FYI: 9th Cir Rejects Challenge to Assumption of Auto Lease in Bankruptcy

In a case of first impression on the issue of "whether a lease assumption can survive discharge even though it is not reaffirmed[,]" the U.S. Court of Appeals for the Ninth Circuit recently held the a creditor's post-discharge attempt to collect the balance owed under an automobile lease assumed by the debtor post-petition but prior to discharge in a Chapter 7 case did not violate the discharge injunction. 

 

A copy of the opinion is available at:  Link to Opinion

 

A bankruptcy debtor wanted to keep her leased SUV so she signed an assumption agreement the day before the received a discharge in her pending Ch. 7 bankruptcy case.

 

However, the debtor stopped making her lease payments and eventually surrendered the vehicle, leaving a balance owed under the assumed lease. When the creditor tried to collect, the debtor filed a motion for sanctions, arguing that the creditor "violated section 524's discharge injunction [and] that the assumption agreement was independently invalid because she and [the creditor] had not followed the required procedures for a lease assumption under 11 U.S.C. § 365(p)."

 

The bankruptcy and court and the trial court both disagreed, and the debtor appealed to the Ninth Circuit.

 

The Ninth Circuit affirmed both courts, holding that "lease assumptions survive discharge event if they are not reaffirmed, and [both the debtor and creditor] mutually waived section 365(p)'s procedural requirements."

 

The Court began its analysis by explaining what happens when debtor files bankruptcy under Chapter 7, and a trustee is appointed with the power to assume or reject "any unexpired contracts—including leases—to which the debtor is a party."  The Court noted that "[i]f 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."

 

The Court went on to explain that "[b]efore 2005, only the trustee could assume or reject a lease." However, "the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 … added section 365(p), which allows the debtor to assume a lease of personal property."

 

In particular, section 365(p)(2) provides that if the debtor notifies a creditor within 30 days of receiving notice the creditor is willing to assume a lease, "the liability under the lease will be assumed by the debtor and not by the estate … [and] the injunction under section 524(a)(2) shall not be violated by notification of the debtor and negotiation of cure under this subsection."

 

The Ninth Circuit reasoned that even though the debtor did not follow the procedures contained in section 365(p)(2), having contacted the creditor by phone instead of in writing and not returning the signed assumption agreement until more than 30 days after the told the creditor by phone she wanted to keep the vehicle, "a lease assumption need not be reaffirmed in order to survive discharge" for three reasons.

 

"First, '[i]t is 'a cardinal principal of statutory construction' that 'a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant[,]" and "[i]f lease assumptions do not survive discharge unless they are reaffirmed, then section 365(p) would be superfluous in at least two ways."

 

"Most specifically, requiring debtors to reaffirm lease assumptions would make section 365(p)'s safe-harbor provisions superfluous. … More broadly, if every lease assumption must be reaffirmed to survive discharge, then section 524(c)'s more onerous requirement would displace section 365(p)'s more informal ones."

 

"Second, 'it is a commonplace of statutory construction that the specific governs the general.' … Here, that principle supports the conclusion that section 365(p), which sets our procedures specifically applicable to individual debtors' assumptions of leases of personal property, should control over the more general reaffirmation procedures of section 524(c)."

 

"Third, other provisions of the Bankruptcy Code suggest that lease assumptions under section 365(p) do not require reaffirmation under section 524(c). For example, section 362(h) requires individual debtors under some circumstances to indicate in their statement of intention whether they will 'either redeem … personal property pursuant to section 722, enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so.'" The use of such language "indicates that it designates distinct options. … The separate listing of reaffirmation under section 524(c) and assumption under section 365(p) undermines the suggestion that a debtor opting for assumption must also pursue reaffirmation."

 

Finally, the Ninth Circuit reasoned, "[t]he historical understanding of lease assumptions by a trustee further supports our conclusion that lease assumptions under section 365(p) are not subject to section 524(c)'s requirements for agreements 'based on a debt that is dischargeable.'" Prior to 2005, once a trustee assumed an unexpired lease, it "was assumed 'subject to all of its provisions, including the in personam liabilities flowing from assumption.' … Significantly, the breach of an assumed lease became a post-petition debt under the Code—meaning that it was not dischargeable and was not subject to section 524(c)'s reaffirmation requirements. … We see no reason to deviate from that understanding just because a debtor initiates the lease assumption rather than a trustee."

