In Re Bacon
OPINION
Before the Court is the Motion of Creditor Chester Housing Authority (“CHA”) and its Receiver Robert C. Rosenberg, Esquire
1
for Relief from Stay (the “Motion”) seeking to enforce its rights and remedies under a lease (the “Lease”) with the debtor Linda Veronica Bacon (“Debtor”) for a public housing unit located in Chester, Pennsylvania. Alleging
As the importance of the legal issue framed by the facts of this ease surpasses the case itself, the parties requested and were granted leave to file extensive memoranda which have been received and reviewed. The matter is therefore ripe for decision.
BACKGROUND
The relevant facts are simple and undisputed. CHA is a governmental entity that operates the public housing complex where Debtor resides. Pursuant to the Lease dated April 21, 1995, Exhibit M-l, Debtor agreed to a monthly rent of $187.00, a sum determined as a percentage of her income. The remaining rent is paid by a HUD subsidy. According to CHA’s tenant account ledger, Debtor owed $9,967.76 as of the filing of her Chapter 7 bankruptcy petition on February 11, 1997. Exhibit M-7. Prior to the filing, CHA had secured a disposition from the Federal Court Master for Arbitration, United States Magistrate Judge Angelí ordering Debtor’s eviction, Exhibit M-2, followed by an Order of Eviction from United States District Judge Norma Shapiro dated January 24, 1997, Exhibit M-6. Eviction proeeedings were stayed by the bankruptcy filing.
Gloria Satriale, Esquire was appointed Chapter 7 trustee in Debtor’s case. She did not assume the Lease pursuant to § 365(d)(1) within 60 days of the order for relief.
DISCUSSION
A.
I begin my analysis by recognizing that this is a Chapter 7 case. Pursuant to § 365(d)(1), in a ease under Chapter 7, if the trustee does not assume or reject an unexpired lease of residential real property within 60 days of the order for relief, the lease is deemed rejected. Not surprisingly, trustee Satriale took no action with respect to the Lease and accordingly it was deemed rejected on or about April 10,1997. While there is considerable disagreement on the ultimate issue to be decided here, it is generally agreed (including by CHA in its Memorandum at 7) that the automatic rejection of a lease pursuant to § 365(d)(1) effects an abandonment of the lease to the debtor.
3
In re Day,
The reason for this result was articulated long ago by former Bankruptcy Judge Émil Goldhaber in
In re Rush,
It is crystal clear from that language that a discharge only prevents a creditor from proceeding against the debtor on the debt as a personal liability____ Here the discharge of the debtor will eliminate the debtor’s personal liability for that debt but does not eliminate any of the other consequences of that debt. Therefore, since the failure to pay rent was a breach of the lease, we conclude that the landlord may pursue any remedy to which it is entitled under state law for that breach except a remedy against the debtor personally to collect the money due. Such action would not be contrary to the provisions of § 524(a) as stated above.
B.
Before addressing the ultimate question concerning the applicability" of § 525(a) to protect public housing benefits, I must make a-threshold determination concerning the viability of the "Lease for if the Lease has been terminated, as CHA contends, § 525(a) cannot help' this Debtor even if it is applicable to this situation. It is first important to note that lease rejection is not synonymous with lease termination, contrary to the view expressed by CHA. The former is a bankruptcy concept that determines whether the estate will administer the lease asset. Jay L. Westbrook, supra at 228 (“assumption and rejection are merely bankruptcy terms for performance or breach by the trustee”). As stated by another often cited scholar of executory contracts in bankruptcy:
Rejection’s effect is to give rise to a remedy in the non-debtor party for breach of the rejected contract, typically a right to money damages assertable as a general unsecured claim in the bankruptcy ease. Rejection has absolutely no effect upon the contract’s existence; the contract is not cancelled, repudiated, rescinded, or in any fashion terminated.
Michael T. Andrew, Executory Contracts Revisited. A Reply to Professor Westbrook, 62 U. Colo. L.Rev. 1,15 (1991).
Termination, on the other hand, is a state law concept that is prescribed, by the common law or statutes of the state in which the property is located.
