PBCBA BAR BULLETINS JULY | AUGUST 2020 - Page 8

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 Upcoming Live Webinars Workers' Comp: Navigating Worker Compensation in Today's Landscape July 15 | 12:00 PM - 1:00 PM Judicial Candidate Forum including Circuit and County Court Races in the 15th Circuit July 16 | 12:00 PM - 1:00 PM Personal Injury Seminar: Unique Issues in Transportation Cases July 28 | 10:00 AM - 2:30 PM Civility and Good Practice: Navigating Complex Cases During a Pandemic August 19 | 12:00 PM - 1:15 PM Bench Bar Virtual Series Friday, August 7 th Friday, August 14 th Friday, August 21 st Friday, August 28 th Register Today! For more information, please visit www.PalmBeachBar.org