Ten-Year Statute of Limitations Applies to Demand Promissory Note: Three-Year ‘SOL’ For Negotiable Instruments Does Not

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Advanced Credit, Inc. v. Linares, 2012 IL App (1st) 121574-U is a fairly recent case illustration of what happens when two statutes of limitation with widely varying time lengths potentially govern the same case.

The defendant in Linares signed a promissory note in 2002 that was payable to the defendant “upon demand.”

The plaintiff payee of the note made a demand for payment in 2004 which the defendant ignored.  Plaintiff sued six years later (in 2010) to recover on the note and sought interest, fees and costs.

Defendant moved to dismiss on the basis that the three-year limitations period  governing negotiable instruments time-barred the complaint. (See 810 ILCS 5/3-104, 3-118.)  The plaintiff argued that the ten-year time to sue on demand promissory notes (735 ILCS 5/13-206) applied and so the suit was timely.  The trial court agreed with the defendant and dismissed the suit.  The plaintiff payee appealed.

Held: Reversed.  The ten-year statute, not the three-year one, applies to the demand promissory note.

Rules/Reasoning:

A note that is “payable on demand” is a demand note and is due and payable immediately upon execution.  810 ILCS 5/3-108.  A claim against the maker of a demand note accrues on the date the note is issued.

Code Section 13-206 provides for a ten-year limitations period for promissory notes and for demand notes.  Under this statute, a demand note plaintiff is barred if the note maker pays no note interest or principal for a period of 10 continuous years and no demand is made during that time.

Uniform Commercial Code Section 3-118(g) applies a 3-year limitations period for actions based on, among other things, negotiable instruments (example: a check).

Section 3-104(a) of the UCC defines a negotiable instrument as

(i) an unconditional promise or order to pay a fixed amount of money;

(ii) that’s  payable to order or to bearer at the time it (the instrument) is issued or first comes into possession of a holder;

(iii) is payable on demand or at a definite time; and

(iv) doesn’t state any other undertakings or instructions other than the payment of money.

Where two limitations period govern the same subject matter, the more specific one applies.  Here, since Code Section 13-206 specifically references “demand promissory notes” and UCC Section 3-104 doesn’t, the 10-year statute of limitations (“SOL”) governs.

The Note accrual date was 2004 when the plaintiff made demand for payment.  Since the plaintiff sued in 2010 – some six years later – it was within the 10-year limitations period for demand promissory notes under Section 13-206.

Afterwords:

A pretty straightforward application of conflicting limitations period rules.  The ten-year period for demand notes more specifically applied over the UCC’s three-year catchall provision.

When defending a promissory note case, I look for earmarks of negotiability (payable to order, at specific time, for specific amount) so I can argue the shorter three-year limitations period (of 3-118) applies.  When representing the note plaintiff/payee, I try to show the 10-year SOL applies and particularly look for any reference to “on demand” or “upon demand” in the text of the note.  This language will signal that a demand note is involved and mean the longer SOL governs.