§ 102.3 — Leases and Executory Contracts after BAPCPA

Revised: April 13, 2006

[1]

BAPCPA did not change the power of Chapter 13 debtors to provide for the assumption or rejection of any executory contract or unexpired lease through the Chapter 13 plan.1 But BAPCPA amended § 365 in ways that will affect Chapter 13 debtors. Lessors of personal property have new rights to prepetition payments in Chapter 13 cases. And some residential landlords will have advantages in Chapter 13 cases after BAPCPA.

[2]

Chapter 13 debtors can still assume, assign or reject an unexpired lease or executory contract in advance of confirmation of a plan.2 Under § 365(d)(2), a Chapter 13 debtor3 can assume or reject an executory contract or unexpired lease of residential real property or of personal property at any time before confirmation of a plan unless, on request of a party to the contract or lease, the court specifies an earlier time.4

[3]

BAPCPA changed the timing for assumption or rejection in § 365 with respect to nonresidential real estate leases. Under § 365(d)(4)(A), as amended, an unexpired lease of nonresidential real property is “deemed rejected” if not assumed or rejected by the earlier of 120 days after the petition or confirmation of a plan.5 The 120-day period can be extended for 90 days on the motion of the trustee or the lessor for cause.6 If one 90-day extension is granted by the court for cause, a subsequent extension is possible only upon written consent of the lessor.7

[4]

Chapter 13 debtors sometimes have leases of nonresidential real property. Especially after the BAPCPA amendments to § 1324,8 most Chapter 13 cases will reach confirmation within 120 days of the petition and before § 365(d)(4)(A) would deem a nonresidential real property lease rejected. In Chapter 13 cases that do not reach confirmation within 120 days of the petition, debtors with nonresidential leases will need to move for a 90-day extension to avoid deemed rejection of any nonresidential real property lease.

[5]

With respect to leases of personal property, BAPCPA added two new provisions in § 365(p):

(1) If a lease of personal property is rejected or not timely assumed by the trustee under subsection (d), the leased property is no longer property of the estate and the stay under section 362(a) is automatically terminated.
. . . .
(3) In a case under . . . chapter 13, if the debtor is the lessee with respect to personal property and the lease is not assumed in the plan confirmed by the court, the lease is deemed rejected as of the conclusion of the hearing on confirmation. If the lease is rejected, the stay under section 362 and any stay under section 1301 is automatically terminated with respect to the property subject to the lease.9
[6]

Under subsection (d) of § 365, a Chapter 13 debtor can assume or reject an unexpired lease of personal property at any time before confirmation of a plan unless the court fixes an earlier time. Under new § 365(p)(1), if a lease of personal property is “rejected or not timely assumed” under § 365(d), the personal property is no longer property of the Chapter 13 estate and the stay under § 362(a) is “automatically terminated.” Under § 365(p)(1), if a Chapter 13 debtor rejects a lease of personal property prior to confirmation, the leased property ceases to be property of the Chapter 13 estate and the § 362(a) automatic stay automatically terminates. The automatic termination of the automatic stay in new § 365(p)(1) is arguably redundant of § 362(c)(1), which provides that the stay under subsection (a) of § 362 continues until property is no longer property of the estate.10 If the bankruptcy court fixes a time in advance of confirmation of the plan by which the debtor must assume or reject an executory contract of personal property under § 365(d)(2) and the debtor fails to timely act, the leased property leaves the Chapter 13 estate and the § 362(a) stay automatically terminates under § 365(p)(1).

[7]

New § 365(p)(3) arguably overlaps § 365(p)(1) in some respects and is not altogether consistent with § 365(p)(1) in other respects. Under § 365(p)(3), a Chapter 13 debtor’s lease of personal property must be “assumed in the plan confirmed by the court” else the lease is deemed rejected at the conclusion of the hearing on confirmation. Under § 365(d), a Chapter 13 debtor can assume a lease of personal property in advance of confirmation of a plan. If an order assuming the lease is entered before confirmation, new § 365(p)(3) could be interpreted to deem the lease rejected notwithstanding the order of assumption if assumption is not also included in the confirmed plan. This is silly, but Chapter 13 debtors who want to assume a lease of personal property should include assumption language in the confirmed plan even if assumption was ordered in advance of confirmation.

