Hon. Gonzalo P. Curiel, Untied States District Judge.
This case presents an issue of first impression in the Southern District of California and the Ninth Circuit, that is, does a lease assumption agreement under 11 U.S.C. § 365(p) remain enforceable following discharge even if the lease assumption was not reaffirmed under 11 U.S.C. § 524(c)? District and bankruptcy courts outside the Ninth Circuit that have confronted the question all agree that the interplay between these statutes is confusing but disagree on the answer to the question. The Court concludes that reaffirmation under Section 524(c) is not required where a debtor has properly assumed a lease under Section 365(p)(2).
This is a bankruptcy appeal brought by Debtor-Appellant Melissa Carin Mather Bobka ("Mather")
The district court has jurisdiction to hear this bankruptcy appeal pursuant to 28 U.S.C. § 158(a)(1).
On appeal, the district court reviews the bankruptcy court's findings of fact for clear error and reviews its conclusions of law de novo. In re Int'l Fibercom, 503 F.3d 933, 940 (9th Cir. 2007). Whether the bankruptcy court applied the correct legal standard is a legal issue which is reviewed de novo. In re Karelin, 109 B.R. 943, 946 (9th Cir. BAP 1990).
On August 31, 2016, Mather filed a voluntary Chapter 7 bankruptcy petition. AR 10, 16. She was represented by the Doan Law Firm throughout her bankruptcy proceedings and in this instant appeal. In her bankruptcy schedules, Mather stated an intention to reaffirm a 2014 Toyota RAV4 ("Vehicle") as a secured debt. AR 250. Her schedules erroneously described Toyota as a lender with a claim secured by a lien against the vehicle, when in actuality Toyota was the lessor of the Vehicle. As such, Mather should have completed part 2 of the Statement of Intention which requires specificity as to her intention to assume the lease of the Vehicle. Id.
Pursuant to Section 365(d)(1), Ms. Mather's chapter 7 trustee had the right to assume the Lease during the first 60 days of the bankruptcy case, but did not do so. Id. As of October 31, 2016, the Vehicle was not an asset of the estate and the automatic stay as to the vehicle was terminated pursuant to Section 365(p)(1). Section 365(p)(2) provides that where a trustee fails to timely assume a lease, a debtor has the right to attempt assumption by advising her lessor "in writing" of her desire to assume the lease. 11 U.S.C. § 365(p)(2).
Mather did not send any "writing" to Toyota. However, on September 8, 2016, she called Toyota and requested that she be allowed to continue payments to retain the vehicle. AR 251. Toyota's agent, National Bankruptcy Services LLC ("NBS") advised Mather that she needed to assume the lease to retain the vehicle. On September 16, 2016, the NBS prepared an assumption agreement and sent it to Mather's attorney at the Doan Law Firm. Mather, who was traveling and attempting a marital reconciliation, did not immediately execute the Lease Assumption Agreement until December 5, 2016. AR 252 Despite the fact that this may have been untimely under § 365(p)(2)(B), Toyota accepted her request for assumption and acknowledged
Mather received her discharge on December 6, 2016, and her case closed on December 12, 2016. Id. While Mather was not in default on the lease when she entered bankruptcy and made payments during the bankruptcy proceedings, in November 2016 she stopped lease payments despite the execution of the Lease Assumption Agreement in December. Toyota does not dispute that it engaged in collection activity between December 20, 2016 through approximately February 25, 2017. Id. The bankruptcy judge observed that Mather provided hearsay testimony that Toyota had called her parent's home while she was traveling prior to her discharge, but that there was no record of any such calls, and particularly that there was no evidence that they related to collection attempts.
On January 2, 2017, Debtor surrendered the vehicle. Id. Mather advised Toyota that her bankruptcy precluded collection attempts and that her assumption of the Lease was ineffective as it was not coupled with reaffirmation. On February 25, 2017, Plaintiff, through the Doan Law Firm, requested an Order to Show Cause re: Violation of the Automatic Stay and Violation of the Plan Discharge. AR 253. In that request, Mather alleged significant emotional distress and requested over $50,000 in compensatory and punitive damages, remedial or coercive sanctions as appropriate, and attorneys' fees. The Bankruptcy Court issued the OSC, which was followed by several rounds of briefing and two hearings. Id.
