How Do I Avoid a Statute of Limitations Defense in a Promissory Note?

Full question:

All parties described herein are California residents and all of the following transaction occurred in California.On April 25, 2006, I lent a substantial sum of money to an individual (the 'borrower') with whom I've done business for many years. On the same date, the borrower executed a promissory note in which he agreed to repay the amount in 60 equal payments over five years at 15% interest per annum. This note was secured by a second deed of trust on real property owned by the borrower.On March 19, 2007, borrower defaulted on the payment of the aforesaid debt, and has not made any payment since that date.Due to the economic downturn, the borrower has lost all of his assets and is essentially 'judgment proof' at this time. There is a four-year statute of limitations on actions on a promissory note as described above under Section 337 of the California Code of Civil Procedure (the 'Code'). I believe the limitations period began to run on the date of default (although I have read one editorial explanation that the limitations period began on the date the note was executed). My question: Given the fact that an action to enforce the terms of the aforesaid note and recover the balance of the debt owed to me would, at this time, be futile, how best can I assure that a future action to do so does not become time-barred under the statute of limitations?The aforesaid loan was a recourse loan and, because I did not seek to foreclose on the second trust deed or otherwise seek to enforce my security interest, said loan was not transformed into a non-recourse loan under Section 580(b) of the Code. The borrower has agreed to execute another promissory note for the balance at this time.

• Category: Debts and Credit
• Subcategory: Promissory Notes
• Date: 04/07/2025
• State: California

Answer:

The best way to avoid a statute of limitations problem is to contact an attorney as soon as possible. A tolling agreement is an agreement to waive a right to claim that litigation should be dismissed due to the expiration of a statute of limitations. Its purpose is typically to allow a party additional time to assess and determine the legitimacy and viability of their claims and/or the amount of their damages without the necessity of filing an action. During this period, the parties waive any defense by way of any statute of limitations which would otherwise arise during such period.

Persons entering into a tolling agreement should verify whether it might void their liability insurance. The agreement should be worded so as not to resuscitate claims for which the limitations period has already passed and to be sure that the agreement only tolls the statute of limitations. The agreement should not contain an admission of wrongdoing, unless that is what you have agreed to.

A promissory note may be secured or unsecured. When it is secured, it means that property, called collateral, may be taken by the lender if the borrower fails to pay the loan payment. If the debtor files bankruptcy, the lender may be able to recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrowers property after it is divided among all creditors. Collateral may be many different types of property, such as shares of stock of a company, inventory, accounts receivable, etc.

The parties to the loan must sign it and the notary must witness the signatures. The contract may contain a choice of law clause as to where it will be litigated if a dispute arises. Choice of law refers to what jurisdiction's law is to be applied when there is a dispute in a transaction. The loan document may then be recorded in the county recorder's office where the property is located.

A promissory note may provide for payments to be made in installments or in a lump sum. The terms may provide for a series of smaller payments at the beginning of the loan period and a larger balloon payment at the end of the loan period. The option for a confessed judgment agreement, also called a cognovit note, may also be included. A confessed judgment agreement requires the debtor not to claim defenses and agree to have a judgment entered against him if he fails to pay and the matter is taken to court.