§ 46.9     Leases and Other Contract Rights
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 46.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The Chapter 13 estate includes the debtor’s interest in leases and contracts, including apartment leases, car leases, rental agreements for personal property and contracts for the purchase or sale of real property. It doesn’t matter whether the debtor is the lessor or the lessee—whatever rights the debtor has under the contract become property of the Chapter 13 estate. Typically, a Chapter 13 debtor can assume, assign or reject a lease or executory contract in advance of confirmation or as part of a confirmed plan.1

[2]

State law and the terms of the lease or contract become involved in determining whether and to what extent a lease or contract became property of the Chapter 13 estate. For example, a month-to-month tenancy that terminated under state law for nonpayment of rent prior to the filing of a Chapter 13 case is not property of the Chapter 13 estate.2 A car lease that terminated before the petition because of the debtor’s default and with respect to which the car was repossessed before the petition brings no property interest into the Chapter 13 estate.3 On the other hand, when repossession did not terminate the lease under state law, the car lease remained property of the Chapter 13 estate, and the contract could be rehabilitated through the plan.4 A debtor’s prepetition contract to buy a car becomes property of the Chapter 13 estate but the debtor’s right to use and possession of the car is subject to all of the conditions in the contract.5 With respect to rental property, the courts have been reluctant to allow mere possession, without an underlying contract interest, to drag the leasehold into the Chapter 13 estate.6

[3]

A Chapter 13 debtor’s interest pursuant to a contract for deed to real property becomes property of the Chapter 13 estate, whether the debtor is vendor or vendee under the contract.7 However, if the debtor’s rights as buyer or seller under the contract terminated prior to the petition, the contract does not become property of the estate and cannot be managed through a Chapter 13 plan by assumption, assignment or treatment as a secured claim.8

[4]

Miscellaneous contract rights of debtors become property of the Chapter 13 estate. For example, in In re Myers,9 the debtor was involved in a prepetition automobile accident and by virtue of a prepetition structured settlement was entitled to payments for years into the future. The debtor’s contract right to those payments became property of the Chapter 13 estate both for purposes of funding a plan and for purposes of the best-interests-of-creditors test at confirmation.10 In contrast, when the debtor assigned rights to receive payments under a structured settlement before the Chapter 13 petition, the interest that becomes property of the estate is limited by the terms of the assignment if the assignment is enforceable under state law.11

[5]

Chapter 13 debtors who are or have been engaged in business often are connected to that business by contracts. For example, if the debtor guaranteed a lease for a business location, that contractual guaranty is property of the Chapter 13 estate. Guaranties for utility services would be property of the Chapter 13 estate.12 Guaranties of debt would be treated as claims payable through the Chapter 13 plan.13

[6]

Defining the contract rights of a Chapter 13 debtor that become property of the estate can involve complicated interactions of state law and bankruptcy law. For example, in Southtrust Bank of Alabama v. Thomas (In re Thomas),14 the debtor was the purchaser of a mobile home under a conditional sales contract. Under Alabama law, the finance company retained legal title to the mobile home pending payment of all installments. Without mention of the debtor’s substantial equitable interest in the mobile home, the Eleventh Circuit held in Thomas that the mobile home did not become part of the debtor’s Chapter 13 estate. Other courts have distinguished Thomas to find that mobile homes subject to conditional sales contracts under Alabama law are property of the Chapter 13 estate.15

[7]

The most common leases and contracts in Chapter 13 cases are apartment leases, car leases and rental agreements for personal property. Debtors’ counsel has a responsibility to review all such leases and contracts to determine whether they are true leases or disguised security agreements. The difference is important because a true lease can only be dealt with in a Chapter 13 case by assumption, assignment or rejection,16 whereas a security interest can be modified in a Chapter 13 case, often much to the benefit of the debtor.17 “Rent-to-rent” contracts for personal property such as stereos, refrigerators and washing machines deserve particular attention because the underlying contracts are often quite onerous.18


 

1  See §§ 56.1 [ Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts ] § 51.3  Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts and 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

2  Kipp v. Depoy, 29 B.R. 466 (Bankr. N.D. Ind. 1983). Accord McDaniel v. Metropolis Towers Apartment Corp. (In re McDaniel), No. 01-Civ.-4138 (WGB), 2002 WL 1065874 (D.N.J. Feb. 26, 2002) (unpublished) (All of the debtor’s rights in a cooperative housing development were terminated before the petition when the shares of the cooperative were canceled.); In re Moore, 290 B.R. 851 (Bankr. N.D. Ala. 2003) (Applying contract and Alabama law, federally subsidized residential leases were terminated before Chapter 13 petitions, and no leasehold interest came into the bankruptcy estate for purposes of § 365.); In re Foote, 277 B.R. 393 (Bankr. E.D. Ark. 2002) (Because commercial sublease was terminated before bankruptcy by notice to quit, sublease did not become property of the Chapter 13 estate, it could not be assumed and lessor did not need relief from the stay.).

 

3  Mayhall v. Ford Motor Credit Co. (In re Mayhall), 200 B.R. 241 (Bankr. N.D. Ala. 1996). Accord Lamar v. Mitsubishi Motors Credit of Am., Inc. (In re Lamar), 249 B.R. 822 (Bankr. S.D. Ga. 2000) (Car lease was a true lease under Georgia law, and the debtors retained no property interest because the lessor repossessed the car and mailed a notice of termination before the petition.).