On November 16, 2017, the bankruptcy court issued its Memorandum Decision. On November 27, 2017, Mather filed her Notice of Appeal from the bankruptcy court, and elected to have its appeal heard by the United States District Court for the Southern District of California instead of the Ninth Circuit's Bankruptcy Appellate Panel. Dkt. No. 1 at 2. Appellant filed their Opening Brief on February 1, 2018. Dkt. No. 9. Appellee filed it Responsive Brief on March 12, 2018. Dkt. No. 15. Appellant filed a Reply on March 26, 2018. Dkt. No. 16.
The instant bankruptcy appeal addresses three issues: (1) whether Appellant waived a challenge to the bankruptcy judge's order that Toyota did not violate the automatic stay; (2) whether a Section 365(p) lease assumption must always be coupled with a judicially approved Section 524(c) reaffirmation for personal liability to attach post-discharge; and (3) whether Mather actually assumed the lease.
Chief Judge Taylor found that Toyota did not violate the automatic stay as the automatic stay had already terminated by the time Toyota commenced collection activities. AR 254. The bankruptcy court found that there was limited hearsay evidence that Toyota may have made calls to Mather between November 9, 2016 and December 12, 2016, but that this evidence was not conclusive and that the calls could have been unrelated to collection activities, such as for Mather's pending Lease assumption or the recovery of the Vehicle. Id. Next, the court found that Toyota's transmission to Mather of a lease assumption agreement was not a stay violation because it was requested from the debtor and because it had been transmitted only to the Doan Law Firm and not Mather directly. AR 255.
Appellees contend as a threshold matter that Mather has waived any claim
The Bankruptcy Abuse Prevention and Consumer Act ("BAPCPA") of 2005 was enacted in October 2005 and added a new subsection (p) allowing the debtor — rather than a trustee — to assume a lease. See 11 U.S.C. § 365(p). Prior to the enactment of the Act, the power to assume a lease in a Chapter 7 case was given only to the trustee. See 11 U.S.C. § 365(a) ("[T]he trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor."). If the trustee did not exercise the right of assumption as to a particular lease, a chapter 7 debtor was free to enter into a reaffirmation agreement as to his or her obligations under the lease (with lessor approval), but "assumption" was not an option for the chapter 7 debtor. See In re Creighton, 427 B.R. 24, 25 (Bankr. D. Mass. 2007).
Post-BAPCPA, even if a lease is rejected or deemed rejected by a trustee's non-action, a debtor may assume a lease under 11 U.S.C. § 365(p). Section 365(p) specifically addresses the assumption of a personal property lease by a debtor. It provides as follows:
A lease assumption under Section 365(p) proceeds in several steps:
Williams v. Ford Motor Credit Co., LLC, No. 15-CV-14201, 2016 WL 2731191, at *3 (E.D. Mich. May 11, 2016) (citing In re Perlman, 468 B.R. 437, 439 (Bankr. S.D. Fla. 2012) (quotations and citations omitted)). Section 365(p) does not require a bankruptcy court to review or approve a lease assumption agreement. See In re Ebbrecht, 451 B.R. 241, 245 (Bankr. E.D.N.Y. 2011) ("Neither judicial review nor approval of the lease assumption agreement is required by the Bankruptcy Code or Rules."). A lease assumed by the chapter 7 debtor becomes a liability of the debtor, and not a liability of the estate. See id. (citing 11 U.S.C. § 365(p)(2)(B)).
Section 524(c) provides a general framework under which a debtor may agree to remain personally liable for a debt obligation following entry of discharge. Under the Section, the following is required:
11 U.S.C. § 524(c). Reaffirmation agreements are "contrary to the stated goal of a debtor receiving a fresh start" and thus are "subject to intense judicial scrutiny and must comply with all statutory requirements." Ebbrecht, 451 B.R. at 243-44. Among these requirements are inter alia that the reaffirmation agreements must contain disclosures contained in Section 524(k), that a debtor may rescind the reaffirmation agreement during a cooling-off period, that the agreement must be filed with the Court accompanied by an attorney's declaration or affidavit stating the agreement represents a fully informed and voluntary agreement by the debtor, and that reaffirmation agreements must be approved by the bankruptcy court. See Williams, 2016 WL 2731191, at *4.
