Bobka v. Toyota Motor Credit Corp.

968 F.3d 946

Melissa Carin Mather BOBKA, Appellant,

v.TOYOTA MOTOR CREDIT CORPORATION, Appellee.

No. 18-55688

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 16, 2019 Pasadena, California

Filed August 3, 2020

Michael G. Doan (argued), Doan Law Firm, Oceanside, California, for Appellant.

Aaron J. Malo (argued) and Karin Dougan Vogel, Sheppard Mullin Richter & Hampton LLP, San Diego, California, for Appellee.

Jan T. Chilton and Mark Joseph Kenney, Severson & Werson, San Francisco California, for Amicus Curiae American Financial Services Association.

Tara Twomey, National Consumer Bankruptcy Rights Center, San Jose, California, for Amici Curiae National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys.

Before: Jacqueline H. Nguyen and Eric D. Miller, Circuit Judges, and Eric N. Vitaliano,^* District Judge.

MILLER, Circuit Judge:

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.

I

In 2016, Mather filed a petition for bankruptcy under Chapter 7. She listed $51,252 in assets—consisting primarily of a Toyota Tundra and a Toyota Rav4—against $145,411 in liabilities. In her statement of intention filed with the petition, Mather mistakenly described Toyota as the owner of a secured claim against the Rav4, rather than as a lessor, and stated her intent to reaffirm what she described as a secured debt.

When a debtor enters Chapter 7 bankruptcy, the creditors appoint a trustee, who is responsible for administering the bankruptcy estate, and who has authority to assume or reject any unexpired contracts—including leases—to which the debtor is a party. 11 U.S.C. §§ 365(a), 365(d)(1), 702. If the trustee assumes the lease, the estate is liable for the debtor's obligations under the lease, and in exchange, the estate can obtain the benefits of the lease. Id . § 365(b)(1), (e)(1). If the trustee rejects the lease, the rejection is deemed a breach of the lease, and the claim created by that breach is treated as one that arose before the petition was filed. Id . § 502(g)(1).

Before 2005, only the trustee could assume or reject a lease. Trustees ordinarily did not assume individual debtors’ leases of personal property because doing so would not benefit the creditors or the estate. But in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, § 309(b), 119 Stat. 23, 82, Congress added section 365(p), which allows the debtor to assume a lease of personal property. 11 U.S.C. § 365(p). Paragraph (2) of that subsection provides:

(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.

Id . § 365(p)(2).

Although Mather sought to keep her leased Rav4, she did not follow the procedures set out in section 365(p)(2). On September 8, 2016, Mather called Toyota to ask about keeping the vehicle. Toyota's agent told Mather that she would need to enter into a lease assumption. The agent did not ask Mather to confirm her request in writing as required by section 365(p)(2)(A), and she did not do so. Instead, the agent sent an assumption agreement to Mather and her attorneys, explaining that the agreement would constitute an assumption of the lease effective upon Toyota's receipt of the signed agreement.

Mather did not return the agreement until December 5—well more than 30 days after she orally informed Toyota that she wished to keep her leased vehicle. Mather received her bankruptcy discharge the next day.

Although Mather was current on her lease when she entered bankruptcy, she began missing payments in November 2016. After the discharge was entered, Toyota contacted Mather to recover the missed payments. Mather ultimately surrendered the Rav4, but she did not pay back her overdue balance on the lease. She told Toyota that the debt had been discharged in bankruptcy, and she denied that her assumption of the lease was effective.

Toyota continued its collection efforts, and Mather responded by seeking relief in the bankruptcy court, including an injunction, sanctions, fees, and more than $50,000 in damages. In her request for an order to show cause, Mather alleged that Toyota had violated the automatic stay by sending her the lease assumption agreement, see 11 U.S.C. § 362, and that its collection efforts violated the discharge injunction, see id. § 524(a)(2). According to Mather, obligations under a lease survive discharge only if they are reaffirmed under section 524(c). That statute provides that "[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 ... is enforceable only to any extent enforceable under applicable nonbankruptcy law," and only if certain procedural requirements are met, including that (1) the debtor received certain disclosures, and (2) the agreement has been filed with the court together with a declaration from the debtor's attorney stating that the agreement is fully informed and voluntary and does not impose an undue hardship. Id. § 524(c). If the debtor was unrepresented while negotiating the agreement, the court must approve the agreement before it can become effective. Id. § 524(c)(6)(A).

The bankruptcy court rejected Mather's claims, concluding that a lease assumption under section 365(p) need not comply with the reaffirmation procedures of section 524(c). The bankruptcy court also held that Mather had successfully assumed the lease, despite the procedural infirmities in her agreement with Toyota. The district court affirmed.

II

We begin by considering whether a lease assumption can survive discharge even though it is not reaffirmed. That is a purely legal issue, so our review is de novo. See Blausey v. U.S. Tr. , 552 F.3d 1124, 1132 (9th Cir. 2009) (per curiam).

The question of statutory interpretation presented here turns on the resolution of an apparent conflict between sections 365(p) and 524(c). Normally, when a bankruptcy proceeding ends, the debtor is "discharge[d] ... from all debts that arose before the date of the order for relief." 11 U.S.C. § 727(b). Section 524(c) provides for a limited exception to that rule by allowing an agreement "based on a debt that is dischargeable" to be reaffirmed and thus remain enforceable after discharge. Id. § 524(c). But reaffirmation can occur only when the debtor receives certain procedural protections, including the involvement of the bankruptcy court. Id. On the other hand, section 365(p) provides that when a lease is assumed, "the liability under the lease will be assumed by the debtor and not by the estate." Id. § 365(p)(2)(B). In Mather's view, section 365(p) would conflict with section 524(c) if it allowed a lease assumption agreement to survive discharge, because such an agreement would be "based on a debt that is dischargeable" and thus would need to meet the conditions of section 524(c) before a lessor could enforce it against a lessee. No court of appeals has yet considered whether lease assumptions under section 365(p) require reaffirmation under section 524(c), and bankruptcy courts have reached differing conclusions. Compare, e.g. , In re Anderson , 607 B.R. 133 (Bankr. D. Mass. 2019) (lease assumption does not require reaffirmation), In re Abdemur , 587 B.R. 167 (Bankr. S.D. Fla. 2018) (same), and In re Ebbrecht , 451 B.R. 241 (Bankr. E.D.N.Y. 2011) (same), with In re Rogers , 359 B.R. 591 (Bankr. D.S.C. 2007) (lease assumption requires reaffirmation), and In re Creighton , 427 B.R. 24 (Bankr. D. Mass. 2007) (same).

According to Mather, the text of section 365(p) indicates that a lease assumption can create an obligation that survives discharge only if it is reaffirmed. Mather emphasizes that the provision says that "liability under the lease will be assumed"; in her view, the use of the future tense suggests that some further action—specifically, reaffirmation—must be completed before a lease assumption can effectively impose liability on the debtor. According to Mather, "it's no coincidence" that section 365(p) uses the same phrase ("will be") as the disclosure...