## Facts

- In 2007, Richard and Olga Sterba bought a condominium in California using two purchase-money loans, each secured by a lien on the condo.
- The junior loan was evidenced by a promissory note issued by National City Bank, an Ohio bank.
- The promissory note contained a general choice-of-law clause stating the note was “governed by the laws of Ohio,” but it did not expressly mention statutes of limitations.
- The Sterbas defaulted on their loan obligations a few months after the purchase.
- The senior lender foreclosed on the condo, extinguishing the junior lien and leaving an unsecured deficiency of about $42,000 on the junior note.
- In 2013, the Sterbas filed a bankruptcy case in California (Chapter 13).
- National City’s successor, PNC Bank, filed a proof of claim based on the junior promissory note.
- The Sterbas objected to the claim as untimely under California’s four-year statute of limitations for actions on written contracts.
- PNC argued the claim was timely under Ohio’s six-year statute of limitations and that Ohio law applied because of the note’s choice-of-law provision.
- The bankruptcy court agreed with PNC and allowed the claim; the Bankruptcy Appellate Panel (BAP) reversed; PNC appealed to the Ninth Circuit.

## Issues

1. Does a general contractual choice-of-law clause providing that a promissory note is “governed by” Ohio law also select Ohio’s statute of limitations when the clause does not expressly refer to limitations?
2. If the clause is silent on limitations, should a federal bankruptcy court apply the forum state’s statute of limitations (California’s) or apply Ohio’s longer limitations period under Restatement (Second) of Conflict of Laws § 142 because of “exceptional circumstances”?

## Decision

- The Ninth Circuit reversed the BAP and remanded.
- The court held the note’s general Ohio choice-of-law clause did not, by itself, incorporate Ohio’s statute of limitations and therefore was treated as silent on the limitations question.
- Applying federal common-law choice-of-law rules in bankruptcy and Restatement (Second) of Conflict of Laws § 142 (1988 revision), the court concluded that “exceptional circumstances” justified applying Ohio’s six-year statute of limitations rather than California’s four-year period.
- Because Ohio’s limitations period applied, PNC’s proof of claim was timely.

## Legal Principles

- In bankruptcy cases involving state-law claims, federal common-law choice-of-law rules apply.
- A generic contractual provision that an agreement is “governed by” a particular state’s law does not select that state’s statute of limitations unless the clause expressly addresses limitations.
- Under Restatement (Second) of Conflict of Laws § 142 (1988), the forum’s statute of limitations generally applies, but a court may apply another state’s limitations period in “exceptional circumstances.”
- “Exceptional circumstances” may exist in bankruptcy where the creditor has no meaningful ability to choose the forum for litigating its claim (because the claim must be asserted in the debtor’s bankruptcy case) and where applying the forum’s shorter limitations period would bar a claim that remains timely under another state’s law tied to the parties’ agreement.

## Conclusion

The Ninth Circuit held that the promissory note’s Ohio choice-of-law clause did not itself choose Ohio’s statute of limitations, but that federal bankruptcy choice-of-law principles and “exceptional circumstances” under Restatement § 142 supported applying Ohio’s six-year limitations period; therefore, PNC’s bankruptcy claim on the note was timely, and the BAP’s contrary ruling was reversed and remanded.


PNC Bank v. Sterba (In re Sterba), 852 F.3d 1175 (2017)