Case No. 10-76019-ast, Chapter 7
UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF NEW YORK
451 B.R. 235; 2011 Bankr. LEXIS 1237
April 6, 2011, Decided
COUNSEL: For Brian J Farley, Debtor: Richard S Feinsilver, Carle Place, NY.
For Brian J Farley, Joint Debtor: Richard S Feinsilver, Carle Place, NY.
Trustee: Kenneth Kirschenbaum, Kirschenbaum & Kirschenbaum, Garden City, NY.
JUDGES: Alan S. Trust, United States Bankruptcy Judge.
OPINION BY: Alan S. Trust
MEMORANDUM OPINION ON DEBTORS' MOTION TO REOPEN CASE TO FILE A STIPULATIONASSUMING LEASE AGREEMENT
Pending before the Court in the above referenced chapter 7 case is a motion("Motion") [dkt item 16] filed by Debtors, Brian J. Farley and Denise A. Farley("Debtors"), through their attorney, requesting that their closed Chapter 7 casebe reopened for the limited purpose of filing and seeking approval of astipulation to assume an auto lease agreement with Ford Motor Credit("Assumption Agreement"). Reopening of this case is sought pursuant to Section350(b) of the Bankruptcy Code, 1 and filing of the Assumption Agreement issought pursuant to Section 365(p). No opposition or response to the Motion hasbeen filed. However, the Court has determined, sua sponte, 2 to address whetherit has authority to grant this Motion in light of its own concerns and recentjurisprudence within this District regarding such agreements. The Court hasdetermined that it is appropriate to reopen this case solely to allow the filingof the Assumption Agreement, but it will not enter an order approving thisagreement because approval of these types of agreements by the Court is neithermandated nor authorized by the Bankruptcy Code or Rules. Therefore, as discussedmore fully below, the Motion is granted in part.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1Throughout this Memorandum Opinion, all statutory references to the BankruptcyCode are under Title 11 of the United States Code, Â§Â§ 101-1532, unless otherwiseindicated.2 Bankruptcy Code Section 105(a) permits this Court to raise, sua sponte, thequestion of whether to "[take] any action or [make] any determination necessaryor appropriate to enforce or implement court orders or rules . . . ." 11 U.S.C.Â§ 105(a).- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C.Â§Â§ 1334(b) and 157(b)(2)(A) and (O), and the Eastern District of New YorkStanding Order of Reference dated August 28, 1986. This decision constitutes theCourt's findings of facts and conclusions of law to the extent Rule 7052 of theFederal Rules of Bankruptcy Procedure so requires. Fed. R. Bankr. P. 7052.
On August 2, 2010, Debtors filed a joint petition for relief under Chapter 7of the Bankruptcy Code ("Petition"). [dkt item 1] On their Schedule B, they listtwo automobiles, including a 2010 Ford Edge. Schedule D notes that both vehiclesare leased vehicles, and states that the Debtors have a security agreement withFord Motor Credit 3 ("Ford") for the 2010 Ford Edge (the "Automobile") in thealleged amount of $13,000.00. Schedule J sets forth the monthly payment to Fordas $475.00. Part A of the Chapter 7 Individual Debtor's [sic] Statement ofIntention ("Statement of Intention") states that the Debtors will retain theAutomobile and reaffirm their debt with Ford. Part B of the Statement ofIntention states that the Debtors will assume the lease ("Lease") with Fordpursuant to Bankruptcy Code Section 365(p)(2).
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3 Althoughthe Schedules and the Motion refer to Ford as the Lessor, the proposedStipulation and Order annexed to the Motion states that CAB East, LLC is theowner of the vehicle, and that Debtors are lessors. For purposes of theDecision, the Court will assume that Ford and CAB East, LLC are one and thesame. However, when a fully executed assumption agreement is filed upon thereopening of this case, this discrepancy must be addressed.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
On August 2, 2010, Kenneth Kirschenbaum, Esq. was appointed and dulyqualified to serve as the Chapter 7 trustee (the "Trustee") for this case. OnSeptember 1, 2010, the Trustee filed a Chapter 7 Trustee's Report of NoDistribution. On November 2, 2010, an Order discharging the Debtors and a FinalDecree was entered. [dkt item 14] That same day the case was closed. The Trusteedid not file a motion to assume the Lease during the pendency of this case.
On December 22, 2010, the Motion was filed. [dkt item 16] The Motion setsforth that Debtors have been the lessees of the Automobile and that the Lease isencumbered by a lien held by Ford. The Motion continues:
Although at all times herein, the debtors were current in the remittance of their auto lease payments, Ford has informed the debtors that they would no longer accept payments and would seek recovery of the subject vehicle absent the execution and filing of a stipulation to assume the subject lease agreement.