Butner v. United States,
Since the Lease had not been terminated as of the bankruptcy filing, I turn now to the question of whether a public housing landlord should be granted relief from stay to prosecute an eviction action where the tenant’s sole default is non-payment of prepetition rent and the lease has been rejected in the tenant’s bankruptcy case. 7
C.
Section 525(a) protects a debtor against discriminatory treatment. It states that except as provided in certain laws not applicable here:
a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
Section 525(a) protects licenses, permits, charters, franchises and “other similar grants” thereto. The eases that have applied § 525(a) in the public housing context have concluded, usually without much discussion, or appear to assume without any discussion, that public housing is a governmental grant. Debtor finds support for that conclusion in the legislative history of § 525(a) which states:
In addition, the section is not exhaustive. The enumeration of various forms of discrimination against former bankrupts is not intended to permit other forms ofdiscrimination. The courts have been developing the Perez rule. 8 This section permits further development to prohibit actions by governmental or quasi-govemmental organizations that perform licensing functions, such as a State bar association or a medical society, or by other organizations that can seriously affect a debtor’s fresh start, such as exclusion from a union on the basis of discharge of a debt to the union’s credit union.
H.R.Rep.No. 595, 95th Cong., 1st Sess. pp. 366-67, 1977 U.S.Code Cong. & Admin.News pp. 5963, 6321-6323; S.Rep.No. 989, 95th Cong. 2d Sess. 81, 1977 U.S. Code Cong. & Admin.News pp. 5787, 5867. 9
Relying on this legislative history, the Court in
In re Gibbs,
A contrary view, albeit
dicta,
was expressed by another Bankruptcy Court in this Circuit in
In re Lutz,
[Section 525] does not cure contractual defaults and does not require governmental units to continue a contractual relationship with a debtor when, pursuant to the terms of that contract, the prepetition default constitutes cause for terminating the contractual relationship. Unless it is shown that the creditor was attempting to collect a prepetition debt, or was otherwise discriminating against the debtor, a governmental unit’s termination of a lease based on a prepetiton default is not per se a violation of section 525.
Id. at 705. Notably, the Court’s focus is on the absence of discriminatory conduct, suggesting that had it been evidenced and the landlord a governmental entity, § 525(a) could be applicable to the grant of public housing benefits.
In a pair of Chapter 7 cases emanating from the Western District of Pennsylvania Bankruptcy Court last year, § 525(a) was found not to preclude public housing landlords from securing relief from stay to evict Chapter 7 debtors. In
In re James,
Two weeks later in
In re Collins.
§ 525(a), while requiring a governmental creditor to continue to provide certain “grant[s],” nevertheless does not require that such entity continue in particular pri- or contractual relationships with a debtor provided that it continues to provide those “grant[s].” Brown v. Pennsylvania State Employees Credit Union,851 F.2d 81 , 85 (3d Cir.1988). 14 The Housing Authority in this case merely sought to end its particular contract with the debtor in accordance with the terms of such agreement while at the same time, on a space available basis, continuing to provide to the debtor an identical housing subsidy. We find that § 525(a) does not require any more than this.
Id. at 565-66. 15
As evidenced by the foregoing, there is a diversity of analytical underpinnings to the conflicting decisions on the applicability of § 525(a) to prevent eviction of a public housing tenant based on failure to pay a dischargeable debt. Regretfully, neither the Third Circuit Court of Appeals, nor any circuit court of appeals for that matter, has been presented with this precise issue. However, in formulating a construct for the application of § 525(a) to the instant facts, I am mindful of certain general principles that the Third Circuit has enunciated in considering the application of § 525(a) in another context. In
Watts, supra
note 12, the Court rejected the debtors’ invocation of § 525(a) to require the Pennsylvania Housing Finance Agency to continue to fund mortgage payments on behalf of participants in a loan
[E]ven if we were ... to venture beyond the confines of the language of the statute, we do not believe that the suspension of the mortgage financing at issue in this case undermines the ‘fresh start’ policy of the Code. While the challenged provision of HEMAP suspends mortgage assistance during bankruptcy because foreclosure is prohibited, assistance can be reinstated once the stay is lifted if foreclosure is still threatened; hence, the debtor’s fresh start is not affected. Although plaintiffs complain that ‘Late charges and other foreclosure costs’ accrued while loan payments were suspended, ... the fresh start policy does not require the State to insulate a debtor from any and all adverse consequences of a bankruptcy filing. Ultimately what the plaintiffs seek is a requirement that PHTA use the limited resources in the Homeowner’s Emergency Assistance Fund to continue paying their mortgages, to the possible detriment of other financially distressed homeowners, when foreclosure on their own homes is prohibited under the Bankruptcy Code.
