Ex. F.) Pursuant to this agreement, Lorince agreed to indemnify and hold harmless the sellers as to any liability arising out of the Note or the guaranties, including liability to the SBA, Bremen Bank, Hazel and James E. Jackson, or Kyriakos and Peter Poulakis. (Id. Ex. F para. 3.)
John W. Davis purchased the assets of Chablis from Lorince pursuant to an agreement dated July 26, 1980. (Lorince 12(e) para. 8 and Ex. I.) In connection with this purchase, Davis, individually and as the president of Leonardo al Dente Restaurant, Inc. ("Leonardo al Dente"), executed an agreement dated June 30, 1980 pursuant to which he and Leonardo al Dente "assume[d] and agree[d] to pay the indebtedness evidenced by the . . . Note in accordance with the terms thereof, on which there [was] a present unpaid principal balance in the amount of approximately $ 333,800.00" (Lorince 12(e) para. 7 and Ex. H.) Pursuant to the July 26, 1980 purchase agreement which followed, Davis further agreed to assume the SBA loan made by Bremen Bank (referred to in the agreement as the "SBA loan"), and "to indemnify and save [Chablis] and Julius Lorince, Richard L. Hutchison, Lawrence Elkin and James Jackson,
harmless from and against any and all liability, costs, damages, expenses, judgments, and claims, including reasonable attorneys' fees, which they or any of them may incur, suffer, or sustain by reason of [Davis'] default in the repayment of the SBA Loan." (Id. at 2.) Davis also agreed to cooperate with Chablis in attempting to have the prior individual guaranties removed from the Loan. (Id.) However, this removal was not made a condition of the purchase (see id.) and, as is evident from the pending suit against Lorince, it never came to pass.
Leonardo al Dente went out of business on or about August 11, 1981. (Lorince 12(e) para. 9.) Bremen Bank wrote to Lorince on August 18, 1981, notifying him that the restaurant had closed its doors and defaulted on the Note and demanding that Lorince perform on his personal guarantee. (Lorince 12(e) para. 9 and Ex. J.) The letter indicated that a principal balance of $ 329,788.17 remained outstanding on the Note. (Id. Ex. J.)
Lorince has not made any payment upon the Note. (Amended Complaint para. 7; Answer para. 7.) The records of Bremen Bank indicate that the last payment made upon the Note was received on August 21, 1981. (Lorince 12(e) para. 10 and Ex. K, Attachments.)
On November 19, 1981, the SBA notified Bremen Bank that it would purchase the 85 percent of the loan which it had guaranteed. (Lorince 12(e) para. 13 and Ex. M.) On April 14, 1982, the SBA wrote to Lorince informing him that the maturity of the Note had been accelerated, and that the entire balance of principal and interest was due and payable. (Lorince 12(e) para. 14 and Ex. N.) The letter also notified Lorince that the SBA would conduct a public auction to liquidate the collateral which secured the loan and apply the proceeds to the outstanding principal and accumulated interest on the Note. (Id.) On April 27, 1982, the equipment and fixtures of Leonardo al Dente were sold at auction, yielding net proceeds of $ 29,757.27. (Lorince 12(e) para. 15 and Ex. O.) J & H Auctioneers & Liquidators, Inc. ("J & H"), which conducted the auction, wrote a check to the SBA for the amount of the net proceeds on May 4, 1982. (Id. and Ex. P.) The SBA received the check on May 5, 1982. (Id.) The SBA received an additional check from J & H in the amount of $ 26.75 on May 13, 1982. (Lorince 12(e) para. 16.)
The government filed this action on May 3, 1988,
seeking to recover from Lorince an unpaid principal balance of $ 321,640.90 on the Note
plus interest which has accrued at the rate of 10 percent per annum and which, as of April 26, 1988, totalled $ 192,144.90. (Amended Complaint para. 6.) All other persons liable on the Note have discharged their obligations in bankruptcy. (Lorince 12(e) para. 17.)
The single issue presented by the cross-motions for summary judgment is whether the government's lawsuit is timely.
The applicable statute of limitations is set forth in 28 U.S.C. § 2415(a), which, in relevant part provides:
. . . Every action for money damages brought by the United States or an officer or agency thereof which is founded upon any contract express or implied in law or fact, shall be barred unless the complaint is filed within six years after the right of action accrues . . . : Provided, That in the event of later partial payment or written acknowledgment of debt, the right of action shall be deemed to accrue again at the time of each such payment or acknowledgment . . . .
(Emphasis in original.) The parties do not dispute the fact that the government failed to file this suit within six years after its cause of action first accrued. Thus, the particular question presented in this case is whether there has been either a partial payment or written acknowledgement of debt sufficient to renew the limitations period under § 2415(a).
