Foreclosure Appeals

Surrender in Bankruptcy Prohibits A Homeowner From Defending Foreclosure!

florida foreclosures

One of the more vexing issue facing foreclosures and bankruptcy is whether a debtor can still defend a foreclosure after they file bankruptcy. Today we learned the answer is “NO”!

A. Debtors Who Surrender Their Property in Bankruptcy May Not Oppose a Foreclosure Action in State Court.

Section 521(a)(2) states a bankruptcy debtor’s responsibilities when his schedule of assets and liabilities includes mortgaged property:

(a) The debtor shall . . .
(2) if an individual debtor’s schedule of assets and liabilities includes debts which are secured by property of the estate—
(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property; and
(B) within 30 days after the first date set for the meeting of creditors under section 341(a), or within such additional time as the court, for cause, within such 30-day period fixes, perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph;

11 U.S.C. § 521(a)(2). Subsection (A) requires the debtor to file a statement of intention about what he plans to do with the collateral for his debts. See Fed. R. Bankr. P. 1007(b)(2). The statement of intention must declare one of four things: the collateral is exempt, the debtor will surrender the collateral, the debtor will redeem the collateral, or the debtor will reaffirm the debt. See In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993). After the debtor issues his statement of intention, subsection (B) requires him to perform the option he declared.

The question here is whether the Faillas satisfied their declared intention to surrender their house under section 521(a)(2)(B). To answer that question, we must decide to whom debtors must surrender their property and whether surrender requires debtors to acquiesce to a creditor’s foreclosure action. The district court and the bankruptcy court correctly concluded that the Faillas violated section 521(a)(2) by opposing Citibank’s foreclosure action after filing a statement of intention to surrender their house.
We agree with both the district court and the bankruptcy court that section 521(a)(2) 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. The text and the context of the statute compel this interpretation.
Reading “surrender” to refer only to the trustee of the bankruptcy estate renders section 521(a)(2) superfluous with section 521(a)(4). Under the surplusage canon, no provision “should needlessly be given an interpretation that causes it to duplicate another provision.” Antonin Scalia & Bryan A. Garner, Reading Law 174 (2012). See also Inhabitants of Montclair Twp. v. Ramsdell, 107 U.S. 147, 152 (1883) (“It is the duty of the court to give effect, if possible, to every clause and word of a statute . . . .”). Section 521(a)(4) states that “[t]he debtor shall . . . surrender to the trustee all property of the estate.” 11 U.S.C. § 521(a)(4).

If a bankruptcy court could only lift the automatic stay, then debtors could violate section 521(a)(2) with impunity. The automatic stay is always lifted at the end of the bankruptcy proceedings, see 2 Bankruptcy Law Manual § 10:7 (5th ed.), so this remedy does nothing to punish debtors who lie to the bankruptcy court about their intent to surrender property. While a creditor may be able to invoke the doctrine of judicial estoppel in state court to force debtors to keep a promise made in bankruptcy court, its availability does not affect 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.” In re Lapeyre, 544 B.R. 719, 723 (Bankr. S.D. Fla. 2016). Just as the bankruptcy court may “order[] creditors who violate the automatic stay to take corrective action in the non-bankruptcy litigation,” the bankruptcy court may “order the Debtors to withdraw their affirmative defenses and dismiss their counterclaim in the Foreclosure Case.” Id. The bankruptcy court had the authority to compel the Faillas to fulfill their mandatory duty under section 521(a)(2) not to oppose the foreclosure action in state court.

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