[8]

Section 365(p)(3) adds to § 365(p)(1) that, if assumption is not included in the plan confirmed by the court, in addition to automatic termination of the stay under § 362, “any stay under section 1301 is automatically terminated.” There is no reference to the § 1301 codebtor stay in § 365(p)(1). In other words, if a lease of personal property is rejected or not timely assumed under § 365(p)(1), the property leaves the Chapter 13 estate and the automatic stay in § 362(a) is terminated; but any codebtor stay under § 1301 remains in effect until relief from the codebtor stay is granted or a plan is confirmed that does not assume the lease under § 365(p)(3).

[9]

Notice also that the automatic termination of the stay under § 365(p)(3) is broader than under § 365(p)(1). Under § 365(p)(1), only the stay under § 362(a) is automatically terminated; under § 365(p)(3), the stay “under section 362” is automatically terminated if the lease of personal property is not assumed in the confirmed plan.

[10]

The message for debtors in new § 365(p) is to act clearly with respect to leases of personal property in the Chapter 13 plan. If the debtor wants to assume the lease, assumption should be a specific provision of the plan. If the lessor compels assumption in advance of confirmation of a plan, the debtor should still include a provision assuming the lease in the confirmed plan notwithstanding a separate order for assumption before confirmation.

[11]

New § 365(p) relieves lessors of personal property of the need to get an order for relief from the stay or codebtor stay in a Chapter 13 case if the lease of personal property is not assumed in the confirmed plan. That Congress thought to automatically terminate the codebtor stay under § 1301 in new § 365(p)(3) with respect to leases of personal property is some evidence that the codebtor stay remains in effect in many other important circumstances in Chapter 13 cases.11

[12]

It is a little strange that § 365(p)(3) deems a lease of personal property rejected “as of the conclusion of the hearing on confirmation” if the plan confirmed by the court does not assume the lease. The hearing on confirmation typically will conclude before a confirmation order is entered by the bankruptcy court. If a plan is subsequently confirmed that does not assume a lease of personal property, § 365(p)(3) retroactively deems the lease rejected as of the conclusion of the hearing on confirmation. The stay under § 362 and under § 1301 is “automatically terminated” if the lease is rejected—perhaps retroactively as well. In districts that hold a hearing on confirmation in Chapter 13 cases only upon objection, the timing of the deemed rejection and of the automatic termination of stays in new § 365(p)(3) is problematic.

[13]

Detailed elsewhere,12 lessors of personal property have new rights to preconfirmation payments in Chapter 13 cases. Under new § 1326(a)(1)(B), a Chapter 13 debtor shall 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.”13 In addition, not later than 60 days after the petition, a Chapter 13 debtor retaining possession of personal property that is subject to a lease must provide the lessor “reasonable evidence of the maintenance of any required insurance coverage.”14 It is at least interesting that the new prepetition payments to lessors of personal property and proof of insurance are not linked to the new provisions in § 365 for deemed rejection or automatic relief from the stay. In other words, lessors of personal property must seek further relief from the bankruptcy court if a Chapter 13 debtor fails to make preconfirmation payments or fails to provide proof of insurance in advance of confirmation.

[14]

Lessors of residential real property also have new rights in Chapter 13 cases.15 Under § 362(b)(22) and (l), a lessor of residential property in which the debtor is a tenant may continue an eviction or unlawful detainer action pending at the petition if the lessor had a judgment for possession and the debtor fails to file the certificate and tender rent consistent with § 362(l). Even if the debtor files the required certificate and pays postpetition rent with the Chapter 13 petition, the debtor then has only 30 days after the petition to cure all prepetition defaults. A landlord with a prepetition judgment for possession and a pending eviction action is substantially advantaged by new § 362(b)(22) and (l).

