Pnc Bank v. Richard Sterba

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE RICHARD STERBA; OLGA No. 14-60061
STERBA,
Debtors, BAP No.
13-1590
PNC BANK,
Appellant, OPINION
v.
RICHARD STERBA AND OLGA
STERBA,
Appellees.
LINDA S. GREEN, Chapter 7
Trustee,
Real-party-in-interest.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Kurtz, Dunn, and Jury, Bankruptcy Judges, Presiding
Submitted October 18, 2016*
San Francisco, California
Filed April 5, 2017
*
The panel unanimously finds this case suitable for decision without
oral argument. See Fed. R. App. P. 34(a)(2)(C).
2 IN RE STERBA
Before: A. Wallace Tashima and Milan D. Smith, Jr.,
Circuit Judges, and Edward R. Korman,** District Judge.
Opinion by Judge Korman;
Concurrence by Judge Tashima
SUMMARY***
Bankruptcy
The panel reversed the Bankruptcy Appellate Panel’s
reversal of the bankruptcy court’s ruling that a creditor’s
claim was timely.
The creditor’s claim was based on a promissory note on
real property in California. The claim would be barred by a
four-year California statute of limitations but not by a six-
year Ohio statute of limitations. The bankruptcy court ruled
that the Ohio statute of limitations applied because the
promissory note stated that it would be governed by the laws
of Ohio.
The panel held that under federal common law, the
contractual choice-of-law provision did not expressly include
the statute of limitations and therefore was silent on the issue.
Under § 142 of the Restatement (Second) of Conflict of
**
The Honorable Edward R. Korman, United States District Judge for
the Eastern District of New York, sitting by designation.
***
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE STERBA 3
Laws, the statute of limitations of the forum state, California,
would generally apply. Exceptional circumstances, however,
directed the application of the Ohio statute of limitations
because the unique strictures of the Bankruptcy Code meant
that, through no fault of the creditor, the only forum for its
claim was the Northern District of California.
Concurring in the judgment, Judge Tashima wrote that,
under § 187 of the Restatement, the law of Ohio, the state
chosen by the parties, must be applied.
COUNSEL
Douglas B. Provencher and Janis H. Grattan, Provencher &
Flatt LLP, Santa Rosa, California, for Appellant.
Thomas P. Kelly III, Santa Rosa, California, for Appellees.
4 IN RE STERBA
OPINION
KORMAN, District Judge:
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 cases. 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 from 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),
59 F.3d 942, 948 (9th Cir. 1995).1
This case adds another wrinkle: The dispute here arises
out of a clause in a promissory note providing that it should
be 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 select 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 court determine which
state’s limitations period applies?
1
There is a circuit split on this issue. Compare In re Lindsay with
Bianco v. Erkins (In re Gaston & Snow), 243 F.3d 599, 605–7 (2d Cir.
2001) (holding that the forum state’s choice-of-law rules apply in the
absence of a strong federal interest), and Compliance Marine, Inc. v.
Campbell (In re Merritt Dredging Co., Inc.), 839 F.2d 203, 206 (4th Cir.
1988) (same).
IN RE STERBA 5
BACKGROUND
In 2007, the Sterbas bought a condo in California. They
took out two loans secured by liens against the property, of
which National 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 regard 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
Sterbas’ objection. The Bankruptcy Appellate Panel reversed.
PNC appeals from the BAP’s decision.
DISCUSSION
Ordinarily, when parties to an agreement select the law
they want to govern an issue, federal courts will enforce that
6 IN RE STERBA
choice. See, e.g., Flores v. Am. Seafoods Co., 335 F.3d 904,
916–19 (9th Cir. 2003). But where a choice-of-law provision
does not expressly include the statute of limitations, we have
construed it as silent on the issue. In Des Brisay v. Goldfield
Corp.—a federal securities case—we applied federal
common law to hold that a clause providing for a contract to
“be governed by and interpreted according to the laws of the
[Canadian] province of British Columbia,” did not include the
statute of limitations. 637 F.2d 680, 682 (9th Cir. 1981). The
contractual choice-of-law provision in this case, adopting
Ohio law, is materially identical to the one we construed in
Des Brisay.
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, 425 U.S. 185, 210 n.29 (1976).” Id. (additional
citations omitted). As the citation to Ernst & Ernst suggests,
this holding was based on the principle that where “no statute
of limitations is provided for” a federal cause of action, “the
law of limitations of the forum State is followed.” Ernst &
Ernst, 425 U.S. at 210 n.29.
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
IN RE STERBA 7
applicable limitations period. The fact that Des Brisay
involved a suit under an implied right of action allowed us, in
the absence of an effective choice by the parties, to apply the
simple, well-established rule that a federal right of action for
which no statute of limitations is provided is subject to the
limitations period which the forum state applies to analogous
claims. Wilson v. Garcia, 471 U.S. 261, 266–67 (1985).
Rather than an implied cause of action under federal law,
this case involves a common-law action on a promissory note,
for 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), 277 F.3d 1057, 1069
(9th Cir. 2001), as a “source of general choice-of-law
principles,” and “an appropriate starting point for applying
federal common law in this area.” Harris v. Polskie Linie
Lotnicze, 820 F.2d 1000, 1003 (9th Cir. 1987). More recently,
in Flores v. American Seafoods Co., we observed that we
only “consider[ed] the principles stated in [the] Restatement
(Second) of Conflict of Laws § 187 to the extent we
conclude . . . that they are persuasive.” 335 F.3d 904, 919 (9th
Cir. 2003). We have directly adopted § 142, the particular
provision of the Second Restatement applicable here.
