United States: Surrendering Your Property In Bankruptcy Means You Must Actually Surrender It

Last Updated: October 17 2016
Article by Scott D. Feather and Christopher Smart

The title of this article seems self-evident. Lenders, servicers, and others active in the foreclosure arena these past few years know that it has been anything but. Borrowers surrender property in bankruptcy but, nevertheless, continue to actively contest foreclosure, sometimes even successfully. Here's a situation that may sound familiar:

  • Lender sues to foreclose on mortgaged property. Borrowers deny every substantive allegation in the complaint, including those relating to the loan documents and the default, and raise numerous defenses. The foreclosure action remains pending for months in part because of borrowers' defensive efforts.
  • Borrowers then file a Chapter 7 or 13 petition for bankruptcy. In their bankruptcy schedules, borrowers don't dispute the validity of the mortgage, they identify the lender as a secured creditor having an interest in the mortgaged property, and they identify approximately how much the lender is owed.
  • Thereafter, in their Chapter 7 statement of intention or Chapter 13 plan for reorganization, borrowers indicate an intention to surrender the mortgaged property. The automatic stay imposed by the bankruptcy court is then lifted or the trustee abandons the property, and the lender proceeds with its foreclosure action.
  • Despite surrendering the mortgaged property in the bankruptcy, however, borrowers continue to vigorously defend against the lender's foreclosure action.

The borrowers' actions post-surrender in the above scenario likely seem, to most, inconsistent with their common understanding and usage of the word "surrender." State and federal courts here in Florida, interpreting the meaning of that word as used in the Bankruptcy Code, did not always reach that same conclusion. The Eleventh Circuit has now weighed in on the issue.

In re Failla Requires Borrowers that Surrender Their Property to Get Out of the Creditor's Way

This week, the Eleventh Circuit concluded in In re Failla, an opinion designated for publication, that "surrender," as used in section 521(a)(2) of the Bankruptcy Code, means the "giving up of a right or claim" and "requires debtors to drop their opposition to a foreclosure action." 2016 WL 5750666, at *4 (11th Cir. Oct. 4, 2016).

In re Failla involved a Chapter 7 bankruptcy filed by debtors who were opposing an action to foreclose on property they owned. During the bankruptcy proceedings, the debtors admitted that their house was collateral for a mortgage, that the mortgage was valid, and that their property was under water. They filed a statement indicating their intention to surrender the property. The trustee ultimately abandoned the property back to the debtors. When the lender pursued its foreclosure action, the debtors continued contesting it.

The Eleventh Circuit found such conduct irreconcilable with the meaning of "surrender" under section 521(a)(2). That section requires debtors to file a statement of intention, choosing between a few options as to secured property — one of which is surrender. If debtors choose to surrender the property, they must, of course, actually do it. In a Chapter 7 proceeding, a debtor's obligation to fulfill that stated intention, according to the Eleventh Circuit, does not end if the property is surrendered to the trustee and the trustee abandons it. Rather, a debtor must then surrender the property to the secured creditor — a conclusion the Eleventh Circuit says is compelled by the text and context of the statute itself. Practically speaking, that means debtors "must get out of the creditor's way" and not contest the creditor's efforts to foreclose.

How This Impacts Secured Creditors and Practice Tips Moving Forward

In re Failla provides some clarity on the "surrender" issue. Prior to In re Failla, federal district courts and bankruptcy courts in Florida disagreed regarding the obligations imposed on borrowers in a foreclosure action after indicating their intention to surrender the property in a bankruptcy proceeding. A secured creditor arguing this issue in the Bankruptcy Court for the Middle District of Florida could point to In re Metzler, 530 B.R. 894 (Bankr. M.D. Fla. 2015), a case in which this firm represented the lender in one of the underlying bankruptcy proceedings. In that opinion, Judge Williamson considered the "relatively novel question" at that time of how a debtor surrenders real property in a bankruptcy and concluded that surrender, whether in a Chapter 7 or 13 proceeding, "at a minimum, require[d] a debtor to relinquish secured property and make it available to the secured creditor." In re Metzler, 530 B.R. at 899. If a debtor failed to do so, the secured creditor probably would be able to reopen the bankruptcy case to address the issue if it did not procrastinate. See In re Guerra, 544 B.R. 707, 710–11 (Bankr. M.D. Fla. 2016).

Some Southern District bankruptcy court judges, however, disagreed on the meaning and effect of surrender, at least in the Chapter 7 context. For example, in In re Elowitz, 550 B.R. 603, 609 (Bankr. S.D. Fla. 2016) the court compelled Chapter 7 debtors who had filed a statement of intention to surrender property to cease contesting a foreclosure action and surrender the property to the appropriate lienholder. But In re Elkouby, 2016 WL 798177, at *8 (Bankr. S.D. Fla. Feb. 29, 2016) held "A chapter 7 debtor who indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee." Although the District Court for the Southern District of Florida had held that debtors were not permitted to actively contest a foreclosure action following their surrender, Failla v. Citibank, N.A., 542 B.R. 606 (S.D. Fla. 2015), at least one bankruptcy judge declined to follow that decision. See In re Elkouby, 2016 WL 798177, at *8.

Finally, if in state court, the one Florida appellate decision on "surrender" aligned itself with the conclusions reached in Metzler, providing support for a secured creditor's position regarding a borrower's obligations post-surrender. Rivera v. Bank of Am., N.A., 190 So. 3d 267 (Fla. 5th DCA 2016) (concluding that borrower's surrender of property via bankruptcy proceeding and the bankruptcy court's order confirming debt and surrender of property while foreclosure appeal was pending fully resolved the matter). The Rivera opinion arose out of a Chapter 7 situation, is the only Florida appellate decision on the meaning of "surrender," and is thus binding on Florida trial courts.

In re Failla settles the disagreement among the Florida federal bankruptcy courts and provides clarity on the "surrender" issue. Secured creditors seeking to foreclose should keep both the In re Failla and Rivera decisions top of mind when litigating a foreclosure action following a debtor's filing of bankruptcy.

Ensure that a debtor's surrender is communicated to those that need to know.

A lender's bankruptcy counsel should let foreclosure counsel know whether borrowers have surrendered the property in the bankruptcy. Foreclosure counsel should then ensure that a suggestion of bankruptcy is filed in the foreclosure action along with a request for judicial notice of copies of the debtor's Chapter 7 statement of intention or Chapter 13 plan for reorganization.

Consider going back to the Bankruptcy Court if needed. As the Eleventh Circuit explained, "Bankruptcy courts have broad powers to remedy violations of the mandatory duties section 521(a)(2) imposes on debtors." In re Failla, 2016 WL 5750666, at *5. Take that statement to heart. If borrowers actively oppose a foreclosure action and pursue their defenses after agreeing to surrender the property in the bankruptcy, a lender will want to assert in state court that the borrower is judicially estopped from doing so. A lender may also want to have the bankruptcy-related issues heard by the bankruptcy court judge, even if there will be some additional, associated costs. In most cases, nothing should prevent a lender from going back to the bankruptcy court to have those issues heard. "[T]here is nothing strange about bankruptcy judges entering orders that command a party to do something in a nonbankruptcy proceeding[,]" including, for example, ordering debtors to dismiss counterclaims and withdraw defenses in a foreclosure action. Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Moritt, Hock & Hamroff LLP
Jones Day
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Moritt, Hock & Hamroff LLP
Jones Day
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions