What is the statute of limitations on a promissory note? The statute of limitations for an action upon any contract, obligation or liability founded upon an instrument in writing is four years from breach per Code of Civil Procedure section 337.
However, Commercial Code section 3118(a) provides a six-year statute of limitations for “an action to enforce the obligation of a party to pay a note payable at a definite time.” The period runs from “the due date or dates stated in the note.” “Note” is defined in Commercial Code section 3104, as an “instrument” or “negotiable instrument.” An “Instrument” means a negotiable instrument. If the instrument is a promise, it is a “note.” A “negotiable instrument” is an unconditional promise or order to pay a fixed amount of money (with or without interest or other charges) if it is: (1) payable to bearer or to order; (2) payable on demand or at a definite time; and, (3) does not state any other undertaking or instruction by the promisor to do any act in addition to the payment of money.
Which statute governs? When the choice is between two conflicting statutes, there are two choices: the newer statute or the more specific statute. Section 337 dates back to 1872. It was last amended in 1961. Section 3118(a) was first enacted in 1992. Section 3118(a) is more specific. It defines “note” precisely, Section 337 applies generally to “any contract, obligation or liability founded upon an instrument in writing.” Section 3118(a) is both newer and more specific. It is the statute of limitations which governs an action on a promissory note. That does not end the story.
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 six-year limitations period under Commercial Code 3118(a) does not begin to run against the principal sum, until the principal sum becomes due at the end of the two year period.
A wise note holder will institute an action on a note within four years of the first missed payment to guarantee maximum recovery and remove any possible bar due to the statute of limitations;. However, a holder should feel confident pursuing recovery within six-years of the last due date.
Caveat: If the note is secured by a deed of trust or mortgage containing 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 summary illustrates the difficulty of determining when the statute of limitations has run on any particular note since it will be determined by note’s exact terms and the conduct of the parties following breach. In view of this difficulty, the statute of limitations should always be pleaded as a defense to prevent waiver.