«Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 1 of 16 PageID# 232 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF ...»
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 1 of 16 PageID# 232
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Bankruptcy No. 13-10541-RGM
IN RE: MARY D. SLAEY,
MARY D. SLAEY,
Civil Action No. I:14cvl210
P.H. HARRINGTON, JR.,
MEMORANDUM OPINIONThis bankruptcy appeal presents the question whether the Bankruptcy Court erred in allowing a creditor's claim against the debtor for a defaulted loan where, as here, the claim is barred by the statute of limitations unless the debtor's written agreement not to assert the limitations bar is given effect. A Virginiastatute, Va. Code § 8.01-232(A), limitsand defines the circumstances under which agreements not to assert the statute of limitations can be enforced.
Thus, the question presented in this appeal is, more precisely, whether the Bankruptcy Court, in allowing the creditor's claim, correctly construed and applied this statute. For the reasons that follow, the Bankruptcy Court did not do so and hence the allowance of the barred claim must be reversed.
Only a brief recitation of the pertinent facts and procedural history is necessary for resolution of the instant appeal. Thus, the record reflects that on July 10, 2002, appellee P.H.
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 2 of 16 PageID# 233 Harrington, Jr., an attorney, loaned $235,000 to his then-friend and client, appellant Mary D.
Slaey. This loan took the form of a $235,000 cashier's check made out to "M.L. Denese Slaey" drawn from Harrington's personal bank account at Branch Banking and Trust Company. Slaey contemporaneously executed a Promissory Note with respect to this loan (the "2002 Note").
Pursuant to the terms of the 2002 Note, Slaey promised to repay "P.H. Harrington Jr. Pension Plan" the total amount of$235,000, with interest at the rate of8% per annum on the unpaid balance from July 10,2002, until the date of maturity. In this regard, the 2002 Note had an express term of only one month, providing that the unpaid balance was "payable in one lump sum installmentof principal and interest on or before August 10,2002."
According to Harrington, Slaey failed to satisfy the terms of the 2002 Note anytime between 2002 and 2008. Slaey and Harrington nonetheless remained in contact with one another throughout these years, apparently both for legal and personal reasons. And, given his legal background, Harrington was aware that legal enforcement of the 2002 Notewas governed by Virginia's six-year statute oflimitations applicable to negotiable instruments.' Thus, on August 7, 2008—^three days before expiration of the six-year limitations period—Harrington drafted an agreement for Slaey's approval and signature. This agreement provided that Slaey agreed not to raise a statute of limitations defense "in any legal proceeding that relates to fimds borrowed" by ' Section 8.3A-118 of the Virginia Code prescribes a six-year statute of limitations fornegotiable instruments like the 2002 Note. See Va. Code § 8.3A-118(a) (providing that "an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six years afterthe duedatestated in the note or, if a duedate is accelerated, within six years after the accelerated due date"). Given that the 2002 Note had an express maturity date of August 10, 2002, the six-year statuteof limitations for legal enforcement of the 2002 Note expired on August 10,2008.
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 3 of 16 PageID# 234 Slaey from Harrington between 2002 and 2008. This written agreement—hereinafter referred to
as the 2008 SOL Waiver—specifically provided, in its entirety, as follows:
The six-year loan period covered by the 2008 SOL Waiver—^January 1, 2002 to January 1, 2008—clearly includes the $235,000 loan extended to Slaey on July 10,2002, that resulted in the contemporaneous 2002 Note. The record also clearly reflects that Slaey signed the 2008 SOL Waiverpresented to her by Harrington, and Harrington, in turn, signed the 2008 SOL Waiveras a witness.
Nearly five years later, on February 4,2013, Slaey initiated bankruptcy proceedings in the EasternDistrictofVirginiaby filinga petition for bankruptcy pursuant to Chapter 11 ofthe United States Bankruptcy Code. Harrington, by counsel, then filed a creditor's claim in Slaey's bankruptcy proceeding on September 4, 2013. The standard proofof claim form submitted by Harrington identified the basis of the claim as "Money Loaned and Unjust Enrichment," and the claim was in the total amount of $523,706.38. This total amount included, inter alia, $235,000 for the entire principalamount ofthe 2002 Note, as well as intereston the 2002 Note fromJuly 10, ^ SIM is a government contracting company that appears to have been owned and operated by Slaey during periods relevant to this action.
