The first court of appeals to tackle the issue, the Eleventh Circuit held that a chapter 13 plan by itself cannot assume an executory contract.
In an opinion on June 3 by Circuit Judge Kevin C. Newsom, the appeals court held that an executory contract or unexpired lease is only assumed on motion by a chapter 13 trustee. Confirmed for a seat on the Eleventh Circuit in August 2017, Judge Newsom was Articles Editor for the Harvard Law Review. After clerking on the Ninth Circuit, he clerked on the Supreme Court for Justice David H. Souter.
Simple Facts, Difficult Questions
Simple facts give rise to difficult questions of statutory interpretation: Utilizing Section 1322(b)(7), the chapter 13 debtor proposed and confirmed a plan providing for the assumption of a lease of personal property. The subsection provides that a chapter 13 plan “may” provide for assumption or rejection of a contract or lease, “subject to section 365.”
The plan also called for curing arrears on the lease through payments by the trustee. Going forward, the debtor would make monthly payments.
The debtor defaulted after confirmation, prompting the lessor to file a motion for the allowance and payment of an administrative expense claim for the missed payments.
Affirmed in district court, the bankruptcy court denied the motion, holding that the lease was not assumed because it had not been assumed by the chapter 13 trustee under Section 365(d)(2), which provides that a “trustee” in chapters 9, 11, 12 and 13 may assume or reject an executory contract.
If a lease of personal property is “rejected or not timely assumed by the trustee under [Section 365(d)],” Section 365(p)(1) says that the lease is no longer property of the estate and “is automatically terminated.” Because the lease was automatically terminated under Section 365(p)(1), the lower courts held there was no benefit to the estate and thus no administrative claim.
Plain Language Wins Again
Judge Newsom said that the treatises are split on whether a chapter 13 plan alone may assume a contract or lease. Collier believes that the plan alone is sufficient, while the Homer Drake treatise says there is no assumption except on motion by the trustee. The Norton treatise says “it is not clear” who has the power to assume.
Judge Newsom framed the question this way: Can the debtor, as part of a chapter 13 plan, “singlehandedly and, in particular, without any action by the trustee — obligate the bankrupt estate?” He upheld the lower courts by holding that the word “trustee” in Section 365(p)(1) “means the trustee — and, accordingly, that if the trustee does not assume an unexpired lease, it drops out of the debtor’s bankruptcy case.” [Emphasis in original.]
Judge Newsom said that Section 1322(b)(7) “doesn’t answer that question,” because it only says what a plan may contain. However, he said it “points” to Section 365(d)(2), which says that “the trustee” in chapter 13 may assume. In addition, Section 1322(b)(7) says that assumption in a plan is “subject to section 365.”
Judge Newsom found the answer “conclusively” in the “plain language” of Section 365(p)(1), which says that a lease of personal property is “automatically terminated” if “not timely assumed by the trustee.” In other words, the lease “drops out of the estate” when “the trustee does not assume an unexpired lease.”
Judge Newsom rejected the lessor’s contention that the word “trustee” should be read to subsume a chapter 13 debtor and a chapter 13 plan. He found no room to modify the statute. Furthermore, he said, obligating the estate is “a big deal.” It therefore “makes good sense to require the trustee [as representative of all creditors] to affirmatively assume an unexpired lease.”
Summing up, Judge Newsom held that Section 365(p)(1) is “crystal clear” and “means what it says.” Not assumed by the trustee, the lease dropped out of the estate. Given no benefit to the estate, the claim for an administrative priority was properly denied.
Observations
The opinion may hurt the lessor in more ways than one. Although it does not say so directly, the opinion could be read to suggest that the lessor’s claim for post-confirmation arrears is a prepetition general, unsecured claim under the plan. In other words, the lessor provided value after confirmation but would be paid only pennies on the dollar under the plan. What’s wrong with that picture?
Has Judge Newsom opened the door for chapter 13 debtors to hornswoggle lessors?
The debtor wouldn’t get away with it in the Seventh Circuit, where the appeals court recently held that failure to pay parking tickets after confirmation of a chapter 13 plan is an administrative expense. In re Steenes, 942 F.3d 834 (7th Cir. Nov. 12, 2019). For ABI’s report on Steenes, click here.
In chapter 13, unlike chapter 11, only the debtor may propose a plan. Since Section 1322(b)(7) says that a plan may include the assumption of contracts and leases, does that imply that the debtor by himself or herself can accomplish an assumption?
True, Section 1322(b)(7) says that the plan may assume a contract, but “subject to section 365.”
However, Section 365 mostly provides protections for the lessor, such as adequate assurance of future performance. Why can’t the requirements of Section 365 be shown at the confirmation hearing? What’s the advantage of requiring a motion by the trustee where the court would consider the same issues in a confirmation hearing? Given that the lessor will have had notice of the plan and the confirmation hearing, what’s to be gained by requiring an additional motion by the trustee?
If the trustee must file a motion to assume, then why does the statute allow assumption in a plan? The trustee cannot file a plan. There would never be an occasion for assuming a lease in a plan if it had been assumed already on motion by the trustee. The Eleventh Circuit’s opinion renders Section 1322(b)(7) useless.
