Waiver of limitations was not enforceable

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A lawyer who loaned money to a client lost his chance to collect the debt in bankruptcy when a federal judge refused to enforce her signed waiver of a statute of limitations defense to the claim.

In reversing the bankruptcy court’s allowance of the lawyer’s claim, an Alexandria U.S. District Court used a narrower definition of “fraud” under Virginia Code § 8.01-232(A), the Virginia statute that defines whether and when to enforce agreements not to assert the statute of limitations.

In 2002, lawyer P.H. Harrington Jr. loaned $235,000 to his then-friend and client, Mary D. Slaey. Slaey executed a promissory note requiring payment of 8 percent annual interest on the unpaid balance, which was due one month later.

Harrington alleged Slaey failed to pay the note, but the two remained in contact “apparently both for legal and personal reasons,” according to Judge T.S. Ellis III’s opinion in Slaey v. Harrington (VLW 015-3-446).

As a lawyer, Harrington was aware of the six-year statute of limitations under Va. Code § 8.01-232(A), Ellis wrote.

Three days before expiration of the six-year period, Harrington drafted an agreement for Slaey’s approval and signature. The agreement said Slaey would not raise a statute of limitations defense “in any legal proceeding that relates to funds borrowed” by Slaey from Harrington between 2002 and 2008. Slaey signed the waiver and Harrington also signed it as a witness.

In 2013, Slaey filed a Chapter 11 bankruptcy petition, and Harrington filed a creditor’s claim for $523,706.38, to include principal and interest on the 2002 loan. The bankruptcy court allowed the claim, holding that failure to enforce the 2008 waiver agreement would “operate as a fraud” on Harrington under the terms of the Virginia waiver statute.

Slaey appealed the decision to enforce the waiver, and the district court reversed the decision for the lawyer creditor.

Fraud clause

Virginia’s waiver statute can be broken down into three parts, said Ellis.

Under the first part of the statute, unwritten promises not to plead a statute of limitations defense generally are not enforceable. Under the second part, written promises generally are valid, if made to avoid litigation pending settlement and if they are not made at the same time as any other contract and not made for an additional term longer than the applicable limitations period.

Slaey’s waiver agreement was not covered by the first two parts of the statute, leading the court to the third part. Under a limited exception, a promisor cannot plead the statute whenever the failure to enforce a promise not to plead the statute “would operate as a fraud on the promisee.”

Ellis found no guidance in the statute and a dearth of case law on what is meant by “operate as a fraud.” In 1938, the 4th U.S. Circuit Court of Appeals interpreted the Virginia waiver statute broadly to mean “an act of bad faith.”

In 1940, however, the Virginia Supreme Court said the statute meant a promise made with a present intent not to perform.

The gist of the fraud, according to the Virginia high court, is not the breach of the agreement to perform, but the fraudulent intent present in the promisor’s mind at the time the promise is made.

In the bankruptcy case, Ellis said, there was simply no evidence that Slaey made any misrepresentation of present fact when she signed the 2008 waiver agreement. Harrington testified that he gave her the agreement, she signed it and he thanked her and told her “now we can get on with our lives.”

Slaey’s “naked, unfulfilled promise” did not satisfy the limited fraud exception of Code § 8.01-232(A), the district court said.