Borrower Who Surrenders House in Bankruptcy May Not Oppose Foreclosure Proceeding

Servicers realized a significant victory in the recent Eleventh Circuit decision in In re Failla v. Citibank, N.A. No.15-15626, 2016 WL 5750666 (11th Cir, October 4, 2016), when the Court held that a debtor who surrenders his house in bankruptcy may not oppose a foreclosure action in state court.  The Eleventh Circuit has jurisdiction for Alabama, Florida, and Georgia.

After the borrowers filed for bankruptcy in 2011, pursuant to 11 U.S.C. § 521(a)(2) they filed a statement of intention to surrender their house because the mortgage balance exceeded its value.  The trustee, in turn, abandoned it back to the Faillas pursuant to 11 U.S.C. § 554.  The borrowers remained in occupation and contested the loan servicer’s foreclosure proceeding.  Citibank, the plaintiff in the foreclosure case, filed a motion in the bankruptcy case to compel surrender.  The court granted the motion and the district court affirmed.

On appeal the Eleventh Circuit held that in the event the debtor elects to surrender his property pursuant to § 521(a)(2), he does so both to the trustee and the creditor.  If the trustee then abandons the property, the effect of the debtor’s surrender is that he must give up his possessory rights to the property.  The Court conducted a careful examination of the meaning of “surrender”, with reference to several external sources.  Rejecting the debtor’s argument that “surrender” in the context of § 521(a)(2) applied only with respect to the trustee “makes sense because a debtor who decides to surrender his collateral must surrender it to both the trustee and the creditor. The debtor first surrenders it to the trustee, id. § 521(a)(4), who decides whether to liquidate it, id. § 704(a)(1), or abandon it, id. § 554. If the trustee abandons it, then the debtor surrenders it to the creditor, id. § 521(a)(2).”  Faillas at *3.  This is because ““surrender” in section 521(a)(2) is used with reference to the words “redeem” and “reaffirm,” and those words plainly refer to creditors.  A debtor “redeems” property by paying the creditor a particular amount, and he “reaffirms” a debt by renegotiating it with the creditor.  See Taylor, 3 F.3d at 1514 n.2; see also 11 U.S.C. §§ 524(c), 722.  Because “[c]ontext is a primary determinant of meaning,” Scalia & Garner, supra, at 167, the word “surrender” likely refers to a relationship with a creditor as well.”  Faillas at *3.

Giving the word “surrender” “its “contextually appropriate ordinary meaning”, id. at *3, the Court agreed with the courts below “that “surrender” requires debtors to drop their opposition to a foreclosure action.”  Id.  This does not mean delivering possession to the creditor, but it does mean the debtors must give up their right or claim to the property.  Id. at *3-4.  Thus, the Court applied “surrender” in the context of a legal relationship rather than a physical action.  Id. at *4.  Applied to a foreclosure proceeding, this means that “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.””  Id.  

The Court was concerned about the danger of debtors taking undue advantage of the bankruptcy code by obtaining “a discharge in bankruptcy based, in part, on their sworn statement to surrender and “enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.”“ Id. (citations omitted).  The Court was also concerned about debtors saying one thing in bankruptcy court and another in state court, making a mockery of the legal system by taking inconsistent positions.  Id. at *5.  “In bankruptcy, as in life, a person does not get to have his cake and eat it too.”  Id.

The debtors also contended that the bankruptcy court lacked the authority to order the Faillas to stop opposing the foreclosure action; instead, it was limited to lifting the automatic stay to allow Citibank to foreclose in the ordinary course.  The Court rejected that argument, holding that bankruptcy courts “have broad powers to remedy violations of the mandatory duties section 521(a)(2) imposes on debtors” and “can “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” 11 U.S.C. § 105(a), which includes section 521(a)(2).  Bankruptcy judges also have “broad authority ... to take any action that is necessary or appropriate ‘to prevent an abuse of process.’ ”  Id. (citations omitted).  § 105(a) provides “the statutory authority of bankruptcy judges to remedy abuses that occur in their courts.  And there is nothing strange about bankruptcy judges entering orders that command a party to do something in a nonbankruptcy proceeding. Bankruptcy courts “regularly exercise jurisdiction to tell parties what they can or cannot do in a non-bankruptcy forum.”  Id. at *6.

This decision provides a powerful tool to creditors in the context of a surrender of the secured property where the borrower continues, nevertheless, to contest the foreclosure case.  It is particularly helpful in states with lengthy foreclosure processes but may be useful in all states where the borrower is either defending a judicial foreclosure action or has filed an independent civil action seeking to block or delay the foreclosure.