[dkt item 16 Â¶ 3] Thus, it appears that the Debtors are proceeding herein at theinsistence of Ford. A proposed Assumption Agreement between the Debtors' counseland Ford providing for the assumption of the Lease pursuant to 11 U.S.C. Â§365(p) is annexed to the Motion as Exhibit B. 4
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -4 TheAssumption Agreement is not signed by counsel for Ford and does not have asignature line for either of the Debtors. In addition, the Assumption Agreementreferences the Lease as an exhibit thereto; however, the exhibit was notincluded with the Motion. Thus, no copy of the Lease is on file with the Court.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
In seeking to reopen this case, Debtors rely on the fact that "no assets havebeen administered by the trustee to which this [sic] creditors, or any othercreditor of the estate, would be entitled" and that "the creditor body in thiscase would not be prejudiced by the reopening of the debtor's [sic] case forthis limited purposed." [dkt item 16 Â¶Â¶ 5-6] The Motion concludes that, "debtor[sic] has established that there is sufficient "cause" within the meaning of 11U.S.C.
Reopening of a Closed Chapter 7 Case
Rule 5010 of the Federal Rules of Bankruptcy Procedure provides that a debtoror other party in interest may make a motion to reopen a case. Fed. R. Bankr. P.5010. Section 350(b) of the Bankruptcy Code provides that "[a] case may bereopened in the court in which such case was closed to administer assets, toaccord relief to the debtor, or for other cause." 11 U.S.C. Â§ 350(b) (emphasissupplied). The statute's permissive language provides the Court with broaddiscretion to determine whether a debtor filed a motion to reopen in good faithor has demonstrated good cause. In re Olejnik, No. 09-76714, 2010 Bankr. LEXIS3860, 2010 WL 4366183 (Bankr. E.D.N.Y. Oct. 28, 2010); In re Meneses, No.05-86811, 2010 Bankr. LEXIS 700, 2010 WL 813975 (Bankr. E.D.N.Y. Mar. 3, 2010);In re Lowery, 398 B.R. 512, 514 (Bankr. E.D.N.Y. 2008)(internal citationsomitted). However, this Court will only exercise its discretion to reopen a casein circumstances where relief may ultimately be afforded to a party, but notwhere reopening is futile or a waste of judicial resources. See In re PolynerMardy & Marie D. Joseph, No. 10-73819, 2011 Bankr. LEXIS 880, 2011 WL 917545(Bankr. E.D.N.Y. Mar. 15, 2011); In re Carberry, 186 B.R. 401, 402 (Bankr.E.D.Va. 1995).
The Court must first determine whether Debtors have met their burden, asasserted in the Motion, that, "there is sufficient 'cause' within the meaning of11 U.S.C. Section 350(b)." [dkt item 16 Â¶ 7] The Bankruptcy Code does not define"cause" under Section 350(b). See State Bank of India v. Chalsani (In reChalsani), 92 F.3d 1300, 1307 (2d Cir. 1992). Consequently, to determine whethercause exists, this Court must examine whether the relief sought by Debtors isavailable under Section 365(p).
Lease Assumption Under Section 365(p)
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005("BAPCPA") added a new provision 5 to the Bankruptcy Code to address theassumption of personal property leases. Section 365(p) 6 was added in responseto the pre-BAPCPA cases that held that a chapter 7 debtor could not assume apersonal property lease, and to clarify that the automatic stay terminates uponthe rejection of a personal property lease. See In re Rogers, 359 B.R. 591, 593(Bankr. D.S.C. 2007). Section 365(p)(2) provides a consensual, non-judicialprocedure for the assumption of a personal property lease by a debtor if thelease has been rejected or not timely assumed by the chapter 7 trustee underSection 365(d). 11 U.S.C. Â§ 365(p)(1). In what some refer to as a "handshake,"the debtor must first offer in writing to the lessor 7 to assume the leaseobligations, the timing of which is not established by the Bankruptcy Code orRules. 8 The lessor then must decide whether to accept such offer, the timing ofwhich is also not specified. If the lessor determines that it is willing toallow the debtor to assume the lease, it will then notify the debtor of thisdecision, and may condition such assumption on cure 9 of any outstandingdefaults on terms set by the contract. Section 365(p) does not provide that thelessor is under any obligation to accept the debtor's offer. Once the debtor hasnotified the lessor of its desire to assume the lease under Section 365(p)(2)(A), the lessor is provided a safe harbor during the ensuing negotiations fromallegations of violation of both the automatic stay of Section 362 and of thedischarge injunction under Section 524(a)(2). See 11 U.S.C. Â§Â§ 362, 524(a)(2).The third and final step required by the statute is that a writing between thelessor and the debtor be signed to memorialize the terms of the leaseassumption. As discussed more fully below, however, neither judicial review norapproval of the agreement is required by the Bankruptcy Code or Rules.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -5 Section309(b) of BAPCPA, Pub. L. No. 109-8, provided for the creation of BankruptcyCode Section 365(p). Comm. On Judiciary, H.R. Rep. No. 31(I), Â§ 309(b)(109thCong., 1st Sess. 2005).6 Section 365(p) provides:
(p)(1) If a lease of personal property is rejected or not timely assumed by the trustee under subsection (d), the leased property is no longer property of the estate and the stay under section 362(a) is automatically terminated.
