When Is a Lease Unexpired And Assumable Under The Bankruptcy Code?
Section 365 of the Bankruptcy Code authorizes a debtor, subject to the court's approval, to assume an unexpired lease. The issue in Stoltz was whether the debtor's lease was "unexpired" and, therefore, assumable under the Bankruptcy Code.
The Facts in Stoltz
Laura Stoltz, the debtor, and her family resided in an apartment owned and operated by the Brattleboro Housing Authority ("BHA"). The BHA offers federally-funded housing to the public in Brattleboro, Vermont. On August 1, 1996, Stoltz and the BHA entered into a month-to-month lease agreement that provided for automatic renewal of the lease each month if Stoltz paid the rent in advance on the first day of each month as follows:
The terms of this lease shall commence on August 1, 1996, and shall continue for the remainder of said month of August and for the term of one month thereafter; provided, however, that in the absence of a notice to terminate, . . . the term of this lease shall be renewed for successive terms of one (1) calendar month upon payment each month of the rent . . . and upon compliance by the Tenant with all the provisions of this [l]ease.
After the debtor failed to pay her July and August 1997 rent, the BHA notified the debtor of its decision to terminate the lease for nonpayment of rent. The notice advised her that the proceedings could be stopped and the debtor could redeem and reinstate the lease by paying the entire amount of arrears on or before September 1, 1997. When she failed to pay the arrearage by that date, the BHA initiated an eviction proceeding. On December 23, 1997, the BHA was granted a judgment for possession. The judgment order provided that a writ of possession was to be issued on December 31, 1997.
On December 26, 1997, after the entry of the judgment of possession, but before the issuance of the writ of possession, the debtor commenced a chapter 13 bankruptcy case. Pursuant to section 362 of the Bankruptcy Code, the filing of a petition triggers an automatic stay of actions against the debtor and property of the estate. An unexpired leasehold interest is property of the estate, as is a mere possessory interest in property. Both are protected by the automatic stay that is imposed under section 362 of the Bankruptcy Code. Thus, filing the bankruptcy petition stayed the eviction proceedings.
In her chapter 13 debt repayment plan, the debtor proposed (i) to cure her default by paying all back rent over a 36-month period and (ii) to assume the lease. The BHA objected to the assumption of the lease on the ground that the debtor's lease terminated on September 1, 1997, when the debtor failed to redeem the lease. Since the Bankruptcy Code provides that only unexpired leases can be assumed, the BHA argued that the debtor was precluded from assuming the lease. The BHA moved for relief from the automatic stay and the co-debtor stay in order to continue the eviction process and gain possession.
Bankruptcy Court Found Lease Had Expired According to Its Terms
Because neither the Bankruptcy Code nor its legislative history defines the term "unexpired," and because property rights are created and defined by state law, the bankruptcy court looked to applicable state law, the law of Vermont, to determine whether the debtor's lease had been terminated before the bankruptcy filing. Under Vermont law, as interpreted by the bankruptcy court, a residential real property lease is terminated upon the issuance of a writ of possession. Because no writ of possession had been issued before the debtor's bankruptcy filing, the bankruptcy court concluded that the lease had not been terminated under Vermont law at the time of the bankruptcy filing.
However, drawing a distinction between "termination" and "expiration," the bankruptcy court concluded that the lease had expired prepetition. With respect to leases, the bankruptcy court noted that "termination means 'come to an end prior to its anticipated term,' and expiration refers to 'a natural ending according to lease terms.'" After reviewing the lease and applicable federal regulations regarding housing authorities, the court concluded that, consistent with those regulations, a public housing authority could refuse to renew a lease for nonpayment of rent. The court found that the December 23, 1997 judgment against the debtor, which included an award for unpaid rent, ended the lease. Accordingly, the court concluded that the lease had expired according to its own terms when the payment was not made. Although the debtor retained the right to discontinue the eviction proceedings by depositing the amount of the default into court in accordance with Vermont law, she could not assume the lease under section 365(d)(2). Consistent with its holding that the lease could not be assumed, the court denied confirmation of the debtor's plan because it was premised on the assumption of the lease, and it granted the BHA's motion for relief from the automatic stay.