The primary question in this appeal is whether the bankruptcy court erred by concluding that a lease assumption agreement under Section 365(p) remains enforceable following discharge even if the lease assumption agreement was not reaffirmed under Section 524(c). Bankruptcy and district courts around the country have struggled with this question, in part because Section 365(p) is "not a model of clarity." In re Garaux, 2012 WL 5193779, at *2 (Bankr. N.D. Ohio, Oct. 19, 2012). Bankruptcy treatises have noted the split on the issue. See § 11:18. Enforcement of the discharge — Reaffirmation of the discharged debt, 1 Bankruptcy Law Fundamentals § 11:18 ("Until Congress or
Chief Judge Taylor held that the "better reading" that was consistent with canons of statutory construction, is that a debt under a lease assumption agreement under Section 365(p)(2) need not be separately reaffirmed under Section 524(c). AR 257. In reaching this conclusion, the bankruptcy court began by finding that a plain language analysis of the statutes was inconclusive.
The Court begins its analysis by reviewing the two competing judicial views on this issue. Several courts across the country have concluded that reaffirmation is required under Section 524(c) in order for a lease assumption to survive discharge. These courts have emphasized the Bankruptcy Code's policy rationale favoring debtor protection and providing debtors with a "fresh start." See Thompson, 453 B.R. at 828.
Another line of cases holds that reaffirmation is not required in order for a lease assumption agreement to be enforced post-discharge. These cases emphasize that Section 365(p) does not explicitly require reaffirmation under Section 524(c) and that Congress would have so stated if that had been its intention. See, e.g., In re Ebbrecht, 451 B.R. at 247 ("[H]ad Congress intended for leases to be both assumed under Section 365(p) and reaffirmed under Section 52, it would have said so, but again, has not."); In re Bailly, 522 B.R. 711, 716 (Bankr. M.D. Fla. 2014) ("Congress easily could have referenced § 524(c) if it desired debtors to follow that procedure in addition to the lease assumption procedure."). Moreover, these courts reason that Section 365(p)(2) would be rendered superfluous if 524(c) reaffirmation was required. See In re Bailly, 522 B.R. at 715 ("Why create § 365(p)(2) at all if Congress intended to require a separate reaffirmation agreements to assume a lease? Why not just require the debtor to reaffirm a lease after the Chapter 7 trustee does not timely assume it?"). Further, they emphasize that anomalous results could result by imposing a Section 524 reaffirmation requirement, including that:
In re Mortensen, 444 B.R. 225, 230 (Bankr. E.D.N.Y. 2011). See also In re Bailly, 522 B.R. at 716 ("[i]f reaffirmation agreements must accompany lease assumptions, a lessor could face the unenviable position of being bound by a lease assumption — which does not require judicial approval — but having its reaffirmation agreement denied by the court.").
Statutory construction requires that "when the statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms." See In re Perlman, 468 B.R. at 441 (quoting Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004)). The Court finds that a plain language analysis does not provide a definitive answer on this issue. Toyota argues that the plain language of 365(p)(2) authorizes consumer debtors to assume personal property leases and couples that assumption with debtors' liability. See 11 U.S.C. § 365(p)(2)(B) (dictating the "liability under the lease will be assumed by the debtor and not by the estate."). According to Toyota that plain language shows congressional intent that assumption of liability survives discharge. On the other hand, some courts have emphasized that Section 365(p) states that "liability under the lease will be assumed," indicating a further step that necessarily must take place via Section
That Courts on both sides of this issue have found plain language to support their respective conclusions is revelatory of the fact that plain language alone cannot resolve this dispute. Compare Thompson, 453 B.R. at 828, 829 ("[Section] 365(p) says that, after certain conditions are satisfied, the liability under the lease will be assumed, suggesting that more is needed for assumption of liability.") (internal quotations omitted); In re Creighton, 427 B.R. at 28 with Williams v. Ford Motor Credit Co., LLC, No. 15-CV-14201, 2016 WL 2731191, at *6 (E.D. Mich. May 11, 2016) ("Section 365(p) specifically addresses lease assumption agreements and does not expressly require that the underlying debt be reaffirmed under Section 524(c). Requiring such reaffirmation would be adding a step that Congress chose not to include ..."); In re Perlman, 468 B.R. at 441 ("If Congress had intended the reaffirmation agreement and lease assumption provisions to be interconnected or interchangeable, it would not have made the two procedures so different and incompatible."). Accordingly, the Court looks to statutory interpretation principles and relevant case law to resolve the dispute.
