§ 51.3 — Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts
Revised: May 24, 2004
The authority of a Chapter 13 debtor to assume, assign, or reject unexpired leases, rental agreements and executory contracts in advance of confirmation of a plan cannot be gathered directly from the Code.1 The power is in § 365. As discussed elsewhere with respect to other powers in Chapters 3 and 5,2 the power to assume, assign or reject unexpired leases and executory contracts in § 365 is granted to “the trustee.”3 There is no specific provision of Chapter 13 giving the debtor the powers of the trustee under § 365.
There is only an inference in § 1322(b)(7) that unexpired leases and executory contracts can be dealt with by someone in a Chapter 13 case in advance of confirmation. 11 U.S.C. § 1322(b)(7) provides in part:
the plan may—
. . . (7) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section.4
Section 1322(b)(7) contemplates that executory contracts and unexpired leases may be assumed, assigned, or rejected under § 365 in advance of confirmation of a plan. Section 1322(b)(7) does not tell us who may exercise that power outside the context of the plan.
We know that only the Chapter 13 debtor can propose a plan.5 Section 1322(b)(7) permits a Chapter 13 debtor to propose a plan that exercises the power in § 365.6 The absence of similar authority before confirmation could be interpreted to confine the power of the debtor with respect to leases and executory contracts to the plan, reserving to the Chapter 13 trustee assumption, assignment or rejection prior to confirmation.
Most of the reported Chapter 13 cases dealing with executory contracts involve plan provisions under § 1322(b)(7).7 The few cases discussing standing to assume, assign or reject in advance of confirmation hold that the debtor has standing.8
Because of short time periods in the Code, the management of contracts in Chapter 13 cases may require action by someone in advance of confirmation. For example, § 365(d)(4) requires the trustee to assume or reject an unexpired lease of nonresidential real property within 60 days after the petition else “such lease is deemed rejected.”9 Several reported decisions have struggled with § 365(d)(4) in Chapter 13 cases that did not reach confirmation before expiration of the 60-day period. One court held that because § 365(d)(4) is worded in terms of action by a trustee, the section does not apply to a Chapter 13 debtor and assumption or rejection of a nonresidential lease can only be accomplished as part of confirmation of a plan under § 1322(b)(7).10 Several courts have held that a proposed plan filed within 60 days of the petition that provides for assumption of a nonresidential lease is effective for § 365(d)(4) purposes if adequately noticed to the landlord, notwithstanding that confirmation did not occur within the 60-day period.11 Given the uncertainty, Chapter 13 debtors who wish to assume a nonresidential lease are best advised to file and serve on the landlord both a plan and a motion within the 60-day time period in § 365(d)(4).
It makes little sense for anyone other than the debtor to move for assumption or rejection of an unexpired lease or executory contract in a Chapter 13 case. It makes even less sense to preclude a Chapter 13 debtor from doing so without help from the trustee before confirmation of a plan. The Chapter 13 trustee has no statutory authority to use or lease property of the estate.12 The Chapter 13 debtor has every incentive to get out of unfavorable leases or executory contracts or to assume favorable ones as quickly as possible after the petition. Especially in jurisdictions that delay confirmation of plans,13 the debtor may need to assume, assign or reject executory contracts in advance of confirmation to avoid preconfirmation litigation with landlords and lessors. Chapter 13 debtors should be empowered to get out of an apartment lease, reject a car lease, cancel a contract for the lease of furniture or home appliances or assume such contracts by filing a motion for assumption or rejection at any time after the petition. Section 1322(b)(7) is an imperfect source of authority for Chapter 13 debtors to use § 365 in advance of confirmation of a plan.
The Bankruptcy Reform Act of 1994 added incentives for Chapter 13 debtors to assume, assign or reject executory contracts before confirmation. As mentioned above,14 the 1994 Act amended § 363(e) to require debtors who lease personal property to provide adequate protection upon demand prior to confirmation.15 Lessors of personal property in Chapter 13 cases can take advantage of § 363(e) by routinely requesting adequate protection (or relief from the stay) prior to confirmation. The lessor’s motion may force the debtor to quickly assume or reject the rental contract or lease, to avoid adequate protection payments.
Procedure for preconfirmation assumption, assignment or rejection is motion practice governed by Bankruptcy Rule 6006. Assumption, assignment or rejection of a lease or executory contract is not automatic upon the filing of a Chapter 13 petition. Filing a petition does not satisfy the requirements in § 365 that the debtor obtain court approval and cure defaults to accomplish assumption.16 Assumption, assignment or rejection by motion in advance of confirmation is a contested matter under Bankruptcy Rule 9014.
