§ 51.4     Preconfirmation Assumption and Rejection of Leases and Executory Contracts after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 51.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA makes the preconfirmation period more active for Chapter 13 debtors and creditors with respect to executory contracts and unexpired leases. Section 1322(b)(7) has always permitted a Chapter 13 debtor to provide for the assumption, rejection or assignment of any executory contract or unexpired lease through the Chapter 13 plan.1 Chapter 13 debtors can still assume, reject or assign unexpired leases and executory contracts between the petition and confirmation.2 Unless the court fixes an earlier time, § 365(d)(2) gives Chapter 13 debtors until confirmation to assume or reject an executory contract or unexpired lease of residential real property or of personal property.3 But other changes by BAPCPA accelerate the time within which a Chapter 13 debtor must act to save some contracts and leases, and the conditions for assumption have been changed. New obligations to make preconfirmation payments to some lessors will inspire Chapter 13 debtors to quickly reject some executory contracts.

[2]

First, there are peculiar new provisions dealing with residential leases, prepetition eviction actions and the automatic stay. Detailed elsewhere,4 if the Chapter 13 debtor is the tenant under a residential lease and the lessor obtained a prepetition judgment for possession, the automatic stay is terminated with respect to the continuation of an eviction or unlawful detainer action unless the debtor files with the petition and serves on the lessor a certification that state law would permit cure of the monetary default that gave rise to the judgment for possession and the debtor deposits with the clerk of the bankruptcy court rent that would become due during the 30 days after the petition.5 If the debtor files the certification and deposits rent, the automatic stay remains in effect and the debtor has 30 days after the petition in which to cure “the entire monetary default that gave rise to the judgment.”6 If the debtor fails to file the certification or fails to deposit rent or fails to cure the entire prepetition default within 30 days of the petition, the automatic stay terminates under new § 362(b)(22) and the lessor is free to proceed with the eviction or unlawful detainer action that was pending at the petition.

[3]

All of the new requirements and potential consequences in § 362(b)(22) and (l) will happen during the first 30 days of the Chapter 13 case. A debtor who comes into Chapter 13 with a pending eviction action and a prepetition judgment for possession of residential property must act with the petition and then within 30 days else the automatic stay evaporates.

[4]

Curiously, there is no mention in these new stay provisions of the debtor’s rights under other sections of the Code to assume or reject the underlying residential lease. BAPCPA did not inject that the contract is rejected or that the lease stops being property of the Chapter 13 estate. It follows that the debtor can race the landlord to confirmation or immediately move to assume the lease before relief from the stay or at least before completion of the state court eviction. A bankruptcy court order assuming the lease and specifying how the debtor will cure defaults would be a complete defense to any state court action for possession that is based on a prepetition default.

[5]

The bankruptcy court might order assumption of a residential lease under § 365 prior to confirmation in a Chapter 13 case on terms that are different from the conditions in § 362(b)(22) and (l) for continuation of the automatic stay. There is no prohibition on this outcome in the Bankruptcy Code as amended by BAPCPA. A debtor financially unable to cure all prepetition defaults within 30 days of the petition should immediately move to assume the lease and to promptly cure the defaults through the Chapter 13 plan. The new stay termination provisions of § 362(b)(22) and (l) will accelerate the assumption process but are not in denigration of the Chapter 13 debtor’s rights under §§ 365 and 1322(b)(7).

[6]

There is a variation on these issues when a landlord claims that the debtor is endangering residential rental property. As amended by BAPCPA, § 362(b)(23) provides that a residential lessor can file and serve a certification that the debtor has endangered the property or illegally used or allowed controlled substances on the property during the 30 days before the certification.7 The debtor then has 15 days to file and serve an objection else the automatic stay terminates to permit the lessor to evict the debtor.8 This certification and objection process could occur before or after confirmation of a Chapter 13 plan. If a landlord’s certification of endangerment is filed before confirmation and the debtor wants to retain the lease, the debtor should timely object under new § 362(m) and file a motion to assume. At assumption, the debtor must address the new provisions of § 365(b)(1)(A) with respect to curing nonmonetary defaults.9 There is nothing in the BAPCPA amendments to prohibit a debtor from using the assumption process under § 365 as a defense to eviction for endangerment under § 362(b)(23), even if the debtor does not succeed at preventing termination of the stay under § 362(m).