Chief Judge Taylor concluded that "[a] statute should not be interpreted so as to render it superfluous or nonsensical; [Mather's] ride through arguments results in both." In reaching this conclusion, the bankruptcy court relied on statutory interpretation canons of construction such that statutes should be construed to give effect to "all its provisions, so that no part will be inoperative or superfluous, void or insignificant." Corley v. United States, 556 U.S. 303, 314, 129 S.Ct. 1558, 173 L.Ed.2d 443 (2009). In In re Mortensen, the bankruptcy judge distinguished Eader and Creighton — which required reaffirmation — on the basis that these cases failed to recognize that a Section 365(p) lease assumption binds the debtor to the lease terms and that the discharge has no effect on the debtor's assumed obligation. 444 B.R. at 230. "Under the logic of Eader, a lessor would have no ability to enforce a lease agreement assumed by the debtor in the event of a subsequent default" rendering section 365(p) a "nullity" because "[c]ongress could not have intended to give the debtor the right to assume a lease, but not be bound by its terms upon assumption." Id.
There would be no purpose to Section 365(p) if a reaffirmation agreement was required. As the Court in Bailly stated:
Bailly, 522 B.R. at 716. The Court agrees with this reasoning. If Congress intended
Next, several aspects of requiring reaffirmation produce an anomalous result when viewed with the full context of Section 365(p). As stated above, the court in Mortensen found that requiring reaffirmation would create an absurd result. 444 B.R. at 230 ("[A]ssumption of a lease under Section 365(p) binds the debtor to the lease terms and the discharge has no effect on the debtor's assumed obligation. Under the logic of [requiring reaffirmation], a lessor would have no ability to enforce a lease agreement assumed by the debtor in the event of a subsequent default. This interpretation would render section 365(p) a nullity and would create an absurd result."). Further, requiring reaffirmation leads to an anomalous result in that a lessor could wind up being bound by a lease assumption — through 365(p) which does not require judicial approval — but the reaffirmation — which does require judicial approval — could be denied by the court. See Bailly, 522 B.R. at 716.
The bankruptcy judge bolstered this argument by reference to the difference in economics between a true lease and a secured transaction. AR 264, pg. 18.
This reasoning is persuasive. Section 365(p) is meant to allow the lessee to retain assumption of the leased asset. To do so, the lessor necessarily must retain a right to go after the lessee in personal liability, otherwise there would be no incentive to enter into a 365(p) assumption with the lessee. This sentiment was echoed by the Court in In re Garaux which ultimately held that reaffirmation was required, but wisely observed that its ruling would "render much of § 365(p) meaningless" because "it is unlikely that creditors will accept a lease assumption that does not revive a debtor's liability, the requirements of Section 524(c) will supplant those of § 365(p)." 2012 WL 5193779, *4.
These absurdities and anomalous results weigh strongly in favor of a rule that does not require reaffirmation to go hand-in-hand with the Section 365(p) lease assumption.
The bankruptcy court also referred to Sections 362(h) and 521(a)(6)
11 U.S.C. § 362(h)(1) (emphasis added). According to Chief Judge Taylor, the "either" before the options to retain the property and the "or" between the description of 524(c) reaffirmation and Section 365(p) assumption provides a clear indication that reaffirmation and assumption are independent actions. To support this analysis, the bankruptcy court cited to In re Dumont, 581 F.3d 1104, 1113-14 (9th Cir. 2009) which stated:
The Court agrees that the use of the disjunctive is indicative of independent actions that can take place without each other. If retention is chosen, the statute indicates that reaffirmation "or" assumption are viable options. See Dumont, 581 F.3d at 1113-14 (he must indicate `either' reaffirmation, `or' assumption.). If one were to view assumption and reaffirmation to be bound together, then the bankruptcy code and Ninth Circuit would have stated reaffirmation "and" assumption, to indicate the interdependence between the two sections. The Court finds that the use of the disjunctive in Section 362(h) is a further statutory reason to dispense with a requirement for reaffirmation of a Section 365(p) lease agreement.
