Business Law
Fitzgerald v. Bell (MD Special Appeals)
The following is a case update written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), analyzing a recent decision of interest:
In a case of first impression, perhaps anywhere in the country, interpreting provisions of the Uniform Commercial Code, the Court of Special Appeals of Maryland ruled that the discovery rule does not apply to toll the statute of limitations to enforce a note payable on demand as set forth in UCC § 3-118(b). Fitzgerald v. Bell, 2020 WL 2104613 (Md Spec. Appeals 4/30/20).
To view the opinion, click here.
FACTS
John Bell was an attorney who, beginning in 1976 until his death in 2017, rendered legal services to John J. Fitzgerald and his company, JJF Management, Inc. (JJF). Bell and Fitzgerald became good friends and from time to time Bell would borrow money from Fitzgerald and/or JJF, all of them documented by Bell and most of them paid off or extended. As pertinent to this case, in 1992 Fitzgerald individually loaned Bell $255,000 secured by a deed of trust (1992 debt) and in 1998 JJF loaned Bell $281,649, as reflected in a “Confessed Judgment Note” (1998 Note). The 1998 Note accrued interest at 11.9% and was “due and owing upon demand.” This case review focuses on the 1998 Note, but the other debt is also discussed in the published opinion.
When Bell died testate in 2017, it was undisputed that Bell never made any payments on the 1992 debt or the 1998 Note, nor had Fitzgerald or JJF ever demanded payment. Bell’s estate was probated, with his wife appointed as personal representative of the estate. Fitzgerald/JJF filed two claims against the estate arising from the 1992 debt and the 1998 note, based on the unpaid principal and accrued interest. The estate opposed allowance of the claims, primarily asserting that the statute of limitations on both had expired long before the claims were filed. The applicable statute of limitations for a demand note set forth in Section 3-118(b) of the Commercial Law Article (Maryland’s version of the UCC), is six years from demand and, if no demand was made, ten years from the last payment of principal or interest on the note.
Responding to the estate’s summary judgment motion based on expiration of the statute of limitations, JJF argued that the statute was tolled based on several theories, focusing primarily on a fiduciary relationship between Bell and JJF, which made the discovery rule applicable. The discovery rule, developed by caselaw in Maryland, says generally that a cause of action does not accrue until the claimant has knowledge that a wrong has occurred for which he has a remedy. As argued by JJF, because Bell was JJF’s attorney, it did not realize it had been “wronged” when Bell did not pay on the 1998 Note.
The trial court granted summary judgment for the estate, ruling from the bench that there was no nexus between the relationship of Bell and JJF and the failure of JJF to timely enforce the right to payment on the note. The claimants noted a timely appeal to the Court of Special Appeals, which affirmed with this written opinion.
REASONING
Because the appeal arose from a summary judgment motion based on undisputed facts, the appellate court recognized the cleanest way to dispose of the defenses to the long-expired statute of limitations on the 1998 Note was to determine whether tolling could occur as a matter of law. In keeping with that standard of review, the estate asserted, apparently for the first time on appeal, that as a matter of law the discovery rule did not apply to toll the statute of limitations set forth in the UCC. The court observed that it could find no cases in Maryland nor in any other jurisdiction which discussed the discovery rule as it applied to demand notes in § 3-118(b). However, it did note several federal and state cases that interpreted § 3-118(g), which dealt with “negotiable instrument theft” or conversion. The vast majority of those cases declined to apply the discovery rule to negotiable instruments absent fraudulent concealment, not asserted by JJF.
The Maryland court found that the principles underlying the case decisions interpreting § 3-118(g) applied equally to subsection (b), relying extensively on a long quote from Official Comment 2 to the Maryland statute, that parroted the UCC Official Comments, which Maryland authorities consider “an excellent place to begin a search for legislative intent.” It was significant to the court that declining to apply tolling to the time to sue on a negotiable instrument “reflects the drafters’ intent to provide finality and resolution of notes.” In other words, an open-ended statute of limitations was inconsistent with the finality and uniformity which the UCC intends to achieve.
AUTHOR’S COMMENTS
I predict that this decision will be the benchmark for all courts asked to determine if the already-lengthy statutes of limitations for demand notes can be tolled by the discovery rule or any similar defense couched in equity. It is difficult to imagine the circumstance where a lender which has not been paid by its borrower could claim that it was unable to “discover” that it had a right to enforce the unpaid note. After all, in a commercial setting it is the lender who has possession of the original note, which sets forth the terms of repayment on its face. The protections contemplated by a discovery rule are demonstrably inapplicable in that setting. Moreover, as the Official Comments to the Uniform Commercial Code make clear, uniformity and swift finality are favored in resolving disputes arising from negotiable instruments. This decision fully supports those goals.
These materials were authored by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), a member of the ad hoc group, with editorial contributions by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.