“Surrender” Means “Surrender” – A Debtor Who Surrenders Collateral in Bankruptcy Gives Up the Right to Oppose Foreclosure

David and Donna Failla filed for Chapter 7 bankruptcy protection in 2011. Shortly thereafter, the Faillas filed the “statement of intention” required by section 521(a)(2) of the Bankruptcy Code with respect to their house, which was subject to a mortgage held by Citibank.  In the statement, the Faillas agreed to “surrender” the house instead of the other options provided under the section:  to claim the property as exempt, to redeem it, or to reaffirm their debt to the mortgagor.

The house was worth less than the balance of the mortgage, so the bankruptcy trustee “abandoned” the property back to the Faillas. Citibank sought to foreclose, and the Faillas opposed foreclosure.  Citibank filed a motion in the bankruptcy court to compel the Faillas to surrender the property to the bank.  The bankruptcy court granted the motion, and the district court affirmed.

In the Eleventh Circuit, the Faillas argued (as they had in the bankruptcy court and the district court) that they had agreed only to “surrender” the property to the trustee, not to the bank. Failla v. Citibank, N.A. (In re Failla), 2016 WL 5750666 (11th Cir. Oct. 4, 2016).  And they added a new argument—over Citibank’s objection—that the only remedy available to the bankruptcy court, if it believed the bank was entitled to foreclose, was to lift the automatic stay as to Citibank.  Judge William Pryor, writing for a panel also including Judge Marcus and Judge Lawson visiting from the Middle District of Georgia, rejected both arguments.

As to the meaning of “surrender,” the court held that “[t]he text and the context of [§ 521(a)(2)] compel” an interpretation encompassing surrender to the creditor as well as to the bank. If “surrender” meant only surrender to the trustee, then there would be no need for § 521(a)(2) at all, in light of § 521(a)(4)’s provision that “[t]he debtor shall . . . surrender to the trustee all property of the estate.”  An interpretation including surrender to the creditor as well as to the trustee is also in harmony with the words “redeem” and “reaffirm,” which appear alongside “surrender” in § 521(a)(2) and which refer to the creditor-debtor relationship.  And “[o]ther provisions of the bankruptcy code that provide a remedy to creditors when a debtor violates section 521(a)(2) suggest that the word “surrender” does not refer exclusively to the trustee. . . . These remedies for creditors reflect an obvious point about section 521(a)(2):  it is a provision that affects and protects the rights of creditors.”

Nor did the Faillas’ agreement to “surrender” the property mean only that they would physically relinquish the property—the court noted that the Bankruptcy Code uses the word “deliver” for that. Instead, their agreement to “surrender” the property constituted “[t]he giving up of a right or claim.”  Thus, “debtors who surrender their property can no longer contest a foreclosure action. . . . Debtors who surrender property must get out of the creditor’s way.”

The court also rejected the argument, raised for the first time in the Court of Appeals, that the bankruptcy court could only lift the automatic stay for Citibank, but not enter an order compelling the Faillas to surrender the property. The court considered the argument on the merits, because it fell “within exceptions to the general rule that a circuit court will not consider an issue not raised in the district court,” in that it was “a ‘pure question of law’ and its ‘proper resolution is beyond any doubt.’”  The argument failed because the bankruptcy court’s “broad powers to remedy violations of the mandatory duties” imposed on debtors by § 521(a)(2) encompass the power to order surrender of collateral.  To hold otherwise, the court noted, would be to allow debtors to violate the section with impunity, because “[t]he automatic stay is always lifted at the end of the bankruptcy proceedings, . . . so this remedy does nothing to punish debtors who lie to the bankruptcy court about their intent to surrender property.”

Posted by Valerie Sanders.

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