Chief Judge Taylor made two findings regarding judicial supervision: (1) that the bankruptcy code does not require close judicial supervision of all reaffirmations and (2) the absence of Court approval of Section 365(p)(2) lease assumption does not require a different conclusion.
First, the bankruptcy court found that the Bankruptcy Code does not require close judicial supervision of all reaffirmations. Consequently, it was not incongruous to assume that Congress would allow personal property lease assumptions without judicial supervision. AR 259. At oral argument before the bankruptcy court, Mather conceded that Congress did not take a consistent position that judicial supervision is always required when a debtor converts a pre-petition obligation to a post-petition debt. One example of this inconsistency is that Congress does not require judicial supervision when a pro se consumer debtor assumes a consumer loan secured by real property. See 11 U.S.C. § 524(c)(6)(B) (Subparagraph (A), which requires judicial approval, "shall not apply to the extent that such debt is a consumer debt secured by real property").
Second, Chief Judge Taylor also found that the absence of court approval for Section 365(p) lease assumptions did not compel a different conclusion. AR 264. To begin, the court reasoned that reaffirmation does not always require judicial oversight. Next, the bankruptcy court distinguished Section 365(p) assumptions, which creates obligations of the debtor and is generally payable from assets not generally available to pre-petition creditors, from Section 365(a) assumptions — which require court
This conclusion is supported by the Court's holding in In re Perlman concluding that Court has "no judicial role to play in § 365(p)(2) lease assumption." 468 B.R. at 441. There, criticizing the practice of filing Section 365(p)(2) lease assumption agreements as "reaffirmation agreements" under Section 524, the court concluded that doing so wasted the "time and resources" of the court and the parties by implicating unnecessary hearings. See id. The Court finds this reasoning to be persuasive and in line with the conclusion that Section 365(p) leases do not require judicial approval.
The bankruptcy judge found that the specific provisions of Section 365(p) "arguably" controlled over the general provisions of Section 524. AR 258. This canon of statutory construction emphasizes that "[i]t is a commonplace of statutory construction that the specific governs the general." RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645, 132 S.Ct. 2065, 182 L.Ed.2d 967 (2012). This is particularly true where "Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions." Id. (citing Varity Corp. v. Howe, 516 U.S. 489, 519, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996) (Thomas, J., dissenting)). The bankruptcy court viewed Section 365 as the "more specific provision" because it deals specifically with personal property leases. In contrast, Section 524(c) is a broader statute addressing only the impact of discharge. The Court agrees that Section 365(p) is a more specific provision, but observes that "reasonable minds can differ as to which statute is more specific." AR 258. As Mather points out, Section 524 may actually contain more procedural steps and more words than that required in Section 365(p). Dkt. No. 16 (observing that Section 524 — which contains 2,591 words — is over twenty times longer than Section 365(p)). Nevertheless, Section 365(p) deals with a narrower issue — assumption of leases when a trustee does not seek to assume — than Section 524 which applies more generally to post-discharge liabilities. Accordingly, the Court finds that Section 365(p) is a more specific provision than Section 524(c) and that this canon of construction weighs in favor of not requiring reaffirmation.
Chief Judge Taylor held that the fact that Congress did not require reaffirmation disclosures relevant to consumer personal property lease transactions when it significantly amended the reaffirmation disclosure provisions of Section 524(k) strongly suggests that Congress did not intend to require a debtor to both assume a lease under Section 365(p)(2) and also obtain reaffirmation under Section 524. AR 261. The bankruptcy court observed that BAPCPA simultaneously added both Section 365(p) and Section 524(k),
Next, the bankruptcy court observed that the TILA "requires specific disclosures in relation to consumer personal property leases that are the counterpart to those required in consumer credit transactions. For example, it requires detailed disclosure about liabilities at lease termination... But no such disclosures were required by BAPCPA and new § 524(k)(1)." AR 261. Instead, the BAPCPA amendments only reference credit transactions portions of the Truth in Lending Act and do not reference provisions related to a consumer lease transaction. Consequently, the bankruptcy court reasoned that the fact that Congress did not require reaffirmation disclosures relevant to consumer personal property lease transactions when it amended Section 524(k) in BAPCPA suggests that Congress did not intend to require that a debtor both assume a lease under Section 365(p)(2) and obtain reaffirmation under Section 524. Id. To Chief Judge Taylor, it was "illogical to assume that Congress would require reaffirmation in a personal property lease assumption situation yet require not a single disclosure relevant to a consumer lease beyond the amount assumed." Id.