A. Initial Accrual of the Cause of Action
In evaluating the timeliness of this action, the Court must first determine when the limitations period commenced. According to the provisions of § 2415(a), the six-year limitations period begins to run when the cause of action first accrues. The general rule is that a cause of action upon a guarantee of a note accrues not upon a mere default in payment, but only when the creditor notifies the guarantor that the entire debt has been accelerated and demands payment of the entire balance. See, e.g., United States v. Boozer, 732 F. Supp. 20, 22 (N.D.N.Y. 1990); United States v. Lowy, 703 F. Supp. 1040, 1043 (E.D.N.Y. 1989); United States v. Frey, 708 F. Supp. 310, 312 (D. Kan. 1988); United States v. Rollinson, 629 F. Supp. 581, 584 (D.D.C. 1986), aff'd, 275 App. D.C. 345, 866 F.2d 1463 (D.C. Cir.), cert. denied, 493 U.S. 818, 110 S. Ct. 71, 107 L. Ed. 2d 37 (1989). See also United States v. Vanornum, 912 F.2d 1023, 1025 (8th Cir. 1990).
Lorince asserts that the cause of action initially accrued on August 18, 1981, when Bremen Bank notified Lorince that the Note was in default and demanded that he perform on his guarantee. (Lorince Mem. at 4, 6.) The government does not dispute this contention (see Government Mem. at 2), and the Court finds it to be well taken. The August 18, 1981 letter from Bremen Bank does not expressly mention acceleration of the Note nor does it expressly demand payment of the full amount outstanding. (See Lorince 12(e) Ex. J.) Nonetheless, the letter does indicate that the loan was in default, lists the outstanding balance, and demands that Lorince honor his guaranty. (See id.) Accordingly, the letter was sufficient to mark the initial accrual of the government's cause of action and to trigger the six-year limitations period.
The SBA sent what might be characterized as a second demand letter to Lorince on April 14, 1982. (Lorince 12(e) para. 14 and Ex. N.) Unlike Bremen Bank's August 18, 1981 letter, the SBA's letter expressly states that the Note had been accelerated and demands payment of the amounts outstanding. (See id. Ex. N.) However, even if the Court were to assume that the cause of action on the Note did not accrue until the date of the SBA's letter, that assumption alone would not render this suit timely. If the limitations period had not commenced until April 14, 1982, it nonetheless would have expired on April 14, 1988, more than two weeks before the government filed this lawsuit. Therefore, unless a subsequent partial payment or written acknowledgement of debt caused the limitations period to run anew, the government's action must be dismissed as untimely.
B. Partial Payment
As set forth above, § 2415(a) provides that a partial payment of a debt owed to the United States renews the six-year limitations period. The government contends that the proceeds which the SBA received from the auction of Leonardo al Dente's equipment and fixtures on May 5, 1982 and May 13, 1982 constituted partial payments sufficient to renew the statutory limitations period under § 2415,
because the equipment and fixtures were collateral and the SBA had a duty to apply the proceeds to the outstanding balance on the Note and thereby reduce the amount for which Lorince was liable. Lorince disagrees on two grounds.
Lorince argues first that the SBA's liquidation of the collateral and application of the proceeds to the outstanding balance on the Note does not constitute a "payment" within the meaning of § 2415, because although this reduced the amount owed by the debtor (i.e. Davis or Leonardo al Dente), it did not necessarily reduce the amount Lorince owed as guarantor. This argument is not persuasive. The basis for the argument lies in the guaranty itself, which provides:
The obligations of [Lorince] hereunder shall not be released, discharged, or in any way affected, nor shall [Lorince] have any rights or recourse against Lender, by reason of any action Lender may take or omit to take under the foregoing powers.
(Lorince 12(e) Ex. G.) Lorince argues that under the terms of this provision, the SBA's liquidation of collateral and use of the proceeds to pay down the outstanding balance on the Note would not reduce his own liability on the guaranty. However, this provision simply makes it clear that the powers which the lender enjoys under the guaranty are in fact elective, and that the guarantor cannot escape liability based upon which powers the lender chooses to exercise or not to exercise. See, e.g., Istituto Mobiliare Italiano, S.p.A. v. Motorola, Inc., 689 F. Supp. 812, 817 (N.D. Ill. 1988) (Bua, J.) (secured creditor's failure to act against assets securing loan does not vitiate liability of unconditional guarantor); Rollinson, supra, 629 F. Supp. at 584-86 (seven deferrals of principal payments by bank and SBA did not discharge guarantors from liability). Indeed, Lorince does not contend that the SBA has failed to give him the benefit of the auction proceeds in assessing his liability, and the record in fact suggests the opposite.
Lorince's second argument holds greater merit. Lorince argues that even if the SBA's application of the auction proceeds did reduce the debt for which he is responsible under the guaranty, this use of the auction proceeds does not qualify as a payment which would renew the statutory limitations period under § 2415(a) because it reflects neither his own acknowledgment of the debt nor his willingness to discharge it.
