The choice of law in a contract governs the statute of limitations on the allowance of a claim in bankruptcy, but not for the reason you would think.
In fact, the governing statute of limitations would be different outside of bankruptcy.
In an opinion on April 5 written by District Judge Edward R. Korman, sitting by designation, the Ninth Circuit explained why the result is different and more forgiving in bankruptcy.
The Facts
A subordinate mortgage lender based in Ohio filed a claim against a debtor in a California bankruptcy court pertaining to a mortgage on the debtor’s home in California. The loan documents provided that the note would be governed by the laws of Ohio, but “without regard to conflict of law principles.”
The debtor objected to the lender’s proof of claim, saying it was outside of California’s four-year statute of limitations. The lender contended that the claim was valid under Ohio’s six-year statute.
The bankruptcy court allowed the claim, but the Ninth Circuit Bankruptcy Appellate Panel reversed. Judge Korman, who ordinarily sits in Brooklyn, N.Y., reversed the BAP by applying Ohio law.
The Circuit’s Analysis
Two choice-of-law principles chiefly governed the outcome, Judge Korman said.
First, a contractual choice of law will not apply unless it specifically incorporates the chosen state’s statute of limitations. Why? Because choice-of-law provisions are mainly concerned with substantive law, and statutes of limitations are considered procedural.
For instance, dismissal under a statute of limitations is generally considered to be without prejudice to bringing the suit in another state with a longer statute.
Consequently, Ninth Circuit law would not immediately invoke Ohio’s longer statute of limitations, but that was not the end of the story.
The second principle arises from the Ninth Circuit’s general policy to follow the Restatement (Second) of Conflict of Laws. In this case, Section 142 of the Restatement was applicable.
Section 142 says that a forum will apply its own statute “unless the exceptional circumstances of the case make such a result unreasonable.”
Judge Korman said that the case presented the exceptional circumstances required to apply Ohio law, rather than the law of the forum, which was California. He relied on a comment in the Restatement that says that an unjust circumstance arises when an alternative forum is not available “through no fault of the plaintiff.”
In the case at bar, the lender could not sue in Ohio because the Bankruptcy Code required filing the claim in California. Judge Korman said that the proof of claim was “not a case filed voluntarily in California, in which a dismissal would be without prejudice to bringing the same claim in Ohio.”
Since the claim had to be filed in bankruptcy court, rejecting the claim “would be the functional equivalent of a dismissal on the merits,” Judge Korman said.
To prevent a procedural rule from becoming substantive, Judge Korman and a Ninth Circuit judge constituted the majority on the panel and applied Ohio’s longer statute to reverse the BAP.
By using what he called a shorter and more direct route, Circuit Judge A. Wallace Tashima reached the same result.
Judge Tashima would have relied on the contract’s choice-of-law provision, which picked Ohio “without regard to conflict of law principles.” He saw no valid reason for ignoring the parties’ choice of law.