[7]

Detailed above,10 in § 1326(a)(1)(B) BAPCPA imposed on Chapter 13 debtors a preconfirmation mandate to commence payments not later than 30 days after the petition in the amount “scheduled in a lease of personal property . . . for that portion of the obligation that becomes due after the order for relief.”11 This preconfirmation payment requirement is not conditioned that the debtor has assumed or rejected the lease of personal property. There are ambiguities with respect to the meaning of “scheduled” amount. Without regard to these uncertainties, the new preconfirmation payment requirement in § 1326(a)(1)(B) seems to be self-starting: There is no mention that the lessor must first move for an order requiring the debtor to commence payments; some courts have already reacted with local rules that require payments during the preconfirmation period.12

[8]

If the debtor intends to assume the underlying lease of personal property through the plan, then perhaps the debtor is best advised to commence making the payments required by new § 1326(a)(1)(B) before 30 days after the petition. There is no cross-reference in § 1326(a)(1)(B) to § 1322(b)(7) or to § 365—strongly supporting a conclusion that the debtor need not assume or reject the underlying lease in order for § 1326(a)(1)(B) to apply. If the debtor intends to reject the lease, rejecting by preconfirmation motion minimizes the argument that § 1326(a)(1)(B) creates payment rights in a lessor of personal property. The nature of those rights is speculative, but it is not beyond the pale that a lessor of personal property will argue it accumulates administrative expenses through § 1326(a)(1)(B) when the debtor fails to commence payments on a lease of personal property within 30 days of the petition.13 Hanging on to leased personal property without making preconfirmation payments when the debtor does not intend to assume the lease invites trouble.

[9]

Perhaps the harder question during the preconfirmation period is what to do when the debtor is unsure whether to assume or reject a lease of personal property. Assuming the lease in the midst of uncertainty is a bad strategy because of the consequences when the debtor later rejects that assumed lease.14 An uncertain debtor is perhaps best advised to commence payments required by § 1326(a)(1)(B) within 30 days of the petition and to make those payments during the period of uncertainty.

[10]

BAPCPA made several changes to § 365 likely to affect Chapter 13 debtors with rental contracts and unexpired leases at assumption or rejection before or at confirmation. Under new § 365(p)(1), if a lease of personal property is rejected or is not timely assumed, the leased property “is no longer property of the estate and the stay under section 365(a) is automatically terminated.”15 It could be significant that new § 365(p) addresses only leases of personal property and is not applicable to leases of residential property addressed immediately above.

[11]

Somewhat redundantly,16 new § 365(p)(3) states that if the Chapter 13 debtor is the lessee of personal property and the lease is not assumed in the confirmed plan, the lease is “deemed rejected as of the conclusion of the hearing on confirmation,” and the stay under § 362 and “any stay under section 1301” is automatically terminated.17 New § 365(p)(3) makes clear that Chapter 13 debtors must assume a lease of personal property in the confirmed plan else the lease is rejected and all stays terminated. Section 365(p)(3) could be interpreted to terminate the stay and reject a personal property lease if assumption is not stated in the confirmed plan even when the debtor has assumed the contract prior to confirmation, perhaps in a separate order.18 This would, of course, be a silly outcome, but any Chapter 13 debtor who desires to assume a lease of personal property should include assumption in the plan or order confirming the plan just to be safe. To the extent pre-BAPCPA Chapter 13 debtors could maintain payments without assuming or rejecting a lease of personal property, § 365(p)(1) and (3) give lessors statutory permission to treat the lease as rejected and to act to take possession of the property at the conclusion of the confirmation hearing.

[12]

It is more than just interesting that new § 365(p)(3) automatically terminates “any stay under section 1301” when a lease of personal property is not assumed in the confirmed plan. This is the only place in the entire Bankruptcy Code that BAPCPA addressed the codebtor stay in § 1301.19 Except for new § 365(p)(3), no provision of BAPCPA grants relief from or terminates the codebtor stay in § 1301 in other circumstances. For example, if the codebtor stay applies to a lease of residential property and the landlord could otherwise complete an eviction upon termination of the § 362 stay under new § 362(b)(22) and (l), the landlord cannot safely proceed without first filing a motion for relief from the codebtor stay. New § 365(p)(3) is proof that Congress knew how to include relief from the § 1301 codebtor stay when it so intended.

[13]

There could be some odd problems in Chapter 13 cases when the debtor does not timely act to assume a lease of personal property and new § 362(p)(1) and (3) kick in to reject the lease, terminate the automatic stay and remove the lease from the Chapter 13 estate. There will be circumstances when leased personal property has value. This is sometimes true at the end of a car lease when the purchase option amount is less than the market value of the car. It may be true when Chapter 13 debtors engaged in business (or not) have leases of equipment or other business property. The Chapter 13 trustee (and creditors) may have an interest in preventing the lease from leaving the Chapter 13 estate—especially if conversion seems likely. When a Chapter 7 debtor fails to exercise a statement of intention under § 521(a)(6), the Chapter 7 trustee has a brief but purposeful statutory period in which to prevent the value of property from being lost to the estate.20 There is no similar mechanism for a Chapter 13 trustee to prevent leased personal property from automatically leaving the Chapter 13 estate if the debtor does not timely assume under new § 365(p).

[14]

With respect to nonresidential leases of real property, BAPCPA changed the deadlines for assumption. Under amended § 365(d)(4), an unexpired lease of nonresidential real property is “deemed rejected” if the trustee21 does not assume or reject by the earlier of 120 days after the petition or entry of an order confirming a plan.22 The bankruptcy court can extend the period for assumption or rejection for 90 days upon motion before expiration of the 120-day period.