The 1971 version of § 142 provides that “(1) An action
will not be maintained if it is barred by the statute of
8 IN RE STERBA
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).2
In the ordinary case, that interest is treated as controlling
because vindicating it imposes no real prejudice on the time-
barred party—dismissal of a claim as barred by the statute of
limitations generally “does not constitute a judgment on the
merits,” and following such a dismissal “the plaintiff will
usually remain free to sue” in a state with a more generous
limitations period. Id. But where a countervailing interest
exists such that “under the special circumstances of the case
2
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, 30 Cal. Rptr. 3d 588, 594 (Cal. App. 2005).
California’s willingness to do so suggests that it is not concerned as much
with preventing the prosecution of stale claims as it is with vindicating the
interest of contracting parties in seeing their agreements enforced. Indeed,
California has adopted § 187 of the Second Restatement, which broadly
enforces “[t]he law of the state chosen by the parties to govern their
contractual rights and duties.” See Nedlloyd Lines B.V. v. Superior Court,
834 P.2d 1148, 1150–51 (Cal. 1992).
IN RE STERBA 9
dismissal . . . would be unjust,” the forum (here, California)
will apply another state’s longer statute of limitations. Id.
The application of § 142 compels the conclusion that
California’s shorter statute of limitations does not apply here,
because this case presents the sort of “exceptional
circumstances” under which the 1988 version of the Second
Restatement looks past the law of the forum, and applies a
longer foreign limitations period. The Restatement, to be
sure, does not provide an exhaustive or technical definition of
an exceptional circumstance. Nevertheless, the comment to
the 1988 version of § 142 makes clear that the present case
comes within that category. Indeed, this case is on all fours
with the Restatement’s only example of what would
constitute such a “special,” “unjust” circumstance: “[W]hen
through no fault of the plaintiff an alternative forum is not
available as, for example, where jurisdiction could not be
obtained over the defendant in any [other] state . . . .” Id.
Here—exactly as the comment describes—the unique
strictures of the bankruptcy 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, 41 Cal. Rptr. 3d 833, 837 (Cal. App. 2006). Rather,
once the Sterbas declared bankruptcy, PNC was obligated to
bring all its claims in the district where the Sterbas filed.
Under these circumstances, to reject PNC’s claim as time-
barred would be the functional equivalent of a dismissal on
the merits. Where another jurisdiction—National City’s home
state of Ohio—would hear the claim, and has a substantial
interest in its resolution, disallowing it by mechanical
10 IN RE STERBA
adoption of California’s statute of limitations would be
wholly unreasonable. We hold that under these exceptional
circumstances, the bankruptcy court was correct to apply
Ohio’s six-year statute of limitations and overrule the
Sterbas’ objection to PNC’s claim.
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 “[f]ederal common law follows the approach outlined in
the Restatement (Second) of Conflict of Laws,” and that
“[a]ccordingly, barring exceptional circumstances” we would
select a statute of limitations by following the approach
outlined in the 1988 version of § 142. 465 F.3d 992, 997 (9th
Cir. 2006) (emphasis added). While the panel in Huynh
eventually applied the statute of limitations dictated by a
straightforward application of § 142, it did so only after
expressly determining that such exceptional circumstances
were not in fact present. See id. at 1005.
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
local law “prescribing how litigation shall be conducted,” and
does not specifically address the statute of limitations. The
IN RE STERBA 11
comment to which Des Brisay cites, however, does point to
the statute of limitations as an example of a rule “primarily
concern[ing] judicial administration,” with respect to which
“the forum will usually apply its own rule.” § 122 cmt. a
(1971) (citing § 142) (emphasis added).
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 637 F.2d at 682. Even
if we had not already decided the question in Huynh, nothing
in Des Brisay would require us to apply the 1971 version of
§ 142. Moreover, the difference between the 1971 and 1988
versions of § 142 is not significant. The 1988 version simply
creates a very narrow exception to the general rule—
essentially unchanged from 1971—that the law of the forum
governs issues relating to the statute of limitations. Thus,
even if we were forced by precedent to apply the 1971
version of § 142, adopting the kind of narrow exception to the
general rule that now appears in the 1988 version would
hardly create an “irreconcilable conflict,” Atonio v. Wards
Cove Packing Co., Inc., 810 F.2d 1477, 1478–79 (9th Cir.
1987) (en banc), or threaten the “uniformity of the court’s
decisions,” Fed. R. App. P. 35(a)(1), and we would not have
to go en banc to do so.
CONCLUSION
The judgement of the Bankruptcy Appellate Panel is
REVERSED, and the case is REMANDED to the
bankruptcy court for further proceedings consistent with this
opinion.
12 IN RE STERBA
TASHIMA, Circuit Judge, 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 4 & 7, 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.), 277 F.3d
1057, 1069 (9th Cir. 2001).
1
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 6. 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., 637 F.2d 680, 682 (9th Cir. 1981).
IN RE STERBA 13
In turn, § 187 of 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, 722 F.3d 1151, 1155 (9th Cir.
2013) (applying New York law “without regard to New
York’s choice of law principles” (footnote omitted)); Fuku-
Bonsai, Inc. v. E.I. DuPont de Nemours & Co., 187 F.3d
1031, 1033 n.3 (9th Cir. 1999) (applying Delaware law
“without giving effect to the conflict of laws or choice of law
provisions thereof”); id. at 1034 (“it is agreed that Delaware
law applies”) (Boochever, J., dissenting).
Under this line of cases and § 187, there is no reason 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 be 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 judgment
REVERSING the judgment of the BAP and REMANDING
for further proceedings.