In re Perez

638 B.R. 248

IN RE: David PEREZ and Silvia Orozco, Debtors.

CASE NO. 15-16136-RAM

United States Bankruptcy Court, S.D. Florida.

Signed March 17, 2022

Jacqueline Calderin, Miami, FL, Trustee, Pro Se.

Matthew A. Petrie, Agentis PLLC, Miami, FL, for Trustee Jacqueline Calderin.

Robert F. Reynolds, Ft. Lauderdale, FL, for Debtors.

ORDER DENYING RECONSIDERATION OF ORDER ENFORCING SURRENDER

Robert A. Mark, Judge

To resolve the pending contested matter in this case, the Court must determine whether to apply the Eleventh Circuit's holding in In re Failla¹ and compel the Debtors to drop their defenses in a pending foreclosure action. Because the Debtors surrendered their home to the mortgage holder in this chapter 7 case, and all of their state court defenses arise from events that occurred prior to surrender, the Court concludes that Failla applies, and the lender is entitled to relief.

Procedural Background

The Court conducted hearings on September 23, 2021 and November 23, 2021, on a Motion to Reopen Bankruptcy Case to Compel Surrender of Real Property (the "Motion to Compel") [DE# 138], filed by Creditor, Red Stick Acquisitions, LLC ("Red Stick"). By Order entered on September 27, 2021 [DE# 144], the Motion to Compel was granted in part, the case was reopened, and the Court set the November 23rd hearing and set briefing deadlines.

After review of the record, including the Motion to Compel, the Response in Opposition to Motion to Reopen Bankruptcy Case to Compel Surrender of Real Property (the "Debtors’ Response") [DE# 150], and Red Stick's Reply [DE# 151], after consideration of the arguments presented by counsel at the November 23rd hearing, and after review of applicable law, the Court entered its November 24, 2021 Order Granting in Part Motion to Compel Surrender (the "Order Enforcing Surrender") [DE# 152].

On December 8, 2021, the Debtors filed a Motion for Rehearing or to Alter or Amend the Court's Order Granting in Part Motion to Compel Surrender (the "Motion for Reconsideration") [DE# 153]. The Court has considered the Motion for Reconsideration, the Notice of Filing Affidavit of Bruce Jacobs, Esq., in Support of Debtors’ [Motion for Reconsideration] [DE#155], Red Stick Acquisitions, LLC's Opposition to the [Motion for Reconsideration] [DE# 157], Debtors’ Reply [DE# 158], and the Notice of Filing Additional Documents in Support of Debtors’ [Motion for Reconsideration] [DE# 159]. The Court has also considered the arguments of counsel presented at the January 6, 2022 hearing on the Motion to Reconsider, and has reviewed applicable law, including three bankruptcy court decisions interpreting Failla .

This Order incorporates and supplements the findings and conclusions in the Order Enforcing Surrender and explains in greater detail why the Court concludes that Failla applies here.

Facts

The material facts are not disputed.

The Debtors filed this chapter 7 case on April 4, 2015. The Debtors were represented by counsel throughout the case. In Schedule A, they listed their home located at 10971 SW 246th Street, Homestead, FL (the "Property") [DE# 19, p. 3]. In Schedule D, they listed "Wfhm" as the holder of a secured claim on the Property [DE# 19, p. 9]. The claim is not listed as contingent, unliquidated, or disputed.

In their chapter 7 case, the Debtors attempted to modify the mortgage on the Property under the Court's Mortgage Modification Mediation ("MMM") Program. Although the term "Wfhm" in Schedule D had only the initials of the secured creditor, the Motion for Referral [to MMM] [DE# 28] spells out the mortgage holder as Wells Fargo Home Mortgage.²

Prior to the filing of the bankruptcy case, Wells Fargo Bank, N.A. ("Wells Fargo") filed a state court lawsuit to foreclose its mortgage on the Property, Case No. 2012-CA-1976, Circuit Court, Miami-Dade County (the "Foreclosure Case"). On February 23, 2015, also prior to the filing of this bankruptcy case, the state court entered a final judgment of foreclosure in favor of Wells Fargo and scheduled a foreclosure sale. The filing of this bankruptcy case stopped the sale and gave the Debtors the opportunity to seek a modification of their mortgage in the MMM program.

The mediation was not successful, and on May 20, 2016, the Court granted Wells Fargo stay relief to proceed with the Foreclosure Case [DE# 101]. In their Statement of Intentions, the Debtors state that they will retain the Property "only if modified in MMM" [DE# 19, p. 33]. Because MMM failed, the Debtors are deemed to have surrendered the Property. The Debtors received a discharge on May 3, 2017, thus extinguishing their personal liability on the note secured by the mortgage on the Property.

