Which Statute of Limitations Applies in a Sale Paid by Promissory Note?

It is fairly common to borrow money to buy large goods. Sometimes, the seller lends the money itself, and takes a promissory note. Unfortunately, the laws for sales, on the one hand, and notes and checks, on the other, have different statutes of limitations. If the seller decides to wait before trying to collect, sometimes the question of which limitations period arises. A recent case from Washington held that the seller has a choice of which document to use as the basis of its claim, and, if the note is properly written, each statute applies to the document in question.

In 2006 and 2007, a breeder sold two alpacas to a buyer for about $40,000 and took payment by two promissory notes, keeping a security interest in the animals as collateral. Later in 2007, the buyer failed to pay. The breeder waited until 2012 to sue, asserting that the buyer owed it the money based on the notes. (There is no explanation why the breeder did not try to repossess the alpacas.)

The statute of limitations on sales contracts in Washington is four years. For notes and checks, it is six years. (The stautes are taken from the Uniform Commercial Code, so most states, including Oregon, have the same provisions.) The buyer argued that only the four-year sales statute applied.

The Washington Court of Appeals ruled for the breeder. The first question was whether the notes were, in fact, promissory notes or some other document. For the purposes of the UCC, promissory notes must include an unconditional promise to pay a specific sum of money to the order of a payee. Although the notes referenced the sales contracts in several places, including a promise to pay “pursuant to” the contacts, the court decided that none of the references placed any conditions on the buyer’s promise to pay. Had the notes said they were “subject to” the contracts, the court suggested, its ruling might have been different. Similarly, references to the sales contracts to identify the alpacas as collateral and the procedures for giving any necessary notices did not affect the promises to pay.

Because the notes were notes, the court then had to decide which statute of limitations applied. The court followed the reasoning of a 1978 case from South Dakota in ruling the six year statute for notes and checks applied even though the notes were given to finance a sale. The reasoning was simple: a promissory note is a different promise than an agreement to buy goods. This makes sense, as notes are used for many purposes other than buying goods.

The case was sent back to the trial court; because the notes were still held by the breeder, the buyer still had the right to raise other defenses, and because the trial court had ruled on a motion to dismiss at the very beginning of the case, it is possible that other defenses might be raised.

Oregon has not yet ruled on this issue, but it probably would rule the same way.

Sellers who want to finance sales would be wise to have their forms reviewed in advance to confirm that the forms do what they want.

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