[15]

To assume an executory contract or unexpired lease, the Chapter 13 debtor must cure defaults or provide “adequate assurance” that defaults will be promptly cured.16 Chapter 13 debtors sometimes want to assume an executory contract or unexpired lease that contains nonmonetary obligations that are in default. BAPCPA has changed the rules with respect to the curing of nonmonetary defaults.

[16]

As amended, § 365(b)(1)(A) provides that the debtor must promptly cure defaults or provide adequate assurance of prompt cure, with this oddly worded “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.17
[17]

Although the quoted language is almost impenetrable, it seems to say that nonmonetary obligations under an unexpired lease of real property need not be promptly cured to assume the lease if it is impossible for the debtor to cure the default by performing nonmonetary acts at and after the time of assumption.

[18]

Residential leases often have nonmonetary default provisions such as prohibitions against excessive noise, pets or illegal activities. Chapter 13 debtors in breach of such provisions may find that BAPCPA has lightened the burden to cure default at or after assumption. If it is impossible for the debtor to cure the breach of a nonmonetary obligation by performing nonmonetary acts at and after the time of assumption, new § 365(b)(1)(A) may be interpreted to excuse the prepetition breach altogether except with respect to a failure to operate in accordance with a nonresidential real property lease. Though rarer, Chapter 13 debtors sometimes have nonresidential real property leases, and a default with respect to a nonmonetary obligation under a nonresidential real property lease must now be cured by performance at and after the time of assumption and compensation for pecuniary losses resulting from the default.


 

1  See 11 U.S.C. § 1322(b)(7), discussed beginning at § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

2  See § 414.1 [ Preconfirmation Assumption and Rejection of Leases and Executory Contracts ] § 51.4  Preconfirmation Assumption and Rejection of Leases and Executory Contracts after BAPCPA.

 

3  11 U.S.C. § 365(d)(2) is worded in terms of “the trustee,” but most courts have allowed Chapter 13 debtors to exercise the powers of a trustee under this section. See § 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

4  11 U.S.C. § 365(d)(2), discussed in §§ 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts and 174.4 [ Lessor Can Accelerate Assumption or Rejection ] § 102.7  Lessor Can Accelerate Assumption or Rejection.

 

5  11 U.S.C. § 365(d)(4)(A).

 

6  11 U.S.C. § 365(d)(4)(B).

 

7  11 U.S.C. § 365(d)(4)(B)(ii).

 

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

 

9  11 U.S.C. § 365(p)(1), (3).

 

10  See 11 U.S.C. § 362(c)(1), discussed in § 74.1 [ Expiration of Stay ] § 58.14  Expiration of Stay.

 

11  See § 436.1 [ Codebtor Heaven ] § 65.3  Codebtor Heaven after BAPCPA.

 

12  See §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA, 414.1 [ Preconfirmation Assumption and Rejection of Leases and Executory Contracts ] § 51.4  Preconfirmation Assumption and Rejection of Leases and Executory Contracts after BAPCPA, 419.1 [ Payments to Creditors before Confirmation ] § 53.11  Payments to Creditors before Confirmation and 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4  Preconfirmation Rights of Landlords and Lessors after BAPCPA.

 

13  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.

 

14  11 U.S.C. § 1326(a)(4), discussed in § 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4  Preconfirmation Rights of Landlords and Lessors after BAPCPA.

 

15  See § 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4  Preconfirmation Rights of Landlords and Lessors after BAPCPA.

 

16  11 U.S.C. § 365(b)(1)(A), discussed in § 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2  Debtor Must Cure Defaults and Assure Future Performance.

 

17  11 U.S.C. § 365(b)(1)(A).