In a case decided at the end of August, the Massachusetts Court of Appeals had the opportunity to address when the statute of limitations expires with respect to the enforcement of a guaranty. In JB Mortgage Co., LLC v. Ring et al., 90 Mass.App.Ct. 93 (2016), the Court held that the terms of the guaranty control when the statute of limitations begins to run. Where the instrument guarantees the prompt payment and performance of obligations under a promissory note and does not require the lender to make demand or to resort to any security (such as foreclosure upon a mortgage) before enforcing the guaranty, the cause of action against the guarantor accrues when a default occurs under the promissory note.
In this case, a bank made a loan to a borrower in 1988, which was later amended, among other things, to extend the maturity date until 1994. The loan was guaranteed by two individuals, including Mr. Ring. The guaranty was an unconditional guaranty of payment and performance. In 1991, the bank went into liquidation and the FDIC became the liquidating agent. The FDIC foreclosed on the mortgage securing the loan in May of 1994, leaving a substantial deficiency under the loan. The FDIC subsequently assigned the loan and it eventually ended up in the hands of JB Mortgage Co., LLC. On March 4, 2014, JB Mortgage sued to enforce the guaranty against Mr. Ring.
Because the Court determined that the default under the underlying loan occurred on or about June 21, 1993, more than 20 years prior to the date that JB Mortgage commenced its action under the guaranty, the Court held that the 20-year statute of limitations applicable to this guaranty had expired before the action to enforce the guaranty was commenced. Although the foreclosure did not occur until May of 1994 (less than 20 years prior to the date that JB Mortgage commenced its action under the guaranty), the cause of action accrued upon the occurrence of the default and not upon the determination of the deficiency by virtue of the foreclosure. The Court therefore dismissed the action against Mr. Ring.
This case highlights the importance of carefully drafting the terms of a guaranty and performing appropriate due diligence when acquiring a lender’s interest in a loan. In some circumstances, a lender may prefer for the liabilities under a guaranty to accrue automatically and without action by the lender upon a borrower default. In that situation, prompt enforcement of the guaranty will avoid statute of limitation concerns and help establish the amount and nature of the claim in advance of any subsequent guarantor bankruptcy. If, however, the lender agrees with the guarantor that the liabilities under the guaranty will not accrue until after it provides written notice or exercises certain remedies, the lender can control (and thus delay to some extent) the commencement of the statute of limitations for enforcement of the guaranty.