 

The Court then turned to consider, in closing, whether "the parties failure to comply with the procedures of section 365(p) nullifies [the debtor's] agreement to assume the [SUV] lease[,]" concluding "that it does not." This is because "[t]he Supreme Court has held that 'absent some affirmative indication of Congress' intent to preclude waiver, … statutory provisions are subject to waiver by voluntary agreement of the parties[,]" and "we have no difficulty concluding that the parties mutually waived section 365(p)'s writing and timing requirements here."

 

The judgments of the bankruptcy court and trial court were affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Rules In Favor of Mortgagee in Insurance Coverage Dispute Involving Fire in Collateral Property

The U.S. Court of Appeals for the Seventh Circuit recently reversed summary judgment in favor of an insurer and against a mortgagee in an action involving state tort claims arising from a deadly fire in the collateral property, holding that an issue of fact existed regarding who was in possession of the property when the fire occurred.

 

A copy of the opinion is available at:  Link to Opinion

 

The owners of a commercial laundromat took out a loan secured by the property, but defaulted seven years later. The parties entered into a repayment agreement, but the borrower defaulted a year later and the laundry went out of business.

 

The owners offered the mortgagee a deed in lieu of foreclosure and the mortgagee accepted on condition the property was still marketable. It wasn't. The mortgagee made repairs to preserve the property and returned the deed to the owners.

 

A year and a half later, two firemen "lost their lives battling a blaze at the abandoned laundromat." Their estates sued the mortgagee "in Illinois state court for negligence under a premises liability theory."

 

The wrongful death case settled for $15 million but the mortgagee only had $1 million in general liability coverage, so the mortgagee filed a claim with "its umbrella insurance provider, for coverage, but [the insurer] refused" on the basis that the policy excluded "any liability or loss, cost or expense arising out of property [the insured] acquire[d] by foreclosure, repossession, deed in lieu of foreclosure or as mortgagee in possession."

 

The mortgagee sued the umbrella carrier, and the trial court granted the insurer's motion for summary judgment because "the undisputed record demonstrated [the mortgage company] was a mortgagee in possession when the fire broke out." The mortgagee appealed.

 

On appeal, the Seventh Circuit first addressed the mortgagee's argument that it was not a "mortgagee in possession" at the time of the fire. Although the Court noted that it did "not read the caselaw in [appellant's] favor[,]" it felt constrained to "remand because a triable issue exists on who possessed the property at the time of the fire."

 

The Court rejected the insured's argument that the trial court misinterpreted Pennsylvania law -- which governed under the policy's choice-of-law provisions -- when it held that "to qualify as a mortgagee in possession, a mortgagee need only obtain possession of the property from the mortgagor upon default with the mortgagor's consent" because "a mortgagee qualifies as a mortgagee in possession if and only if it takes possession of and operates the property to recoup the defaulted loan."

 

The Seventh Circuit reasoned that under Pennsylvania law, what matters is possession, not possession plus management and control of the property. "[O]nly if a mortgagee takes possession … do management and control come into play; the mortgagee's operation of the property is not necessary otherwise." "The mortgagee's right of actual possession lasts until the default is recovered. How the default is recovered does not drive possession. … Thus a mortgagee who exercises its right of actual possession upon default and moves to safeguard its security interest in the property still fits the definition of 'mortgagee in possession.'"

 

The Court then turned to the fact question of whether the mortgagee had actual possession of the property when the fire occurred. "If not, then [the insurer] cannot invoke the policy's exclusion for 'mortgagees in possession.'"

 

The Seventh Circuit concluded that the trial court "jumped the gun" when it found that the mortgagee "indisputably possessed the property…." This is because "[u]nder Pennsylvania law, whether a party is a 'possessor' of land is treated as a question for the trier of fact."

 

The Court reasoned that the trial court relied too heavily on the fact that the mortgagee had changed the locks, finding it significant that the mortgagee returned the deed in lieu to the mortgagors, never actually prevented them from accessing the property, and one of the mortgagors cut a deal with the City of Chicago to remedy the code violations after the mortgagee secured the property.