This reasoning is supportive, to a limited extent, of a rule not requiring reaffirmation. As the bankruptcy court acknowledged, Section 524(k)'s requirement to disclose could broadly be applied in the lease context. See, e.g., In re Creighton, 427 B.R. at 28 (rejecting substantially similar argument and concluding that "[t]he disclosures required by § 524(k) are flexible enough to accommodate a wide variety of debts."). Moreover, the Court does not view the lack of a reference to TILA's consumer lease transaction provisions in the BAPCPA disclosure amendments to significantly support that Congress did not intend to require reaffirmation in this context. Accordingly, this portion of the bankruptcy court's decision is only somewhat persuasive.
The bankruptcy court held that it was "not inconsistent with anything in the Bankruptcy Code to assume that Congress would create more than one method for allowing claims to survive discharge" as the bankruptcy code (1) identifies numerous claims that are never dischargeable; (2) allows creditors under certain circumstances to obtain a determination that a particular claim is not appropriate for discharge; (3) Section 365 involves a method to convert dischargeable executory contract claims into non-dischargeable post-petition claims through assumption. AR 258. This follows from the canon of construction to construe statutory language as a whole. See, e.g., Duparquet Huot & Moneuse Co. v. Evans, 297 U.S. 216, 218, 56 S.Ct. 412, 80 S.Ct. 591 (1936).
The Court affords this canon of construction minimal weight. Just as the plain language analysis is inconclusive, the Court finds that the statutory scheme of the bankruptcy code as a whole could be viewed to support both requiring and not requiring reaffirmation. Accordingly, the Court finds that this canon of construction
In Thompson, District Judge Jonker reversed a bankruptcy court by holding that Section 524 reaffirmation was required for a Section 365(p) post-discharge enforcement to be enforced post-discharge. Specifically, Judge Jonker concluded that "[t]o set aside the discharge protection, a lessor must obtain not only the debtor's assumption but also Bankruptcy Court approval under the reaffirmation provisions of section 524(c), or other appropriate Code provisions." 453 B.R. at 824. The bankruptcy court had held that assumption under Section 365(p) created a post-petition liability outside the scope of the discharge that did not require reaffirmation. Id. at 826. The Thompson court reasoned that nothing in Section 365(p) or the plain language explanation on the bankruptcy discharge form provided notice to Chapter 7 petitioners that their lease assumption lacks discharge protection. Id. Next, the court emphasized that Section 365(p) emphasized possession of property, not ultimate liability after discharge. Id. According to that court's reading, the language in Section 365(p)(2) stating "liability under the lease will be assumed" indicated that "more is needed for assumption of liability." Id. at 828. Pointing to Section 524's "web of protections for debtors," the Thompson court emphasized that requiring reaffirmation was in line with the "policy of giving debtors a fresh start." Id.
Other courts have reasoned similarly to Thompson to find that reaffirmation was required. One of the first cases to address this issue was In re Creighton, 427 B.R. 24, 27 (Bankr. D. Mass. 2007), which held that a lease assumption agreement constituted an "agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title" under Section 524(c), such that Section 365(p)(2) lease assumptions were merely a "species of reaffirmation agreement." Id. The Creighton court emphasized the congressional purpose of consumer protection in making this determination and that it would be strange if Congress removed a category of reaffirmation agreements from the Section 524(c) requirements without a stated reason. Id. at 30. See also In re Eader, 426 B.R. 164, 165 (Bankr. D. Md. 2010) (emphasizing that BAPCPA increases the protection afforded to debtors by adding additional requirements). Reviewing these cases, the court in Garaux observed that "[b]y executing either a lease assumption or a reaffirmation agreement, debtors are releasing substantial and consequential rights, protections and benefits. For this reason, the court can find no reason that a debtor should be provided more protection, via § 524(c), under a reaffirmation agreement than a lease assumption." In re Garaux, 2012 WL 5193779, at *4.
