BANKRUPTCY CORNER
The Debtor Assumed Your Lease in a Chapter
13 Plan, “to what Effect”?
JASON S. RIGOLI
The Eleventh Circuit recently issued an
opinion, a first among the circuit courts,
regarding administrative expense claims
and unexpired leases or executory contracts
that is important to creditors. See Microf,
LLC v. Cumbess (In re Cumbess), --- F.3d ---,
2020 WL 2897260 (11th Cir. June 3, 2020). In
the end, according to the Eleventh Circuit,
clear and unambiguous statutory language
carries the day.
Background
In this case, the debtor assumed an HVAC
lease through his confirmed chapter 13
plan for HVAC equipment on his residence.
Cumbess at *1. The debtor was responsible
for making the post-confirmation payments
directly to the lessor. Id. The debtor
consistently failed to make his payments
to the creditor and ran up $1,763.95 in postconfirmation
arrears. Id. The Chapter 13
trustee, in this case, did not assume the
lease pre-confirmation. Id.
The creditor eventually asked the
bankruptcy court to deem these postconfirmation
arrears as an administrative
expense, “bump[ing its way] up the
creditor food chain.” Id. The bankruptcy
court denied the creditor’s request and
the district court affirmed. The creditor
appealed to the Eleventh Circuit.
The question before the court was: “whether
by assuming the lease as part of his Chapter
13 plan, the debtor can—singlehandedly
and, in particular, without any action by the
trustee—obligate the bankruptcy estate.”
Cumbess, at *3.
Analysis
Several sections of the Bankruptcy Code
come into play in this scenario. Sections
365 and 1322 govern the assumption,
rejection, and assignment of unexpired
leases or executory contracts in a chapter
13 bankruptcy case. Section 1322(b)(7)
authorizes a debtor to assume, reject, or
assign an unexpired lease or executory
contract, not previously assumed, assigned,
or rejected, through the debtor’s plan
subject to section 365. 11 U.S.C. § 1322(b)(7).
However, as the Eleventh Circuit holds, that
authority does not answer the question
before the Court. The Court must look to
the language of § 365, to which § 1322(b)(7)
points.
The Eleventh Circuit first addresses “who”
can assume, reject, or assign. Cumbess,
at *3-4. The Trustee for certain. Id. at *3
(citing § 365(a) (authorizing the trustee to
assume or reject) and (d)(2) (authorizing
the chapter 13 trustee to assume or reject
preconfirmation)). And, in a chapter 13 the
Debtor’s authority remains subject to § 365.
11 U.S.C. § 1322(b)(7).
The next question the court considered
was “to what effect.” Cumbess, at *4. Which
gets to the question of whether the debtor
can obligate the estate by assuming an
unexpired lease or executory contract in
a chapter 13 plan. The Eleventh Circuit
found the statutory language of 365 made
short shrift of this analysis. Section 365(p)
(1) states in relevant part: “[i]f a lease of
personal property is rejected or not timely
assumed by the trustee ... the leased property
is no longer property of the estate.” Id. at
*4 (quoting 11 U.S.C. § 365(p)(1)) (quotation
marks in original). “Section 365(p)(1)’s plain
language answers the question that we are
principally tasked with deciding: Where
(as here) the trustee does not assume an
unexpired lease, it drops out of the estate.”
Ibid. Essentially, the debtor’s assumption
of an unexpired lease or executory contract
in a plan amounts to a “reaffirmation
agreement” similar to debtors in chapter
7, where the debtor assumes, post-petition
personal liability for the debt excluding it
from discharge. Id. at *6 (citing In re Ruiz,
2012 WL 5305741 at *3 n.5 (Bankr. S.D. Fla.,
Feb. 15, 2012) (Isicoff, J.)).
Conclusion
What the Eleventh Circuit, and the lower
courts found, was that for the property and
attendant lease to remain in the estate they
must remain in the estate and, according
to § 365(p)(1), was for the chapter 13 to
assume the lease pre-confirmation. Id. at
*8 (“The language of 11 U.S.C. § 365(p)(1) is
crystal clear: ‘If a lease of personal property
is rejected or not timely assumed by the
trustee ... the leased property is no longer
property of the estate.’ That provision
means what it says, and so here—where
it’s undisputed that the trustee did not
assume the Microf lease—it means that the
Microf lease dropped out of the bankruptcy
estate upon confirmation of Cumbess’s
Chapter 13 plan.”). Otherwise, the “effect”
of the assumption of an unexpired lease or
executory contract by a chapter 13 debtor in
a plan, is that the debtor simply “reaffirms”
the personal liability of that debt obligation.
The Eleventh Circuit does note, however,
that whether the property and lease remain
property of the estate is not necessarily
dispositive of allowing an administrative
claim. Id. at *8 fn. 7. The issue for
administrative expense claim to be allowed
is whether that expense conferred a benefit
on the estate, if so, the claim may be entitled
to administrative priority status.
1
11 U.S.C. §§ 101 et seq.
2
“Section” or “§” refers to the Bankruptcy Code, unless
expressly stated otherwise.
This article was submitted by Jason S.
Rigoli, Furr Cohen, P.A., 2255 Glades Road,
Suite 301E, Boca Raton, FL 33431, jrigoli@
furrcohen.com
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