What is the statute of limitations for an action on a promissory note? The statute of limitations for an action upon any contract, obligation or liability founded upon an instrument in writing, i.e., a promissory note, is four years from breach. Code of Civil Procedure section 337.
When an instrument is payable in installments, the cause of action on each installment accrues on the day following the date the installment is due. Consequently, where money is payable in installments, the statute of limitations begins to run against the cause of action for the recovery of an unpaid installment at the time it is payable. Moreover, when a note contains an acceleration clause, the statute does not begin to run on installments not yet due until the creditor, by some affirmative act, manifests his election to declare the entire sum due.
Therefore, a promissory note which calls for monthly interest payments only for two years and the balance, including the unpaid principal sum, at the expiration of two years, is not due until the principal sum is due at the end of the two year period. Assuming the holder did not declare the principal amount due earlier than the end of the two-year period under the acceleration clause, the four-year limitations period does not begin to run against the principal sum, until the principal sum becomes due at the end of the two year period. For application of this rule, see this non-published case.
Caveat: 1) A note holder is always wise to institute an action on the note within four years of the first missed payment to guarantee maximum recovery; 2) If the action had been upon an obligation secured by a deed of trust or mortgage which contained a power of sale, following the exercise of the power of sale via judicial foreclosure, the limitations period is shortened to three months after the date of sale.
This brief summary illustrates the difficulty of determining when the statute of limitations has run on any particular note as it will be determined not only by the exact terms of the note but by the conduct of the parties. A thorough analysis of the terms of the note and of the parties’ conduct following breach is required. In view of this difficulty in any suit based upon a note the statute of limitations should always be pled as a defense.