The nondebtor party to a lease or contract can move pursuant to Bankruptcy Rule 6006(b) and § 365(d)(2) to fix a time in advance of confirmation within which assumption, assignment or rejection must occur.17 In jurisdictions that delay confirmation, the nondebtor party can use motion practice to accelerate disposition of the contract.18
Debtor’s counsel should take special care to examine unexpired leases and executory contracts in Chapter 13 cases. Chapter 13 debtors often cannot qualify for ordinary credit and have been steered or lured into rental and lease agreements that are most unfavorable. Such contracts are sometimes disguised security agreements that should be treated as secured claims.19
Too many Chapter 13 debtors neglect to deal with their apartment leases in the plan (or otherwise) though they fully intend to keep the apartment. Debtors living in subsidized housing have special incentives to promptly move for assumption. Many subsidized leases are open-ended and continue from month to month absent default. Failure to assume such a lease after the petition may jeopardize the debtor’s right to the subsidy.
Continued use of rented residential or personal property may subject the debtor to administrative expenses that must be paid in full through the Chapter 13 plan.20 Unpaid rent for nonresidential real property accruing between the petition and rejection under § 365(d) may be a (substantial) expense of administration in the Chapter 13 case.21 A prompt motion to reject limits this exposure and maximizes the debtor’s alternatives for dealing with the resulting claim through the plan.
Restrictions in § 365 limit the preconfirmation assumption, assignment or rejection of a lease or contract by a Chapter 13 debtor.22 For example, § 365(i) applies to a Chapter 13 debtor who desires to reject a contract for the sale of real property when the debtor is the seller and the buyer does not consent to rejection.23 Preconfirmation management of executory contracts in a Chapter 13 case may include dealing with a noncompete clause or other restriction on the debtor.24
1 See § 102.1 Debtor Can Assume, Assign or Reject Executory Contracts for discussion of assumption, assignment or rejection of unexpired leases and executory contracts as part of the Chapter 13 plan.
2 See §§ 52.1 [ Turnover of Property ] § 50.1 Turnover of Property, 53.1 [ Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances ] § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances and 53.2 [ Postpetition Transfers ] § 50.7 Postpetition Transfers
3 See 11 U.S.C. § 365(a) (“[T]he trustee . . . may assume or reject any executory contract or unexpired lease of the debtor.”).
4 11 U.S.C. § 1322(b)(7) (emphasis added).
5 See § 55.1 [ Debtor Must File a Plan ] § 51.2 Debtor Must File a Plan.
6 See § 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1 Debtor Can Assume, Assign or Reject Executory Contracts.
7 See discussion beginning at § 102.1 Debtor Can Assume, Assign or Reject Executory Contracts.
8 See In re Kirsch, 242 B.R. 77, 79 (Bankr. M.D. Fla. 1999) (“Though Section 365(d) provides that the trustee is permitted to assume or reject unexpired leases, courts interpret the Bankruptcy Code as to allow chapter 13 debtors to assume or reject leases under this Section.”); In re Brewer, 233 B.R. 825, 828 (Bankr. E.D. Ark. 1999) (“Although the Code expressly permits rejection or assumption only by the trustee, courts have reasoned that chapter 13 debtors are also entitled to reject or assume under this Code section. . . . Under section 365 and prevailing case law, the Debtor in this chapter 13 case may properly reject his tenancy at will rental agreement.” Landlord is entitled to administrative expense for postpetition, pre-rejection rent at the contract rate without proof of benefit to the estate because of § 365(d)(3).); In re Jennings, 204 B.R. 41, 43 (Bankr. W.D. Mo. 1997) (“In a Chapter 13 case, absent any limitations or conditions that the Court imposes, a debtor has all the rights and powers of a trustee. 11 U.S.C. § 1303. Therefore, debtor has the authority to assume the [nonresidential] lease if he does so within sixty days of the petition.”); In re Steffen, 181 B.R. 981, 984 (Bankr. W.D. Wash. 1995) (Although Code is not altogether clear, Chapter 13 debtors are proper parties to assume or reject an executory contract. “After all, § 365(a) gives the assume/reject determination to the trustee, not debtors, and nothing in Chapter 13 directly authorizes debtors to exercise that power. However, the outcome of that decision, at least if it is to assume, must of necessity be implemented in a plan, and only debtors may propose a plan. . . . Since the debtors’ plans may provide for the assumption or rejection of the executory contracts, § 1322(b)(2), the Steffens are proper parties.”).
9 11 U.S.C. § 365(d)(4).