Chief Judge Taylor offered three distinct reasons to discount the Thompson line of cases. First, the court criticized the Thompson court's assumption that judicial supervision was an absolute requirement for all reaffirmations. AR 266. Second, she concluded that the Thompson court had failed to consider the commonly understood consequences of lease assumption and that the court had ignored the economics of lease assumption in crafting a rule that would render Section 365(p)(2) without meaning, functionally creating a "surplus statute with nonsensical terms." Id. Finally, the bankruptcy court observed that the Thompson court required reaffirmation but never explained "why this is appropriate where the reaffirmation disclosures created concurrently with
The policy implications of requiring reaffirmation must be weighed against the fact that interpreting Section 365(p) to also apply Section 524(c)'s requirements renders the former statute superfluous and leads to anomalous results. On one hand, a rule that does not require reaffirmation is arguably less protective of bankrupt lessees because it strips away the potential protection of judicial review provided by the reaffirmation process. Doing so may somewhat threaten the "fresh start" being offered by the bankruptcy proceeding.
On the other hand, the Court must also consider the impact of requiring reaffirmation. Doing so renders the Section 365(p) statutory process superfluous — If Congress had intended to require reaffirmation then it could have simply required the negotiation and assumption process of Section 365(p) to be a part of the reaffirmation procedures. See In re Bailly, 522 B.R. at 716. Moreover, requiring reaffirmation could lead to strange results. A lessor and lessee could agree to a lease assumption under Section 365(p) and yet a lessor would have no ability to enforce a lease agreement assumed by the debtor in the event of subsequent default. In re Mortensen, 444 B.R. at 230. Or a lessor could become bound by a lease assumption that the court declines to approve. See In re Bailly, 522 B.R. at 716. Moreover, a lessor — who agrees to make an asset available for possession in exchange for periodic payments — would have no economic incentive to undertake a Section 365(p) lease assumption with a bankrupt lessee.
Mather argues that the line of case law holding that reaffirmation is not required is built upon the foundations of the now reversed Thompson bankruptcy court opinion. See, e.g., In re Mortensen, 444 B.R. 225 (Bankr. E.D.N.Y. January 19, 2011); In re Farley, 451 B.R. 235 (Bankr. E.D.N.Y. 2011); In re Ebbrecht, 451 B.R. 241 (Bankr. E.D.N.Y. 2011). This argument fails to acknowledge that recent cases have continued to adopt the underlying reasoning of these decisions even after the reversal of the Thompson bankruptcy court's opinion. See, e.g., Williams v. Ford Motor Credit Co., LLC, 2016 WL 2731191 (E.D. Mich. 2016); In re Hayden, No. 13-10865, 2014 WL 1612164, at *4 (Bankr. D. Vt. Apr. 22, 2014); In re Perlman, 468 B.R. 437, 441 (Bankr. S.D. Fla. 2012).
Another argument Mather makes on appeal is that Section 365(p)'s failure to use the word "personal" to modify "liability" means that she has no liability resulting from her assumption of the lease unless this liability was reaffirmed on appeal. To support this proposition, Mather points to caselaw in insurance law, Forsyth v. Jones, 57 Cal.App.4th 776, 781-782, 67 Cal.Rptr.2d 357 (1997), foreclosure law, In re the Marriage of Walker, 240 Cal.App.4th 986, 994, 193 Cal.Rptr.3d 134 (2015), and ride thru in bankruptcy law, McClellan Fed. Credit Union v. Parker, 139 F.3d 668 (9th Cir. 1998). These cases and this argument are inapposite to the instant issue as they do not involve the intersection of Section 365(p) and Section 524(c). Moreover, no court requiring reaffirmation has ever relied on such a theory. See, e.g., Thompson, 453 B.R. at 823; In re Garaux,
The same reasons discount Mather's attempt to differentiate between the "liability" and "enforceability" of a claim. Midland Funding, LLC v. Johnson, ___ U.S. ___, 137 S.Ct. 1407, 197 L.Ed.2d 790 (2017) does not involve an analysis of Section 365(p) and any attempt to extrapolate a difference between liability and enforcement from this case is inapposite from the instant legal question. Furthermore, such a theory has never been the basis of any of the case law requiring reaffirmation which instead emphasize the language of the statute and the policy rationale of the bankruptcy code to provide a "fresh start" to debtors.
