Maybe Ride-Through Will Relive?

20 Apr Maybe Ride-Through Will Relive?

Recently, the Bankruptcy Appellate Panel ruled that ride-through no longer existed in light of the recent changes to the Bankruptcy Code under BAPCPA. Nevertheless, they entirely ignored my 11 USC 365(e) argument and it’s presently before the Ninth Circuit Court of Appeals.

This argument has never been ruled on by any Court in the Country yet, let alone presented except in my recent BAP case. Anyways, here is the argument:

In 1979, the Bankruptcy Code replaced the Bankruptcy Act and section 11 USC 365(e) effected a significant change from the uncertainty and contradictory decisions interpreting “ipso facto” default clauses under former Section 70b. Specifically, Congress created 365(e) to once and for all invalidate “ipso facto” default clauses.

When BAPCPA was created twenty six years later, 365(e) was left untouched, despite the additional provisions to 11 USC 362 and 11 USC 521. Nevertheless, these new provisions do not conflict with 11 USC 365(e), do not resurrect ipso facto default clauses, and were never intended to eliminate ride-through.

Accordingly, 11 USC 365(e) continues to render ipso facto default clauses unenforceable, pre-BAPCPA ninth circuit case law has not been superceded by statute, and ride-through remains.11 USC 365(e) completely invalidates ipso facto default provisions and was never eliminated, modified, or restricted by BAPCPA.

Specifically, 365(e) completely prohibits the modification or termination of contractual rights and obligations solely for filing for bankruptcy protection. Courts have consistently held such clauses unenforceable in automobile contracts, retail sales contracts, and other executory contracts due to 365(e).

Although technically speaking 365(e) applies to “executory” contracts, the definition of an executory contract is no where defined under the Bankruptcy Code, and a very broad definition is accorded the term. Williston says that all contracts are, more or less, executory. When they cease to be, they are no longer contracts. Williston on Contracts, Third Edition § 14 (1957).

The Ninth Circuit case of In re Alexander, 670 F.2d 885 provides further guidance and defines an executory contract at 887:

Nowhere does the Code define the phrase “executory contract.” However, Notes of Committee on the Judiciary, Senate Report No. 95-989, observes with regard to 11 U.S.C. § 365 (Executory Contracts and Unexpired Leases: Though there is no precise definition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides.

In Alexander the Court determined that a deposit receipt sales agreement for the sale of a home was executory, since the remainder of the purchase price still had to be paid in return for possession and conveyance of title.
Ride-through on a vehicle is no different than Alexander, since the remainder of the purchase price still needs to be paid in return for the Creditor to release their security interest with the DMV and convey the “pink slip” to the Debtor.

Moreover, California Law provides recourse and exposes a creditor to damages if it fails to perform the conveyance of title within 15 days of final payment.

Accordingly, there can be no doubt that “performance to some extent” continues to remain due by the Creditor and render the contract executory. Moreover, even if not deemed to be technically executory under 365(e), Congress had always intended for ipso facto clauses to be invalid in all contracts without limitation, as seen in the legislative history to Section 365(e):

Subsection (e) invalidates ipso factor [sic] or bankruptcy clauses. These clauses, protected under present law, automatically terminate the contract or lease, or permit the other contracting party to terminate the contract or lease, in the event of bankruptcy. This frequently hampers rehabilitation efforts. If the trustee may assume or assign the contract under the limitations imposed by the remainder of the section, then the contract or lease may be utilized to assist in the debtor’s rehabilitation or liquidation. [House Report No. 95-959, 95th Cong., 1st Sess. 348-9 (1977); See Senate Report No. 95-989, 95th Cong., 2d Sess. 59 (1978).]

Written by Michael G. Doan

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