Failure to Include Acceleration Clause Costly
On cross-motions for partial summary judgment, the Delaware Court of Chancery, in Knutkowski v. Cross, C.A. No. 4889-VCG (Oct. 13, 2014), found that certain payments due under a promissory note were barred by the applicable statute of limitations where the note called for repayment of the loan in installments, but did not include an acceleration clause. The plaintiff asserted various equitable and legal claims, and, with respect to the legal claim for recovery under the note, the court found that 6 Del. C. Section 3-118(a) barred the recovery of any payments that were due more than six years before the plaintiff initiated the action. As the note did not include an acceleration clause, the plaintiff was not in a position to accelerate the amounts due and seek a recovery of the full amount of the note.
The note at issue in Knutkowski was in the amount of $85,000 and called for monthly installment payments in the amount of $900 over a 10-year period, with the first payment due Jan. 1, 1998. The note, however, did not provide for acceleration of the entire amount due in the event the debtor defaulted on one or more of the payment obligations. The court assumed, for purposes of the pending motions, that no payments had been made under the note. The plaintiff did not initiate the present action to enforce the note until Sept. 11, 2009.
On its motion for partial summary judgment, the defendant argued that the plaintiff's claim was barred in its entirety under the six-year statute of limitations applicable to promissory notes. Under 6 Del. C. Section 3-118(a), "an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced 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." The defendant argued that the plaintiff had six years from the date of the defendant's first failure to make an installment payment to file an action. The defendant also argued that the plaintiff's claim was barred by laches.
In contrast, the plaintiff argued that the parties agreed to a continuous obligation that, in the event of a breach, allowed for a recovery of the full amount of the note. The plaintiff argued in the alternative that, at a minimum, the question of whether the parties intended for the note to represent a continuous or severable obligation was a fact issue that could not be decided on summary judgment. The plaintiff relied on case law finding a factual dispute where the contracts at issue involved various forms of ongoing obligations.
In deciding the parties' cross-motions, the court initially found that, in addition to considering the defense of laches, it was appropriate to apply the statute of limitations. In so finding, the court relied on Reid v. Spazio, 970 A.2d 176, 183 (Del. 2009), and Haas v. Sinaloa Exploration & Development, 152 A. 216, 217-18 (Del. Ch. 1930), for the proposition that, "while the 'limitations of actions applicable in a court of law are not controlling in equity,' this court 'will apply the terms of the statute in bar of a purely legal right which happens to be drawn into its cognizance where, had the action been at law, it would have been barred there.'" The court further noted, "Even in equitable actions, this court 'accords great weight to the analogous statute of limitations. In the absence of unusual or extraordinary circumstances, the analogous statute of limitations creates a presumptive time period during which the claim must be filed or else be barred as stale,'" citing Envo v. Walters, (Del. Ch. Dec. 30, 2009) and (Del. Mar. 28, 2013); see also Whittington v. Dragon Group LLC, 991 A.2d 1, 9 (Del. 2009) ("where the plaintiff seeks equitable relief, however, the Court of Chancery applies the statute of limitations by analogy").
In applying the statute of limitations, the court relied on the express language of 6 Del. C. Section 3-118(a), which requires actions to enforce a note to be filed "within six years after the due date or dates stated in the note." Based on this statutory language, the court found that an action on payment obligations due before Sept. 11, 2003—six years before the action was filed—was barred. In reaching its decision, the court distinguished, on two grounds, the case law cited by the plaintiff in support of the argument that the note represented a continuous obligation. The court found that such case law involved agreements either on which the accrual date of a breach could not be readily determined or where damages were not ascertainable as of some intermediate date. Neither circumstance applied to the note, as the dates on which the payments were due were "defined precisely in the note, as were the amounts to be repaid." The note's specificity in this regard also precluded the defendant's argument that the entire claim was time-barred due to the plaintiff's failure to file after the first breach. Under the express language of the statute, the plaintiff was entitled to seek recovery within six years of amounts due on the "dates" stated in the note.
The primary lesson to be learned from this decision is that a claim under a promissory note that does not allow for acceleration of the amount due is subject to reduction under 6 Del. C. Section 3-118(a). Also, this decision reaffirms the Court of Chancery's willingness to apply the applicable statute of limitations to claims that are legal in nature. As such, under these circumstances, a defendant may rely on the applicable statute of limitations in addition to asserting the defense of laches.