Pnc Bank v. Richard Sterba
852 F.3d 1175 (2017)
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Rule of Law:
In a bankruptcy proceeding governed by federal choice-of-law rules, a general choice-of-law clause in a contract is insufficient to select a specific statute of limitations. However, the compulsory nature of a bankruptcy forum constitutes an "exceptional circumstance" under the Restatement (Second) of Conflict of Laws § 142, permitting a court to apply a non-forum state's longer statute of limitations to prevent an unreasonable result.
Facts:
- In 2007, the Sterbas purchased a condominium in California.
- The Sterbas took out two loans to finance the purchase, with the junior loan held by National City Bank.
- The promissory note for the National City Bank loan contained a clause stating the note would be governed by and construed in accordance with the laws of Ohio.
- Less than one year after obtaining the loans, the Sterbas defaulted.
- The senior lender foreclosed on the property, leaving National City Bank with an unsecured debt of approximately $42,000.
- PNC Bank subsequently became the successor in interest to National City Bank's claim.
Procedural Posture:
- The Sterbas filed for bankruptcy in the U.S. Bankruptcy Court for the Northern District of California.
- PNC Bank filed a proof of claim for the unpaid debt.
- The Sterbas objected to PNC's claim, arguing it was barred by California's four-year statute of limitations.
- The bankruptcy court, as the court of first instance, overruled the Sterbas' objection, applying Ohio's six-year statute of limitations.
- The Sterbas appealed to the Bankruptcy Appellate Panel (BAP), an intermediate appellate court.
- The BAP reversed the bankruptcy court's decision, siding with the Sterbas.
- PNC Bank, as appellant, appealed the BAP's decision to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
In a bankruptcy proceeding where a promissory note's general choice-of-law clause is silent on the statute of limitations, must the court apply the forum state's shorter limitations period, or may it apply another state's longer period under federal choice-of-law rules due to exceptional circumstances?
Opinions:
Majority - Korman, District Judge
No. The court is not required to apply the forum state's shorter limitations period when exceptional circumstances make that result unreasonable. While a general choice-of-law provision that does not expressly mention the statute of limitations is deemed silent on the issue, federal choice-of-law rules, which follow the Restatement (Second) of Conflict of Laws, govern the analysis. The Restatement § 142 generally directs a court to apply its own (the forum's) statute of limitations. However, the 1988 version of § 142 contains an exception for 'exceptional circumstances.' The compulsory nature of bankruptcy proceedings, which forces a creditor like PNC to bring its claim in the single forum where the debtor filed, constitutes such an exceptional circumstance because dismissal is effectively on the merits, as no alternative forum exists. Therefore, applying Ohio's longer statute of limitations is appropriate to avoid an unreasonable and unjust result.
Concurring - Tashima, Circuit Judge
No. The court should apply Ohio's longer statute of limitations, but for a more direct contractual reason. The promissory note's choice-of-law clause stated that Ohio law should apply 'without regard to conflict of law principles.' The majority's complex analysis under Restatement § 142 is exactly the type of 'conflict of law' analysis the parties contracted to avoid. This phrase effectively incorporates all of Ohio's law, including its statute of limitations, making it unnecessary to resort to a federal common law conflicts analysis. The court should simply honor the parties' explicit agreement.
Analysis:
This decision carves out a significant exception for bankruptcy cases within the Ninth Circuit's choice-of-law jurisprudence. By classifying the compulsory nature of bankruptcy as an 'exceptional circumstance' under the Restatement, the court protects creditors from having otherwise valid claims extinguished solely because a debtor files for bankruptcy in a state with a shorter statute of limitations. This ruling harmonizes the principle that statutes of limitation are typically procedural and governed by forum law with the unique, non-discretionary reality of bankruptcy claims. It establishes a clear precedent that prevents debtors from using the bankruptcy system to effectively 'forum shop' for favorable limitations periods.
