When Does a 12-Year Statute of Limitations Apply to a Loan Document in Maryland?
BY MICHAEL J. LICHTENSTEIN, ESQ. AND REBEKAH PARADIS, ESQ.
THE MARYLAND CODE PROVIDES THAT CIVIL ACTIONS, including actions based on written contracts or negotiable instruments, have a three-year statute of limitations. However, under special circumstances, the statute can be extended to 12 years, which can have significant consequences that lenders and borrowers might consider when drafting loan documents. This article explores situations in which the longer statute of limitations applies to promissory notes and other loan documents, and what factors courts have considered in determining which statute of limitations applies.
THREE-YEAR STATUTE OF LIMITATIONS
The Maryland Code states generally that:
A civil action shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.1
In Evans v. Benefit Fin. I, Inc., 2 the court noted that in Maryland, three years is the default statute of limitations for civil actions unless another provision applies. The plaintiff sued her mortgage lender, asserting breach of contract and fraudulent misrepresentation3 and the lender asserted that a three-year statute of limitations applied.4
The plaintiff attached to her complaint the loan agreement, which, the court noted, did “not appear to contain a seal.”5 However, the deed of trust was notarized and sealed in multiple places, thereby potentially qualifying as a specialty contract under Maryland law (12-year statute of limitations).6
The Evans court did not rule on which statute of limitations applied but noted that, based on the allegations in the complaint, a 12-year statute of limitations might apply.7
In Cain v. Midland Funding, LLC, the Supreme Court of Maryland held that, as previously made clear, the default statute of limitations for civil actions at law in Maryland is three years, unless another provision of the Code expressly provides for an alternative limitations period. The court rejected the plaintiff’s assertion that a 12-year statute of limitations applied, alleging that this was a “specialty action” based upon a judgment and held that the default three-year statute of limitations applied.8
TWELVE-YEAR STATUTE OF LIMITATIONS
The statute provides that:
(a) An action on one of the following specialties shall be filed within 12 years after the cause of action accrues, or within 12 years from the date of death of the last to die of the principal debtor or creditor, whichever is sooner: (1) Promissory note or other instrument under seal; (2) Bond except a public officer’s bond; (3) Judgment; (4) Recognizance; (5) Contract under seal; or (6) Any other specialty.9
I. Defining a “Specialty” or an “Other Specialty” under Cts. & Jud. Proc. 5-102
While a “specialty” is not defined by the Maryland Code, the U.S. District Court of the District of Maryland has stated that a specialty is “a well-known term of the common law which Maryland and elsewhere by judicial decision denotes a legal instrument under seal.”10 In Master Fin., Inc. v. Crowder, the Supreme Court of Maryland identified a “workable general principle for determining when a statutory action falls within Cts. & Jud. Proc. § 5-102(a)(6).”11
An action will constitute an “other specialty” if:
(1) the duty, obligation, prohibition, or right sought to be enforced is created or imposed solely by the statute, or a related statute, and does not otherwise exist as a matter of common law; (2) the remedy pursued in the action is authorized solely by the statute, or a
1 Md. Code, Cts & Jud. Proc. Section 5-101.
2 2015 LEXIS 15032 *7 (D. Md. Feb. 9, 2015).
3 Id. at *5
4 Id. at *5-6.
5 Id. at *8.
6 Id. at *8-9.
7 Id. at *9.
8 Id. at 785. See also Rouse-Teachers Props. v. Maryland Cas. Co., 358 Md. 575, 750 A.2d 1281, 1282 (2000) (if corporate seal is impressed on agreement it will remain simple contract unless either body of contract itself indicates that parties intended to establish agreement under seal, or sufficient extrinsic evidence, in nature of ‘how and when and under what circumstances corporate seal was affixed,’ establishes parties’ desire to create a specialty)
9 Md. Code, Cts & Jud. Proc. Section 5-102(a)(5).
10 Columbia Ass’n v. Poteet, 199 Md. App. 537, 549, 23 A.3d 308, 315 (2011) (quoting General Petroleum Corp. v. Seaboard Terminals Corp., 19 F.Supp. 882, 883-84 (D. Md. 1937)).
