HVAC Leases and Chapter 13 Bankruptcy: Here’s A Hot One for You

Microf, LLC v. Cumbess (In re Cumbess), No. 18-cv-00449-TES (M.D. Ga. May 2, 2019).

Paul Cumbess leased HVAC equipment from Microf, which he used to heat and cool his residence.  When Paul filed bankruptcy, his Chapter 13 plan “assumed” the lease, meaning that he wanted to keep the equipment and would continue to pay for it directly (i.e., not included in the Chapter 13 bankruptcy payments).  After the bankruptcy plan was confirmed, Paul fell behind in lease payments.  Microf wanted the missed payments to be included in the Chapter 13 plan as an “administrative claim” and paid in full, but the Chapter 13 Trustee objected. 

The Trustee argued the missed payments should not be allowed because, while Paul definitely needed the HVAC, the usage did not benefit the bankruptcy estate.  Therefore, the Trustee opposed using Chapter 13 plan payments to catch up the missed amounts. 

As soon as a bankruptcy case is filed, an “estate” is created, and all the property a debtor owns becomes either “property of the estate” or “property of the debtor.”  Which property is which can be a confusing question, and the answer sometimes depends on the jurisdiction. 

The Bankruptcy Court’s decision, upheld on appeal, was that the Microf lease “exited the bankruptcy estate when the plan was confirmed.”  Although Paul’s plan assumed the lease and expressed his intention to keep paying, the Trustee did not assume the lease.  And therefore, the Court ruled Paul did not have the power to “reinsert” leased property into the bankruptcy estate because this would give a debtor “veto power” over the Trustee’s decisions. 

The Court compared Paul’s assumption to the lease in Chapter 13 to “reaffirming” the debt in a Chapter 7 case, meaning that he would continue to be responsible for payment of the entire debt. 

The Trustee and Court’s perspective are understandable – the estate should not have to pick up payments that Paul should have made.  But this leaves Paul in hot water: If he can’t catch up payments, Microf could seek relief from the bankruptcy stay and repossess the equipment.  In that situation the bankruptcy discharge might not wipe out the debt Paul still owes to Microf. 

What should a debtor in Paul’s position do?  “Nothing” is not the right answer.  Paul waited for Microf to request payment in the Chapter 13 case, and that did not go well.  The Cumbess decision did not address whether Paul could modify his Chapter 13 plan to pay missed payments to Microf.  The Eleventh Circuit Court of Appeals has held that plans can be modified to cure post-confirmation defaults, and Paul’s situation seems to fit.  If Paul is unwilling (not likely in a place like Georgia) or unable to catch up the payments to Microf, he could attempt to modify his plan to surrender the HVAC and either limit or eliminate his liability for the missed payments. 

The7thirteen is a blog presented by Narmore Law Office LLC, focusing on consumer bankruptcy issues.  Visit the website at narmorelawoffice.com.