Provisional Credit and Statute of Limitations

Pay attention to these two terms:  “Provisional Credit” and “Statute of Limitations.”

A provisional credit occurs when a bank puts $ in your account while it is collecting an item from a third party.  The bank reserves the right to pull the $ from you if it can’t ultimately collect on the item.

The term was recently in the news when a real estate company was scammed by a person posing as a CFO for a Chinese company.  The CFO said he wanted to purchase a home in the US, and sent the real estate company a check for $30,000.00.  The real estate company deposited the check and the bank gave it a provisional credit.  After being assured twice by a bank employee that the funds were there and the check had cleared,  the real estate company wired the funds out of its account.

Only then was the CFO’s check discovered to be a counterfeit.  The bank charged back the $30,000 to the real estate company.  The real estate company sued the bank.

Not only did the real estate company lose, it also had to pay the bank’s attorneys’ fees to the tune of $72,000.00.  It turns out that the real estate company could not rely upon the bank’s oral assurances.  A provisional credit is just that – provisional.

Statute of Limitations is a defense to payment of a note.  The exact time is set out by statute – for example, in Texas the statute of limitations for a promissory note is 6 years.  If there has been no action on the note within that period of time, then the lender can’t sue for payment.

But the debt can be revived, and that is where borrowers often make mistakes.  One way to revive it is to make a payment.  Another way (and this one was the subject of a 2015 case) is to send a letter acknowledging the willingness to pay the debt.

In the 2015 case, the borrower owed 2 notes from 1999.  The borrower discussed doing some more deals with the lender, and wrote that he intended to use the proceeds from those deals to pay off the notes.   The Court ruled that was sufficient to establish a brand new obligation to pay the debt, and that payment was no longer excused under the Statute of Limitations.

Let’s be careful out there!

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