Statute of Limitations Can be Different for Borrowers and GuarantorsJune 9, 2017
A statute of limitations establishes a time period during which a lawsuit can be filed. The time period begins when the cause of action on an account accrues. In a typical debt case, when a borrower defaults under the terms of a note or credit agreement, the cause of action accrues and the time to sue begins.
Limitation periods range from three to 15 years, depending on the type of debt and the state in which the cause of action occurred. If a lawsuit is later filed after the expiration of the period, the borrower can raise the issue as a defense and most likely have the lawsuit dismissed.
A partial payment of a debt after default will restart the statute of limitations from the date of the payment.1 A payment is a voluntary acknowledgement of the existence of the debt, which implies a new promise to pay.2 Accordingly, many lenders use the date of last payment as the starting point for calculating the expiration of the statute of limitations.
However, when a guaranty exists, lenders should be cautious of using the last payment date as shorthand for accrual of the statute of limitations. Special attention is required because a post-default payment made by the principal obligor will not renew the statute of limitations for the guarantor.3 Therefore, the accrual date for the guarantor can be earlier than the accrual date for the principal. But if the payment is made by the principal at the direction, or with the agreement, of a guarantor, then it will renew the statute of limitations for the guarantor as well.4 A review of the account history may be necessary to determine the true accrual date for the guarantor.
The statute of limitations should also be kept in mind when renewing or extending a due date, either before or after default. Where the lender holds a continuing guaranty covering renewals and extensions, courts have held that an agreement between the lender and principal obligor to renew the loan also extends the statute of limitations for a guarantor.5 By contrast, unilateral actions by the creditor to extend the due date without a negotiated agreement (such as accepting an interest-only payment when the principal is due), will not extend the statute of limitation for a guarantor who neither agreed to the extension nor made a payment.6
Simply referring to the last payment date can be a convenient way to track the statute of limitations for your borrowers. But where guarantors are involved, this measure can be misleading.
Statute of limitations law varies from state to state. This article reflects the common law or specific state authorities cites and is provided for general informational purposes. Contact an attorney who specializes in creditors' rights to conduct a further review of your specific case to determine the statute of limitations for the guarantor.
Thomas R. Kendall is an attorney in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA who focuses his practice in commercial and consumer litigation.
1 See 51 Am Jur 2d Limitation of Actions §316; Ohio Rev. Code § 2305.08.
2 Am Jur 2d Limitation of Actions §316; Kerper v. Wood, 48 Ohio St. 613, 620, 29 N.E. 501 (Ohio 1891).
3 Restatement 3d of Suretyship and Guaranty, § 65; Frost v. Johnson, 140 Ohio St. 315, 317, 43 N.E.2d 277 (Ohio 1942); 51 Am Jur 2d Limitation of Actions § 341.
4 51 Am Jur 2d Limitation of Actions § 341; Bender v. Vaughan, 106 Ohio App. 136, 143, 153 N.E.2d 778 (Ohio App. 1958).
5 United States v. Rollinson, 866 F.2d 1463, 1468-70 (D.C. Cir. 1989)(citing common law, secondary sources, and state case law).
6 Id. (citing Wellington Nat’l Bank v. Thomson, 9 Kan. App. 667, 59 P. 178 (1899).
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