 

4  In re Dash, 267 B.R. 915 (Bankr. D.N.J. 2001).

 

5  See Skinner v. Cumberland Auto Ctr. (In re Skinner), 238 B.R. 120, 124 (Bankr. M.D. Tenn.. 1999) (“Buyer’s Order” to purchase a car became property of the Chapter 13 estate although subject to an unfulfilled condition that the debtor get financing. “The purchase order may not have been a sale contract, but it was a contract of some kind. . . . [T]he purchase order allows the debtor possession of the car before obtaining financing. Moreover, the purchase order had not been abandoned or terminated, and the time for obtaining financing had not expired. Thus, when the debtor filed Chapter 13, he had possession of the car pursuant to his contract with Cumberland, and the contract still allowed the opportunity to obtain financing and complete the deal.” The car dealer violated stay by repossessing car, but debtor was not entitled to turnover because the conditions precedent to the debtor’s rights under the contract had not been satisfied.).

 

6  See, e.g., In re Street, 214 B.R. 779, 781–82 (Bankr. W.D. Pa. 1997) (Debtor who is not signatory to rental agreement but who is in possession of rented personal property has insufficient interest to support treatment of the lessor as a secured creditor through the plan. Lease agreement was a true lease, not a security agreement. Debtor was not a signatory and cannot assume or reject the lease based only on possession of the rented property.); In re Walker, 171 B.R. 197 (Bankr. E.D. Pa. 1994) (Debtor’s alleged leasehold interest in property titled in the debtor’s mother was too vague and “too obviously contrived” to constitute a property interest for purposes of the automatic stay in a Chapter 13 case.).

 

7  Thorpe v. Jones, 54 B.R. 697 (Bankr. E.D. Ark. 1985); N.P.C. Realty Co. v. Rose, 7 B.R. 911 (Bankr. S.D. Tex. 1981). See In re Giddens, 298 B.R. 329, 333–34 (Bankr. N.D. Ill. 2003) (“Having received the deed to the Property after fulfilling her duties under the ‘Installment Agreement for Warranty Deed’ in the early 1980s, Giddens became the holder of both the legal and equitable title. Furthermore, Giddens had a property interest that became part of her bankruptcy estate under 11 U.S.C. § 541(a), in spite of the fact that she did not record her legal interest in the property until [January 31, 2002].”).

 

8  See In re Horton, 302 B.R. 198 (Bankr. E.D. Mich. 2003) (When redemption period with respect to land sale contract expired two days before the petition, debtor lost all right to redeem, and no interest became property of the Chapter 13 estate.); In re Miller, 90 B.R. 865 (Bankr. W.D. Mich. 1988) (Debtor’s rights under a land contract were terminated two months before the petition, thus contract is not property of the estate and the debtors cannot treat the contract under § 1322(b)(5).); In re Booth, 43 B.R. 197 (Bankr. D. Vt. 1984) (Debtor’s interest as vendee under contract for sale of real estate was terminated prior to filing of petition and did not become property of the estate.).

 

9  200 B.R. 155 (Bankr. N.D. Ohio 1996).

 

10  See § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1  In General: Plan Payments vs. Hypothetical Liquidation.

 

11  See In re Brooks, 248 B.R. 99 (Bankr. W.D. Mich. 2000) (Debtors’ prepetition assignment of rights to receive monthly payments under a structured settlement is enforceable, and periodic payments did not become property of the Chapter 13 estate. Debtors may not use the payment stream to fund a Chapter 13 plan.); In re Terry, 245 B.R. 422 (Bankr. N.D. Ga. 2000) (Prepetition assignment of a portion of the annuity the debtor received in settlement of a tort action transferred all of the debtor’s interest in that portion of the income stream, and the payments due on account of the assigned portion are not property of the Chapter 13 estate.).

 

12  See Schnippel v. City of Piqua (In re Schnippel), 121 B.R. 784 (Bankr. S.D. Ohio 1990) (Contract to guaranty utility service to the debtors’ business is property of the Chapter 13 estate notwithstanding that guaranty agreement may require payment from the debtor. Automatic stay protects the debtors’ right in this guaranty agreement and requires the city to seek relief from the stay before altering the debtors’ guaranty obligations.).

 

13  See also the discussion of codebtors in §§ 18.1 [ Joint Obligations of Spouses and Codebtors; Collateral That Is Not Property of the Estate ] § 17.3  Joint Obligations of Spouses and Codebtors; Collateral That Is Not Property of the Estate and 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected.

 

14  883 F.2d 991 (11th Cir. 1989).

 

15  See Southtrust Mobile Serv., Inc. v. Englebert, 137 B.R. 975 (N.D. Ala. 1992) (Distinguishing Southrust Bank of Alabama v. Thomas (In re Thomas), 883 F.2d 991 (11th Cir. 1989), mobile home was property of the bankruptcy estate where title was in the debtors and creditor was a lienholder.); Smith v. Homes Today, Inc. (In re Smith), 296 B.R. 46 (Bankr. M.D. Ala. 2003) (Debtor in possession of mobile home had valuable contract rights that became property of the Chapter 13 estate notwithstanding that no certificate of title had been issued.); Smoot v. Southtrust Mobile Serv., Inc. (In re Smoot), 134 B.R. 960, 964 (Bankr. N.D. Ala. 1991) (Mobile home is property of Chapter 13 estate where creditor had not perfected its security interest. “Property that is included in the estate under Section 541 is to be broadly interpreted to include all interests in property, including title, possession, and right to possession. . . . Alabama recognizes property interests less than legal title. . . . Since [the creditor] can only assert an unsecured claim in this case which is subordinate to the priority lien of the trustee, the mobile home in this case is property of the estate.”).

 

16  See §§ 56.1 [ Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts ] § 51.3  Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts and 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

17  See §§ 104.1 [ The Power to Modify ] § 74.11  The Power to Modify and 175.1 [ Fake Leases and Rental Agreements ] § 102.8  Fake Leases and Rental Agreements.

 

18  See § 175.1 [ Fake Leases and Rental Agreements ] § 102.8  Fake Leases and Rental Agreements.