11 Master Fin., Inc. v. Crowder, 409 Md. 51, 70, 972 A.2d 864 (2009).
related statute, and does not otherwise exist under the common law; and (3) if the action is one for civil damages or recompense in the nature of civil damages, those damages are liquidated, fixed, or by applying clear statutory criteria, are readily ascertainable.12
II. To Receive the Benefit of the Twelve-Year Statute of Limitations, the Cause of Action Must be “On” the Specialty
To determine whether a 12-year statute of limitations applies, there are two questions to consider: (i) is it a specialty contract, and (ii) is the cause of action “on” the specialty contract, both of which must be answered in the affirmative.13 In Evans, the court concluded that the loan agreement was not under seal, but, because the deed of trust was under seal, that instrument might qualify as a specialty contract.14 The court did not need to determine which statute of limitations applied because it dismissed all claims for failure to state a claim upon which relief could be granted.15
In Wellington Co. Profit Sharing Plan & Tr. v. Shakiba, the Maryland Court of Special Appeals determined whether a suit a lender filed against a borrower to recover on a loan was time-barred where such payment obligation was evidenced by a deed of trust executed under seal and a promissory note that was not executed under seal.16 In the lower court, the defendant argued
12 Id.
13 Evans v. Benefit Fin., Inc., 2015 LEXIS 15032 at *8.
14 Id.
To determine whether a 12-year statute of limitations applies, there are two questions to consider: (i) is it a specialty contract, and (ii) is the cause of action “on” the specialty contract, both of which must be answered in the affirmative.13
that because recovery of payment was an action on the promissory note, and the note was not executed under seal, the three-year statute of limitations applied.17 The plaintiff argued that because the action was brought on both the note and the deed of trust, and both instruments were specialties, the 12-year statute of limitations applied.18 The trial court agreed with the plaintiff, finding that the action was brought on the note and the threeyear statute of limitations applied.19 However, in the Maryland Court of Special Appeals, the appellant argued that when a deed of trust contains a covenant to pay, an action for recovery of debt may be brought specifically on the deed of trust.20 The appellee countered that a deed of trust is merely a security instrument, and not an independent contract on which a lender may sue.21 Thus, the appellee argued that because the action was not “on” the deed of trust, the lender could not benefit from the 12-year statute of limitations.22 The Maryland Court of Appeals determined that a note and deed of trust are “separate, enforceable contracts” and the lender “was entitled to seek repayment under” the deed of trust because the deed of trust contained a covenant to pay.23
III. For an Individual, the Inclusion of the Word “Seal” is Sufficient to Make an Instrument Under Seal. However, for a Corporation, More is Required.
In Pac. Mortg. & Inv. Grp. v. Horn,24, the appellant argued that the contract was not under seal because the word “seal” was pre-printed on the contract. The Maryland Court of Special Appeals disagreed, holding that “the inclusion of the word ‘seal’ in a pre-printed form executed by an individual is sufficient to
15 Id. at *18. See also Scher v. Altomare, 278 Md. 440, 365 A.2d 41 (1976) (reversing lower court and holding that twelve-year statute of limitations period applied).
16 180 Md. App. 576, 952 A.2d 328 (2008).
17 Id. at 586.
18 Id.
19 Id. at 586-87.
20 Id. at 588-89.
21 Id. at 589-90.
22 Id. at 590-91.
23 Id. at 592-600.
24 100 Md. App. 311, 641 A.2d 913 (1994).