(2)(A) If the debtor in a case under chapter 7 is an individual, the debtor may notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract.
(B) If, not later than 30 days after notice is provided under subparagraph (A), the debtor notifies the lessor in writing that the lease is assumed, the liability under the lease will be assumed by the debtor and not by the estate.
(C) The stay under section 362 and the injunction under section 524(a)(2) shall not be violated by notification of the debtor and negotiation of cure under this subsection.
(3) In a case under chapter 11 in which the debtor is an individual and in a case under chapter 13, if the debtor is the lessee with respect to personal property and the lease is not assumed in the plan confirmed by the court, the lease is deemed rejected as of the conclusion of the hearing on confirmation. If the lease is rejected, the stay under section 362 and any stay under section 1301 is automatically terminated with respect to the property subject to the lease.
11 U.S.C. Â§ 365(p).7 The statute refers to the lessor as the "creditor."8 Rule 6006(a) of the Federal Rule of Bankruptcy Procedure addresses a"proceeding" for the assumption and rejection of executory contracts andunexpired leases, while Rule 6006(c) appears to define a proceeding as a motion.Fed. R. Bankr. P. 6006(a), 6006(c). No reference, however, is made to the timefor a debtor to notify a creditor of his or her desire to assume a lease eitherunder Section 365(p) or in Rule 6006. Moreover, because Section 521(a)(6)addresses the timing mechanics for reaffirmation or redemption of personalproperty secured in whole or in part by a security agreement, and because itmakes no reference to assumption of personal property leases, the timingmechanics of Section 521(a)(6) are not applicable to Section 365(p)(2)(A). See11 U.S.C. Â§Â§ 365(p)(1), 521(a)(6).9 The Bankruptcy Code does not define the term "cure."- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Under Section 362(h), which was also added by BAPCPA, if the lease is nottimely assumed under Section 365(p)(2), the stay will be automaticallyterminated and the personal property at issue of either the estate, or of thedebtor, shall no longer be property of the bankruptcy estate. See 11 U.S.C. Â§362(h). However, Section 362(h) refers to Section 521(a)(2), which is notaddressed to leased property, but to property of the estate against which thereis a secured claim.
The three-step lease assumption process appears to have been properlyfollowed here. From a review of the Assumption Agreement attached to the Motion,the Court can reasonably infer that step one was followed as the Lessor wasnotified of the Debtors' offer to assume the lease obligations, which led to theAssumption Agreement. Further, it appears that the Lessor's terms of curecontemplated in step two are incorporated in the Assumption Agreement. Here,there is no cure to be made because there have been no payment defaults by theDebtors.
However, the signature of Debtors does not appear to be on the AssumptionAgreement. Debtors' counsel signed the Assumption Agreement and served theMotion on Ford. Although Debtors' counsel acts with presumptive authority tobind the Debtors to assumption of the Lease, certainly the better practice wouldbe for Debtors themselves to sign the Assumption Agreement. Further, for Ford tobe bound by the Assumption Agreement, an authorized representative of Ford orCAB East, LLC 10 should sign the agreement.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -10 See note3, supra.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Timing of the Filing of the Assumption Agreement is Irrelevant
Recently this Court addressed the issue of reopening a closed chapter 7 caseto allow the filing of a reaffirmation agreement. In re Polyner Mardy & Marie D.Joseph, No. 10-73819, 2011 Bankr. LEXIS 880, 2011 WL 917545. There, this Courtdetermined not to allow the closed chapter 7 case to be reopened because theBankruptcy Code prohibits the making or approval of a reaffirmation agreementafter a discharge has been granted. Therefore, this Court concluded reopening ofthat case would serve no purpose. The timing of the Motion in Mardy was criticalto this Court's determination because the controlling statute, Section 524,prescribes a very specific deadline for reaffirmation of debts, being before theentry of the discharge order. Here, however, Section 365(p) lacks any particulardeadline for assumption 11 of a personal property lease by a debtor, other thanit being after the trustee's time to assume the lease has lapsed. Thus, theentry of a discharge order and the closing of the instant case do not preventthis Court from granting Debtors relief by allowing the Assumption Agreement tobe filed. Thus, cause exists to reopen this case under Section 350(b).
