The 9th Circuit Court of Appeals is the first court of appeals to rule on the issue of whether a bankruptcy court must approve a lease assumption.  See Bobka v. Toyota Motor Credit Corp, 968 F.3d 946 (2020).

What happened?

When Melissa Mather Bobka filed a Chapter 7 she was leasing a Toyota Rav4.  She wished to keep her vehicle and called Toyota Motor Credit to let them know of her intention to keep the vehicle.

Toyota Motor Credit sent the debtor a Lease Assumption agreement that was signed and filed with the bankruptcy court.  The next day the bankruptcy discharge was issued.

Payments on the lease went into default and the vehicle was eventually surrendered. Toyota Motor Credit then sought to collect the past-due balance and the debtor objected stating the debt had been discharged since Toyota failed to follow the requirements of a Reaffirmation Agreement outlined in 11 U.S.C.524(c).

Toyota Motor Credit countered that the requirements of 524(c) pertain only to auto purchase agreements and not to auto leases which are regulated under bankruptcy code section 365(p).

The debtor requested that all collection activity stop and that she be awarded $50,000 in damages.

What the court said.

The bankruptcy court and the district court ruled in Toyota Motor Credit’s favor and held that banks do not need to comply with the cumbersome requirements applied to auto purchase reaffirmation agreements.  The debtor then appealed to the Ninth Circuit court of appeals.

In rejecting the debtor’s appeal, the Ninth Circuit Court identified three reasons why a lease assumption agreement does need to follow the stricter rules governing reaffirmation agreements.

  1. To apply the stricter requirements of reaffirmation agreements to lease agreements would render the language of 365(p) superfluous.
  2. Courts should to apply specific statutory construction before more general provisions.  Section 365(p) specifically deals with lease agreements and should be applied before more general rules of reaffirmation agreements apply.
  3. Other parts of the Bankruptcy Code suggest that lease agreements are not governed by reaffirmation agreement requirements.

Why is this opinion important?

A great deal of uncertainty has surrounded lease assumption agreements. Some creditors require that debtors sign reaffirmation agreements to assume a lease while others simply rely on one-page lease assumption agreements.

Reaffirmation agreements require court approval, while lease assumption agreements do not. And sometimes bankruptcy judges rule that it is not in the best interest of a debtor to reaffirm an auto loan that is beyond their ability to pay.

A ruling that court approval is not required makes it easier to keep a leased vehicle, although debtors and their attorneys should give serious thought to whether that is a good idea.


Image courtesy of Flickr and Dennis Elzinga.