Why not employ common sense rather than attempt to tease the answer out of a poorly written statute? The country’s best lawyers become judges, so why not let them use their brains when Congress obviously didn’t prescribe the issue? And don’t say that judges would be legislating. Undoubtedly, on questions like this they would fashion answers consistent with policies evident throughout the Bankruptcy Code.
Also, what about the effect of confirmation of the plan? Judge Newsom did not discuss United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010), nor did either side brief the issue.
In Espinosa, the chapter 13 debtor confirmed a plan that discharged student loans, in violation of the debtor’s obligation to file an adversary proceeding and obtain a declaration that the student loans were dischargeable under Section 523(a)(8). Although the plan violated Section 523(a)(8), Justice Thomas ruled for the unanimous Court that the student loans were nevertheless discharged because the plan was final and not subject to collateral attack.
Presumably, the lessor in the Eleventh Circuit had notice of the plan and its assumption of the unexpired lease. Under Espinosa, wasn’t the plan binding on the lessor, and wouldn’t it preclude a collateral attack months after the confirmation order became final?
This area in general is a mess. Congress needs to give better definition to the rights of a chapter 13 debtor. For instance, courts disagree over a chapter 13 debtor’s standing to pursue an avoidance action.
The clarification task is difficult, because a chapter 13 debtor is not the same as a chapter 11 debtor in possession, where Congress easily could say in Section 1107(a) that the DIP has the powers of a trustee.
The first court of appeals to tackle the issue, the Eleventh Circuit held that a chapter 13 plan by itself cannot assume an executory contract.
In an opinion on June 3 by Circuit Judge Kevin C. Newsom, the appeals court held that an executory contract or unexpired lease is only assumed on motion by a chapter 13 trustee. Confirmed for a seat on the Eleventh Circuit in August 2017, Judge Newsom was Articles Editor for the Harvard Law Review. After clerking on the Ninth Circuit, he clerked on the Supreme Court for Justice David H. Souter.
Simple Facts, Difficult Questions
Simple facts give rise to difficult questions of statutory interpretation: Utilizing Section 1322(b)(7), the chapter 13 debtor proposed and confirmed a plan providing for the assumption of a lease of personal property. The subsection provides that a chapter 13 plan “may” provide for assumption or rejection of a contract or lease, “subject to section 365.”
The plan also called for curing arrears on the lease through payments by the trustee. Going forward, the debtor would make monthly payments.
The debtor defaulted after confirmation, prompting the lessor to file a motion for the allowance and payment of an administrative expense claim for the missed payments.
Affirmed in district court, the bankruptcy court denied the motion, holding that the lease was not assumed because it had not been assumed by the chapter 13 trustee under Section 365(d)(2), which provides that a “trustee” in chapters 9, 11, 12 and 13 may assume or reject an executory contract.
If a lease of personal property is “rejected or not timely assumed by the trustee under [Section 365(d)],” Section 365(p)(1) says that the lease is no longer property of the estate and “is automatically terminated.” Because the lease was automatically terminated under Section 365(p)(1), the lower courts held there was no benefit to the estate and thus no administrative claim.
Plain Language Wins Again
Judge Newsom said that the treatises are split on whether a chapter 13 plan alone may assume a contract or lease. Collier believes that the plan alone is sufficient, while the Homer Drake treatise says there is no assumption except on motion by the trustee. The Norton treatise says “it is not clear” who has the power to assume.
Judge Newsom framed the question this way: Can the debtor, as part of a chapter 13 plan, “singlehandedly and, in particular, without any action by the trustee — obligate the bankrupt estate?” He upheld the lower courts by holding that the word “trustee” in Section 365(p)(1) “means the trustee — and, accordingly, that if the trustee does not assume an unexpired lease, it drops out of the debtor’s bankruptcy case.” [Emphasis in original.]
Judge Newsom said that Section 1322(b)(7) “doesn’t answer that question,” because it only says what a plan may contain. However, he said it “points” to Section 365(d)(2), which says that “the trustee” in chapter 13 may assume. In addition, Section 1322(b)(7) says that assumption in a plan is “subject to section 365.”
Judge Newsom found the answer “conclusively” in the “plain language” of Section 365(p)(1), which says that a lease of personal property is “automatically terminated” if “not timely assumed by the trustee.” In other words, the lease “drops out of the estate” when “the trustee does not assume an unexpired lease.”
Judge Newsom rejected the lessor’s contention that the word “trustee” should be read to subsume a chapter 13 debtor and a chapter 13 plan. He found no room to modify the statute. Furthermore, he said, obligating the estate is “a big deal.” It therefore “makes good sense to require the trustee [as representative of all creditors] to affirmatively assume an unexpired lease.”
Summing up, Judge Newsom held that Section 365(p)(1) is “crystal clear” and “means what it says.” Not assumed by the trustee, the lease dropped out of the estate. Given no benefit to the estate, the claim for an administrative priority was properly denied.
Observations
The opinion may hurt the lessor in more ways than one. Although it does not say so directly, the opinion could be read to suggest that the lessor’s claim for post-confirmation arrears is a prepetition general, unsecured claim under the plan. In other words, the lessor provided value after confirmation but would be paid only pennies on the dollar under the plan. What’s wrong with that picture?
Has Judge Newsom opened the door for chapter 13 debtors to hornswoggle lessors?