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11th Circuit Rules on Bankruptcy Surrender

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Michael J. McCormick
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

David and Donna Failla owned a house in Boca Raton, Florida. They defaulted on their mortgage in 2009. Citibank filed a foreclosure action in a Florida court. The Faillas commenced a Chapter 7 bankruptcy proceeding in 2011 and filed a statement of intention to surrender the house. Because the home had a negative value, the Chapter 7 trustee “abandoned” it back to the Faillas.

After their Chapter 7 discharge, the Faillas continued to live in the house while they contested the foreclosure action. Citibank filed a motion to compel surrender in the bankruptcy court. Citibank asserted that the Faillas’ opposition to the foreclosure action contradicted their statement of intention to surrender the property.

The bankruptcy court granted Citibank’s motion to compel surrender and ordered the Faillas to cease opposing the foreclosure action. The bankruptcy court explained that if the Faillas did not comply with its order, it might “enter an order vacating [their] discharge.” The district court affirmed on appeal.

The Faillas then appealed to the Eleventh Circuit Court of Appeals, where the appellate court made two rulings:

1. Bankruptcy Code section 521(a)(2) prevents debtors who surrender their property from opposing a foreclosure action in state court.
2. The bankruptcy court had the authority to order the Faillas to stop opposing the bank’s foreclosure action.

Section 521(a)(2) requires a debtor to file a statement of intention regarding the retention or surrender of property securing various debts. This section of the Bankruptcy Code also requires the debtor, within 30 days after the first setting of the 341 hearing, to perform his intention with respect to such property.

The court of appeals went on to say that the Bankruptcy Code “requires debtors who file a [‘]statement of intent to surrender[’] to surrender the property both to the trustee and to the creditor. Even if the trustee abandons the property, debtors’ duty to surrender the property to the creditor remains.” [In re Failla, 838 F.3d 1170 (11th Cir. 2016)].

The Eleventh Circuit also agreed with the bankruptcy court and the district court that “surrender” requires debtors to drop their opposition to a foreclosure action. The Bankruptcy Code does not define the word “surrender,” so the court gave the word its “contextually appropriate ordinary meaning.”

Because one meaning of “surrender” is the “giving up of a right or claim,” debtors who surrender their property can no longer contest a foreclosure action. “When the debtors act to preserve their rights to the property ‘by way of adversarial litigation,’ they have not ‘relinquish[ed] ... all of their legal rights to the property, including the rights to possess and use it.’” [Citing In re White, 487 F.3d 199, 206 (4th Cir. 2006) (emphasis omitted)].

The court of appeals was also concerned with notions of fairness, quoting In re Guerra, 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016): “The concern here is that the Debtor is making a mockery of the legal system by taking inconsistent positions. In an effort to obtain her chapter 7 discharge, the Debtor swears — under the penalty of perjury — an intention to ‘surrender’ her property. In other words, the Debtor is representing to the Court that she will make her property available to the Bank by refraining from taking any overt act that impedes the Bank’s ability to foreclose its interest in the property. Yet, once she receives her discharge, the Debtor in fact impedes the Bank’s ability to foreclose its mortgage.”

On the second question, whether the bankruptcy court had authority to stop the debtors from opposing the foreclosure sale, the Eleventh Circuit said: “… bankruptcy courts are not limited to lifting the automatic stay. Bankruptcy courts have broad powers to remedy violations of the mandatory duties section 521(a)(2) imposes on debtors.” Moreover, the court continued, under Section 105 of the Bankruptcy Code, bankruptcy judges have “broad authority ... to take any action that is necessary or appropriate ‘to prevent an abuse of process.’ … A debtor who promises to surrender property in bankruptcy court and then, once his debts are discharged, breaks that promise by opposing a foreclosure action in state court has abused the bankruptcy process.”

Legislative Note: House Bill 471 was introduced in the Florida State Senate in January 2017. The bill would allow a lienholder to submit any document from a mortgagee’s bankruptcy case that suffices as an “admission by the defendant” that he or she intended to surrender the property. Provided the document in question isn’t withdrawn, it can (when combined with a discharged bankruptcy) serve as a “rebuttable presumption” that the defendant has surrendered interest in the property and waived any defense to the foreclosure.

Copyright © 2017 USFN and McCalla Raymer Leibert Pierce, LLC. All rights reserved.
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