Debtor’s Assumption of Lease Removes Property from Estate

Posted by NCBRC - September 29, 2020

Once the trustee declines to assume an ongoing lease, the leased property drops out of the estate and new debt based on the debtor’s failure to make payments on the lease is not an administrative expense under section 503(b). Microf LLC v. Cumbess, No. 19-12088 (11th Cir. June 3, 2020).

When he filed for chapter 13 bankruptcy, the debtor’s plan provided that the arrears owed on an unexpired lease for an HVAC unit would be paid through the estate and he would assume the ongoing lease, paying for it outside the plan. He failed to maintain the lease payments and the HVAC creditor, Microf, sought to have the new arrears treated as administrative expenses by the bankruptcy court and given priority for repayment. The trustee objected. The bankruptcy court sustained the objection, finding that when the debtor assumed the lease, the property exited the bankruptcy estate and the new debt could not be deemed an administrative expense. The district court affirmed.

On appeal, Microf argued that when the debtor assumed the lease he did so on behalf of the bankruptcy estate and, therefore, the property remained part of the estate and, under section 503(b)(1)(A), the lease payments were “necessary costs and expenses of preserving the estate,” and thus “administrative expenses” entitled to priority under section 507(a)(2).

The court walked through the statutory context beginning with section 1322(b)(7) which permits a chapter 13 debtor to assume, reject, or assign an ongoing lease. Section 365(a), on the other hand, permits a chapter 13 trustee to assume an unexpired lease. Importantly, section 365(p)(1) provides that if the trustee elects not to assume a lease, the leased property drops out of the estate. The Eleventh Circuit found the answer straightforward: when the debtor assumed the lease (and the trustee did not), the property was no longer part of the bankruptcy estate and the missed lease payments could not be treated as administrative expenses necessary to the preservation of the estate.

The court rejected each of Microf’s three arguments to the contrary beginning with its contention that “trustee,” as defined in section 365, is generally understood to include “the Chapter 13 Debtor and plan.” Citing general rules of statutory construction—words have the meaning they have—the court noted that in eleven of section 365’s sixteen subsections, Congress used the words “trustee” and “debtor” to refer to two separate people. It concluded, therefore, that in 365(p) Congress did not change its methods to use the word “trustee” to include both. Nor was Microf able to point to any other provision in the Code in which Congress used the word “trustee” to mean “debtor.” The fact that in section 1303, Congress explicitly gave the debtor powers otherwise held by the trustee, indicated that Congress generally differentiated the two but knew how to equate them when desired.

Microf next argued that it was Congress’s intent to retain an unexpired lease as part of the estate even where the debtor assumed it. In support of this contention, Microf cited section 365(p)(3), which provides that “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.” From that, Microf argued that the inverse “logically follows” and any assumed lease, whether it be by the debtor or the trustee, remains part of the estate. In rejecting this argument, the court found that the plain text of section 365(p)(1) prevails over any implied intent of Congress to the contrary. It faulted Microf’s logic, “denying the antecedent,” under which Microf argued essentially, “if P implies Q, then not-P implies not-Q.”

Finally, Microf argued that the court’s interpretation of section 365(p)(1), enacted in 2005, created a “seismic shift” in pre-365(p) bankruptcy practice under which a debtor historically was able to obligate the estate by assuming an unexpired lease. The court disagreed with Microf’s position regarding the universality of that treatment of leases, noting that other courts and treatises historically took the position that the debtor could not bind the estate. The court again fell back on the plain language of section 365(p)(1) that if the trustee does not assume the lease, the property drops out of the estate.

To the extent the court’s interpretation of section 365(p)(1) would lead to a requirement that every time a trustee seeks to assume a lease he or she would have to file a motion with the court thereby leading to a flood of motions and needless additional time and expense, the court found that concern did not alter its decision. It disagreed with the notion that assumption of a lease by the trustee does not merit the additional safeguard of a motion, and, in the alternative, it found that such considerations did not justify ignoring the plain language of the statute.

The court affirmed.

Cumbess 11th Cir. June 2020


Post a Comment

You must be logged in to post a comment.