Id. at 1094 (citations omitted).
Sudler and its progeny are conceptually inconsistent with the Third Circuit’s reading of § 525. These eases in effect equate discharge of the debt with payment of the debt when the creditor is a governmental entity. 16 See D. Keating, Offensive Uses of the Bankruptcy Stay, 45 Vand. L.Rev. 71, 101-106 (1992). As such, they go beyond the harm sought to be ameliorated in Perez, the result of which is codified as § 525(a). In Perez, the Supreme Court held that the state could not refuse to renew a driver’s license for nonpayment of a tort judgment that had been discharged in bankruptcy. A contrary result was inconsistent with the fresh start principles of a bankruptcy discharge. Notably the debtor did not seek relief from the judgment creditor, whose coercive action was prohibited by §§ 362 and 524, but rather the government that was conditioning the availability of a license on the existence of the unpaid judgment. Thus, the issue in § 525(a) is not collection of discharged debt, ably dealt with in other sections, but refusal to deal with the debtor because of his bankruptcy and its consequences. While there is no proscription on a private party’s refusal to deal, there is such a prohibition when the party is a governmental entity and the dealings are in the nature of licenses, permits, charters, franchises or similar grants for due to the exclusivity of those benefits, their absence will impair the debtor’s fresh start.
Instructive in defining the parameters of § 525(a) is the analysis of my colleague Judge Bruce Fox in
In re Saunders,
Section 525(a) instead was intended to reach non-creditor governmental (or quasi-governmental) entities that, in their quest to protect the public interest, wrongfully discriminate against debtors and frustrate the “fresh start” policy of the bankruptcy code by denying property interests not obtainable through the private sector. Cf. In re Exquisito Services, Inc., 823 F.2d 151 (5th Cir.1987) (while § 525(a) does not prohibit all governmental discrimination, it does bar a governmental refusal to renew food services contract where that contract is awarded under a program designed to provide governmental assistance to small and minority owned businesses). Unless the governmental entity was acting as an agent for a creditor, see In re Colon [,102 B.R. 421 (Bkrtcy.E.D.Pa. 1989)], such conduct would not run afoul of § 362. See Matter of M. Frenville Co.,744 F.2d 332 , 335 (3d Cir.1984), cert. denied,469 U.S. 1160 ,105 S.Ct. 911 ,83 L.Ed.2d 925 (1985) (automatic stay does not apply to entity that holds no prepetition claim). See also Taylor v. First Federal Sav. & Loan Assoc.,843 F.2d 153 , 154 (3d Cir.1988).
Id. at 787.
Consistent with this analysis, it is helpful to separate CHA’s interest as a creditor and role as grantor of a public benefit. 17 As a creditor, CHA seeks to implement its in rem remedies against the leasehold by evicting the Debtor. The debtor/creditor relationship is not implicated by § 525(a) so long as it is not being utilized to deprive the Debtor of a protected grant. CHA acknowledges that it does not seek to preclude Debtor from exercising her right to participate in public housing programs for which she is otherwise eligible. Were that the case, § 525(a) would be applicable since the right to participate in the public housing program is a “similar grant.” To find public housing benefits beyond the reach of § 525(a) protection would allow public housing authorities to forever deny participation to otherwise eligible persons because of a bankruptcy filing or unpaid discharged debt absent separate regulation on the subject. This is plainly contrary to the fresh start principles of the Code. And indeed none of the cases denying § 525(a) protection to a public housing tenant has held or suggested that it cannot be invoked upon a housing authority’s refusal to grant public housing benefits to a debtor with unpaid, but discharged, debt to the landlord.
