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Ninth Circuit Finds “Exceptional Circumstances,” Allows Time-Barred Claim

The Ninth Circuit Court of Appeals recently addressed whether general choice-of-law clauses encompass statutes of limitations and, if not, which state’s statute of limitations controls. The court ruled that while a general clause will not typically include a statute of limitations, there are cases in which “exceptional circumstances” dictate a departure from the standard rule.

Generally, when parties to an agreement select the law they want to govern an issue, federal courts abide by that decision.  Where a choice-of-law provision fails to explicitly reference whether it includes the state’s statute of limitations, courts will apply the law of the state in which the litigation occurs, absent “exceptional circumstances.”

In re Sterbia, concerns a promissory note containing a choice-of-law provision that designates Ohio law as governing the note.  Significantly, Ohio law contains a six-year statute of limitations for actions brought on rights arising from a promissory note.  The purchasers defaulted on the note, leading to a bankruptcy petition filed in California, which has a four-year statute of limitations.  The creditor filed for enforcement of the note and was initially granted relief by the bankruptcy judge applying the Ohio statute of limitations.  The Bankruptcy Appellate Panel, however, reversed the lower court’s decision and barred the claim under California’s four-year statute of limitations.

Acknowledging its prior cases detailing the general principal concerning choice-of-law provisions silent on statute of limitations, the Ninth Circuit pointed out that this case was different.  Bankruptcy actions present unique burdens to creditors seeking to enforce their rights under a promissory note.  Because the creditor had no choice but to file its action in federal bankruptcy court in California, the appellate court highlighted the “exceptional circumstances” carve-out to the general rule applying the forum state’s statute of limitations.  In rare cases, such as this, when the application of a forum state’s own statute of limitations will render the result unreasonable, a court may apply the statute of limitations of the state selected by the choice-of-law clause.  The Ninth Circuit held that, because the creditor had no choice but to file in California, it should be able to take advantage of Ohio’s longer time period to assert its rights under the promissory note.

It must be noted that the specific language used in the choice-of-law at issue included the phrase “this note shall be governed by and construed in accordance with… the laws of Ohio… without regard to conflict of law principles.”   A judge who concurred with the result but not the court’s reasoning, pointed to this phrase as a way to decide the case without appealing to the “exceptional circumstance” exception.  Dismissing this phrase almost entirely, the majority of the court made it clear that parties should take pains to explicitly include whether they intend a choice-of-law clause to include the chosen state’s statute of limitations.

The entire Ninth Circuit opinion may be found here.