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Dodging Unfriendly Statutes: How the Ninth Circuit May Have Limited Bankruptcy Petitions in its Circuit

By: Ryan J. Krumholz 

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

General choice of law provisions do not always incorporate a statute of limitations. Such an omission compels the application of a forum state’s statute of limitations.[1]  Specifically, courts apply the statute of limitations of the state in which they sit. However, a bankruptcy court may use the statute of limitations of the jurisdiction in the choice of law provision—even if the statute of limitations was not mentioned in the provision—provided that “exceptional circumstances” exist.[2] In In re Sterba, the Sterbas secured two loans secured by a condominium.[3]  By its terms, the junior lien, held by National City Bank (“NCB”), was governed by Ohio law per the terms of the promissory note.[4]  The Sterbas defaulted on the loan and timely filed for bankruptcy in the Northern District of California, after which PNC Bank, the successor in interest to NCB’s junior lien, filed a claim with the bankruptcy court.[5] Citing California’s four-year statute of limitations, the Sterbas objected to PNC’s filing as untimely.[6]  PNC contended that, because the parties agreed on an Ohio choice of law provision, Ohio’s six-year statute of limitations applied.[7]

The Ninth Circuit noted that the Restatement does not define “exceptional circumstance,” but the comment to the 1988 version of § 142 of the Restatement states that an exceptional circumstance exists “when through no fault of the plaintiff an alternative forum is not available[.]”[8] The court also recognized that the Bankruptcy Code mandates that all claims must be brought in the district in which the bankruptcy petition was filed. This qualified as an “exceptional circumstance” because it limited where PNC could bring its claims. Specifically, the court explained that the underlying purpose of applying a forum state’s statute of limitations when a choice of law provision is silent is that the party seeking to apply the choice of law jurisdiction’s statute of limitations can simply file suit in that jurisdiction if the party prefers that forum’s rules.[9]9 The court concluded that because PNC is precluded from bringing the claim in another jurisdiction, the policy behind applying the forum state’s statute of limitations is moot.[10] Because PNC could not file suit in Ohio, the Ohio statute of limitations could apply.[11]

Bankruptcy courts in the Ninth Circuit may apply statutes of limitation from other jurisdictions, even if the choice of law provision in a given contract did not contemplate the statute of limitations. Thus, parties must be mindful about where they file for bankruptcy. For example, if a party such as the Sterbas realizes that the choice of law jurisdiction has a longer statute of limitations, it may behoove them to file the bankruptcy petition outside of the Ninth Circuit, because they may be able to avoid that forum’s statute of limitations. However, this may cause individuals and entities who should file for bankruptcy to refrain from filing, because there may not be an alternate jurisdiction to file in. This is bad for the debtors because it may incentivize them to not seek bankruptcy protection, which prevents them from reestablishing their financial credibility. It also hurts creditors, who may never be able to secure a payment plan from debtors without the help of the Bankruptcy Code.

 



[1] RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 142; see also Des Brisay v. Goldfield Corp., 637 F.2d 680, 682 (9th Cir. 1981) (finding that a general choice of law provision selecting British Columbia did not incorporate British Columbia’s statute of limitations because it was not explicitly mentioned).

[2] See In re Sterba, 852 F.3d 1175, 1179 (9th Cir. 2017).

[3] Id. at 1178–80.

[4] Id.

[5] Id.

[6] Id.

[7] See id.

[8] Id.

[9] Id. at 1179–80.

[10] Id.

[11] Id. at 1179–81.