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...
