Insurance companies need to lobby for special-interest legislation similar to provisions in the Bankruptcy Code protecting landlords and aircraft lessors, as shown by a district court decision from eastern Pennsylvania.
Although the time for curing a payment default under an insurance policy expired after bankruptcy, the trustee could still assume and assign the policy because the debtor and the trustee had taken timely actions to extend the time for assumption, according to a Nov. 16 opinion by District Judge Michael M. Baylson of Philadelphia.
The debtors had a life insurance policy that could not be cancelled as long as they paid the annual premiums. Before they filed a chapter 13 petition, they failed to pay a renewal premium. The grace period in the policy for paying the premium and reinstating coverage would have expired one week after the couple filed their chapter 13 petition.
Judge Baylson said that the built-in grace period was automatically extended 60 days by Section 108(b).
About a week after the built-in grace period expired but before the 60-day extension ran out, the debtors filed a chapter 13 plan providing for them to assume and cure defaults on the policy. The debtors never confirmed a plan. Instead, the case converted to chapter 7.
Before the chapter 7 trustee’s time for assumption of executory contracts would have expired, the debtors filed a motion, later granted by the bankruptcy court, extending the time for the trustee to assume and assign the policy under Section 365(d)(1). On the day the assumption extension would have expired, the trustee filed a motion to assume and assign the policy to a third party. Over the insurance company’s objection, the bankruptcy court approved assumption and assignment.
The insurance company appealed to Judge Baylson, arguing that the policy could not be assumed because the grace period, even with the Section 108(b) extension, had expired long before assumption, leaving no contract to be assumed.
Judge Baylson upheld the bankruptcy court, fashioning his opinion around Counties Contracting, a 1988 Third Circuit opinion. In that case, the appeals court held that the chapter 11 corporate debtor could not assume an insurance policy because the debtor had taken no “affirmative act” to assume the contract during the 60-day extension under Section 108(b).
In the appeal before him, Judge Baylson said the “debtors undeniably took the ‘affirmative act’” to assume by filing a plan calling for assumption before the Section 108(b) extension ran out. Consequently, the original chapter 13 filing date remained the date for measuring whether the contract was executory and therefore subject to assumption.
The timely motion for an extension of time to assume and assign preserved the trustee’s ability to sell the policy, even though the extended grace period for payment had elapsed months before.
In substance, the insurance company was complaining that it was left in limbo while the trustee took months in locating a purchaser for the policy. Although the argument has emotional appeal, it evidently was insufficient to persuade Judge Baylson. Relying on Third Circuit authority, he held that the insurance policy could be assumed and assigned.
Aircraft lessors and landlords had similar complaints about debtors taking months or years before deciding whether to assume or assign and not paying rent or lease costs in the meantime. However, landlords and aircraft owners prevailed on Congress to adopt provisions — like Sections 362(b)(10) and (22), 362(d) and (h), and Section 1110 — requiring debtors to make lease payments, pay rent after bankruptcy, and quickly elect to assume or reject. Insurance companies perhaps should lobby Congress for similar protections.