The legislative history of § 2415 reflects a congressional intent to codify the common law principle that "the obligation of a debt will continue where a debtor has acknowledged the debt and indicated his willingness to discharge the obligation." See S. Rep. No. 1328, 89th Cong., 2d Sess. 3 (1966), reprinted in 1966 U.S. Code Cong. & Admin. News 2502, 2504. See also United States v. Rollinson, supra, 866 F.2d at 1468; United States v. Blusal Meats, Inc., 817 F.2d 1007, 1010 (2d Cir. 1987); F.D.I.C. v. Petersen, 770 F.2d 141, 144 (10th Cir. 1985) (dissenting opinion); United States v. Glen Falls Ins. Co., 546 F. Supp. 643, 645 (N.D.N.Y. 1982). This principle rests in turn upon the premise that when a debtor has unequivocally acknowledged a preexisting debt and demonstrated an intention to honor it, she has effectively made a new promise to pay the debt and thereby triggered a new limitations period. See Rollinson, 866 F.2d at 1468; Glen Falls, 546 F. Supp. at 645-46.
In this context, not every partial payment of a debt is sufficient to start the statute of limitations running anew under § 2415; rather, the circumstances of the payment must reflect the intent of the debtor to honor the debt. As the court explained in Glen Falls :
Whether part payment takes a case out of the statute of limitations depends on the intention of the debtor. It must be shown that there was part payment of an admitted debt, made and accepted in circumstances where an unequivocal promise may be inferred to pay the remainder of the debt. Thus, it is the intent of the debtor when he made the payment, not the intention of the creditor when he received the payment, that is the crucial inquiry here.
546 F. Supp. at 645-46.
See also Joseph v. Carter, 382 Ill. 461, 467, 47 N.E.2d 471, 474-75 (1943) ("Payment resulting in law in a new promise which would take the case out of the Statute of Limitations is only that designedly made as a payment upon the note. There must be an actual and affirmative intention to make such payment before a promise can be inferred.") The requirement of conduct evincing the debtor's affirmative intent to honor the debt makes intrinsic sense, for when a debtor takes no action or acts in an ambiguous manner, it is implausible to construe her conduct as any sort of "promise" to act further. Moreover, given the significant benefit which accrues to the government when the debt is acknowledged -- namely, another six years in which to bring suit upon the debt -- it is only reasonable to insist that the circumstances of the acknowledgement be plain, such that a reasonable person would have notice of the consequences of her conduct. Accordingly, the auction proceeds which the SBA received on May 5 and May 13, 1982 and applied to the Note may be deemed "partial payments" sufficient to renew the limitations period under § 2415(a) only if they marked Lorince's acknowledgement of his obligation and his willingness to pay the outstanding balance of the Note. For the reasons set forth below, they do not.
As a practical matter, it is difficult to characterize use of the auction proceeds to reduce the outstanding balance on the Note as a payment for purposes of § 2415(a). The funds to effectuate that reduction came not from Lorince, but from the auctioneer which conducted the auction on the SBA's behalf. Moreover, prior to the auction, the SBA had already asserted control over the equipment and fixtures of Leonardo al Dente. Consequently, all the SBA accomplished through the auction was conversion of assets already in its possession from one form to another. Neither Lorince nor any other debtor or guarantor played any part in this transaction, and none of the funds used to reduce the outstanding balance on the Note came from their pockets. Accordingly, neither application of the auction proceeds nor the auction itself can properly be characterized as a partial payment for purposes of § 2415(a).
Indeed, at first blush, it would seem that to the extent there was any payment involved in the liquidation of the collateral, logically it would have occurred when the SBA first exerted ownership over the collateral prior to the auction. The record does not reflect when that event occurred. However, even if the Court were to assume that the SBA did not exercise control over the collateral until the date of the auction itself and use that date as the date of payment, it would be of no avail to the government. The auction took place on April 27, 1982, more than six years prior to the filing of this suit. Therefore, assuming that the limitations period began anew on the date of the auction, this suit would still be untimely.
Against this logic the government offers a more technical view of the transaction which would support its contention that no payment was made until the SBA actually received the auction proceeds. In the government's view, "the proceeds of the sale of collateral are in substance funds owned by the debtor, whose right, title and interest to the property is being transferred pursuant to the Uniform Commercial Code ("UCC"), Section 9-504(4),
but subject to the secured party's paramount right to receive said funds for application against the loan balance." (Gov. Mem. at 2.) Thus, the government maintains that even once the SBA asserted control over the collateral it had not yet been "paid"; rather, until the SBA actually applied the auction proceeds to the outstanding balance of the Note, it merely enjoyed a lien upon the collateral. (See id. and Gov. Reply to Defendant's Supp. Mem. at 4.) See 70 C.J.S. Payment § 22 at 26 (1987) ("The mere taking of collateral security for a preexisting debt does not discharge the debt, nor do proceedings or attempts to secure payment by resort to the security where no payment results, or mere forbearance to enforce or collect the security, although payment thereby might have been obtained.") (footnotes omitted). The government further argues that because the debtor retained an ownership interest in the collateral until such time as the collateral was sold at auction and the proceeds were delivered to the SBA for application against the debt, the auctioneer should be viewed as the agent of the debtor rather than the SBA. Looking at the transaction from this perspective, the government concludes, receipt of the auction proceeds really was a payment on behalf of the debtor.
