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In re McCray, 342 B.R. 668 (Bkrtcy.D.Dist.Colo. 2006) S. Martin Teel, JR., Bankruptcy Judge newly enacted provisions of § 362(b)(22) preventing stay of eviction from arising in serial filing cases requires a lease or rental agreement.


The debtors had filed several petitions to frustrate eviction by an owner who had newly acquired the property in a foreclosure. The court held that there was no lease or rental agreement, nor did the owner have a “security interest” per se because by acquiring ownership its security interest was extinguished, and accordingly new BAPCPA provisions of § 362 did not apply. Nevertheless the court ruled that it had the power under § 105(a) to terminate the stay and issue order preventing stay from arising in any case filed within the next 2 years.

Lessee’s interest in real property does not survive a “free and clear” sale in bankruptcy court:

Reprint from article published in Lexology (blog – Kate Thomas, Squire Patton Boggs) In the Matter of Spanish Peaks Holdings II, LLC, Do a lessee’s possessory interests in real property survive a “free and clear” sale of the property under section 363 of the Bankruptcy Code? In a recent decision, the Ninth Circuit Court of Appeals said “no,” holding that section 365(h) did not protect the interest of the lessee in the context of a section 363 sale when there had been no prior formal rejection of the lease under section 365. In so holding, the Ninth Circuit joined the Seventh Circuit Court of Appeals in rejecting the majority view that a sale of real property under 363(f) does not extinguish leasehold interests in that property. The Ninth Circuit’s decision undermines the notion that lessees enjoy special protections under the Bankruptcy Code and underscores the need for lessees to be proactive in protecting their interests when their lessors file bankruptcy.

An automobile sale/lease-back/option-to-buy agreement that meets Merryweather v. Pendleton test is a security device for a loan and subject to Consumer Lenders Act; latter act is not void for vagueness. SAL Leasing, Inc. v Arizona, 1 CA-CV 99-0631, 10/3/00.

A lender who takes title, then allowing old owner to reside in property under premise of a lease to purchase; Arizona Question regarding Equitable Mortgages There is a good discussion of “disguised real estate security transactions” in Nelson and Whitman’s hornbook on Real Estate Financing, Chapter 3, and an old law review article by Cunningham and Tischler in 26 Rutgers Law Review 1 (1972).

Note: pre-BAPCPA

Pacific Shores v. At Homes Corp., No. 03-15769 (9th Cir. December 28, 2004) A bankruptcy court may approve retroactively the rejection of an unexpired nonresidential lease.

Note: pre-BAPCPA

Lease assumptions survive discharge even if they are not reaffirmed

Bobka v. Toyota Motor Credit Corp., No. 18-55688 (9th Cir. Ct Appeals, Aug. 3, 2020). When Melissa Mather Bobka filed for Chapter 7 bankruptcy, she wanted to keep her leased Toyota Rav4. She called Toyota and was told that to keep the vehicle, she would need to assume the lease. Two months later, Mather sent Toyota a signed assumption agreement. She received her bankruptcy discharge the next day. By then, Mather had stopped making lease payments, and when Toyota sought to collect Mather’s past-due balance, she refused to pay. Mather asserted that her obligations under the lease did not survive the bankruptcy discharge because the assumption agreement had not been reaffirmed under 11 U.S.C. § 524(c). When Toyota continued its collection efforts, Mather sought sanctions, alleging that Toyota had violated section 524’s discharge injunction. She also argued that the assumption agreement was independently invalid because she and Toyota had not followed the required procedures for a lease assumption under 11 U.S.C. § 365(p). The bankruptcy court and the district court rejected Mather’s interpretation of the Bankruptcy Code. We agree with both courts that lease assumptions survive discharge even if they are not reaffirmed, and that Mather and Toyota mutually waived section 365(p)’s procedural requirements. We therefore affirm.

