The Ninth Circuit Bankruptcy Appellate Panel (“BAP”) recently issued the opinion, Sterba v. PNC Bank (In re Sterba), BAP No. NC-13-1590-KuDJu (9th Cir. BAP Aug. 27, 2014), which held that the bankruptcy court improperly relied on California’s choice of law rules instead of Ninth Circuit precedent in determining the timeliness of a creditor’s claim against the bankruptcy estate. In this case, the Chapter 7 debtors (“Debtors”) appealed from an order overruling their objection to the proof of claim filed by PNC Bank. The Debtors argued that PNC’s claim was barred by a four-year statute of limitations under California law. The bankruptcy court found that Ohio law applied – and thus a six-year statute of limitations applied – based on the choice of law provision set forth in the promissory note on which PNC’s claim was based.
The issue before the BAP was which choice of law rules apply. The bankruptcy court had held that, when a federal court considers claims based on state law, the forum state’s choice of law rules apply. The BAP found that the bankruptcy court improperly relied on California’s choice of law rules and appeared unaware of a Ninth Circuit case on point. In Des Brisay v. Goldfield Corp., 637 F.2d 680, 682 (9th Cir. 1981), the Ninth Circuit held as a matter of law that standard contractual choice of law provisions do not cover conflicts between statute of limitations. Rather, choice of law issues in bankruptcy cases are governed by federal choice of law rules. Although both California and federal choice of law rules generally follow the Restatement (Second) Conflict of Laws, the bankruptcy court improperly focused on California’s interpretation of the Restatement. Accordingly, the Ninth Circuit reversed the bankruptcy court’s decision. To see the full opinion, please click here.