Pnc Bank v. Richard SterbaPnc Bank v. Richard Sterba
Lead Opinion
Concurrence by Judge TASHIMA
OPINION
When it comes to conflicts of law, bankruptcy is a bit of an odd duck. The substantive focus is often on state law, as it always is in diversity eases. But where a federal court sitting in diversity applies the forum state’s choice-of-law rules — a straightforward policy that prevents the forum’s federal character frоm determining the outcome of disputes that are really about state law — we have held that in bankruptcy, federal choice-of-law rules control which state’s law applies. Lindsay v. Beneficial Reinsurance Co. (In re Lindsay),
This case adds another wrinkle: The dispute here arises out of a clause in a promissory note providing that it should bе construed according to Ohio law. So we face two issues — one sounding in contract, the other in conflict of laws. The first is whether such a general choice of law clause encompasses issues relating to the statute of limitations, or whether the parties to an agreement must seleсt a limitations period expressly if they want to do so at all? The second is, if the parties must select a statute of limitations expressly and fail to do so, how should a bankruptcy
BACKGROUND
In 2007, the Sterbas bought a condo in California. They took out two loans secured by liens against the property, of which Nationаl City Bank held the junior one. The Sterbas’ promissory note to National City provided in relevant part that: “[T]he Bank is a national bank located in Ohio and Bank’s decision to make this Loan ... was made in Ohio. Therefore, this Note shall be governed by and construed in accordance with ... the laws of Ohio ... without rеgard to conflict of law principles.” Less than a year after the loans were made, the Sterbas defaulted, the senior lender foreclosed, and National City was left holding the bag for $42,000.
When the Sterbas filed for bankruptcy in the Northern District of California in 2013, PNC Bank (National City’s successor in interest) filed a claim based on the 2007 note. The Sterbas objected, contending that the claim was barred by California’s applicable four-year statute of limitations. See Cal. Code Civ. Proc. § 337. PNC, in turn, argued that the claim was timely because the promissory note’s choice of Ohio law incorporated Ohio’s six-year limitations period. See Ohio Rev. Code § 1303.16.
The bankruptcy judge agreed that the promissory note selected Ohio’s six-year limitations period, and overruled the Ster-bas’ objection. The Bankruptcy Appellate Panel reversed. PNC appeals from the BAP’s decision.
DISCUSSION
Ordinarily, when parties to an agreement select thе law they want to govern an issue, federal courts will enforce that choice. See, e.g., Flores v. Am. Seafoods Co.,
Our holding in Des Brisay was based on our recognition that choice-of-law provisions are concerned mainly with substantive law, and “generally do not contemplate ... statutes of limitation,” which are “usually considered” a matter of local procedure “related to judicial administration.” Id. (citing Restatement (Second) of Conflict of Laws § 122 cmt. a). Unbound by the contractual choice-of-law provision, we went on to hold that “[t]he rule in federal securities actions is to apply the applicable limitations period of the state in which the federal court sits. Ernst & Ernst v. Hochfelder,
Unlike Des Brisay, this is not a federal securities case premised on an implied right of action. Nor is this a case, like those arising under 42 U.S.C. § 1983, where Congress has created a right of action but remained silent as to the applicable limitations period. The fact that Des Brisay involved a suit under an implied right of action allowed us, in the absence of
Rather than an implied cause of action under federal law, this case involves a common-law action on a promissory note, fоr which both Ohio and California have statutorily prescribed a statute of limitations. So while Des Brisay resolves the contractual issue in this case, it does not dispose of the conflicts-of-law problem that results. Under these circumstances, the applicable rule is prescribed by § 142 of the Restatement (Second) of Conflict of Laws, which addresses conflicts between statutes of limitation.
Federal choice-of-law rules in the Ninth Circuit follow the Restatement (Second) of Conflict of Laws, see Liberty Tool, & Mfg. (In re Vortex Fishing Systems),
The 1971 version of § 142 provides that “(1) An action will not be maintained if it is barred by the statute of limitations of the forum, including a provision borrowing the statute of limitations of another state.” The 1988 version of § 142 is similarly worded, except that it provides a limited carve-out for “exceptional circumstances.” Specifically and in relevant part, it reads as follows: “[I]n general, unless the exceptional circumstances of the case make such a result unreasonable ... The forum will apply its own statute of limitations barring the claim.” (emphasis added).
The Second Restatement’s preference for the forum state’s statute of limitations, in cases where it has the shorter limitations period, is based on the policy that “[a] state has a substantial interest in preventing the prosecution in its courts of claims which it deems to be ‘stale.’ ” § 142, cmt. f (1988).
