the instrument at issue is determined to be a promissory note, the shorter six-year statute of limitations will apply.
For more information, please contact Jack W. Hinneberg, Esq. Mr. Hinneberg practices in the Commercial Collections Practice Group, with a focus on complex matters. He is a member of the Cleveland Metropolitan Bar Association and the Ohio State Bar Association.1 For causes of action that are governed by Section 2305.06 of the Ohio Revised Code and accrued prior to September 28, 2012, the period of limitations shall be eight years from the effective date of this Act or the expiration of the period of limitations in effect prior to the effective date of this Act, whichever occurs first.
2 See ORC § 1303.16(A).
3 See ORC § 1303.16(B).
5 See Buckeye Federal Savings & Loan Assoc. v. Guirlinger, 62 Ohio St.3d 312 (1991).
6 See The Bank of New York Mellon v. DePizzo, 42 N.E.3d 1218, 2015-Ohio-4026 (11th Dist., 2015).