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In re Slaey

United States District Court, E.D. Virginia, Alexandria Division

September 1, 2015

IN RE: MARY D. SLAEY, Debtor.
v.
P.H. HARRINGTON, JR., Appellee MARY D. SLAEY, Appellant,

Page 501

Bankruptcy No. 13-10541-RGM.

For Mary D. Slaey, Appellant: Gregory H. Counts, LEAD ATTORNEY, Tyler Bartl Ramsdell & Counts PLC, Alexandria, VA.

For P. H. Harrington, Jr., Appellee: Christopher Stuart Moffitt, LEAD ATTORNEY, Christopher S. Moffitt, P.C., Alexandria, VA.

Page 502

MEMORANDUM OPINION

T. S. Ellis, III, United States District Judge.

This 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 Virginia statute, Va. Code § 8.01-232(A), limits and 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.

I.

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. 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 of 8% 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 installment of 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 Note was governed by Virginia's six-year statute of limitations applicable to negotiable instruments.[1] 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 funds borrowed" by 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:

AGREEMENT

For Ten Dollars ($10.00) cash in hand paid, receipt of which is hereby acknowledged by the undersigned, and for other

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good and valuable consideration, the undersigned agrees that she will not raise the defense of the statute of limitations in any legal proceeding that relates to funds borrowed by either DeNese Slaey or SIM[2] from P.H. Harrington, Jr. Esquire and/or P.H. Harrington, Jr. pension plan from January 1, 2002 through January 1, 2008.
Signed this 7th day of August, 2008.

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 Waiver presented to her by Harrington, and Harrington, in turn, signed the 2008 SOL Waiver as a witness.

Nearly five years later, on February 4, 2013, Slaey initiated bankruptcy proceedings in the Eastern District of Virginia by filing a petition for bankruptcy pursuant to Chapter 11 of the United States Bankruptcy Code. Harrington, by counsel, then filed a creditor's claim in Slaey's bankruptcy proceeding on September 4, 2013. The standard proof of 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 principal amount of the 2002 Note, as well as interest on the 2002 Note from July 10, 2002, to February 4, 2013.[3]

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 Slaey were 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 had jointly executed the 2008 SOL Waiver prior to 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 within the

Page 504

meaning of Virginia Code ยง 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 ...


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