Assuming that the government's portrayal of the transaction is correct as a matter of law, the Court nonetheless concludes that transfer of the auction proceeds from the auctioneer to the SBA fails to qualify as a partial payment within the meaning of § 2415(a), because that payment does not evince Lorince's own acknowledgement and promise to repay the debt. The government itself characterizes the payment as one on behalf of the debtor rather than Lorince.
However, without more, a payment by or on behalf of the debtor does not renew the statute of limitations as to the guarantor. See Rollinson, 866 F.2d at 1468-69 (collecting authorities reflecting the general rule that partial payment of note by debtor does not toll statute of limitations against guarantor); Petersen, 770 F.2d at 143 (partial payment suspends statute of limitations only against party making such payment); Kallenbach v. Dickinson, 100 Ill. 427, 431 (1881) (payment by debtor does not arrest statute as against surety unless debtor is designated as surety's agent "not only for the purpose of liquidating the note by payment, but also for the purpose of doing what, in legal estimation, is necessary to make a new promise that will remove the bar of the statute"); Korf v. Fansler, 57 Ill. App. 3d 440, 441-42, 15 Ill. Dec. 55, 56, 373 N.E.2d 325, 326 (2d Dist. 1978) (payment by third party to creditor, which creditor applied to outstanding balance on promissory note, insufficient to indicate a promise to pay on the part of the debtor)
; Deaton v. Deaton, 109 Ill. App. 7, 10 (3d Dist. 1903) (payment by principal does not extend statute as to guarantor). In this case, the record supplies no additional evidence which would permit attribution of the purported payment to Lorince. Although the record indicates that the SBA notified Lorince that the auction would take place, the record reflects no involvement by Lorince in either the conduct of the auction or disposition of the auction proceeds. Indeed, all that occurred on the two dates on which the government maintains the limitations period began to run anew was the SBA's receipt of checks from the auctioneer. To construe this receipt as action by Lorince reaffirming his obligations under the Note strains credulity and renders the premise underlying the partial payment provision of § 2415(a) an utter fiction. Thus, in Hoffman v. Sheahin, the court spurned the contention that a party's authority to liquidate collateral and apply the proceeds to an outstanding obligation should be considered the equivalent of authority to render a "voluntary" payment on the debtor's behalf:
We think this extends the "agency" beyond its intended scope and ignores its true nature as well as the basis upon which payment is held to give new life to the debt. The "agency" is not one solely on behalf of the debtor, if indeed it is truly one at all. It is rather a power coupled with an interest, irrevocable by the donor. In exercising it the donee acts on behalf of the creditor, whether himself or another, rather than for the debtor, though the latter has empowered him to do the act. The application therefore lacks the voluntary character which gives to the debtor's own act, or to that of an agent acting solely on his account, the character of waiver of immunity and acknowledgment that the debt retains vitality.
121 F.2d 861, 862 (D.C. Cir. 1941) (citation omitted). Moreover, such an untenable construction would permit the government to manipulate the timing of auctions and the disposition of auction proceeds in order to renew the statutory limitations period and thereby undermine the interests served by the statute of limitations. See Zaks v. Elliott, 106 F.2d 425, 427 (4th Cir. 1939).
Indeed, the notion that the creditor's liquidation of collateral qualifies as a partial payment which renews the statute of limitations long has been rejected by courts applying state statutes of limitations comparable to § 2415. These courts have reasoned that although the creditor in this context typically disposes of the collateral pursuant to authority granted by the debtor, usually the authority was given years before when the loan was first made; and at the point when the creditor avails himself of that authority, the debtor no longer has any say in the matter. Thus, it is implausible to construe from the creditor's action a new promise on behalf of the debtor. As Professor Williston has explained:
It would be a more logical position to deny that in any case a renewed right arises at the time payment is collected by the creditor from collateral in his hands, unless at least the debtor at the time of the sale voluntarily authorizes the credit or subsequently voluntarily ratifies it. In any other case though it be granted that the debtor originally authorized the collection, a new promise may fairly be implied only at the time when the authority was given. The authority when once given could not subsequently be revoked by the debtor had he wished to do so, and there is nothing from which it can be inferred that at the time the collection was made the debtor still acknowledged the existence of the debt or was willing to pay it.