Article courtesy of Michael Robson (Greenberg Traurig, LLP)
First Security Bank v. Buehne et al., 121,765 (Kan. Ct. App. Sept. 18, 2020).
In a dispute between borrowers and a lender with a security interest in the borrowers’ business equipment, the Kansas Court of Appeals (the “Court”) found no strongly held public policy interest that would require it to invalidate the borrowers’ waiver of the statute of limitations regarding the lender’s enforcement of the note’s acceleration clause. The Court held that borrowers David and Linsay Buehne (the “Buehnes”) waived their right to assert a statute of limitations defense against lender First Security Bank’s (“First Security”) foreclosure petition regarding real estate that secured a $323,000 commercial promissory note.
The Buehnes and First Security executed the commercial promissory note on June 28, 2005, with the Buehnes granting First Security a mortgage in real property in Meade County, Texas and a security interest in the car wash equipment they used as part of their business. The note’s maturity date was October 28, 2025 and provided for four interest‑only payments, followed by 240 monthly payments, which began on November 28, 2005. The note included an acceleration clause in the event of default and provided for payment in full upon demand. The Buehnes also expressly waived, among other things, any applicable statute of limitations, “to the full extent permitted by law.”
There was no dispute that the Buehnes failed to make any payments under the note. On August 17, 2006, First Security delivered a demand letter to the Buehnes for the unpaid balance of the principal, accrued interest, and penalty, to which the Buehnes failed to respond. First Security subsequently sent a letter on November 17, 2006 informing them that the matter had been turned over to its attorney. On May 21, 2014 – more than seven years after its demand – First Security filed a foreclosure action against the Buehnes, who in turn asserted the statute of limitations as an affirmative defense. Both parties moved for summary judgment, with the trial court granting First Security’s motion, finding that the statute of limitations had not begun to run until the foreclosure action was commenced. On June 25, 2019, the trial court entered a judgment against the Buehnes for the total amount of the note and directed foreclosure on the commercial real estate mortgage which secured the note, and ordered the sale of the property, with the sale proceeds to be applied to the monetary judgment.
On appeal, the Buehnes contested that the applicable five‑year statute of limitations began to run in 2006 after First Security sent its demand and attorney letters, and expired well before it filed its foreclosure petition in 2014. First Security responded that the statute of limitations did not begin to run until it hired an attorney to pursue foreclosure in 2014, and alternatively, that the Buehnes waived their right to assert a statute of limitations defense under the agreed‑upon terms of the promissory note. The Buehnes argued that the note’s waiver provision was “void against public policy and unenforceable.” The Court declined to decide on the question as to when the statute of limitations began to run, and instead focused its analysis on the enforceability of the note’s waiver provision.
The Court began its opinion by pointing out that the Buehnes expressly waived the statute of limitations defense when they agreed to the terms of the promissory note and ruled that they failed to carry the burden of establishing that the waiver provision was void for public policy reasons. At no point did the Buehnes claim that the waiver was illegal or ambiguous, that they were incompetent to understand the agreement, or that they were induced to enter into the agreement on the basis of fraud, mistake, or duress. As a result, their only potential defense was that the waiver offended public policy, a standard which the United States Supreme Court required in United Paperworkers Intern. Union v. Misco, Inc. to be explicit, well‑defined and dominant, and ascertained “by reference to the laws and legal precedents.” 484 U.S. 29, 108 S. Ct. 364, 98 L. Ed. 2d 286 (1987).
In its analysis, the Court noted that the waiver provision made no attempt to abbreviate the statute of limitations, nor constrain a party’s access to the courts. Instead, the Court viewed First Security’s ability to delay filing suit as a potential benefit for the Buehnes, allowing them additional time to work out a compromise or settlement. In addition, the Court highlighted that the Buehnes made no showing, and even failed to allege, prejudice resulting from First Security’s delay in filing suit. The Court went on to discuss the practical purposes of the statute of limitations, including sparing courts from litigating stale claims and mitigating concerns about evidence that is corrupted or diminished over time. Neither of these concerns were applicable in this case; in fact, the promissory note was not set to mature until October 2025, and there was no dispute of fact in regard to the Buehnes’ default on the note.
As such, the Court found that the Buehnes effectively waived their right to raise the statute of limitations as an affirmative defense to First Security’s foreclosure action, and such waiver did not violate public policy. Instead, the Court viewed that upholding the waiver provision supported Kansas’ public policy favoring freedom to contract.