The panel affirmed the district court’s affirmance of the bankruptcy court’s ruling that a creditor’s post-discharge collection efforts on a vehicle lease did not violate the discharge injunction in a Chapter 7 case.The debtor sent the creditor a signed lease assumption agreement before she received her bankruptcy discharge. The panel held that debtors’ lease assumptions survive discharge even if they are not reaffirmed under 11 U.S.C. § 524(c). The panel also held that the debtor and the creditor mutually waived the procedural requirements for a lease assumption by a debtor under § 365(p).

In re Anderson, 2019 Bankr. LEXIS 2800 (Bankr. D. Mass. 2019) the court suggested that court approval of a lease-assumption agreement is the best means of ensuring that a debtor can achieve the goal of motor vehicle retention without fear of repossession, and creditors can achieve the goal of a leasehold obligation that survives the bankruptcy discharge.  The court described the road to lease assumption as follows: (1) include the lease on the statement of intention and indicate that the lease will be assumed; (2) notify the lessor in writing of the intention to assume; (3) thereafter and within 30 days notify the lessor that the lease is assumed;31 (4) reach an agreement on the terms of the assumed lease; and (5) submit the written assumption agreement to the court for approval and “include a request for a determination that the assumed lease is a post-petition obligation of the debtor.

June 1, 2022

This entry is part of Nelson Mullins’s ongoing “Bankruptcy Basics” blog series that is intended to address foundational aspects of bankruptcy for non-bankruptcy practitioners and professionals.  This entry will discuss lease rejection in chapter 11 bankruptcy cases.

One critical component of chapter 11 bankruptcy cases is the debtor’s ability to assume or reject certain executory contracts, including leases of nonresidential real property.  Under section 365 of the Bankruptcy Code, a chapter 11 debtor has 120 days (currently 210 days pursuant to an extension in the CARES Act) to assume or reject leases.  This assumption/rejection window can be extended by court order for an additional 90 days.  Any further extension requires agreement of the debtor and the landlord.

Assumption of a lease in chapter 11 allows for the lease to remain ongoing throughout the life of the bankruptcy case.  In order to assume a lease, the debtor must cure any arrears and show adequate assurance of future performance under the lease. 

Similarly, a debtor may assume and assign a lease.  Assumption and assignment may occur under the Bankruptcy Code even if the lease includes a clause preventing assignment.  Assumption with an intent to assign still requires curing all arrears and a showing by the assignee of adequate assurance of future performance.  If cure and adequate assurances are satisfied, the lease will be assumed under the current terms of the lease.

If a lease is not assumed in the timeframe provided by the Bankruptcy Code, it shall be deemed rejected.  Rejection results in the termination of the lease.  Upon rejection, either by affirmative action by the debtor to reject the lease or by expiration of the assumption window, the lease is deemed terminated as of the date that the debtor filed for bankruptcy.  The landlord may retake possession of the property upon rejection and is owed breach damages to be calculated starting from the petition date. 

Rejection damages are subject to a statutory cap under Bankruptcy Code section 502(b)(6).  This statutory cap is intended to ensure that potentially large landlord rejection damages do not disproportionately affect other unsecured creditors upon rejection.  The cap is the greater of (1) one year’s rent or (2) the rent for 15 percent, not to exceed three years, of the remaining term of the lease.  Typically, the cap takes the place of mitigation factors, as courts treat the imposition of the cap as a form of mitigation, meaning that other mitigation issues are not considered when calculating the capped damages. 

In sum, the Bankruptcy Code allows for a debtor to assume or reject commercial leases in a chapter 11 bankruptcy.  The debtor can also freely assign leases, provided the cure and adequate assurances of future performance are provided.  The decision to reject a lease may result in substantial, albeit capped, rejection damages claims for any landlord whose lease is rejected. 

Nelson Mullins attorneys are experienced in handling bankruptcy matters of all sizes and are well equipped to advise debtors, trustees, purchasers, professionals, and other stakeholders on both the legal and practical aspects of any number of issues that arise in a bankruptcy case, including lease rejection issues.