In Gouletas, Bankruptcy Court Rules Statutes Of Limitations Have Limitations

In the recent Chicago bankruptcy case In re Gouletas, U.S. Bankruptcy Judge Timothy A. Barnes ruled that obligations are not extinguished by statutes of limitation and, even after the expiration of the limitation period, a creditor retains its rights in collateral so long as the underlying debt is enforceable.

Background

The Gouletas case involved a complicated series of remedial actions by a creditor that culminated in the creditor exercising its rights under a security agreement to force a LLC to bring a suit for breach of fiduciary duty and self-dealing against its former manager, the Chapter 7 debtor. The debtor argued the creditor's exercise of control over the LLC under the security agreement to force the commencement of the action against the debtor was invalid because the ten-year statute of limitations for actions on written contracts expired. More specifically, the debtor moved to dismiss the suit because he believed the security agreement was no longer enforceable after the expiration of the statute of limitations and, consequently, the creditor had no legal authority to direct the LLC to commence the action against him.

Discussion

Illinois law is clear that statutes of limitation do not extinguish obligations but only bar the remedy of an action on the debt. In Gouletas, Judge Barnes surveyed case law on the effect of statues of limitations on claims, including the Supreme Court's decision in Midland Funding LLC v. Johnson (bankruptcy proofs of claim based on time-barred claims are not "false, deceptive, or misleading" and do not violate the Fair Debt Collection Practices Act). Even though a statute of limitations might prevent a creditor from filing suit to collect the debt, the running of the statute of limitations does not "preclude setoff or recoupment of a time-barred contract.... Similarly, a secured party in possession of collateral when the statute runs may, nevertheless, retain its collateral until the time-barred debt is paid."1 Judge Barnes ruled there were no claims barred by the application of the statute of limitations. However, he held that even if the statutory time period expired, the creditor would retain its rights and property acquired under its security agreement, including the...