Bankruptcy Judge Robert J. Faris in Honolulu disagreed with the Eleventh Circuit and held that a chapter 7 debtor’s election to “surrender” real property does not preclude the debtor from defending against a foreclosure action or asserting claims for an allegedly improper foreclosure.
In Failla, the Atlanta-based circuit court resolved a split among Florida bankruptcy judges by holding on Oct. 4 that a debtor who elects to “surrender” real property under Section 521(a)(2) cannot oppose foreclosure. To read ABI’s discussion of Failla, click here.
Judge Faris faced the same issue in his Oct. 19 opinion, although in a procedurally different posture.
In the Hawaii case, the debtors stated their intention under Section 521(a)(2) to surrender their residence, and the lender sought and obtained a modification of the automatic stay. After the debtors received their discharges and the court closed the case, the lender completed nonjudicial foreclosure.
One week after the foreclosure, the debtors initiated a wrongful-foreclosure suit in state court. The lender filed a motion to dismiss, arguing that the intention to surrender, coupled with discharge, precluded the debtors from suing for wrongful foreclosure.
To prevent the state court from ruling on the implications flowing from the statement of intention, the debtors reopened their bankruptcy case and filed a motion asking Judge Farris to declare that their intention to surrender did “not deprive them of any substantive right to litigate their wrongful foreclosure action.”
Finding that the Eleventh Circuit’s reasoning was “flawed,” Judge Farris disagreed with Failla’s holding that a stated intention to surrender requires “debtors to drop their opposition to a foreclosure action.”
Reading the word “surrender” in “its immediate statutory context,” Judge Faris said he agreed with courts that have held that an intention to surrender waives only the right to redeem the collateral, reaffirm the secured debt, or exempt the property. He found nothing in Section 521 to suggest “that the debtor is required to give a broader waiver.”
A narrow reading of “surrender,” he said, is consistent with the Collier treatise and a Ninth Circuit Bankruptcy Appellate Panel opinion holding that Section 521(a)(2) is a notice provision that does not affect a debtor’s substantive rights.
Fairly read, Judge Faris said “there is no reason to read” the so-called hanging paragraph in Section 521(a)(2) “to give secured creditors a free pass to violate foreclosure laws.”
Judge Faris also ruled on several other unimportant issues. He found jurisdiction, held that the debtors were not asking him to issue an advisory opinion, and saw insufficient reason to abstain.
In addition, he held that neither receipt of discharges nor closing the case precluded the debtors from reopening their bankruptcy and importuning the court to rule on the implications of an election to surrender.
Bankruptcy Judge Robert J. Faris in Honolulu disagreed with the Eleventh Circuit and held that a chapter 7 debtor’s election to “surrender” real property does not preclude the debtor from defending against a foreclosure action or asserting claims for an allegedly improper foreclosure.