10 In re Dodd, 73 B.R. 67 (Bankr. E.D. Cal. 1987).
11 In re Jennings, 204 B.R. 41, 44 (Bankr. W.D. Mo. 1997) (Failure to serve plan in which debtor assumed nonresidential lease within 60 days permitted by § 365(d)(4) is fatal of assumption. “[A] debtor is allowed to assume a lease in a Chapter 13 plan, however, the intent to assume must be timely, and notice of such intent must be given to the lessor. . . . [D]ebtor failed to send Noland a copy of the plan or notice that the plan was on file with the Court. . . . [S]ection 365(d)(4) requires, at a minimum, that a debtor inform a lessor within sixty days after the date of the order for relief of its intention to assume or reject its lease. . . . [W]hen this Court denied confirmation of the Chapter 13 plan in which debtor stated his intention to assume the lease, debtor needed to preserve his right to assume the lease by seeking an extension of time pursuant to section 365(d)(4). . . . [B]ecause of his failure to notify Noland of his intention within sixty days of the petition, and because he did not obtain an extension of time to state his intention in the Amended Chapter 13 Plan and Summary . . . debtor has failed to satisfy the requirements of section 365(d)(4), therefore, the lease is deemed rejected.”); In re Flugel, 197 B.R. 92, 94–97 (Bankr. S.D. Cal. 1996) (Requirement in § 365(d)(4) that nonresidential lease be assumed within 60 days of the order of relief is satisfied where plan filed by debtor within the 60-day period contains a provision assuming the lease. The motion required to assume a lease under Bankruptcy Rule 6006(a), according to the 1983 Advisory Committee Note, “‘does not apply . . . to the assumption or rejection of contracts in a plan pursuant to . . . § 1322(b)(7).’ . . . Under Section 365(d)(4) a lease will be deemed rejected unless it is assumed within 60 days of the order for relief. . . . [H]owever, a debtor need not actually obtain court approval within the 60 days. . . . In this case the actions of the Debtors effectively ended the uncertainty well within the 60-day period of section 365(d)(4). The Debtors declared their intention to assume the lease in their plan. The plan was filed with the petition. Within nine days [the landlord] was served with the 341 Notice which included specific notice that the Debtors intended to assume the lease. . . . [The landlord] was afforded the safeguards which would have been afforded under Rule 6006(a) and 9014. This Court holds that the assumption provisions in the plan, together with the 341 Notice, satisfied the requirements of Section 365(d)(4).”); In re Aneiro, 72 B.R. 424 (Bankr. S.D. Cal. 1987) (Provision in debtor’s plan assuming nonresidential lease satisfies § 365(d)(4) where debtor’s plan was filed 29 days after petition.). See also In re Dulan, 52 B.R. 739 (Bankr. C.D. Cal. 1985) (Section 365(d)(4) applies in Chapter 13 to require timely assumption or rejection of unexpired lease of nonresidential real property. Creditor waived automatic rejection mechanism in § 365(d)(4) by inviting debtor to cure rent arrearages.).
12 See § 44.1 [ Debtor Has Exclusive Control of Estate Property ] § 45.1 Debtor Has Exclusive Possession and Control of Estate Property.
13 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
14 See § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation.
15 11 U.S.C. § 363(e), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 219, 108 Stat. 4106 (1994). See § 174.3 [ Lessor Can Demand Adequate Protection ] § 102.6 Lessor Can Demand Adequate Protection.
16 In re Wallace, 122 B.R. 222 (Bankr. D.N.J. 1990).
17 See In re Von Keisler, 166 B.R. 620 (Bankr. N.D. Tex. 1994) (Applying Texas law, contract for deed for the purchase of a homestead is an executory contract, and 11 U.S.C. § 365 applies. It is appropriate, on motion of the vendor, for the bankruptcy court to fix a deadline within which the debtors as vendees must assume or reject the contract.); In re Wallace, 122 B.R. 222 (Bankr. D.N.J. 1990) (On lessor’s motion to compel debtors to assume or reject true lease, court granted debtor 15 days to file motion for authority to assume or reject lease, including plan provision for exercise of purchase option in lease.).
18 See § 174.4 [ Lessor Can Accelerate Assumption or Rejection ] § 102.7 Lessor Can Accelerate Assumption or Rejection.
19 See § 175.1 [ Fake Leases and Rental Agreements ] § 102.8 Fake Leases and Rental Agreements.
20 See § 296.1 [ Leases and Executory Contracts ] § 136.10 Leases and Executory Contracts before BAPCPA.
21 See In re Kirsch, 242 B.R. 77 (Bankr. M.D. Fla. 1999).
22 See § 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2 Debtor Must Cure Defaults and Assure Future Performance.
23 In re Walkup, 28 B.R. 225 (Bankr. N.D. Ind. 1983).
24 See, e.g., In re Udell, 18 F.3d 403 (7th Cir. 1994) (Bankruptcy court’s decision to grant relief from the stay in a Chapter 13 case to the party in whose favor a prepetition, noncompete clause ran, is remanded to the district court for further consideration.); In re Hughes, 166 B.R. 103 (Bankr. S.D. Ohio 1994) (Debtor’s former employer is entitled to relief from the stay to pursue an injunction to enforce a prepetition covenant not to compete.); In re Kilpatrick, 160 B.R. 560 (Bankr. E.D. Mich. 1993) (Beneficiary of prepetition covenant not to compete is not entitled to relief from the stay to enforce prepetition state court injunction against the debtor, and enforcement of the covenant within the Chapter 13 case depends upon whether the covenant is a dischargeable claim.).