Choice of Law and the Allowance of Bankruptcy Claims

In the case of In re Hionas, ___ B.R. ___, 2006 WL 3913760 (Bkrtcy.S.D.Fla.)(Isicoff J.) the Bankruptcy Court denied a casino's motion for summary judgment in its adversary proceeding to determine an alleged gambling debt nondischargeable. The decision also provides a review of the rules of choice of law in the 11th Circuit in the context of the allowance of a claim in a bankruptcy case.

The Court noted that normally a federal court hearing a matter pursuant to diversity jurisdiction must apply the law of the state in which the court sits pursuant to the ruling in the case of Erie Railroad v. Tompkins, 304 U.S. 64 (1938), including the conflict of law rules of the state in which the federal court sits. However, a federal court with jurisdiction over a matter by virtue of its bankruptcy jurisdiction, when considering the allowance of claims, is not sitting as a court of diversity and the court does not apply the law of the state where it sits. Bankruptcy courts must determine how and what claims should be allowed under equitable principles.

The Court stated that there is apparently a split among the courts as to whether a bankruptcy court should apply the conflicts of law provisions of the state in which it sits or whether it should apply federal law to determine which law should apply. But the Court stated that there does not appear to be a conflict when a bankruptcy court is considering allowance of claims, which is a matter subject to the bankruptcy court's core jurisdiction. The Court reviewed the Supreme Court's decision of Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156 (1946) and stated that it held that the determination by a bankruptcy court of which state law should apply in adjudicating the allowability of a claim should not be dictated by the happenstance of where the bankruptcy case is filed, but rather which law more logically relates to the claim and is most consistent with the dictates of the court's equitable jurisdiction. Furthermore this determination requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accomodate the equities among the parties to the policies of those states.

The Court further found that each of the cases that have followed Vanston in the context of the allowance of a claim have been consistent in recognizing the inapplicability of Erie and Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941) and apply a federal analysis to the choice of law issue in the claims allownace context. The Court noted that in the 11th Circuit, in order to determine which law should apply in making a decision regarding choice of law, the court must apply the "significant relationship" test although, depending on the nature of the dispute, more specific factors may have a bearing on the court's determination. See Dresdner Bank A.G v. M/V Olympia Voyager, 446 F.3d 1377 (11th Cir.2006).

The Court concluded by pointing out that whether Nevada law applies to the involved decision would be based on the significant relationships test and not solely on the language in the involved contracts.Jordan E. Bublick is a Miami Personal Bankruptcy Lawyer with over 25 years of experience in filing chapter 13 and chapter 7 bankruptcies. Miami Personal Bankruptcy Lawyer Jordan E. Bublick has filed over 8,000 chapter 13 and chapter 7 cases.