 

The Seventh Circuit concluded that "[t]ogether, these facts create a triable issue on who possessed, i.e., physically controlled, the laundromat—or at the very least, on whether [the mortgagee] possessed the property with the intent to exclude [the mortgagors]—at the time of the fire. Summary judgment, therefore, was premature."

 

The Court, in closing, rejected the insurer's final argument that the mortgagee cannot litigate the issue of coverage because it "conceded its premises liability under Illinois law by settling[,]" reasoning that "[s]ettlement does not create a judicial ruling. Nor does it vindicate a plaintiff's theory of liability."

 

"The notion that a party cannot litigate coverage after settling claims brought against it is not supported by the cases [the insurer] cites. Instead, those cases explain an insured can expect reimbursement of a settlement made 'in reasonable anticipation of liability' for covered damages, where the covered claim was the 'primary focus' of settlement. … Those items—anticipation of liability, coverage, and primary focus—are litigated regularly post-settlement."

 

The trial court's summary judgment was vacated, and the case remanded to resolve the factual disputes.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Cal App Ct (1st Dist) Rejects Claims Against Digital Currency Exchange Regarding Unsupported Currency

The Court of Appeals of California, First District, recently held that online digital currency exchange platforms have no obligation, in contract or in tort, to honor "forked" cryptocurrencies unless affirmatively provided for in a user agreement or otherwise.

 

A copy of the opinion is available at:  Link to Opinion

 

In October 20017, a consumer stored 350 Bitcoin in his account with an online digital currency platform exchange (Exchange).

 

As you may recall, online digital currency platforms or exchanges allow customers to send, receive, and store certain digital currencies. A digital currency (also known as " cryptocurrency") is a type of currency maintained by a decentralized network of participants' computers. Anyone can be part of such a network by running software that allows the computer to interact with the network. Transactions between network participants are recorded on a "blockchain," which is a public ledger of digital currency transactions.

 

Bitcoin is among the most well-known, but there are thousands of digital currencies, each on its own unique network and blockchain ledger.  Anyone can create a new digital currency, and new digital currencies are created almost daily.

 

On October 23, 2017, a third party launched a new cryptocurrency, "Bitcoin Gold," as a "fork."  A fork is a way of creating a new digital currency by copying the source code of an existing digital currency's blockchain and repurposing it into a new digital currency network. When a developer creates a fork, the existing ledger of transactions from the original currency is used, and holders of the original currency are assigned equivalent units of the new currency on the new network. The new currency then "forks" into a separate blockchain ledger that records transactions of the new currency between participants in the new network.

 

Shortly after the Bitcoin Gold fork, the Exchange evaluated Bitcoin Gold's network and informed its customers via its website: "At this time, [the Exchange] cannot support Bitcoin Gold because its developers have not made the code available to the public to review. This is a major security risk."

 

On March 27, 2018, the plaintiff consumer filed suit against the Exchange based on its failure and refusal to allow him to receive his forked Bitcoin Gold currency. The Exchanged filed a demurrer with only the consumer's claims for negligence, conversion, and breach of contract surviving the demurrer.

 

The Exchange filed a motion for summary judgment and in support presented evidence that upon registering an account in February 2014, and again in April 2015, the consumer signed a "User Agreement" with the Exchange. The User Agreement contained no provision requiring the Exchange to provide support or services related to any particular digital currency created by a third party.

 

Thereafter, the trial court granted summary judgment for the Exchange on all three causes of action concluding "[t]he fact that [the Exchange's] User Agreement with [consumer] contains no provision requiring [the Exchange] to provide services related to any particular digital currency created by a third party is dispositive, requiring the Court to grant this motion."  The plaintiff consumer appealed.

 

The Appellate Court began its review by first examining consumers breach of contract claim, and noting a breach of contract claim requires the existence of a contract, plaintiff's performance, the other party's breach, and damages. In addition, a claim for breach of contract requires plaintiff specifically plead breach of agreed upon contractual provision.

 

The Appellate Court noted it is "undisputed that the User Agreement does not contain a provision requiring it to support or provide services for any particular digital currency created by a third party."  Moreover, the Exchange presented evidence that it "issued a public statement that it would not support the new currency due to security concerns."  Consumer was unable to identify any representations, oral or written, by the Exchange that it would support Bitcoin Gold, or that it would provide "usual and customary services" in any way relating to Bitcoin Gold.