Finally, Mather cites to Bankruptcy Judge Mann's February 14, 2018 order denying a reaffirmation agreement in In re Talley, Case No. 17-05752-MM7, Dkt. No. 19 (Bankr. S.D. Cal. Jan. 18, 2018) to argue that the Court allowed "ride thru," allowing the debtor to keep the vehicle as payments were made but removing "personal liability." Dkt. No. 16 at 11 n. 3. Talley is inapposite to the facts of this case, in that the Court determined the lease at issue in that case to actually be a secured transaction, and thus did not involve the process set forth in Section 365(p).
For the reasons described above, the Court
The Court next considers whether Toyota obtained a valid assumption of the lease. Appellant argues that the Lease Assumption Agreement did not comply with writing and time requirements that she asserts are "mandatory" under 365(p)(2). Dkt. No. 9 at 30. Appellant asserts that it was error for the bankruptcy court to ignore (1) the requirement for Mather to have provided an initial writing requesting lease assumption under 365(p)(2)(A) and (2) that Mather acted on December 5, 2016 well past the thirty day requirement established in 365(p)(2)(B).
Chief Judge Taylor found that although there was "arguably" a written notification based on Mather's indication in her statement of intention that she intended to enter into a reaffirmation agreement with Toyota, the court did not find that sufficient to constitute a written notification regarding assumption of leases within the meaning of § 365(p)(2)(A). AR 269. However, the bankruptcy court concluded that written notification was "not absolutely required" as Toyota had the right to waive the writing requirement. AR 269-270.
Section 365(p)(2) provides that:
This process providing for a "consensual, non-judicial procedure for the assumption of a personal property lease by a debtor if the lease has been rejected or not timely assumed by the chapter 7 trustee under 365(d)" involves a distinct process described in In re Ebbrecht, 451 B.R. 241, 244 (Bankr. E.D.N.Y. 2011), as follows:
In re Ebbrecht, 451 B.R. 241, 244-45 (Bankr. E.D.N.Y. 2011) (internal citations omitted).
As the bankruptcy court found, the written notification requirement accomplishes three distinct purposes: (1) alert the lessor that debtor is interested in an assumption — the "handshake"; (2) provides the lessor with safe harbor protections under Section 365(p)(2)(C) so that the lessor may enter into negotiations without violating the automatic stay or discharge order; and (3) a filed written statement forestalls the termination of an automatic stay under Section 362(h). AR 269. Chief Judge Taylor found that the writing requirement was only relevant to be a passport to safe harbor and a method to preserve the automatic stay, and was not an absolute requirement for assumption to occur. Consequently, the lessor negotiated at its own risk in the event that a debtor denied initiating the procedure or extending the handshake and could waive this requirement. See Williams, 2016 WL 2731191, at *8 (allowing waiver of procedural requirements of Section 365(p) where lease assumption was eventually entered into by both parties). The Court agrees that in a case where an assumption agreement is ultimately signed, the lack of a written notification does not invalidate it, and that Toyota had the right to waive the requirement of a writing in the lease negotiation process. AR 270.
Finally, significant policy rationales support allowing Toyota to waive these requirements to validly enforce a lease assumption. As the bankruptcy court observed, "the policy of allowing a debtor to assume a personal property lease obligation, particularly for something as critical as an automobile, is not well served if assumption is impossible in the absence of strict compliance with the writing and timing requirements." AR 270. Notably, while the debtor loses the right to compel lease assumption if the lease is not assumed timely, the lessor takes on a risk when it proceeds with an assumption in the absence of an oral request. Where both lessor and debtor remain willing to proceed on an oral request for assumption, and where the lessor remains willing to allow assumption after 30 days, it does not make sense to establish strict requirements with the statute that would deprive the debtor of the opportunity to assume. Accordingly, as a policy matter, it makes sense to allow Toyota to waive the written notification and timing requirements.
Accordingly, the Court
For the reasons stated above, IT IS HEREBY ORDERED that the November 16, 2017 Bankruptcy Court Order is
