Massachusetts court weighs in on guaranty's statute of limitations

is article looks at a recent case concerning the statute of limitations for enforcing a guaranty.

The Massachusetts Court of Appeals recently ruled on a case that clarifies when the clock on the statute of limitations begins to run for the enforcement of a loan guaranty. The court ruled in the case of JB Mortgage Co., LLC v. Ring et al. that the statute of limitations begins to run according to the terms set out in the guaranty. In this particular case, the court ruled that the 20-year statute of limitations on a guaranty begins to run upon the occurrence of the default on the underlying note and not later when the loan securing that loan was foreclosed upon. The case has important implications for businesses who need clarity as to time restrictions on commencing suits on a guaranty.

The background

The case begins back in 1988 when a bank issued a loan to a borrower. That loan was later amended, which changed the maturity date to 1994. An unconditional guaranty of payment and performance was made on the loan by two individuals, one of whom was Mr. Ring. In 1991, before the loan's maturity date of 1994, the bank was liquidated with the FDIC becoming the liquidating agent. After the FDIC foreclosed on the mortgage that was securing the loan in 1994, it then assigned the loan to JB Mortgage, which filed a lawsuit in 2014 to enforce the guaranty against Mr. Ring.

The central issue was whether JB Mortgage had properly filed the lawsuit before the statute of limitations on the enforcement of the guaranty had run out. While the default on the underlying loan had occurred in 1993, the foreclosure was in 1994. Given that there was a 20-year statute of limitations on the guaranty, JB Mortgage would only be able to enforce the terms of the guaranty if the court found that the statute of limitations began to run in 1994 rather than in 1993.

Statute of limitations

Unfortunately for JB Mortgage, the court ruled that the clock on the statute of limitations began to run in 1993 when the default on the loan occurred. The decision provides clarity to lenders and other businesses about the term period of enforceability on a guaranty. Furthermore, the case should serve as a reminder for businesses to be extremely careful about the terms of a loan and/or guaranty agreement keeping in mind the language of the instrument may restrict the ability to collect the moneys owed.

Lesson for Lenders and Borrowers

Of course, controversies surrounding the statute of limitations of a loan guaranty can usually be avoided by simply taking prompt action to enforce such guaranties. An experienced law firm, such as Aceto Bonner & Prager, that has a history of representing commercial and corporate clients can help businesses with loan guaranty concerns and structure the language of the instrument in order any ambiguity as to the period of enforceability.