Surrender Ends State Foreclosure Fight

Posted by NCBRC - October 7, 2016

“Debtors who surrender their property in Bankruptcy may not oppose a foreclosure action in state court.” Failla v. Citibank, No. 15-15626 (11th Cir. Oct. 4, 2016). Bankruptcy debtors, David and Donna Failla, opted, under section 521(a)(2)(B), to surrender their home but continued to live in the house and oppose Citibank’s state court foreclosure action. The trustee abandoned the property as having negative value. Citibank moved to compel surrender. The bankruptcy court granted the motion ordering the Faillas to cease opposition to foreclosure in the state court. The district court affirmed.

On appeal, the Faillas argued that the surrender was to the trustee only and that when the trustee abandoned the property their rights returned to them. The court disagreed. It found that the surrender is to both the trustee and the creditor and that the position taken by the debtors would render section 521(a)(4) superfluous because that paragraph already demands that the debtor relinquish all estate property to the trustee. Additionally, the other two options in section 521—redeem or reaffirm—clearly refer to the creditor as the object of the action. Other sections of the Code also suggest that the surrender option adheres to the benefit of the creditor. Section 362(h) offers remedies to the creditor in the event that a debtor violates his obligation under section 521(a)(2) to surrender personal property. In that event either the creditor is freed from the automatic stay to pursue remedies outside bankruptcy or the trustee may override that remedy but only if the creditor’s rights are otherwise protected. While those remedies are specific to personal property, the court found that they establish the context for interpreting section 521(a)(2) as applying to both the trustee and the creditor.

Where “surrender” is defined as giving up a right or claim, the court found that upon surrender the Faillas gave up their right to oppose the state foreclosure action. The hanging paragraph to section 521(a)(2) which provides that “nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as provided in section 362(h)” only preserved the debtors’ rights in Bankruptcy.

Finally, the court rejected the Faillas’ argument that the bankruptcy court overstepped its power by taking action beyond merely lifting the automatic stay to permit Citibank to foreclose. Under section 105(b) the bankruptcy court has broad power to remedy abuse of the bankruptcy process by stepping into the state court action to enforce its orders.


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