A dispute exists among the courts as to whether the lease assumption process found in Bankruptcy Code Section 365(p)(2) also contemplates compliance with the reaffirmation procedures of Section 524(c), i.e., “[a]n 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.” Section 365(p)(2) of the Bankruptcy Code provides:
(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.
Some courts have held that complying with Section 524(c) is an additional step. See e.g., Thompson v. Credit Union Fin. Grp., 453 B.R. 823 (W.D. Mich. 2011) (“[A] debtor’s unapproved assumption under section 365(p) does not eliminate the discharge protection that flows from the Trustee’s rejection of the lease. To set aside the discharge protection, a lessor must obtain not only the [d]ebtor’s assumption but also Bankruptcy Court approval under the reaffirmation provisions of section 524(c)”); In re Eader, 426 B.R. 164 (Bankr. D.Md. 2010); In re Creighton, 427 B.R. 24 (Bankr. D.Mass. 2007) (holding an individual chapter 7 debtor may assume personal liability for an unexpired lease of personal property, and such assumption does not require any approval by the Bankruptcy Court, but debtor’s personal obligation under the assumed lease is subject to discharge, unless the debtor reaffirms his or her indebtedness under the lease in accordance with subsection 524(c)). See also, In re Creighton, 427 B.R. 24 (Bankr. D.Mass. 2007) (holding stipulations between a chapter 7 debtor and a lessor under unexpired pre-petition personal property leases, through which the debtor personally assumes these unexpired leases, were in the nature of reaffirmation agreements, such that assumption required compliance, not only with requirements set forth in the newly enacted subsection Section 356(p), but with requirements for reaffirmation agreements as well).
Other courts have held that the lease assumption process under Section 365(p)(2) is separate and distinct from the reaffirmation requirements. See, In re Mortensen, 444 B.R. 225 (Bankr. E.D.N.Y. 2011) and In re Perlman, 468 B.R. 437 (Bankr. S.D.Fla. 2012). These court rely on §365(p)(2)(C), which states that Section 524(a)(2)’s discharge injunction “shall not be violated by notification of the debtor and negotiation of cure under this subsection,” indicating Congress contemplated lease assumption after discharge. Thus, in In re Bailly, 522 B.R. 711, 715 (Bankr.M.D.Fla.2014), the court stated that the Bankruptcy Code expressly allows parties to negotiate a lease assumption before or after a Debtor’s discharge is entered but limits the time to reaffirm a debt to the pre-discharge period. “If reaffirmation agreements must accompany lease assumptions, ‘some lease assumption agreements authorized under §365(p) would not satisfy the provisions governing reaffirmation .* * * because to be valid, a reaffirmation agreement must be made before discharge.” Id. (Quoting In re Perlman, 468 B.R. 437,440 (Bankr.S.D.Fla.2012) (citing In re Thompson, 440 B.R. 130, 131 (Bankr.W.D.Mich.2010) rev’d and remanded sub nom. Thompson v. Credit Union Fin. Grp., 453 B.R. 823 (W.D.Mich.2011)).
Bailly went on to note that other additions by BAPCPA addressing a debtor’s assumption of a lease further clarify that assuming a lease under Section 365(p)(2) is totally separate from reaffirming a debt under Section 524(c). The court stated that Section 362(h) of the Bankruptcy Code, for example, states that the automatic stay will be terminated as to personal property subject to an unexpired lease if the debtor fails to timely file a Section 521(a)(2) statement of intention indicating whether the debtor intends to surrender or retain the property. If the debtor intends to retain the personal property, the debtor must indicate whether he or she will redeem the property, enter into a reaffirmation agreement on the property, “or assume such unexpired lease pursuant to Section 365(p) if the trustee does not do so.” The court noted that Congress could have written the statute to require the debtor to indicate he or she will reaffirm and assume the unexpired lease, but it did not do so, rather it created distinct alternatives.
Bailly also noted that in contrast with the numerous procedural hurdles erected to reaffirm a debt under Section 524(c), Section 365(p) does not contemplate judicial approval of lease assumption. The court stated that “[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.” Id. at 716. In sum, “requiring compliance with reaffirmation procedures renders Congress’s choice to add §365(p)(2) effectively meaningless – a debtor simply could submit a reaffirmation agreement and forego the §365(p)(2) process entirely.” Id.
The court in In re Abdemur, 587 B.R. 167 (Bankr. S.D.Fla. 2018) came to a similar conclusion. It found that only is court approval unnecessary to assume a lease, but it is inappropriate to seek court approval. It held that assumption binds the debtor to all of the terms of the lease irrespective of the bankruptcy discharge. It when on to explain:
[W]hen reviewing the other statutes relevant to an individual debtor’s obligations, it is clear that Congress considered reaffirmation and assumption to be separate procedures. The most significant example of this is 11 U.S.C. §362(h)(1)(A), also enacted as part of BAPCPA. Subsection 362(h)(1)(A) provides that the stay is terminated with respect to personal property that an individual seeks to retain if the individual fails to timely either redeem the property, enter into a reaffirmation agreement in accordance with subsection 524(c), “or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so.
When considering these other Bankruptcy Code sections, it is clear that assumptions under subsection 365(p) and reaffirmations under section 524 are not interdependent. To hold otherwise would render certain provisions of subsection 365(p) absurd. To accept that in personam liability under an assumed lease requires reaffirmation under subsection 524(c) would mean that, notwithstanding subsection 365(p)(2)(C), which clearly contemplates assumption post-discharge, assumption post-discharge would not be possible, or would be limited to non-recourse assumption, because reaffirmation must occur prior to discharge. The law has always been clear that assumption of a lease is cum onere, meaning that an assumed lease is assumed subject to all of its provisions, including the in personam liabilities flowing from assumption. . .
Thus, once the Debtor assumed the Lease, the Debtor assumed the Lease subject to any personal liability that might arise under its provisions. So, I must decide the impact of the Debtor’s rejection of the Lease after assumption.
Abdemur, 587 B.R. at 172 (internal citations omitted).
Matthew T. Gensburg
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