In re Wallace

• Decision Date: 01 February 1990
• Docket Number: Bankruptcy No. 89-05356.
• Citation: 122 BR 222
• Parties: In re Bruce A. WALLACE and Eileen T. Wallace, h/w, Debtors.
• Court: U.S. Bankruptcy Court — District of New Jersey

122 B.R. 222 (1990)

In re Bruce A. WALLACE and Eileen T. Wallace, h/w, Debtors.

Bankruptcy No. 89-05356.

United States Bankruptcy Court, D. New Jersey.

February 1, 1990.

Lester J. DaCosta, Sicklerville, N.J., for debtors.

George J. Lavin, Jr. Associates by David G. McNitt, Cherry Hill, N.J., for General Motors Acceptance Corp.

OPINION

ROSEMARY GAMBARDELLA, Bankruptcy Judge.

The matter before this court is a motion filed on September 28, 1989 on behalf of creditor General Motors Acceptance Corporation ("GMAC" or "Creditor") to compel the debtors to assume or reject an unexpired lease. The motion seeks inter alia an order compelling debtors to assume or reject a lease for a 1987 Buick Century automobile, vehicle identification number ("VIN") 1 G4AH81W2H6435895, within ten (10) days of the entry of such order. In GMAC's application in support of its motion GMAC also seeks to compel the debtors' rejection and termination of the lease; modify the automatic stay under Section 362; and direct turnover of the leased automobile which is in the debtors' possession to GMAC. The following constitutes this court's findings of fact and conclusions of law.

On July 11, 1989 Debtors Bruce Wallace and Eileen Wallace ("Debtors") filed a Chapter 13 petition under the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, and the Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986 ("Bankruptcy Code"). In conjunction with their petition, the Debtors filed a Chapter 13 plan which provides for the total payment of $377.82 monthly to the Chapter 13 Standing Trustee for sixty (60) months to cure mortgage arrearages to Beneficial Mortgage Corporation and Beneficial Financial Company on two residential mortgages. Also included in the plan was a "cramdown" of GMAC's claim in the subject vehicle to $11,906.25 payable in 60 monthly payments of $198.44 of the total monthly plan payment. The plan provided that unsecured creditors would receive no dividend. By Order dated October 19, 1989, the Debtors' Chapter 13 case was dismissed for failure to attend the confirmation hearing scheduled on October 18, 1989. At a hearing conducted on November 15, 1989, the Debtors' Chapter 13 case was subsequently reinstated upon verification of insurance on the subject vehicle. Proof of insurance was supplied to GMAC. By order dated January 11, 1990, the Chapter 13 petition was reinstated.

On July 2, 1987, Debtors and GMAC entered into an agreement entitled "Lease Agreement." Debtors were described as "Lessee (and Co-lessee if any)" and GMAC was described as "Lessor." The vehicle was described as a 1987 Buick Century ("leased vehicle"). The agreement provided for a total of 48 monthly payments of $280.62 for a total lease price of $13,469.76. On July 6, 1987 GMAC purchased the vehicle from Masson Buick, Inc. for the sum of $13,437.00.

Paragraph 8 of the lease agreement provided Debtors with an option to purchase the vehicle as follows:

8. OPTION TO PURCHASE. Provided you are not in default, you will have the option to purchase the vehicle at the scheduled termination of this lease (Item 6 above) for its Fair Market Value if you advise Lessor no later than 30 days prior to the scheduled termination. "Fair Market Value" will be the average of the retail and wholesale values stated in a then current vehicle guidebook selected by Lessor. For this purpose, the value established will be the "clean" or "average" value of a like vehicle including options and with the mileage that would have accrued if the vehicle had been operated in accordance with the Excess Mileage Charge provision of the lease. Upon early termination, you will have the option to purchase the vehicle for the greater of its Fair Market Value or the amount due Lessor under Paragraph 12(c)(i) in addition you will also be responsible for any fees and taxes in connection with the purchase of the vehicle.

Paragraph 12 entitled "Early Termination and Default" stated:

12. EARLY TERMINATION AND DEFAULT.

(a) Provided you are not in default, you may terminate this lease prior to its scheduled termination (Item 6 above) if you give the Lessor 15 days written notice. Upon early termination, your obligation will be determined under Paragraphs 12(c)(i) and 12(c)(ii).