Here — exactly as the comment describes — the unique strictures of the bankruрtcy code mean that, through no fault of PNC’s, there is no forum for its claim other than the Northern District of California. This is not a case filed voluntarily in California, in which a dismissal on statute of limitations grounds would be without prejudice to bringing the same claim in Ohio. See Mid-Century Ins. Co. v. Superior Court,
Des Brisay’s decision to rely on the 1971 version of § 122 of the Second Restatement, to hold that an agreement selecting a statute of limitations must do so expressly, does not bind us to apply the 1971 version of § 142 — which is identical to the 1988 version, with the exception of the narrow carve-out for “exceptional circumstances” on which we base our decision. There is clear Ninth Circuit precedent adopting the 1988 version of § 142. In Huynh v. Chase Manhattan Bank, a federal-question case where the underlying rights at stake (in deposits held by American banks in Vietnam) were not created by federal law, we held that “[fjederal common law follows the approach outlined in the Restatement (Second) of Conflict of Laws,” and that “[accordingly, barring exceptional circumstances” we would select a statute of limitations by following the approach outlined in the 1988 version of § 142.
Moreover, Des Brisay did not rely on either the 1971 or 1988 version of § 142. Rather, because it was decided in 1981, it relied on the comment to the 1971 version of § 122, the text of which provides that a court will generally apply its locаl law “prescribing how litigation shall be conducted,” and does not specifically address the statute of limitations. The comment to which Des Brisay cites, however, does point to the statute of limitations as an example of a rule “primarily concerning] judicial administration,” with respect to which “the forum will usually apply its
We need not take issue with this aspect of Des Brisay’s analysis, because it merely provided the basis for its holding that contractual choice-of-law provisions “generally” do not include the statute of limitations. See
CONCLUSION
The judgement of the Bankruptcy Appellate Panеl is REVERSED, and the case is REMANDED to the bankruptcy court for further proceedings consistent with this opinion.
Notes
. There is a circuit split on this issue. Compare In re Lindsay with Bianco v. Erkins (In re Gaston & Snow),
. We pass over the fact that, under the circumstances of this case, California has no interest in barring PNC's claim. California law would allow the parties to select their own limitations period, even if they wanted one longer than that prescribed by the California Legislature. See ABF Capital Corp. v. Berglass,
Concurrence Opinion
concurring in the judgment:
Although the majority reaches the correct result, it gets there by an unnecessarily circuitous route. Because I believe there is a more direct route, that is not only shorter, but preferable, I concur in the judgment only.
The promissory note at issue in this case contains the following choice-of-law provision:
[T]his Note shall be governed by and construed in accordance with ... the laws of Ohio, to the extent Ohio laws are not preempted by federal laws or regulations, and without regard to conflict of law principles.1
(Emphasis added.) The question we should be asking ourselves is whether there is any valid reason why the parties’ choice-of-law should not be honored? As the majority recognizes, Maj. Op. at 1177 & 1179, because this is a federal question case, federal choice-of-law rules, which generally follow the Restatement (Second) of Conflict of Laws (“Restatement”), apply. See Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.),
In turn, § 187 оf the Restatement provides that “[t]he law of the state chosen by the parties ... will be applied.... ” We have consistently honored the parties’ choice-of-law, including provisions of similar import to the italicized provision in this case that the chosen law applies “without regard to conflict of law principles.” See, e.g., Mortensen v. Bresnan Comm’cns, LLC,
Under this line of cases and § 187, there is no reаson not to give effect to the parties’ choice-of-law, which included their choice of the Ohio statute of limitations. That choice was made by inclusion of the phrase “without regard to conflict of law principles,” which, in this case, means without regard to any analysis that would otherwise bе called for under § 142 of the Restatement. Thus, the majority’s extended analysis of how § 142 should be applied in this case contravenes the parties’ choice-of-law that the Ohio statute of limitations should apply, “without regard to conflict of law principles.”
For these reasons, I concur in the judgmеnt REVERSING the judgment of the BAP and REMANDING for further proceedings.
. The majority completely ignores this italicized phrase in its analysis, noting only that “[t]he contractual choice-of-law provision in this case, adopting Ohio law, is materially identical to the one we construed in Des Brisay." Maj. Op. at 1178. But, of course, the choice-of-law provision at issue in Des Brisay did not include a provision like or comparable to the italicized phrase quoted in the text, above. See Des Brisay v. Goldfield Corp.,