This focused definition of the “grant” avoids the difficult interpretation of the “solely because” requirement which has resulted in some decisions that are hard to legally or factually rationalize.
See, e.g., Robinson,
My decision is intended to ensure the protection contemplated by
Perez
while allowing CHA to implement its rights as a creditor. I recognize the result of this rule may be the temporary loss of a public housing unit for the Debtor as she awaits the assignment of a new unit. The hardship of this consequence will be a function of the demand for housing and the availability of units.
19
However, as the Court noted in
Watts,
“the fresh start policy does not require the State to insulate a debtor from any and all adverse consequences of a bankruptcy filing.”
Notes
. The Receiver was appointed by Order of the District Court for the Eastern District of Pennsylvania dated June 4, 1994 to replace the United States Department of Housing and Urban Development ("HUD”) to "hold, protect, and preserve, manage and control" all real and personal property of CHA. Specifically, “[t]he Receiver shall rebuild CHA’s capacity to manage and oversee its public housing program in accordance with applicable laws and regulations.” Exhibit A to Memorandum of Law in Support of Motion. Pursuant to the federal receivership proceedings, landlord/tenant actions are adjudicated in the District Court.
. If there are post-petition defaults, a disputed issue in this case, CHA would be granted relief from stay to commence new enforcement proceedings based on the new default. Since there are certain requirements of notice and hearing afforded the tenant upon default and prior to eviction, a new enforcement action would delay CHA's ability to secure complete relief. If a new enforcement action was all CHA sought to achieve in this case, it could have awaited the passage of time since the Debtor's discharge is accompanied by the automatic termination of the stay. 11 U.S.C. § 362(c)(2)(C). Indeed a review of the docket in this case reveals that the discharge was granted after the hearing and during the contemplated briefing period in this contested matter. Thus, the stay has lifted. However, since CHA seeks to enforce its remedies under the Lease with respect to pre-petition monetary defaults and the Debtor contends that would be a violation of § 525, I do not consider the Motion to be moot. I will not, however, address the alleged post-petition arrears since CHA is free by reason of the termination of the stay to enforce its remedies with respect to such a default if one exists today.
. The Code treats non-residential and residential leases differently upon rejection, requiring the trustee to deliver the non-residential real property to the lessor but imposing no such requirement with respect to residential real property. 11 U.S.C. § 365(d)(4).
. As this is the framework for a Chapter 7 lease rejection, I find the arguments concerning the interplay between the § 365(d) right of assumption and the § 525 right to non-discriminatory treatment irrelevant except to suggest the consequences of Debtor’s requested ruling in a Chapter 13 case. The Chapter 7 debtor has no § 365 right of assumption; it is a right of the trustee. Accordingly the cases that analyze the debtor's rights in terms of lease assumption are not helpful in a Chapter 7 context.
. For this reason, the cases cited from other jurisdictions on the issue of whether or not a lease has been terminated are not relevant because the state laws are not the same as the law of Pennsylvania.
. Contrary to CHA’s contention, that Order did not find the lease had been terminated but merely recited that CHA "has brought proceedings to terminate the Lease.” Thus, CHA's contention that the District Court’s final eviction Order is dispositive in this matter is without merit.
. The Debtor accurately notes that I have addressed this question before in
In re Jackson,
No. 94-18512DWS (May 4, 1995). In that unpublished decision, I answered that question in the negative, joining those courts that have applied ¶ 525(a) to tenants of federally-subsidized housing to protect what have been characterized as their "governmental grant of a rent subsidy.”
See, e.g., Curry v. Metropolitan Dade County (In re Curry),
. Section 525(a) codified the result of
Perez v. Campbell,
'(o)ne of the primary purposes of the Bankruptcy Act' is to give debtors 'a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.’
