Thursday, April 20, 2017

FYI: 9th Cir Holds Mortgagee's "Sold Out Second" Claim Not Barred by California's 4-Yr Statute of Limitations

The U.S. Court of Appeals for the Ninth Circuit recently reversed a ruling that disallowed an unsecured creditor's claim filed in a California bankruptcy court based on the forum state's statute of limitations. 

In so ruling, the Ninth Circuit held that, although courts typically apply the forum state's statute of limitations if the contract is silent on the issue, exceptional circumstances warranted the application of a longer statute of limitations here, because the creditor had no option but to enforce its claim in the forum based on where the bankruptcy petition was filed.  

A copy of the opinion is available at:  Link to Opinion

In 2007, the plaintiff borrowers ("Borrowers") purchased a condominium in California with two loans secured by liens against the property, of which a bank ("Bank") held the junior lien.

Borrowers' promissory note to Bank 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."

Borrowers defaulted, the senior lender foreclosed, and Bank was left holding an unsecured claim in the amount of $42,000. 

Borrowers filed bankruptcy, and Bank filed a proof of claim based on the 2007 note.  Borrowers objected to the claim on the grounds that the claim was barred by California's applicable four-year statute of limitations.  Cal. Code Civ. Proc. § 337.  Bank argued that its claim was timely because the promissory note's choice of Ohio law incorporated Ohio's six-year statute of limitations period.  Ohio Rev. Code § 1303.16.

The bankruptcy court held that the promissory note selected Ohio's six-year statute of limitations period, and overruled Borrowers' objection.  The Bankruptcy Appellate Panel ("BAP") reversed.  Bank appealed from the BAP's decision.

As you may recall, when a contract contains a choice of law provision, federal courts will enforce that 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, the Ninth Circuit construes it as silent on the issue.  See, e.g., Des Brisay v. Goldfield Corp., 637 F.2d 680, 682 (9th Cir. 1981).  Here, the Ninth Circuit determined that the choice of law provision at issue was materially identical to the one in Des Brisay. 

In Des Brisay, the Ninth Circuit applied the well-established rule that a federal right of action for which no statute of limitations was provided was subject to the limitations period which the forum state applies to analogous claims.  See, e.g., Wilson v. Garcia, 471 U.S. 261, 266-67 (1985).  However, unlike Des Brisay, this was not a federal securities case premised on an implied right of action.  This case involved a common law action on a promissory note for which both Ohio and California have statutorily prescribed a statute of limitations. 

To resolve this conflict of laws, the Ninth Circuit turned to the Restatement (Second) of Conflict of Laws.  See, e.g., Liberty Tool, & Mfg. (In re Vortex Fishing Systems), 277 F.3d 1057, 1069 (9th Cir. 2001). 

As you may recall, the 1971 version of the Restate (Second) of Conflict of Laws § 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 borrower the statute of limitations of another state."  The 1988 version of § 142 is similarly worded, except that it provides a limited carve out which states "unless exceptional circumstances of the case make such a result unreasonable … The forum will apply its own statute of limitations barring the claim."

Here, the Ninth Circuit held that § 142 compelled the application of the longer statute of limitations under Ohio law based on "exceptional circumstances." 

According to the Ninth Circuit, the unique structures of the Bankruptcy Code meant that, through no fault of Bank's, there was no forum for its claim other than the one in which Borrower's bankruptcy was filed.  This was not a case filed voluntarily by Bank in California, in which a dismissal on statute of limitations grounds would be without prejudice to bringing the same claim in Ohio.  Rather, the Court held, once Borrowers declared bankruptcy, Bank was obligated to bring all of its claims in the district where Borrowers filed. 

Thus, the Ninth Circuit concluded that disallowing Bank's claim under California's statute of limitations would be wholly unreasonable under the circumstances. 

Accordingly, the Ninth Circuit reversed the BAP's judgment and remanded the case to the bankruptcy court.


Eric Tsai
Maurice Wutscher LLP
 
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Email: etsai@MauriceWutscher.com

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