Eleventh Circuit Decides Surrender Means Just That

Tuesday, November 29, 2016

In the recent opinion of In re Failla, the Eleventh Circuit ruled that when a debtor indicates in a Chapter 7 bankruptcy schedules case that she or he intends to “surrender” property subject to a secured claim, the debtor can’t renege on that commitment. The Court of Appeals therefore affirmed the bankruptcy court’s order requiring the debtors to cease opposition to a secured creditor’s subsequent foreclosure of the surrendered property.

The Faillas indicated in their Chapter 7 Statement of Intention that they intended to surrender their residence, which was worth less than the mortgage loan it secured. The Chapter 7 trustee then abandoned the property, and the mortgage lender commenced foreclosure proceedings. The Faillas, who were still living in the house, filed state court pleadings contesting the foreclosure. Rather than simply seeking bankruptcy stay relief and proceeding in state court, the mortgage lender sought relief in the bankruptcy court, asserting that the debtors had surrendered their rights to the property, and had no right to contest the foreclosure. The bankruptcy court agreed and entered an order directing the Faillas to cease opposition to the foreclosure, failing which the court would revoke their Chapter 7 discharge.

The district court affirmed the bankruptcy court’s ruling, as did the Court of Appeals. Taking a dim view of the Debtors’ behavior, the Court reasoned that a § 521 “surrender” was a relinquishment of the debtor’s rights in the property to the bankruptcy trustee and the creditor, and that if the trustee then abandons the property, the surrendering debtor must “get out of the creditor’s way.” Noting that a debtor should not be able to “undo his surrender” by opposing the foreclosure in state court after having obtained a discharge in bankruptcy, the Court stated that “[i]n bankruptcy, as in life, a person does not get to have his cake and eat it too.”

For any assistance with secured claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.

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