In re George, 606 B.R. 236 (Bankr. E.D. Pa. 2019) –

A chapter 13 debtor objected to the proof of claim filed by a lender asserting an unsecured claim based on the debtor’s guaranty. The debtor contended that the guaranty was unenforceable because the statute of limitations expired.

The bankruptcy court noted that claims objections usually involve a burden-shifting framework. Under FRBP 3001(f) a properly filed a proof of claim provides prima facie evidence of the validity and amount of the claim. An objection must undercut at least one necessary element of the claim (described by the court as “bubble-bursting” evidence). If the objection creates an issue, both parties can present further evidence, with the ultimate burden of proof resting on the claimant.

In this case the debtor argued that the claim should be disallowed under section 501(b)(1) of the Bankruptcy Code as unenforceable against the debtor under state law. Specifically, he contended that the statute of limitations had expired.

The debtor was the principal of a business that applied to a bank for a line of credit. The credit application required a signature from the business entity. It also included a personal guaranty from the principal of the business, with a signature line for the principal.

The last sentence of the guaranty (located directly above the signature line) stated:

This Guaranty … is intended to take effect as an instrument under seal and shall be governed by the law of the state which governs the Documents.

The Business Credit Line Agreement also included a statement that the document was made as an instrument under seal. However, there was no signature line and it was not signed.

Under applicable state law the general statute of limitations for an “instrument in writing” was four years. However, the limitations period for an “instrument in writing under seal” was 20 years. It was clear that a personal guaranty constituted an instrument in writing, and a guaranty could be under seal even if the primary document was not.

Although the bank extended the loan maturity date to 2012, the loan remained unpaid. In 2016 the creditor made a demand for full payment, and then filed a complaint against the debtor and the business for collection in 2017. The parties agreed that (1) the statute of limitations began to run on the extended maturity date in 2012, and (2) the state court action was not commenced within four years.

Originally seals were impressions in wax using the signet ring of the signatory. However, over the years seals evolved into a design embossed or stamped on paper. Then with the advent of pre-printed contracts, contracts were presented to the signatory with the seal already inserted. The question for courts became whether the signatory intended to adopt the pre-printed seal.

State court decisions indicated that there is a presumption of the signatory’s intent to adopt the seal if there is an actual or textual seal next to the signature. Documents were held to be under seal where the word “SEAL” was preprinted near the signature line and where the execution clause read “Witness our hand and seal.” The debtor argued that in this case there was no actual seal or words to that effect next to a signature, and the statement that it was “intended to take effect” as a document under seal was insufficient.

Initially the debtor’s position was supported by the decision of a panel of a lower state court. However, that opinion was withdrawn and when the case was reheard en banc, the court concluded that use of the word “seal” was not required and unambiguous text was sufficient. In that case, the court found that the phrase “intends this to be a sealed instrument” was an unambiguous expression that the document was sealed.

The bankruptcy court found the en banc lower court decision to be well reasoned and predicted that the state supreme court would reach the same conclusion. Accordingly, it overruled the debtor’s objection, holding that (1) the statement above the guarantor’s signature line that the document “is intended to take effect as an instrument under seal” was a sufficient expression of intent such that the guaranty was a sealed instrument, and thus (2) the guaranty was subject to a 20 year limitations period, which clearly had not expired.

It is fair to say that today most lawyers do not give much thought to seals. However, finding that a single reference to “seal” in the general vicinity of a signature line can extend the statute of limitations period from four years to 20 years is enough to grab one’s attention.

Vicki R Harding, Esq.