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -11 The onlytiming element in Section 365(p) is the requirement under subsection365(p)(2)(B) that the debtor, within 30 days after notice is provided undersubparagraph (A), must notify the lessor in writing that the lease is assumed.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The Court, however, is concerned that the Assumption Agreement here is notfully executed, as it lacks Debtors' signatures, and either Ford's or CAB EastLLC's signature. Reopening this case for a short time will allow the parties awindow of opportunity to complete their paperwork. Accordingly, based uponservice of the Motion and the lack of any opposition by Ford thereto, causeexists to reopen the instant case to allow the filing of a fully executed leaseassumption agreement with all exhibits, to supplant the partially executedAssumption Agreement annexed to the Motion. This Court has determined that sixtydays provides more than ample time to do so.
Interplay with Reaffirmation Agreements
This memorandum opinion does not address the issue of whether the assumptionof a personal property lease should be viewed and treated as a reaffirmation ofdebt as provided for in Bankruptcy Code Section 524, the effect of assumption ofthe lease on Debtors' liability for payments post discharge, or whether the debtassociated with the assumption of a personal property lease can be reaffirmedunder Section 524 in addition to being assumed under Section 365(p). The Courtwill address these issues when they are properly brought before this Court foradjudication.
A Motion for Approval of a Lease Assumption Agreement Is Unnecessary
Although, as discussed above, the Court will consider motions to reopenclosed cases to allow the filing of a personal property assumption agreement,the Court will not allow motions or stipulations for approval of such agreementsin cases that are open or in cases that have been closed. The express languageof Section 365(p) does not require judicial approval of the assumptionagreement. In re Finch, No. 06-14016, 2006 WL 3900111 at *1(Bankr. D. Colo. Oct.2, 2006); see also In re Mortensen, No. 10-75234, 444 B.R. 225, 2011 Bankr.LEXIS 581, 2011 WL 165846, *6 (Bankr. E.D.N.Y. 2011); In re Gaylor 379 B.R. 413(Bankr D.Conn. 2007); In re Walker, No. 06-11514C-7G, 2007 Bankr. LEXIS 1547,2007 WL 1297112 (Bankr. M.D.N.C 2007); In re Rogers, 359 B.R. at 591.
In contrast, Bankruptcy Code Section 365(a), which addresses a trustee'sassumption of contracts and leases, mandates judicial intervention. 11 U.S.C. Â§365(a). From the plain reading of the text of Section 365(a), it is clear thatCongress intended that the bankruptcy court give its imprimatur to assumptionsby the trustee because Section 365(a) conditions a trustee's assumption as being"subject to the court's approval." Id. Rule 6006(a) and (c) provide that aproceeding by a trustee to assume a lease is a contested matter governed by Rule9014. Fed. R. Bankr. P. 6006 (a), (c); 9014. In making a determination on atrustee's assumption of a lease, the Court is guided, in part, by the trustee'sbusiness judgment, as well as the statutory requirements that must be met forassumption to be approved. See, e.g., 11 U.S.C. Â§ 365 (b) (addressing cure ofexisting defaults). As stated in Collier's "[a]lthough the business judgment isthe proper standard for determining whether to permit assumption or rejection ofan executory contract or unexpired lease, the court should focus on the businessjudgment of the trustee or debtor in possession, not on its own businessjudgment." Collier On Bankruptcy Â¶ 365.03 (Alan N. Resnick & Henry J. Sommereds., 16th ed.). However, nowhere in the text of Section 365(p) is there anyprovision for or suggestion that the bankruptcy court hold a hearing or enter anorder with respect to a personal property lease assumption agreement by thedebtor. Further, Congress did not provide any conditions under which suchapproval would be granted or withheld. A Section 365(p) assumption is not akinto a Section 524 reaffirmation; neither the disclosures under Section 524(k),nor the hearing and court approval under 524(m), are required. Therefore, theCourt shall not, in this case or in the future, enter any orders approving ordisapproving a debtor's lease assumption agreements under Section 365(p).
Based upon the foregoing, the Motion is granted only to extent that the caseis reopened for a period of sixty days to allow the filing of a fully executedlease assumption agreement with all exhibits and proper signatures, to supplantthe partially executed Assumption Agreement annexed to the Motion. The Courtdeclines to approve or disapprove the Assumption Agreement itself, and shallrefrain from approving or disapproving such agreements going forward. An orderconsistent herewith shall issue.
/s/ Alan S. Trust
Alan S. Trust
United States Bankruptcy Judge
Dated: April 6, 2011
Central Islip, New York