10/16/15

In In Re Slaey, 2015 WL 5139317 (E.D. Va. Sept. 1, 2015), the Eastern District of Virginia clarified the operation of an infrequently litigated statute concerning promises not to assert the statute of limitations.  While most lawyers would insist on a written promise or agreement, a mere promise, even in writing, may not be enforceable under Virginia law.  If you are not familiar with the statute, Slaey might surprise you.

The statute, Virginia Code Section 8.01-232(A) provides, in relevant part, as follows:

Whenever 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 the 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 case arose from an appeal from a bankruptcy court order allowing a creditors’ claim that otherwise would have been barred by the statute of limitations.  The debtor had borrowed money in 2002 and, just prior to the expiration of the statue limitations in 2008, had executed an agreement waiving her right to assert the statute of limitations.  After an evidentiary hearing, the bankruptcy court allowed the claim finding that it would operate as a fraud on the creditor to do otherwise.

On appeal, the District Court analyzed the statute in detail, noting that there were only two prior published decisions that had analyzed its application, both of which were more than 75 years old (and applied the predecessor statute).  The parties conceded that the written waiver did not satisfy the terms of the statute.  The agreement was not made to defer litigation pending settlement and was open-ended, and therefore did not meet the requirement of setting forth a specific period not to exceed the limitations period.

The main issue was whether "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 bankruptcy court had relied on a prior Fourth Circuit case that interpreted fraud broadly, stating "such conduct may not be fraud in the sense of a false pretense, that is, a false representation of an existing fact, but if successful, it makes possible a gross injustice and lacks the elements of honesty and fair dealing which are the antitheses of fraud.  Indeed, using the expression in an intelligent and proper sense, such conduct would, in the words of the statute, ‘operate a fraud’ and would be regarded as an act of bad faith."  Id. at*6 (quoting Tucker v. Owen, 94 F.2d 49, 52 (4th Cir. 1938)). 

In reversing the bankruptcy court, however, the District Court noted that the Supreme Court of Virginia had issued an opinion two years after Tucker in which it had rejected a broad interpretation of fraud and applied the more commonly accepted meaning and the well-settled principle that "fraud must relate to a present or a pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises or statements as to future events."  Id. at *7 (quoting Soble v. Herman, 9 S.E.2d 459, 464 (Va. 1940)).  Although the court noted the well-established exception to the general rule where an action for fraud is predicated on promises which are made with the present intention not to perform them, or on promises made without any intention to perform them, the court found no evidence of the necessary intent, much less the clear and convincing evidence of fraud required to meet the exception.  Indeed, the creditor had testified that the debtor had made no representations to him concerning the waiver.  Accordingly, the District Court held that the waiver was unenforceable and, therefore, that the underlying claim was barred by the statute of limitations.

The decision in Slaey may come as a surprise to many Virginia practitioners.  While promises not to assert the statue limitations are relatively common and often a better solution than filing suit, the existence of a statute setting forth specific elements that must exist to make the waiver enforceable is not well known.  Without question, an oral waiver is unenforceable and, in many instances, a written waiver may be unenforceable as well.  While the fraud exception applies, proving that another party has made a promise without a present intention to comply is difficult at best.

Needless to say, anyone electing to go this route should review the statute carefully and follow it precisely.

 

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