In Radiance Capital Receivables Fourteen, LLC v. Foster (Va.)

The following is a case update written by Dean T. Kirby, Jr., a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:

SUMMARY:

In Radiance Capital Receivables Fourteen, LLC v. Foster, 2019 WL 5445522 (Va. Oct. 24, 2019), the Virginia Supreme Court recently upheld the dismissal of a complaint based on a guaranty of a construction loan which was originated by a bank. The guarantor successfully raised a statute of limitations defense, despite a contractual waiver of limitations defenses which appeared in the guaranty. The case is a sample of the variegated state laws on pre-dispute waivers of limitations defenses. It is of more general interest because it deals with the lender’s unsuccessful argument that the guarantor committed promissory fraud in agreeing to the waiver provision by signing the guaranty in the first place. The case is accessible via this link.

Facts: Foster and Wilson Building, LLC obtained a construction loan from New South Federal Savings Bank in 2006. Both Foster and Wilson signed a “Continuing Guaranty” of the debt. The Guaranty stated that the guarantors “waive[] the benefit of any statute of limitations or other defenses affecting the . . . Guarantor’s liability . . . .”

The loan went into default and the Bank sent a demand for payment to the guarantors on August 27, 2010. The loan was subsequently assigned to Radiance Capital, which did not file an action against the guarantors until November 23, 2015. The guarantors responded with a plea in bar on the grounds that Virginia’s five year statute of limitations had expired. The guarantors contended that the waiver provision was ineffective under Virginia Code §8.01-232, which provides in relevant part:

[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.

In all other cases, an unwritten promise not to plead the statute shall be void, and a written promise not to plead such statute shall be valid when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term not longer than the applicable limitations period.

The Circuit Court sustained the plea in bar and dismissed the complaint, and the Virginia Supreme Court has now affirmed.

Reasoning: Radiance first argued that the Guaranty provision in issue was a waiver of a statute of limitations defense and not a promise not to plead limitations at a later date. The Court reasoned that “a waiver of the right to plead the statute of limitations and a promise not to plead the statute of limitations have the same practical effect.” The Court also observed that if the statute were given the narrow interpretation urged by Radiance, a lender could circumvent the statute by “characterizing a promise not to plead the statute of limitations as a contractual waiver . . . .”

Radiance invoked the first sentence of Virginia Code §8.01-232 which states 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 Court acknowledged that Virginia law recognizes the tort of promissory fraud, and that generally, “[i]f a defendant makes a promise that, when made, he has no intention of performing, that promise is considered a misrepresentation of present fact and may form the basis for a claim of actual fraud.” SuperValu, Inc. v. Johnson, 276 Va. 356, 368, 666 S.E.2d 335 (2008).

The Court concluded that “[a]s Radiance Capital relied solely on the breach of the statute of limitations waiver without providing any additional evidence to establish that Foster and Wilson did not intend to comply with the waiver when they executed the Guaranty, Foster and Wilson were not estopped from pleading the statute of limitations.”

Author’s Comment: There is not much to say, even to Virginia practitioners, about the Court’s obvious interpretation of Virginia Code § 8.01-232. The laws of each state on the subject of pre-dispute waivers of limitations vary widely Some states, including New York and Texas, do not allow such waivers at all. Many states give effect to waivers but only subject to various conditions. For example, in Virginia as seen above, the waiver must itself expressly be for a specific term not longer than the limitations period. In California, the effective length of an indeterminate waiver is automatically limited by Code of Civil Procedure §360.5.

The law of promissory fraud is much more, if not completely, uniform. Proving promissory fraud requires more than showing that the promise was breached. It requires proof, usually by circumstantial evidence that at the time the promise was made, the promisor intended not to perform. It also requires a showing of justifiable reliance on the promisor’s misrepresentation. Riverisland Cold Storage, Inc. v. Fresno-Madera Prod. Credit Assn., 55 Cal. 4th 1169, 1183, 291 P.3d 316, 325 (2013).

The Radiance Capital case is representative of a subset of promissory fraud cases in which the defendant is accused of knowing at the outset that a contract, or a particular provision of a contract, is unenforceable. As an example, the majority view is now that promissory fraud can be raised to estop a defendant from pleading that a contract is unenforceable under the statute of frauds. See, Tenzer v. Superscope, Inc., 39 Cal. 3d 18, 28, 702 P.2d 212, 217 (1985). The concern is that allowing such an action opens the door to lawsuits which are, at bottom, based on contracts that public policy says should not be enforced.

The Radiance Capital court pointed out, more than once, that the promissory fraud claim was based “solely on the breach of the statute of limitations waiver” and not on a general claim that Foster and Wilson did not intend to honor the guaranty at all. Promissory fraud is hard to prove, but would seem to be much harder to prove with respect to one boilerplate contract provision.

As to the requirement that a plaintiff prove justifiable reliance on the illegal promise, it would not be easy for a bank, using an attorney-prepared form, to claim that it justifiably relied on a provision that the attorney should have recognized to be unlawful. Opinion letters issued in loan transactions often decline to opine on many such “standard” provisions. Any opinion letter issued with respect to the Radiance Capital loan might have been highly relevant to the reliance issue.

These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them.  This material may not be further distributed without the consent of Thomson Reuters.