[15]

Notwithstanding the accelerated timing of confirmation,23 there will be Chapter 13 cases in which the deadlines in new § 365(d)(4) will expire. Chapter 13 debtors with nonresidential real property leases must act to assume or reject within 120 days of the petition or timely file a request for an extension of that deadline.

[16]

When a Chapter 13 debtor assumes an unexpired lease of real property—before confirmation or as part of a plan—§ 365(b)(1)(A) was amended by BAPCPA to change the rules for curing nonmonetary defaults. The requirement that a breach of a nonmonetary obligation must be promptly cured has these new exceptions and exceptions to the exception:

other than a default that is a breach of a provision relating to the satisfaction of any provision (other than a penalty rate or penalty provision) relating to a default arising from any failure to perform nonmonetary obligations under an unexpired lease of real property, if it is impossible for the trustee to cure such default by performing nonmonetary acts at and after the time of assumption, except that if such default arises from a failure to operate in accordance with a nonresidential real property lease, then such default shall be cured by performance at and after the time of assumption in accordance with such lease, and pecuniary losses resulting from such default shall be compensated in accordance with the provisions of this paragraph.24
[17]

The nested exceptions and conditions in new § 365(b)(1)(A) are difficult to penetrate. The new section seems to codify part of the holding in Worthington v. General Motors Corp. (In re Claremont Acquisition Corp.):25 the cure requirement at assumption does not apply to the satisfaction of any “penalty rate or penalty provision.” But new § 365(b)(1)(A) also departs from Claremont Acquisition: a Chapter 13 debtor need not cure nonmonetary defaults under a lease of real property if it is “impossible” for the debtor to do so. The debtor must perform nonmonetary obligations after assumption. A failure to operate in accordance with a nonresidential real property lease must be compensated as part of the cure.


 

1  See § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts and § 102.3  Leases and Executory Contracts after BAPCPA.

 

2  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.

 

3  See 11 U.S.C. § 365(d)(2), discussed in § 56.1 [ Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts ] § 51.3  Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts.

 

4  See §§ 382.1 [ Certification and Rent Deposit ] § 36.35  Certification About Eviction Judgment and Rent Deposit and 431.1 [ Real Estate, Landlord and In Rem Exceptions ] § 58.9  Real Estate, Landlord and In Rem Exceptions after BAPCPA.

 

5  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.

 

6  11 U.S.C. § 362(l)(2).

 

7  11 U.S.C. § 362(b)(23), discussed in § 431.1 [ Real Estate, Landlord and In Rem Exceptions ] § 58.9  Real Estate, Landlord and In Rem Exceptions after BAPCPA.

 

8  See 11 U.S.C. § 362(m), discussed in § 431.1 [ Real Estate, Landlord and In Rem Exceptions ] § 58.9  Real Estate, Landlord and In Rem Exceptions after BAPCPA.

 

9  See below in this section, and see § 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3  Leases and Executory Contracts after BAPCPA.

 

10  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

11  11 U.S.C. § 1326(a)(1)(B), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

12  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

13  See §§ 296.1 [ Leases and Executory Contracts ] § 136.10  Leases and Executory Contracts before BAPCPA, 297.1 [ Failed Adequate Protection ] § 136.12  Failed Adequate Protection before BAPCPA, 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA, 517.1 [ Leases and Executory Contracts ] § 136.11  Leases and Executory Contracts after BAPCPA and 518.1 [ Failed Adequate Protection ] § 136.13  Failed Adequate Protection after BAPCPA.

 

14  See §§ 296.1 [ Leases and Executory Contracts ] § 136.10  Leases and Executory Contracts before BAPCPA and 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3  Leases and Executory Contracts after BAPCPA.

 

15  11 U.S.C. § 365(p)(1).

 

16  Under § 365(d)(2), assumption or rejection of an executory contract or lease of personal property in a Chapter 13 case is timely “before the confirmation of a plan.” See §§ 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts and 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3  Leases and Executory Contracts after BAPCPA. Under 11 U.S.C. § 365(p)(1), a lease of personal property that is not timely assumed under § 365(d) ceases to be property of the estate, and the stay under § 362 is automatically terminated. Under new § 365(p)(3), “timely” is more precisely identified as the conclusion of the confirmation hearing.

 

17  11 U.S.C. § 365(p)(3).

 

18  See § 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3  Leases and Executory Contracts after BAPCPA for further discussion of this issue.

 

19  11 U.S.C. § 1301 is discussed beginning at § 65.1  Cosigners and Joint Obligors Are Protected.

 

20  See 11 U.S.C. § 521(a)(6).

 

21  Assume for this purpose that a Chapter 13 debtor has the powers of a trustee. 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.

 

22  11 U.S.C. § 365(d)(4)(A).

 

23  See § 502.1 [ Timing of Hearing on Confirmation ] § 115.2  Timing of Hearing on Confirmation after BAPCPA.

 

24  11 U.S.C. § 365(b)(1)(A).

 

25  113 F.3d 1029 (9th Cir. 1997).