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 4 of 16 PageID# 235 2002, to February 4,2013.^ In the course of the bankruptcy proceedings, Slaey, by counsel, objected to Harrington's claim on multiple grounds. With respect to the 2002 Note, in particular, Slaey raised four objections, namely (i) that Harrington's claim was barred by the statute of limitations, (ii) that Slaey had not executed the 2002 Note, (iii) that the majority of the 2002 Note had already been repaid to Harrington, and (iv) that Slaey was not personally liable on the 2002 Note. Slaey also challenged the validity of the 2008 SOL Waiver, arguing that it could not operate to save Harrington's time-barred claim because it did not meet the statutory requirements of a valid written waiver of the statute of limitations pursuant to Virginia Code § 8.01-232, which is the Virginia statute that limits and defines the circumstances under which agreements not to assert the statute of limitations can be enforced.
On March 20,2014, the Bankruptcy Court held an evidentiary hearing on Slaey's objection to Harrington's claim. Harrington and Slaeywere the only two witnesses. At the conclusion of the hearing, the Bankruptcy Court made certain preliminary factual determinations, including (i) that Slaey, rather than her company, SIM, personally incurred the $235,000 debt covered by the 2002 Note, (ii) that Slaey had not made any payments on the 2002 Note, and (iii) that Slaey and Harrington hadjointly executed the 2008 SOL Waiverpriorto expiration of the six-year statute of limitations applicable to negotiable instruments in Virginia. The Bankruptcy Court also concluded that failure to enforce the 2008 SOL Waiver would "operate as a fraud" on Harrington ^ Harrington's claim against Slaey filed inthe bankruptcy court also included additional amounts not pertinent to the instant appeal. It is worth noting, however, that the materials submitted in support of Harrington's claim reflect that the July 10, 2002 loan at issue here was not the only instance in which Harrington loaned significant sums of money to Slaey and/or Slaey's company.
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 5 of 16 PageID# 236 within the meaning of Virginia Code § 8.01-232 given that Harrington detrimentally relied on the 2008 SOL Waiver in not filing a lawsuit against Slaey based on the 2002 Note within the six-year limitations period. In other words, the Bankruptcy Court held that the 2008 SOL Waiver was valid and enforceable in these circumstances, and that expiration of the six-year statute of limitations did not preclude Harrington's claim against Slaey's bankruptcy estate. In the end, therefore, by Order entered May 14, 2014, the Bankruptcy Court allowed Harrington's claim against Slaey on the 2002 Note (with some minor adjustments not pertinent to the instant appeal) in the total amount of $234,420,67. See In re: Mary D. Slaey, Case No. 13-10541-ROM (Bankr.
E.D. Va. May 14,2014) (Order).
On May 28, 2014—two weeks after the Bankruptcy Court rendered its decision allowing Harrington's claim—Slaey filed a motion to reconsider based on what she claimed was "newly discovered evidence" that Harrington had already been repaid on the 2002 Note. Harrington filed a prompt written objection to Slaey's motion to reconsider, and the Bankruptcy Court ultimately denied the motion by Order dated July 15, 2014. See In re: Mary D. Slaey, Case No.
13-10541 -ROM (Bankr. E.D. Va. July 15,2014) (Order). Slaey then filed the instant appeal with this Court pursuant to 28 U.S.C. § 158.'* In the appeal, Slaey initially raised two distinct arguments, namely (i) that the Bankruptcy Court erred in concluding that the 2008 SOL Waiver was valid and enforceable under Virginia Code § 8.01-232, thereby allowing Harrington's time-barred claim on the 2002Note, and (ii) that the Bankruptcy Court erred in denying Slaey's motion for reconsideration based on alleged newly '' That statute provides, in pertinent part, that "[t]he district courts of the United States shall have jurisdiction to hear appeals... from final judgments, orders, and decrees [of the bankruptcy court]." 28U.S.C.§ 158(a)(1).
