Trustee May Not Waive Debtor’s Defenses to Foreclosure Action

Posted by NCBRC - August 8, 2012

In an action comparable to two wolves and a sheep voting on what to have for dinner, the Bankruptcy Court for the Southern District of Florida stepped in on behalf of the sheep and disapproved a settlement agreement under which the trustee sought to waive the debtor’s defenses in an underlying state court foreclosure action. In re Larkin, 468 B.R. 431 (Bankr. S.D. Fla. 2012).

Approximately one year prior to debtor’s filing her chapter 7 bankruptcy petition, Wells Fargo instituted foreclosure proceedings on the debtor’s home. The debtor counterclaimed in that action and raised defenses to Wells Fargo’s claims. The chapter 7 trustee sought to allow the foreclosure to go forward and to dismiss the debtor’s counterclaim and waive her defenses in the underlying foreclosure action, in exchange for Wells Fargo paying $10,000 to the estate. The court disapproved the settlement agreement finding that while the counterclaim was property of the estate, (citing Parker v. Wendy’s Int’l, Inc., 365 F.3d 1268,1272 (11th Cir.2004)), the defenses to the foreclosure action were not and, therefore, could not be waived by the trustee.

The issue of whether the debtor’s defenses were property of the estate turned on interpretation of section 558 which provides:

The estate shall have the benefit of any defense available to the debtor as against any entity other than the estate, including statutes of limitation, statutes of frauds, usury, and other personal defenses. A waiver of any such defense by the debtor after the commencement of the case does not bind the estate.

The court correctly found that this provision permits the trustee to avail himself of debtor’s defenses but does not authorize the trustee to deprive the debtor of those defenses. The court did caution that defenses that seek monetary damages may be more akin to counterclaims and could, therefore, be waived by the trustee, but that defenses that seek to reduce potential recovery by the claimant do not fall into that category and are not waivable by the trustee as to the debtor.

In re Larkin, 468 B.R. 431 


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