EDVA Provides Road Map to Enforce a Contractual Waiver of the Statute of Limitations Defense

limits of waivers
Business attorneys frequently agonize over the statute of limitations. After a debt has gone unpaid, attorneys often seek an alternative to filing suit to provide more time to collect the debt before the running of the statute of limitations. Many attorneys demand a debtor execute a waiver of a statute of limitations defense in return for refraining from filing suit. Such waivers, however, contain hidden landmines due to a little-known Virginia statute. The Eastern District of Virginia recently relied upon that statute to allow a debtor to escape repayment of a $235,000 loan despite signing such a waiver. This case is a warning to corporate practitioners and creditors’ counsel, but it also provides a road map to successfully navigate this statutory minefield. In Slaey v. Harrington, 1:14-cv-1210, 2015 WL 5139317 (E.D. Va. Sept. 1, 2015), Judge T.S. Ellis reversed the EDVA bankruptcy court which initially ruled in favor of the creditor. The facts of the case are straight-forward. Harrington (an attorney) loaned $235,000 to Slaey (a client of Harrington’s) in 2002 in return for a signed promissory note requiring repayment in 30 days. Slaey, however, failed to repay the loan. Approximately three days prior to the expiration of Virginia’s statute of limitations, Harrington had Slaey sign a written agreement that purported to waive any defense of the statute of limitations in a subsequent lawsuit. Based upon this new agreement, Harrington did not file suit until five years later during Slaey’s Chapter 11 bankruptcy proceeding. Slaey opposed, arguing that Harrington’s claim was time-barred under Virginia law and that the waiver signed five years earlier was unenforceable under Section 8.01-232(A) of the Virginia Code. Normally, most defenses to a breach of contract action are waivable by a defendant, and this general rule has led many attorneys to mistakenly assume that they can easily contract around a looming statute of limitations defense. But little-known Va. Code § 8.01-232(A) restricts the enforceability of such waivers, and unfortunately, the statute is not a model of clarity: Whenever the failure to enforce a promise, written or unwritten, not to plead the statute of limitations would operate as a fraud on the promisee, the promisor shall be estopped to plead the statute. In all other cases, an unwritten promise not to plead the statute shall be void, and a written promise not to plead the statute shall be valid when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term no longer than the applicable limitations period. The bankruptcy court initially agreed with Harrington’s argument that to ignore Slaey’s waiver would operate as a “fraud” on Harrington, and thus, the first sentence of the statute should apply. In doing so, the bankruptcy court relied upon a 1938 Fourth Circuit case that broadly interpreted the term “fraud” in this context. In Tucker v. Owen, 94 F.2d 49 (4th Cir. 1938), the Fourth Circuit focused on the apparent purpose of the statue to protect creditors and noted that the “[Virginia] Legislature intended to stigmatize as fraudulent the failure of a debtor to keep a promise of this sort upon which his creditor has relied, and to estop the debtor from pleading the defense when at his request the suit has been delayed.” Based upon this, the bankruptcy court sided with Harrington and enforced the waiver of the statute of limitations defense. After Slaey appealed to the U.S. District Court, Judge Ellis reversed. The judge noted that two years after the Tucker case, the Supreme Court of Virginia handed down a contrary ruling in Soble v. Herman, 9 S.E.2d 459 (Va. 1940). In that case, the Supreme Court rejected the Fourth Circuit’s reasoning and held that the “fraud” exception must be interpreted narrowly. Looking to the elements of common law fraud, the Virginia high court stated that the exception only applied if the debtor misrepresented a present fact at the time of execution of the waiver. Judge Ellis noted that the bankruptcy court should have followed the Virginia Supreme Court’s Soble decision and not the Fourth Circuit’s Tucker opinion since the question turned on interpretation of a Virginia statute. Judge Ellis found no evidence in the record of Slaey’s intentions at the time she executed the waiver, let alone “clear and convincing evidence” that she never intended to comply with the agreement. This was fatal to Harrington’s claim. According to Judge Ellis, “[s]imply put, therefore, the circumstances presented here involve merely an unfulfilled written promise on Slaey’s part not to assert a statute of limitations defense in a future suit brought by Harrington. Such a naked, unfulfilled promise is precisely what the Soble court made clear would not satisfy the limited fraud exception set forth in Va. Code § 8.01-232(A).” While this case stands as a warning to corporate practitioners, the most useful part of this opinion is the road map through section 8.01-232(A) provided by Judge Ellis. After noting that unwritten waivers are flatly barred under the statute, the judge turned to written waivers: [A] written promise not to plead the statute is generally valid and enforceable only if three specified requirements are met, namely, if the written promise (i) is made to avoid or defer litigation pending settlement of a case, (ii) is not made contemporaneously with any other contract, and (iii) is made for an additional term not longer than the applicable limitations period. The only exception to this rule, according to Judge Ellis, is the “limited” fraud exception. To trigger this exception, a creditor must meet the heavy burden of showing the debtor misrepresented a present fact at the time of the waiver (as opposed to merely failing to fulfill a future promise such as payment). As a practical matter, most creditors will not successfully meet this burden. Thus, Judge Ellis’s opinion essentially means that creditors must strictly follow the road map to enforce a limited, written waiver of a statute of limitations defense. For example, such a waiver must come after a promissory note has been signed (and cannot be included in the promissory note itself), must be contained in a separate document, and can only extend the time to file suit to a date that is twice the amount of time under the applicable statute of limitations (meaning that if the applicable statute of limitations is three years, the waiver can only extend the time to file suit another three years). The practical effect is that general, open-ended waivers of the defense are unenforceable under the statute. Judge Ellis’s ruling makes sense as a matter of statutory interpretation. To otherwise apply a broad reading of the “fraud” exception would allow the exception to swallow the rest of the statute, encouraging a creditor to draft an open-ended waiver and then claim that the failure of a debtor to pay the legitimate obligations operated as a fraud on the creditor. The Fourth Circuit, however, may have the final say as Harrington has already filed a Notice of Appeal with the district court. Assuming that Harrington follows through on the appeal, a decision from the appellate court can be expected in the fall or winter of 2016. But regardless of the outcome, this case stands as a warning and a road map for Virginia corporate practitioners and creditors’ counsel.