 

The plaintiff consumer argued, through his expert witness, that the Exchange was able to transfer Bitcoin Gold to him via the information it already had and through existing software without the need to develop additional software. The Exchange presented counter evidence that it could not do so because it had not developed the software and the Bitcoin Gold Network was unreliable and unsecure.

 

The Appellate Court discounted the consumer's argument, noting whether the Exchange could provide consumer "with access to the forked currency is not dispositive; the pertinent question is whether [the Exchange] had a contractual obligation to do so, and the undisputed evidence submitted by [the Exchange] shows it did not."

 

In sum, consumer "failed to establish the existence of a disputed issue of material fact showing [the Exchange] agreed to provide [consumer] access to his forked Bitcoin Gold currency."

 

The Appellate Court next examined consumers conversion claim again restating the elements of a claim for conversion which are "(1) the plaintiff's ownership or right to possession of the property, (2) the defendant's wrongful act or disposition of the property that interferes with the plaintiff's possession, and (3) damages." 

 

Furthermore, conversion requires the defendant to take some affirmative action to exercise dominion over or deprive a plaintiff of his or her property.  To establish a conversion, it is incumbent upon the plaintiff to show an intention or purpose to convert the goods and to exercise ownership over them, or to prevent the owner from taking possession of the property.  . . . [C]onversion requires affirmative action to deprive another of property, not a lack of action."

 

The Appellate Court was quick to note that the plaintiff consumer's "declaration in support of his opposition to the summary judgment motion admits [the Exchange] took no affirmative action to possess his property, stating:  By [the Exchange] taking no action, knowing I had no ability to access my Bitcoin Gold on my own, [the Exchange'] inaction was tantamount to direct conduct depriving me of my property and was [the Exchange's] way of exercising complete dominion and control over my property thus depriving me of it."

 

As this issue was a matter of first impression in California, the Appellate Court looked to the reasoning of a federal trial court in Georgia considering a similar claim. In that matter, the Georgia federal trial court granted summary judgment for the digital currency exchange on the plaintiff's claim for conversion of a forked digital currency on the exchange's failure to give the plaintiff its Bitcoin Gold.

 

In explaining its ruling, the Georgia court reasoned:

 

"[I]n order for a bitcoin owner who holds [his or] her virtual currency in an exchange (or other type of shared wallet) to access the forked currency, the exchange must take some affirmative action. The Court would be imposing a major new duty on all cryptocurrency exchanges operating in Georgia to affirmatively honor every single bitcoin fork.  Bitcoin investors are aware they are operating in an unregulated market, and therefore it seems more reasonable to place the burden to ensure access to forked currency on the investors themselves.  There is no requirement that investors keep their coins in exchanges; they can always withdraw the coins to their own private wallets. In the unregulated cryptocurrency market, potential investors are well advised to ensure that the terms of service of the exchange they are using clearly spell out what the exchange's obligations are with respect to forked currency, if any."

 

BDI Capital, LLC v. Bulbul Investments LLC, supra,_ F.Supp.3d at p. _, fn. omitted [2020 WL 1161100 at p. *10].

 

The Appellate Court found the Georgia federal trial court's opinion persuasive and declined "to impose a major new absolute tort duty on digital currency exchanges to honor forked currencies."

 

Finally, the Appellate Court addressed consumers negligence claim noting to prevail in a negligence action, a plaintiff must establish the defendant owed a legal duty, the defendant breached that duty, and the breach proximately caused the plaintiff's damages.

 

In his amended complaint consumer argued the Exchange owed him a duty to allow him to acquire all cryptocurrency to which he was entitled, based on his opening an account with the Exchange and complying with the Exchange's terms and conditions for the account.

 

The Appellate Court noted that "[a] person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations."  Thus, consumer may not recover in tort based solely on allegations that the Exchange negligently performed its contractual duties.

 

Consumer argued the Exchange was required to provide "the usual and customary" services, including services for "fork occurrences," but identified no basis for the alleged duty, nor evidence of any written or oral representation by the Exchange that it would provide such services, as alleged in the first amended complaint.

 

Accordingly, the judgment of the trial court was affirmed on all three counts.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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