20 Oct Does “Surrendering” a House in Bankruptcy Allow for Opposition to Foreclosure in State Court?

The Eleventh Circuit Court of Appeals recently decided whether a person who agrees to “surrender” his house in bankruptcy may oppose a foreclosure action in state court in the case of In re Failla, No. 15-15626, 2016 WL 5750666 (11th Cir. Oct. 4, 2016).  The Faillas owned a home in Florida, and defaulted on that mortgage in 2009. Citibank, the owner of the mortgage and the promissory note, filed a foreclosure action in state court.  The Faillas opposed that action.  The Faillas filed for bankruptcy, and during the bankruptcy proceedings, they admitted that: they owned the house; that it was collateral for a valid mortgage; and that the balance of the mortgage exceeds the value of the house.  They also filed a statement of intention pursuant to Bankruptcy Code § 521(a)(2) to surrender the house.  However, because the house had a negative value, the trustee “abandoned” it back to the Faillas, and they continued to live there while they contested the foreclosure action.

Citibank moved to compel surrender, arguing that the Faillas’ opposition to the foreclosure action contradicted their statement of intention to surrender the house.  The bankruptcy court granted Citibank’s motion and ordered the Faillas to stop opposing the foreclosure action.  The district court affirmed, and the Faillas appealed the decision to the U.S. Court of Appeals.

Circuit Judge William Pryor of the Eleventh Circuit also affirmed, holding that debtors who surrender their property in bankruptcy may not oppose a foreclosure action in state court.  Section 521(a)(2), he noted, states a bankruptcy debtor’s responsibilities when his schedule of assets and liabilities includes mortgaged property.  The statute requires the debtor to file a statement of intention about what he plans to do with the collateral for his debts.  This statement must declare one of four things: (i) the collateral is exempt; (ii) the debtor will surrender the collateral; (iii) the debtor will redeem the collateral; or (iv) the debtor will reaffirm the debt.  After the debtor issues his statement of intention, he is required to perform the option he declared, the Court held.

The Eleventh Circuit found the Faillas violated § 521(a)(2) by opposing Citibank’s foreclosure action after filing a statement of intention to surrender the house.  Judge Pryor said that § 521(a)(2) requires debtors who file a statement of intent to surrender the property both to the trustee and to the creditor—even if the trustee abandons the property.  The Eleventh Circuit agreed that “surrender” meant that debtors had to drop their opposition to a foreclosure action.  Because “surrender” means “giving up of a right or claim,” debtors who surrender their property can no longer contest a foreclosure action.  “The Faillas may not say one thing in bankruptcy court and another thing in state court…” Judge Pryor wrote.  He added “In bankruptcy, as in life, a person does not get to have his cake and eat it too.”