. CHA likewise finds support in the legislative histoiy for its view that public housing is not a grant similar to a license, permit, charter, or franchise by noting the observation that:
The section is not so broad as a comparable section proposed by the Bankruptcy Commission, H.R. 31, 94th Cong., 1st. Sess. § 4-508 (1975), which would have extended the prohibition to any discrimination, even by private parties.
Id. However, the legislative history then quickly notes:
Nevertheless, it is not limiting either, as noted. The courts will continue to mark the contours of the anti-discrimination provision in pursuit of sound bankruptcy policy.
Id.
.Presaging his recent decision in
In re Day,
. The Courts in
Housing Authority of City of Decatur v. Caldwell (In re Caldwell),
. The Court citing
Watts v. Pennsylvania Housing Finance Company (In re Watts),
. The
Collins
Court focused on rejection and the abandonment of those leases to the debtor in not only Chapter 7 but Chapter 11 and Chapter 13 and the "windfall” to the debtor of being allowed to take advantage of the lease notwithstanding the contractual default. The Court did not mention the other possibility, recognized in
Day,
that absent assumption or rejection the lease will pass through bankruptcy to the reorganized debtor and the prepetition monetary defaults wiE be discharged.
. While I concur with the Collins Court in this regard, I do not find Brown, a case dealing with §§ 362 and 524, not § 525 as the creditor was not a governmental entity, authority for the proposition stated. Section 525(a), where applicable, provides a layer of protection to a debtor in addition to the discharge injunction of § 524. The breadth of that protection is what courts have been attempting to define.
. Most recently, the Bankruptcy Court for District of Vermont weighed in on the subject, albeit also gratuitously since the lease in question was found to have been terminated under Vermont law. In
In re Couture,
When an executory contract or lease is not assumed by the estate, the ‘breach’ rule simply coordinates the treatment of the non-debtor party with that of all other creditors by creating a presumption, conclusive for claims allowances purposes, that the debtor will not perform. The ‘breach’ rule thus is not in any sense designed to diminish the non-debtor’s rights vis-a-vis the estate, but rather to buttress them, relief to the debtor is correspondingly enhanced, because the debtor’s obligation on the contract will be within the scope of the discharge.
Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding Rejection, 59 U. Colo. L.Rev. 845, 873 (1988).
. Moreover, their logical extension in Chapter 13 is to read § 525(a) as overriding § 365, a proposition I find no support for in the Code, legislative history or principles of statutory interpretation. I particularly find questionable the conclusion of
Curry
that § 525(a) is more specific than § 365(d)(2) and, consequently, that under well recognized principles of statutory construction, it must control the conflicting more general provision. Rather I agree with CHA,
citing James,
. I respectfully disagree with my colleague Chief Judge Scholl on this critical point. Where he views the protected § 525(a) "grant” as the debtor’s public housing lease including the contract and its subsidized rent component,
see Day,
. It is not clear that CHA attempts to legitimatize its action by contending that it was motivated by the rejection of the Lease. Aside from its view that the Lease was terminated by reason of its actions in the District Court, it justifies its action as only seeking to "complete the termination of its contractual relationship with Debt- or.” Yet the reason for such intention is her failure to pay prepetition dischargeable rent arrears.
. CHA, in its brief, argues that Sudlerand its progeny have created a "public housing tenant exception” that causes tenants to refuse to pay rent until the eve of eviction, protracted by the due process requirements of public housing law, and then to file bankruptcy with no adverse consequences to their tenancies. The resulting loss of rental income, it states, prejudices the CHA receivership and all tenants whose services are impaired by CHA’s lack of funds. Whether that tenant practice is widespread and whether its consequences are as CHA has argued is not part of this Court's consideration as they implicate matters of policy that are provinces of a legislative, not judicial determination. Moreover, my ruling is not intended to implement CHA’s desire to replace the debtors with unpaid dischargeable debt with other tenants perceived to be better credit risks. In holding that § 525(a) protects a debtor’s right to public housing, presumably were there no waiting list for a unit, there would be no reason to evict the debt- or. However, to the extent that there are equally eligible financially disadvantaged persons waiting for housing, debtor’s fresh start is not intended to be a head start and she will have to take her place in line to gain access to a unit.