Wells Fargo did not seek a new sale date. Instead, on July 26, 2016, Wells Fargo moved to vacate the final judgment to add two junior lienholders as defendants. The state court vacated the final judgment, and Wells Fargo filed an amended complaint on August 24, 2017.

The note and mortgage held by Wells Fargo (the "Note and Mortgage") were assigned in 2017 to the Secretary of Housing and Urban Development ("HUD"). HUD assigned the Note and Mortgage to Wilmington Savings Fund Society, FSB in 2017, which then assigned the Note and Mortgage in 2017 to the Investment Fund IV, LP. In 2020, the Investment Fund IV, LP assigned the Note and Mortgage to Red Stick. The assignments described in this paragraph will be referred to collectively as the "Post-Bankruptcy Assignments".

The Debtors Raise New Defenses in the Foreclosure Case

Although not raised in the Foreclosure Case prior to entry of the pre-bankruptcy foreclosure judgment or prior to the filing of this bankruptcy case, Debtors’ current counsel in the Foreclosure Case now challenges Wells Fargo's standing. The Debtors are also asserting other defenses, including an argument that the mortgage is unenforceable because Wells Fargo did not pay documentary tax stamps when the mortgage was modified in 2007. In support of their claimed right to assert defenses, the Debtor/Husband, David Perez, filed an affidavit in the Foreclosure Case stating that "I never surrendered my home in the Bankruptcy proceeding" [DE# 138, p. 113]. The Court finds nothing in the record of this bankruptcy case to support Debtor's statement. On August 30, 2021, Red Stick filed the Motion to Compel seeking an order barring the Debtors from raising any defenses in the Foreclosure Case, citing Failla and arguing that the Property was surrendered to Wells Fargo in this bankruptcy case.

Discussion

In Failla , the 11th Circuit held that "debtors who surrender their property can no longer contest a foreclosure action." 838 F.3d at 1177. Where debtors state an intention to surrender a property interest, they surrender their interest to the chapter 7 trustee, 11 U.S.C. § 521(a)(4), who can either abandon or administer the interest. Because the Trustee in this case abandoned any interest in the Property [DE# 107], the Debtors’ interests in the Property were surrendered to Wells Fargo. See In re Failla , 838 F.3d 1170, 1176 (11th Cir. 2016).

Surrendering property interests to a creditor means "get[ting] out of the creditor's way." In re Failla , 838 F.3d at 1177. The 11th Circuit's ruling in Failla is based on the premise that "[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." In re Failla , 838 F.3d at 1179 (citation omitted). In this case, the Debtors stated an intent to retain their Property "only if [their mortgage debt is] modified in MMM". They did not state an intent to retain their Property regardless of the outcome of MMM, nor did they reserve their right to challenge Wells Fargo's standing at any point in the bankruptcy case.

The Failla holding is clear. Because the Debtors surrendered the Property to Wells Fargo in this bankruptcy case, they are barred from asserting in the Foreclosure Case that Wells Fargo lacked standing or asserting other defenses to foreclosure arising from pre-surrender events. "In bankruptcy, as in life, a person does not get to have his cake and eat it too." In re Failla , 838 F.3d at 1178.

Debtors' Argument Against Applying Failla

The Debtors argue that compelling them to give up their defenses in the Foreclosure Case would be inequitable because Wells Fargo lacks standing to enforce the Note and Mortgage and the Debtors’ due process rights entitle them to challenge Wells Fargo's standing. The Debtors allege that Wells Fargo lacks standing to enforce the Note and Mortgage because of the following alleged facts (collectively, the "Pre-Bankruptcy Events"): (i) both Washington Mutual Bank, F.A. ("WAMU") and the original mortgagee, Interstate Financial Mortgage Group Corp., endorsed the Note and Mortgage to Wells Fargo, making the provenance of Wells Fargo's interest in the Note and Mortgage unclear, (ii) assuming Wells Fargo acquired its interest in the Note and Mortgage from WAMU, that interest is not enforceable because WAMU transferred its interest to Wells Fargo via a rubber-stamped, undated endorsement (the "WAMU Endorsement"), and (iii) even if properly acquired in the first instance, Wells Fargo cannot enforce the Note and Mortgage because it did not pay documentary stamp taxes when it agreed to modify the Note and Mortgage after acquisition.

The Debtors did not challenge Wells Fargo's standing to enforce the Note and Mortgage during their bankruptcy case. On the contrary, they recognized Wells Fargo's standing by scheduling the Wells Fargo debt as undisputed and by seeking to mediate a modification of the Note and Mortgage with Wells Fargo.

The Debtors state that deficiencies in the WAMU Endorsement were not easily discoverable because they were fraudulently concealed and that Wells Fargo's admissions in state court during pre-trial discovery on the issue of standing obviated the need to investigate the provenance and...