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Email: firstname.lastname@example.org[/info_box][info_box]Trevor is an attorney based in Clark Partington’s Tallahassee office. He specializes in commercial litigation including bankruptcy and appeals.[/info_box][/vc_column][vc_column width=”1/2″][vc_column_text]
11th Circuit Holds Section 521(a)(2) Surrender Precludes Foreclosure Defense
The United States Court of Appeals for the Eleventh Circuit recently issued an opinion in Failla v. Citibank, N.A. (In re Failla), No. 15-15626, 2016 WL 5750666 (11th Cir. 2016) addressing what it means for a debtor to “surrender” property under 11 U.S.C. § 521(a)(2). In Failla, the debtors were residential mortgagees that defaulted on their mortgage with Citibank in 2009 and filed a Chapter 7 bankruptcy petition in 2011. During the bankruptcy case, the debtors admitted ownership of the house, the validity of the mortgage and that it encumbered the house, and that the debt exceeded the value of the house. They filed a statement of intention under section 521(a)(2) that they would surrender the house. Because the property had no value to the bankruptcy estate, the trustee abandoned the property back to the debtors. The debtors received their discharge and apparently remained living in the house through the appeal.
In state court, however, the debtors continued to contest Citibank’s foreclosure action. Citibank moved in the bankruptcy court to compel the surrender, asserting that the debtors could not both surrender the property and fight foreclosure at the same time. The bankruptcy court agreed, holding that the debtors “cannot continue to defend and/or contest the foreclosure in the State Court which is in effect resisting the surrender of the Property to CitiBank.” 529 B.R. 786, 792 (Bankr. S.D. Fla. 2014). The bankruptcy court warned that failure to surrender the property could jeopardize the debtors’ discharge. The district court affirmed and the debtors appealed to the Eleventh Circuit.
On appeal, the debtors argued that there was nothing inconsistent with a surrender in bankruptcy court and a full defense of the foreclosure in state court. They also added a new argument for the first time that the bankruptcy court’s power was limited solely to granting CitiBank stay relief as opposed to the order compelling the debtors personally. The Eleventh Circuit heard the latter question on the merits as an “important, unsettled question of law.”
Under section 521(a)(2), when an individual debtor’s schedules reveal secured debts, a statement of intention must be filed that requires a debtor to declare either an intention to surrender the collateral, declare that the collateral is exempt property, state an intention to redeem the property, or state an intention to reaffirm the debts secured by the property. Once that election is made, section 521(a)(2)(B) requires the debtor to act to honor that choice. The issue became whether contesting the foreclosure was consistent with the declaration of an intention to surrender the house. The Eleventh Circuit concluded it was not.
Statutory Interpretation and Bankruptcy Policy Both Support Compelling Debtors to Abandon Defense
The opinion includes an extensive discussion interpreting section 521(a)(2) and related provisions of the Bankruptcy Code to determine that a surrender under section 521(a)(2) is a surrender to both the bankruptcy trustee and the creditor. The Failla court notes that the term “surrender” in context means something more than the word “deliver” used in the Bankruptcy Code to refer to physically turning over property. The court concludes that surrender means “giving up of a right or claim,” which precludes acts to preserve any rights in the property by litigation. Putting the obligation concisely, “Debtors who surrender property must get out of the creditor’s way.”
The opinion then transitions from statutory interpretation to a policy-based discussion, concluding that its definition of surrender is consistent with the Bankruptcy Code. The Failla court sees nothing unfair in its holding, instead focusing on the inconsistency between the debtors’ positions in the bankruptcy and state courts—a reasoning sounding in judicial estoppel. This conclusion makes sense and evokes some of the themes at issue in an earlier Eleventh Circuit case, Taylor v. AGE Federal Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir. 1993), in which the court noted that a debtor can get a discharge while either paying for non-exempt property (by redemption or re-affirmation) or surrendering non-exempt property. It would be improper, however, to allow retention of the property without paying down the debt and without personal liability.
The opinion uses a similar rationale to reject the debtors’ contention that the Bankruptcy Code limits the court’s authority to awarding stay relief, stating that there is broad authority to remedy abuses of the bankruptcy process. The court concludes that a debtor breaks a promise by contesting the foreclosure after surrender and in so doing abuses the bankruptcy process.
While similar cases may arise under distinguishable facts, the Failla opinion takes an emphatic position against a debtor’s defense following surrender.[/vc_column_text][/vc_column][/vc_row]