Notes must be analyzed to determine whether a four or six year statute of limitations applies
Practitioners usually state that the limitations period for bringing suit on a promissory note is four years. This view is based on Texas Civil Practice and Remedies Code § 16.004(a)(3) which provides that a person must bring suit on an action for debt not later than four years after the day the cause of action accrues. But there is more to the story. Under Texas Business & Commerce Code § 3.118, an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six years after the due date or dates stated in the note or, if a due date is accelerated, within six years after the accelerated due date. The term "note" is defined in Texas Business & Commerce Code § 3.104 using the related terms "instrument" and "negotiable instrument." An "instrument" is defined as a negotiable instrument. A "negotiable instrument" is defined as an unconditional promise or order to pay a fixed amount of money (with or without interest or other charges) if it (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.
Therefore, if the "instrument" qualifies as a note, the holder of the note arguably has six years, rather than four, within which to bring suit. So, if two apparently conflicting statutes of limitations exist, how does one determine which should apply? The Dallas Court of Appeals recently addressed this issue in Bank of Am., N.A. v. Alta Logistics, Inc., No. 05-13-01633-cv, 2015 WL 505373 (Tex. App.—Dallas Feb. 6, 2015). In that case, the creditor-bank sued Alta Logistics, Inc. for breach of contract more than five years after a promissory note matured. Alta Logistics, Inc. asserted that the lawsuit was barred by the four year statute of limitations applicable to contract claims. However, the creditor-bank asserted that a six-year statute of limitations applied because the lawsuit was an action to enforce the obligation of a party to pay a note.
In determining that the promissory note at issue in the lawsuit was not a negotiable instrument and that a four year statute of limitations applied, the Dallas Court of Appeals noted that a negotiable instrument represents a sum certain in order to provide commercial certainty in the transfer of negotiable instruments and to make negotiable instruments the functional equivalent of money. Because the promissory note at issue in the lawsuit represented a revolving line-of-credit, the borrower could prepay all or any portion of the amount due without incurring any prepayment penalty, the note stated the amount due was $125,000 "or so much as may be outstanding" and the unpaid principal balance may not have been determinable without reference to the creditor-bank's records, the amount due on the promissory note was not readily determinable. As a result, the promissory note did not contain an unconditional promise to pay a sum certain and was not the functional equivalent of money. Accordingly, the promissory note was non-negotiable and a four year statute of limitations applied.
In order to determine the statute of limitations on a note, the note should be analyzed to determine if it can be classified as a negotiable instrument and if there is any doubt as to its status, any lawsuit to collect on the note should be filed within four years of the date on which a cause of action accrues.