Collectability of Oral Family Loans

By Doug Chalgian on January 29, 2023

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A new unpublished decision from the Michigan Court of Appeals looks at a dispute over several intra-family oral loans.  In the course of an unusually lengthy opinion, the reader is provided a comprehensive course on when, to what extent, and for how long, such loans remain collectible. Albeit not a probate case per se, these issues come up frequently in estate and trust settlement work.

The History

Parents finance Child’s life and business ventures over a period of decades.  At least according to the Parents, these financial transactions were “loans” that Child has failed to pay back. So, they sue for breach of contract.

In addition to disputing the nature of the transactions as “loans,” Child files a Motion for Summary Disposition on the proposition that even if they were loans the statute of limitations on all of them has long since run, and the statutes of frauds make them void.

Both sides agree that the Parents first demanded repayment of these obligations three years before they filed the Complaint.

Child loses at the trial court, and, for the most part, loses in the COA.

Types of Loans

One of the things that makes this lengthy opinion a worth reading is the discussion related to the types of loans involved and the corresponding analysis of the statute of limitations as to each type.

According to Parent, Child was given some money with the understanding that he would repay it when the Parents demanded repayment (a simple “demand loans).

Other loans, they say, were to be repaid when a certain event occurred, such as when the Child became financially stable so as to have the wherewithal to be able to afford to repay.  What we might call: loans which become due upon the occurrence of an event.

Other loans were simple installment loans, which installment payments were to begin immediately upon the making of the loan.

Finally, there were loans that were a mix of installment and event-triggered loans.  That is, upon the occurrence of a triggering event, the Child would be obligated to begin paying back the loan in installments.

Statute of Limitations

The statute of limitations on a breach of contract is six years.  The issue is when the clock starts ticking.

For the demand notes and the event-triggered loans, the rule is that the statute of limitations begins to run when the demand if made or the event occurs, which are fact findings that, in this case, have yet to be established.  A caveat to the demand notes is the rule that the period of time between the loan and the demand cannot be unreasonable.

For the immediately owing installment note, the statute of limitations runs as to each individual installment separately on the date that each individual installment payment comes due.  The COA notes that the “continuing wrong” doctrine does not apply to such transactions.  Which is to say that one can only go back six years, and installments that were due prior to that time are outside the statute of limitations and uncollectible,

Logically, the statute of limitations on instalment contracts that begin upon demand or upon the occurrence of an event, is based on the date the installments become due after the obligation to repay has been triggered.

Statutes of Frauds

The Child also raises two differing statutes of frauds as defenses.

MCL 566.106 requires that agreements re interests in real estate must be in writing.

MCL 566.132(1)(a) mandates that agreements which by their terms must be performed beyond a period of one year, must be in writing.

Child says that one of the so-called loans was for the transfer of a gas station from Parents to him.  Accordingly, he claims to be protected by the statute of frauds relating to real property.  But the COA points out that, according to the Complaint, what was actually conveyed was stock in the entity that owned the realty on which the gas station was located.  The COA cites Michigan decisions that have held that the conveyance of stock in an entity that holds real estate is not subject to the statute of frauds on realty.  The Child loses.

Child says that all of the loans are nonetheless unenforceable under the one-year statute of frauds.  The COA agrees that the one-year statute of frauds is grounds for dismissing the installment loans, including the installment loans that were event-triggered because in each instance the installment payment period extended beyond one year.  That is true notwithstanding the Parents’ argument that the fact that some payments had been made on some of these loans (aka “partial performance”) because, the COA says, the doctrine of partial performance is not applicable to contracts dealing with personal property. The Child gets a partial victory, but not so fast….

Equitable Estoppel

Parents argue that pursuant to the doctrine of equitable estoppel the Child is precluded from arguing that either the statute of limitations or statute of frauds applies.  The evidence tendered by Parents is that Child kept telling them that he would pay the loans in full when his financial situation improved, and that he also said he did not want his obligation reduced to a writing because such a writing would potentially interfere with his efforts to obtain financing from other sources for other ventures.  This was enough for the COA to conclude that the Parents had adequately established a basis for equitable estoppel as to both defenses.

The Opinion

This is one of the longer opinions I’ve seen from the COA.

To read Mashni Revocable Trust v Estate of Boulos Mashni, click here.

The case is unpublished.



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mm By: Doug Chalgian
Doug Chalgian

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