Section 365(p) enables an individual debtor in chapter 7 to retain leased personal property, such as a car, if the trustee rejects the lease. Bankruptcy Judge Melvin S. Hoffman of Boston described the section as “conferring a gift upon chapter 7 debtors.”
Like many other changes wrought by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 365(p) created innumerable questions of interpretation. For instance, must a debtor also reaffirm the debt underlying a lease that is assumed? And whether or not the debtor assumes obligations under the lease, is the debt discharged?
In his September 9 opinion, Judge Hoffman offered a coherent synthesis of Section 365(p) and related statutory provisions. Basically, the lessor can ensure that debt under an assumed lease is not discharged, but a debtor can retain the property in Massachusetts even if the lessor does not consent to assumption, so long as the lease was not in payment default.
The Facts and the Statute
The debtor filed a chapter 7 petition when he was current on lease payments for his 2017 automobile. If the trustee were to reject the lease or if the trustee did not assume the lease before the prescribed deadline, the lessor could theoretically repossess the car because it would no longer be estate property, assuming there was an ipso facto clause in the lease making bankruptcy an event of default.
That’s where Section 365(p) kicks in. Subsection (p)(2)(A) allows the debtor to “notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract.”
If the debtor, “not later than 30 days after notice is provided under subparagraph (A),” notifies the lessor in writing that “the lease is assumed,” Subsection (p)(2)(B) provides that “the liability under the lease will be assumed by the debtor and not by the estate.”
The debtor in Judge Hoffman’s case filed a motion to compel the lessor to permit his assumption of the lease under Subsection (p)(2)(B). The lessor responded to the motion by saying it would consent to assumption if the debtor were to reaffirm the debt under Section 524(c).
Judge Hoffman used the occasion “to articulate my understanding of the relationship between motions to approve the assumption of a car or other personal property lease under Section 365(p) and reaffirmation agreements under Section 524(c).” There are two principal questions, he said.
First, is reaffirmation “a prerequisite for assumption”? Second, is personal liability under the assumed lease nonetheless discharged?
The Proper Procedure
Judge Hoffman began his analysis of the first question by focusing on the statutory language in Section 362(h)(1)(A), a corresponding amendment also added by BAPCPA. A lease for personal property drops out of the estate and is no longer protected by the automatic stay if the individual debtor does not “enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so . . . .”
Judge Hoffman said “that the use of the either/or structure in [Section 362(h)(1)(A)] makes it clear that reaffirmation and lease assumption are alternative, independent procedures.” In that regard, he agreed with Chief Bankruptcy Judge Laurel M. Isicoff of Miami in In re Abdemur, 587 B.R. 167, 171 (Bankr. S.D. Fla. June 12, 2018). To read ABI’s report on Abdemur, click here.
“In the vast majority of chapter 7 cases,” Judge Hoffman went on to explain, the lengthy process of reaffirming a debt would ordinarily take longer than the debtor’s limited window of opportunity under Section 365(p). Because discharges are usually entered before a debtor can complete the reaffirmation process, he said “it would be too late for the parties to be negotiating a lease assumption since reaffirmation is no longer possible.”
Furthermore, Judge Hoffman said, “there is no requirement [in Section 365(p)] of lease assumption to be accompanied by or constitute debt reaffirmation.” To require both lease assumption and reaffirmation, he said, “would completely undercut the purpose of Section 365(p)(2).”
Next, Judge Hoffman confronted the second question: Does assumption under Section 365(p) result in a debt that survives discharge? Stated in other terms, does a debtor have nonrecourse debt on a lease after a Section 365(p) assumption?
Judge Hoffman first cited Abdemur, where Judge Isicoff ruled that assumption under Section 365(p) creates a liability that survives discharge, just like lease assumption under Section 365(a). Id. at 587 B.R. 172-173.
On the other hand, Judge Hoffman cited Thompson v. Credit Union Fin. Group, 453 B.R. 823 (W.D. Mich. 2011), where the district court reversed the bankruptcy court and held that the debtor did not assume a post-petition liability merely by a Section 365(p) assumption.
Judge Hoffman did not say whether he agreed with Abdemur or Thompson. Instead, he crafted a procedural method for a lessor to emerge from a Section 365(p) assumption with a nondischarged debt.
The lessor, he said, could condition a Section 365(p) assumption on entry of a court order saying that the resulting debt would survive discharge.
Finally, Judge Hoffman asked how a debtor could retain a car if the lessor will not come to terms on a Section 365(p) assumption and the lease contains an ipso facto clause making bankruptcy an event of default.
For a debtor in Massachusetts, the answer combines Sections 521(d) and 362(h)(1) with state law that prohibits repossession in the absence of a payment default.
Because the debtor scheduled his intention to assume the lease, Judge Hoffman said that the lessor could “not default [the debtor by use of the ipso facto clause] and attempt to take his car for having filed a bankruptcy petition.” In other words, he said, “the failure to complete the lease assumption process [when there is no payment default] will not revive an otherwise unenforceable ipso facto provision in the lease.”
The analysis by Judge Hoffman in substance comports with recommendations contained in the Final Report of the ABI Commission on Consumer Bankruptcy. To read the Commission’s recommendations, click here.
Section 365(p) enables an individual debtor in chapter 7 to retain leased personal property, such as a car, if the trustee rejects the lease. Bankruptcy Judge Melvin S. Hoffman of Boston described the section as “conferring a gift upon chapter 7 debtors.”
Like many other changes wrought by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 365(p) created innumerable questions of interpretation. For instance, must a debtor also reaffirm the debt underlying a lease that is assumed? And whether or not the debtor assumes obligations under the lease, is the debt discharged?
In his September 9 opinion, Judge Hoffman offered a coherent synthesis of Section 365(p) and related statutory provisions. Basically, the lessor can ensure that debt under an assumed lease is not discharged, but a debtor can retain the property in Massachusetts even if the lessor does not consent to assumption, so long as the lease was not in payment default.
The Facts and the Statute
The debtor filed a chapter 7 petition when he was current on lease payments for his 2017 automobile. If the trustee were to reject the lease or if the trustee did not assume the lease before the prescribed deadline, the lessor could theoretically repossess the car because it would no longer be estate property, assuming there was an ipso facto clause in the lease making bankruptcy an event of default.
That’s where Section 365(p) kicks in. Subsection (p)(2)(A) allows the debtor to “notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract.”
If the debtor, “not later than 30 days after notice is provided under subparagraph (A),” notifies the lessor in writing that “the lease is assumed,” Subsection (p)(2)(B) provides that “the liability under the lease will be assumed by the debtor and not by the estate.”
The debtor in Judge Hoffman’s case filed a motion to compel the lessor to permit his assumption of the lease under Subsection (p)(2)(B). The lessor responded to the motion by saying it would consent to assumption if the debtor were to reaffirm the debt under Section 524(c).