(b) You will be in default if any of the following occur: (1) You do not make a payment when due; (2) You or your property are the subject of a proceeding in bankruptcy, receivership or insolvency or you make an assignment for the benefit of creditors; (3) You fail to comply with the insurance requirements of the lease; (4) You fail to maintain or repair the vehicle as required by the lease; (5) You have made any material misrepresentation on your Lessee Statement; (6) You fail to answer traffic summons or pay fines when due; or (7) You fail to comply with any other terms or conditions of the lease. If you are in default, Lessor may terminate this lease prior to the scheduled term. Your obligation to Lessor will then be determined in accordance with Paragraphs 12(c)(i) and 12(c)(ii).

(c)(i) Upon early termination, Lessor will calculate the remaining amount you owe by totalling the unmatured Fixed Monthly Rental Charges for the remaining scheduled term. Lessor then will add the residual value of $4,414.92 plus any past due Monthly Payments and additional amounts owed by you and subtract any unearned Charges. The unearned Charges will be determined by applying actuarial method to the amount of $3,685.44.

(c)(ii) If the vehicle is not purchased by you under the provisions of Paragraph 8 above, Lessor will sell it at wholesale in a commercially reasonable manner and apply the greater of the amount of the net proceeds as defined below or the residual value to the amount determined in Paragraph 12(c)(i). If there is a balance due, you agree to pay it promptly. Any surplus will be kept by Lessor. To arrive at the net proceeds of sale, Lessor will subtract from the proceeds of sale the reasonable costs of preparing the vehicle for sale and selling it. If Lessor terminated the lease pursuant to Paragraph 12(b), then Lessor also will subtract the costs of taking and storing the vehicle, and reasonable attorney\'s fee if permitted by law.

(d) To the extent that the amount you owe is based on the value of the vehicle at the end of the lease term, if you disagree with the value Lessor assigns to the vehicle, you may obtain at your expense, from an independent third party agreeable to you and Lessor, a professional appraisal of the wholesale value of the vehicle which could be realized at sale. The appraisal value shall then be used as the actual value.

Paragraph 24 of the lease agreement provides:

24. OWNERSHIP. This is a lease only and Lessor remains the owner of the vehicle. You will not transfer, sublease, rent, or do anything to interfere with Lessor\'s ownership of the vehicle. You and Lessor agree that this lease will be treated as a true lease for Federal Income Tax purposes and elect to have Lessor receive the benefits of ownership (IRC sec. 168(f)(8)).

The two-page agreement contained in total 29 paragraphs the additional details of which will be discussed infra as they become relevant to the matter before this court. The certificate of title issued by the State of New Jersey Division of Motor Vehicles is in the name of GMAC.

GMAC brings this motion to compel Debtors to assume or reject the automobile lease. In response, Debtors argue that the lease agreement is no longer a "true lease", but rather a security agreement by virtue of Debtors exercising the option to purchase by filing a Chapter 13 petition and plan and proposing to pay to GMAC the fair market value of the vehicle. In essense, Debtors argue that the lease agreement was a "true lease" when it was executed on July 2, 1987, but that it was converted to a "sale" by the Debtors' filing of the Chapter 13 petition. The Debtors further assert that all of GMAC's rights and remedies must be in the context of a sale and that there was no agreement giving GMAC a security interest in the vehicle. The Debtors assert that since GMAC has not perfected a security interest in the vehicle pursuant to N.J.S.A. 39:10-11, its claim is unsecured and that a modification of the plan will follow pending the determination of this motion. In reply to Debtors' arguments, GMAC claims that under the lease itself and § 1322(b)(7) of the Bankruptcy Code, Debtors cannot elect the option to purchase by the mere means of filing a petition and plan. GMAC argues that the lease agreement is a "true lease", that the question of GMAC's interest in the motor vehicle is not properly before this court by motion, and Debtors are required to bring an adversary complaint in order for this court to determine the question of GMAC's interest in the automobile.

It appears undisputed that the Debtors made 24 payments under the lease and that the last payment was received on June 21, 1989. The Debtors' Chapter 13 petition was filed on July 11, 1989. The Debtors are due, according to the GMAC, for all payments since July 2, 1989.

Preliminarily, GMAC raises certain procedural objections to the defenses raised by the Debtors to this motion. On September 14, 1989 GMAC filed its proof of claim asserting that the Debtors were liable to GMAC on account of an "Automobile Lease Agreement" in the amount of $9,571.27. GMAC takes the position that under Bankruptcy Rule 3001(f) "A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim" and that Section 502(a) further provides that "A claim or interest, proof of which is filed under Section 501 of this title is deemed allowed, unless a party in interest . . . objects." GMAC asserts that it has received no objection to its proof of claim. GMAC also contends that while Bankruptcy Rule 6006(a) provides that actions...