March 10, 2020
By Zack G. Lemon with Attorney W. David Arnold
When long-standing buyer-seller relationships begin to falter, sellers may hesitate to file a lawsuit to collect unpaid bills, instead trying to work out a resolution informally. If these negotiations go on too long, or if the buyer starts and stops payments over time, the seller’s lawsuit could be barred by the four-year statute of limitations. However, a recent Ohio appellate court decision offers some hope for recovery for sellers who file a lawsuit after lengthy negotiations fail to resolve the issues, or the buyer doesn’t live up to a payment plan.
In N. Frozen Foods, Inc., v. Farro, 2019-Ohio-5344, Plaintiff was a distributor of food and other restaurant supplies, and Defendants were a group of affiliated restaurant owners. The parties had a long-standing relationship, with Plaintiff selling Defendants approximately $4 million of products annually starting in 1995. The restaurant group started falling behind on its payments in 2009. The seller tried to work with the buyer, maintaining the relationship for another three years and agreeing to extended payment terms. By 2012, the buyer had an outstanding payable of $1.8 million, and the parties agreed to another negotiated payment plan. In 2013, the buyer again failed to meet the terms of the new agreement. This pattern continued for years, but it wasn’t until 2017 that seller filed a lawsuit seeking the unpaid sums the buyer still owed it.
The trial court granted summary judgment against the seller on statute of limitations grounds, because the lawsuit had been brought more than four years after the claim for payment originally arose. Effectively, because the seller spent so much time working to maintain a long-standing business relationship, entering into repeated installment payment plans, the trial court held it lost its chance to sue for the money the buyer owed.
On appeal, Ohio’s Eighth District Court of Appeals overturned the trial court’s decision, holding that equitable estoppel principles can be used to prevent the application of the statute of limitations. Promises to make a better settlement if a suit is not brought, affirmative statements that the statutory period to bring the suit is longer than it actually was, or other similar statements or actions that cause a seller to reasonably delay filing suit can be used to prevent application of the statute of limitations and keep the case in court.
This is an important case for sellers of goods on credit, who typically want to work with existing customers instead of hauling them into court. Working with a customer, including negotiations and one or more payment plans, can be the most effective business strategy, but it takes time and may result in finally bringing a lawsuit too late. The doctrine of equitable estoppel – essentially using equity to prevent the buyer from asserting a limitations period -- can be used by the seller to prevent a buyer from successfully asserting a statute of limitations defense should negotiations or payment plans fail.
When to negotiate and when to file a lawsuit can be tough decisions for any business. RCO Business attorneys can guide you through these decisions at the beginning of the conflict to protect your legal rights.
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