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 6 of 16 PageID# 237 discoveredevidence. Not surprisingly, Slaey, by counsel, later withdrew the argument pertaining to newly discovered evidence in the course of these appeal proceedings. See Tr. of 12/12/14 Hearing (where appellant's counsel states that "on the new evidence issue... I don't want you to waste your time on it. I am prepared to withdraw that issue and focus only on the Statute of Limitations issue"). Thus, the sole remaining issue on appeal is whether the Bankruptcy Court erred in allowing Harrington's otherwise time-barred claim on the 2002 Note in light of the 2008 SOL Waiver. In other words, the precise question presented here is whether the Bankruptcy Court correctly concluded that the 2008 SOL Waiver is valid and enforceable under Virginia Code § 8.01-232 on the ground that failure to enforce the 2008 SOL Waiver would "operate as a fraud" on Harrington within the meaning of that statute. See Va. Code § 8.01-232(A) (providing that "[w]henever 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").
The standard of review applicable to a bankruptcy appeal filed with a district court is the same standardthat is applied by a court of appeals reviewing a district court proceeding. See 28 U.S.C. § 158(c)(2) (providing that "[a]n appeal under subsections (a) and (b) of this section shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts and in the time provided by Rule 8002 of the Bankruptcy Rules").
Thus, a district court reviews the bankruptcy court's factual findings for clear error and its legal conclusions de novo. See National Heritage Found., Inc. v. Highbourne Found., 760 F.3d 344, 347 (4"' Cir. 2014); SG Homes Associates, LP v. Marinucci, 718 F.3d 327, 334 (4"' Cir. 2013).
Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 7 of 16 PageID# 238 Moreover, "[m]ixed questions of law and fact are also reviewed de novo." In re J.A. Jones, Inc., 492 F.3d 242,249 (4"* Cir. 2007), The issue presented in the instant appeal is amixed question of law and fact that must be reviewed de novo.
Analysis properly begins with the plain language of the applicable Virginia statute. As already noted, Va. Code § 8.01-232 governs the validity and legal effect of written and unwritten promises not to plead the statute of limitations in Virginia. That statute—entitled "Effect of
promises not to plead statute"—provides, in pertinent part, as follows:
Va. Code § 8.01-232(A).
Thus, carefully read, the governing language of Va. Code § 8.01-232(A) may be viewed as consisting of essentially three parts, with two of those parts setting forth general rules regarding the validity and enforceability of (i) unwritten and (ii) written promises not to plead the statute of limitations, and the third part setting forth (iii) a limited exception to those general rules.
Specifically, Part I provides that, with one limited exception set forth in Part III, unwritten promises not to plead the statute of limitations are generally void and unenforceable in Virginia.
Part II of the statute provides that, again, with one limited exception set forth in Part III, a written promise not to plead the statute is generally valid and enforceable only if three specified Case 1:14-cv-01210-TSE-JFA Document 9 Filed 09/01/15 Page 8 of 16 PageID# 239 requirements are met, namely, ifthe written promise (i) is made to avoid or defer litigation pending settlement of a case, (ii) is not made contemporaneously with any other contract, ^ (iii) is made for an additional term not longer than the applicable limitations period. Va. Code § 8.01-232(A), Finally, Part III of the statute—^and the part at issue in the instant appeal—^provides a limited exception to the general rules set forth in Parts I and II, That limited exception specifically provides that "[w]henever 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," Va. Code § 8.01-232(A).
Here, the parties do not dispute that the facts of this case do not fall within Parts I or II of the statute. Specifically, not onlyis there no oral agreement involved in this case, but theparties' written agreement—^the 2008 SOL Waiver—clearly does not meet all three requirements of a valid and enforceable written promise not to plead the statute oflimitations.® Thus, the sole question presented here is whether failure to enforce the 2008 SOL Waiver would "operate as a fi-aud" on Harrington in this instance, so as to place this case within the limited exception set forth in Part III of § 8.01-232(A).
Thus, to resolve this appeal, it is necessary to determine precisely what is meant by the phrase "operate as a fraud," as used in the limited exception set forth in Part III of § 8.01-232(A).