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9th Cir. Rejects Challenge to Assumption of Auto Lease in Bankruptcy

auto leaseIn a case of first impression on the issue of “whether a lease assumption can survive discharge even though it is not reaffirmed[,]” the U.S. Court of Appeals for the Ninth Circuit recently held that a creditor’s post-discharge attempt to collect the balance owed under an automobile lease assumed by the debtor post-petition but prior to discharge in a Chapter 7 case did not violate the discharge injunction. 

A copy of the opinion in Bobka v. Toyota Motor Credit Corp. is available at:  Link to Opinion.

A bankruptcy debtor wanted to keep her leased SUV so she signed an assumption agreement the day before she received a discharge in her pending Chapter 7 bankruptcy case.

However, the debtor stopped making her lease payments and eventually surrendered the vehicle, leaving a balance owed under the assumed lease. When the creditor tried to collect, the debtor filed a motion for sanctions, arguing that the creditor “violated section 524’s discharge injunction [and] that the assumption agreement was independently invalid because she and [the creditor] had not followed the required procedures for a lease assumption under 11 U.S.C. § 365(p).”

The bankruptcy court and the trial court both disagreed, and the debtor appealed to the Ninth Circuit.

The Ninth Circuit affirmed both courts, holding that “lease assumptions survive discharge event if they are not reaffirmed, and [both the debtor and creditor] mutually waived section 365(p)’s procedural requirements.”

The Court began its analysis by explaining what happens when the debtor files bankruptcy under Chapter 7, and a trustee is appointed with the power to assume or reject “any unexpired contracts—including leases—to which the debtor is a party.”  The Court noted that “[i]f the trustee rejects the lease, the rejection is deemed a breach of the lease, and the claim created by that breach is treated as one that arose before the petition was filed.”

The Court went on to explain that “[b]efore 2005, only the trustee could assume or reject a lease.” However, “the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 … added section 365(p), which allows the debtor to assume a lease of personal property.”

In particular, section 365(p)(2) provides that if the debtor notifies a creditor within 30 days of receiving notice the creditor is willing to assume a lease, “the liability under the lease will be assumed by the debtor and not by the estate … [and] the injunction under section 524(a)(2) shall not be violated by notification of the debtor and negotiation of cure under this subsection.”

The Ninth Circuit reasoned that even though the debtor did not follow the procedures contained in section 365(p)(2), having contacted the creditor by phone instead of in writing and not returning the signed assumption agreement until more than 30 days after she told the creditor by phone she wanted to keep the vehicle, “a lease assumption need not be reaffirmed in order to survive discharge” for three reasons.

“First, ‘[i]t is ‘a cardinal principal of statutory construction’ that ‘a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant[,]’” and “[i]f lease assumptions do not survive discharge unless they are reaffirmed, then section 365(p) would be superfluous in at least two ways.”

“Most specifically, requiring debtors to reaffirm lease assumptions would make section 365(p)’s safe-harbor provisions superfluous. … More broadly, if every lease assumption must be reaffirmed to survive discharge, then section 524(c)’s more onerous requirement would displace section 365(p)’s more informal ones.”

“Second, ‘it is a commonplace of statutory construction that the specific governs the general.’ … Here, that principle supports the conclusion that section 365(p), which sets our procedures specifically applicable to individual debtors’ assumptions of leases of personal property, should control over the more general reaffirmation procedures of section 524(c).”

“Third, other provisions of the Bankruptcy Code suggest that lease assumptions under section 365(p) do not require reaffirmation under section 524(c). For example, section 362(h) requires individual debtors under some circumstances to indicate in their statement of intention whether they will ‘either redeem … personal property pursuant to section 722, enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so.’” The use of such language “indicates that it designates distinct options. … The separate listing of reaffirmation under section 524(c) and assumption under section 365(p) undermines the suggestion that a debtor opting for assumption must also pursue reaffirmation.”

Finally, the Ninth Circuit reasoned, “[t]he historical understanding of lease assumptions by a trustee further supports our conclusion that lease assumptions under section 365(p) are not subject to section 524(c)’s requirements for agreements ‘based on a debt that is dischargeable.’” Prior to 2005, once a trustee assumed an unexpired lease, it “was assumed ‘subject to all of its provisions, including the in personam liabilities flowing from assumption.’ … Significantly, the breach of an assumed lease became a post-petition debt under the Code—meaning that it was not dischargeable and was not subject to section 524(c)’s reaffirmation requirements. … We see no reason to deviate from that understanding just because a debtor initiates the lease assumption rather than a trustee.”

The Court then turned to consider, in closing, whether “the parties failure to comply with the procedures of section 365(p) nullifies [the debtor’s] agreement to assume the [SUV] lease[,]” concluding “that it does not.” This is because “[t]he Supreme Court has held that ‘absent some affirmative indication of Congress’ intent to preclude waiver, … statutory provisions are subject to waiver by voluntary agreement of the parties[,]” and “we have no difficulty concluding that the parties mutually waived section 365(p)’s writing and timing requirements here.”

The judgments of the bankruptcy court and trial court were affirmed.

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida. For more information, see https://mauricewutscher.com/attorneys/hector-e-lora/

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