§ 136.11     Leases and Executory Contracts after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 136.11, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA made changes to § 365 of the Bankruptcy Code that will affect claims arising from leases and executory contracts in all bankruptcy cases. BAPCPA made some changes that are specific to the treatment of leases and executory contracts in Chapter 13 cases. The impact of these changes to § 365 on claims in Chapter 13 cases is not always clear.

[2]

A residential landlord with a prepetition judgment for possession and a pending action for eviction has special rights in a Chapter 13 case after BAPCPA. The Chapter 13 debtor must tender postpetition rent with the petition, file special certificates and cure all prepetition defaults on an accelerated schedule.1 The Chapter 13 debtor who fails to tender postpetition rent with the petition, fails to file the new certificates or fails to quickly cure all defaults loses the protection of the automatic stay. But there is nothing in these new provisions that grants the landlord any special claim status in the Chapter 13 case.

[3]

Lessors of personal property have a new entitlement in Chapter 13 cases under § 1326(a)(1). Unless the court orders otherwise, a Chapter 13 debtor must commence making payments not later than 30 days after the petition in the amount “scheduled in a lease of personal property directly to the lessor for that portion of the obligation that becomes due after the order for relief.”2

[4]

BAPCPA does not tell us the consequence if a Chapter 13 debtor fails to commence payments to a lessor of personal property consistent with new § 1326(a)(1). If the debtor is using personal property subject to a prepetition lease and fails to make postpetition payments, it can be anticipated that the lessor will seek relief from the stay and perhaps move to require the debtor to assume or reject the lease. There is also the possibility that the lessor will request an administrative expense for postpetition amounts not paid consistent with new § 1326(a)(1).

[5]

If the debtor assumes the underlying lease, the missed payments will be buried somewhere in the amount the debtor must pay to cure default under § 365(b). If the debtor rejects the lease, those missed postpetition payments become part of the lessor’s prepetition unsecured claim and would not be entitled to any special distribution priority in the Chapter 13 case.

[6]

BAPCPA made several changes to § 365 that will affect the assumption and rejection of leases and executory contracts in Chapter 13 cases but are not likely to change the classification or amount of claims that result. For example, although not especially common in Chapter 13 cases, nonresidential real property leases are affected by a BAPCPA amendment to § 503.

[7]

Before BAPCPA, it was especially dangerous for a Chapter 13 debtor (or any debtor) to assume an unexpired lease or executory contract and then reject the same lease or contract during the bankruptcy case. Basically, the effect of assumption and then rejection was to generate a potentially huge priority administrative expense.3 BAPCPA does not change that general rule, but § 503(b)(7) was amended to limit the administrative expense generated by assumption and then rejection of a nonresidential real property lease. The new section includes as an allowable administrative expense:

(7) with respect to a nonresidential real property lease previously assumed under section 365, and subsequently rejected, a sum equal to all monetary obligations due, excluding those arising from or relating to a failure to operate or a penalty provision, for the period of 2 years following the later of the rejection date or the date of actual turnover of the premises, without reduction or setoff for any reason whatsoever except for sums actually received or to be received from an entity other than the debtor, and the claim for remaining sums due for the balance of the term of the lease shall be a claim under section 502(b)(6).4

The new two-year limitation on rejection damages with respect to a previously assumed nonresidential real property lease is perhaps some relief for Chapter 13 debtors who inauspiciously assume a nonresidential real property lease, but the fact remains that great care in the assumption of leases and executory contracts is required in Chapter 13 cases else an improvident assumption becomes an unmanageable administrative expense.


 

1  See 11 U.S.C. § 362(b)(22) and (l), discussed in §§ 382.1 [ Certification and Rent Deposit ] § 36.35  Certification About Eviction Judgment and Rent Deposit and 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4  Preconfirmation Rights of Landlords and Lessors after BAPCPA.

 

2  11 U.S.C. § 1326(a)(1)(B), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4  Preconfirmation Rights of Landlords and Lessors after BAPCPA.

 

3  See § 296.1 [ Leases and Executory Contracts ] § 136.10  Leases and Executory Contracts before BAPCPA.

 

4  11 U.S.C. § 503(b)(7).