The first court of appeals to address the question, the Ninth Circuit held that an individual can assume a personal property lease under Section 365(p) without reaffirming the debt with court approval under Section 524(c).
Perhaps more controversially, the Ninth Circuit also held that a lease assumption is binding on the debtor even if the debtor has not complied with the procedural steps required by Section 365(p).
In his August 3 opinion, Circuit Judge Eric D. Miller observed that the bankruptcy courts are divided on whether an assumption under Section 365(p) also requires reaffirmation under Section 524(c). No circuit court has confronted the issue, he said.
The Leased Car
The chapter 7 debtor originally intended to keep her leased car and stated her intention to reaffirm the debt. She called the lessor and asked about keeping the car. The lessor told her that she must assume the lease and sent her an assumption agreement. The debtor did not sign and return the assumption agreement until the day before receiving her discharge, about three months after asking the lessor for assumption.
A month before returning the signed assumption agreement, the debtor stopped paying on the lease. She later surrendered the car to the lessor but refused to pay what she owed on the lease.
The debtor filed a motion in bankruptcy court seeking fees and more than $50,000 in sanctions for violating the discharge injunction. The debtor contended that the lease-assumption agreement was not enforceable because she had not reaffirmed the debt under Section 524(c).
Affirmed in district court, Bankruptcy Judge Laura S. Taylor denied the motion for sanctions, ruled that the debtor had assumed the lease and said no reaffirmation was required.
BAPCPA Added Section 365(p)
Until 2005, only a chapter 7 trustee could assume a personal property lease. That year, the so-called BAPCPA amendments added Section 365(p), which allows a debtor to assume a lease of personal property.
The subsection does not require court approval, but it obliges the debtor to request assumption in writing from the lessor. The lessor may agree to assumption or demand cure. If the lessor agrees to assumption, the debtor has 30 days to notify the lessor that the lease is assumed. Assumption becomes a liability of the debtor, not of the estate.
Judge Miller said that the debtor did not follow Section 365(p) in two ways: She did not make her assumption request in writing, and she did not respond to the lessor within 30 days of receiving the assumption agreement.
Still, Judge Miller said that the debtor’s “failure to follow section 365(p)’s requirements cannot excuse her from the lease assumption to which she agreed.” He cited the Supreme Court for the idea that people may waive statutory provisions if there is no public interest.
Because the debtor’s assumption did not affect any creditor’s recovery, Judge Miller found nothing in the Bankruptcy Code or caselaw to prohibit waiver. Thus, he agreed with the bankruptcy court and held that the lease was assumed.
Conflict with Section 524(c)
But what about Section 524(c), which lays down strict requirements for reaffirmation? Must a debtor go through reaffirmation under Section 524(c) on top of assumption under Section 365(p)?
Judge Miller found “an apparent conflict between Sections 365(p) and 524(c).”
Section 524(c) has several provisions that would not have been satisfied if reaffirmation were also required. Among other things, reaffirmation requires court approval and proof that the debtor knows what she’s getting into.
If reaffirmation were also required, as the debtor contended, she had no liability on the lease even though she had signed the reaffirmation agreement. Judge Miller found conflicting authority among the bankruptcy courts and no ruling at the circuit level.
If assumption also required reaffirmation, Judge Miller found ways in which some of the statutory language would be superfluous. For instance, the more debtor-friendly assumption provisions would be displaced by the more onerous requirements of Section 524(c).
“If the Code requires a separate reaffirmation agreement in order to make a lease assumption effective,” Judge Miller said, “it is difficult to see how Section 365(p)(2) serves any purpose.” He also said that the more specific provisions in Section 365(p) govern over the more general ones in Section 524(c).
Judge Miller found “no absurdity in allowing a debtor to assume a car lease without judicial approval when she can also reaffirm a home mortgage without judicial approval” under Section 524(c)(6)(B). He noted the title of the BAPCPA amendment, “Giving Debtors the Ability to Keep Leased Personal Property by Assumption.” He said it “indicates that the purpose of adding Section 365(p) was to give debtors a way to continue using their leased vehicles — the most common type of leased personal property — during and after bankruptcy without engaging in the more onerous requirements of section 524(c).”
Judge Miller held that assumption does not also require reaffirmation because imposing the demands of Section 524(c) “would frustrate that purpose by eliminating the debtor-friendly option that Congress provided.”
The first court of appeals to address the question, the Ninth Circuit held that an individual can assume a personal property lease under Section 365(p) without reaffirming the debt with court approval under Section 524(c).
Perhaps more controversially, the Ninth Circuit also held that a lease assumption is binding on the debtor even if the debtor has not complied with the procedural steps required by Section 365(p).
In his August 3 opinion, Circuit Judge Eric D. Miller observed that the bankruptcy courts are divided on whether an assumption under Section 365(p) also requires reaffirmation under Section 524(c). No circuit court has confronted the issue, he said.
The Leased Car
The chapter 7 debtor originally intended to keep her leased car and stated her intention to reaffirm the debt. She called the lessor and asked about keeping the car. The lessor told her that she must assume the lease and sent her an assumption agreement. The debtor did not sign and return the assumption agreement until the day before receiving her discharge, about three months after asking the lessor for assumption.
A month before returning the signed assumption agreement, the debtor stopped paying on the lease. She later surrendered the car to the lessor but refused to pay what she owed on the lease.
The debtor filed a motion in bankruptcy court seeking fees and more than $50,000 in sanctions for violating the discharge injunction. The debtor contended that the lease-assumption agreement was not enforceable because she had not reaffirmed the debt under Section 524(c).
Affirmed in district court, Bankruptcy Judge Laura S. Taylor denied the motion for sanctions, ruled that the debtor had assumed the lease and said no reaffirmation was required.