District Court Found Lease Unexpired Under State Law
The district court reversed. Noting that the Bankruptcy Code does not define the term "unexpired," the district court looked to state law to determine whether the debtor's "leasehold interest, including actual possessory interest, is finally and conclusively extinguished, so that there is nothing to assume at the time the petition is filed." Interpreting Vermont law, the district court ruled that even if the lease had been terminated under Vermont law, it was not "expired" for purposes of chapter 13 until execution of the writ of possession. Because the possessory interest alone was sufficient to permit the debtor to assume the lease, the district court reversed the bankruptcy court's finding that the lease could not be assumed and remanded the matter to the bankruptcy court to determine whether there were alternative grounds to deny the debtor's motion to assume the lease.
Second Circuit Held that Lease Is Unexpired If Debtor Retains Possessory Interest
On appeal, the Second Circuit also looked to state law to ascertain the debtor's interests, if any, in her tenancy. The Second Circuit observed that under Vermont law, in order to evict a residential tenant for failing to pay rent, the landlord must (1) give notice by certified mail or service by a law enforcement officer at least fourteen days before the termination date; (2) wait for the termination date to pass; (3) file an ejectment action and obtain a judgment of possession; (4) obtain a writ of possession; and (5) execute on the writ of possession.
The Second Circuit stated that, under Vermont law, a judgment is not final until the earlier of the date of the issuance of the writ of possession or the date by which a notice of appeal must be filed. Further, Vermont law permits a tenant to halt an ejectment action by paying the rent arrearage, interest, and costs of suit before a judgment becomes final. Accordingly, a residential lease can be redeemed even after the judgment of possession is entered, provided the judgment has not become final.
Stoltz filed her chapter 13 petition before the writ of possession was issued and the time to appeal the judgment of possession expired. Thus, the judgment of possession had not become final, and she had the right to vacate the judgment of possession by curing her default. The right to cure the default was preserved by the automatic stay; therefore, the Second Circuit concluded that Stoltz was in lawful possession of the apartment.
The Second Circuit reasoned that, under Vermont law, a debtor with a possessory interest in a residential tenancy has an "unexpired lease," at least until the writ of possession has been issued. In so holding, the court rejected the BHA's argument that the district court's holding was inconsistent with the plain language of the lease. The Second Circuit observed that although the lease offered the BHA the right to terminate the lease for nonpayment of rent, the terms of the lease do not mean that the lease automatically "expires" if rent is not timely paid.
What is left unanswered by Stoltz is: What tenant rights must be extinguished in order for a lease to "expire"? In this case, the debtor filed her chapter 13 petition before the writ of possession was issued. The Second Circuit found that, under Vermont law, the debtor's possessory interest in the residential tenancy had not expired. Therefore, the Second Circuit found it unnecessary to decide whether the lease would have remained unexpired if the writ of possession had been issued but had not yet been executed.
The Second Circuit's opinion in Stoltz makes clear that the determination of whether a lease is unexpired is a question of state law. In that respect, the decision is consistent with the reasoning of the Seventh Circuit in a case with similar facts, Robinson v. Chicago Housing Authority. In both jurisdictions, courts must look to state law to determine whether the debtor has a remaining interest in the tenancy sufficient to permit continued lawful possession. The relevant inquiry is whether the landlord has proceeded far enough in the eviction action to extinguish the tenant's right to retain possession. In Robinson, the landlord had extinguished the tenant's rights under applicable state law. In Stoltz, it had not.
Brattleboro Housing Authority v. Stoltz (In re Stoltz), 197 F.3d 625 (2d Cir. 1999), aff'g 233 B.R. 280 (D. Vt. 1998), rev'g 220 B.R. 552 (Bankr. D. Vt. 1998).
In re Robinson, 54 F.3d 316 (7th Cir. 1995).