Maryland law “requires more than the mere affixing of the corporate seal to transfer a would-be simple contract into one under seal.”31
make the instrument one under seal.”25 The court noted that the fact that one party placed the word ‘seal’ on the instrument did not make it any less the seal of the other party, whose signature appeared next to the word ‘seal.’26
The court did indicate that if there was evidence indicating that the party placing their signature next to a seal did not intend for the instrument to be under seal, then the instrument would not be under seal.” 27 However, as there was no evidence to provide that the appellee did not intend that the instrument be under seal, the court held that the 12-year statute of limitations applies.28
In Gildenhorn v. Columbia Real Estate Title Ins. Co., the Supreme Court of Maryland discussed the historical significance of a corporate seal on a contract in determining that the seal alone is insufficient to transform a contract into a specialty.29 The court stated,
In the early law it was held that a corporation could not contract except under its corporate seal . . . Today, in the absence of charter or statute to the contrary, a corporation may bind itself by a writing not under seal to the same extent as an individual.30
Maryland law “requires more than the mere affixing of the corporate seal to transfer a would-be simple contract into one under seal.”31 Rather, “if a corporate seal is impressed on an agreement it will remain a simple contract unless either the body of the contract itself indicates that the parties intended to establish an agreement under seal, or sufficient extrinsic evidence... establishes that the parties desired to create a specialty.”32 The court held that the addition of the following testimonium clause, along with the printed name of the corporation, and the president’s and secretary’s facsimile signatures with the corporate seal printed over the signatures, was sufficient to indicate the parties’ intent that the contract be under seal:
IN WITNESS WHEREOF, Columbia Real Estate Title Insurance Company has caused its corporate name and seal to be hereunto affixed by its duly authorized officers.33
25 Id. at 322 (quoting Warfield v. Baltimore & Electric Co., 307 Md. 142, 143).
26 Id.
27 Id. (internal citations omitted).
28 Id.
29 Gildenhorn v. Columbia Real Estate Title Ins. Co., 271 Md. 387, 317 A.2d 868 (1974).
30 Id. at 398 (internal citations omitted).
31 Federalsburg v. Allied Contractors, Inc., 275 Md. 151, 155, 338 A.2d 275, 279 (1975).
32 Id. at 155-56.
33 Gildenhorn, 271 Md. at 390.
34 199 Md. App. 537, 551-52, 23 A.3d 308 (2011).
35 Id. at 552.
Similarly, in Columbia Ass’n v. Poteet, the Maryland Court of Special Appeals confirmed while the “mere affixation” of a corporate seal did not necessarily make the contract at issue a specialty, a recital “directly above the signatories’ names, stating ‘IN WITNESS WHEREOF the parties hereto have set their hands and respective seals as of the day and year first above written’ is conclusive evidence of an intent to create a sealed instrument.”34 Thus for a corporation, testimonium clauses, or “formal recitals such as ‘signed and sealed’ and ‘witness my hand and seal’ in the body of an instrument” make the instrument under seal that are afforded the 12-year statute of limitations.35
Conclusion
The Maryland statutes and applicable case law make it clear that civil actions typically have a three-year statute of limitations. However, under special circumstances, the statute of limitations can be extended to 12 years, which can have significant consequences that lenders and borrowers should consider when drafting loan documents. Considering the case law set forth above, parties might want to exercise caution when signing documents that state the document is under seal. For borrowers, under seal could extend the statute of limitations under which they could be sued to 12 years. Conversely, for lenders, signing a document under seal could result in a longer period during which borrowers could assert claims under the document at issue.
Michael Lichtenstein is a shareholder in the Litigation and Corporate Department and co-chair of the Bankruptcy and Creditors' Rights Group at Shulman Rogers, who practices in the areas of workouts, bankruptcy litigation and commercial litigation.
Rebekah Paradis is an Associate in the Bankruptcy and Creditor’s Rights Practice at Shulman Rogers. Clients look to her for support with matters including bankruptcy, confessed judgments, breach of contract actions and judgment recovery. She has experience in all aspects of bankruptcy and corporate restructuring, including asset dispositions and bankruptcy litigation, as well as out-of-court restructurings and receivership cases.