Considering that bankruptcy cases typically involve divvying up a less-than-whole pie, it should not come as a surprise when a court disfavors debtors trying to have their cake and eat it, too.
The Eleventh Circuit Court of Appeals recently issued a decision addressing chapter 7 debtors whose statement of intention indicated that they intended to abandon their residence, but who continued opposing the secured creditor’s foreclosure action. The court considered the question to whom the debtors must surrender their residence, and whether such surrender prevents the debtors from opposing a creditor’s foreclosure action.[1]
In In re Failla, the chapter 7 debtors filed a statement of intention declaring that they intended to abandon their residence. They abandoned the house to the chapter 7 trustee, who abandoned it back to the debtors because the house was underwater.[2] The debtors continued challenging the creditor’s foreclosure action, however, all the while living in the house.[3] The creditor filed a motion to compel abandonment, arguing that the debtors’ opposition to the foreclosure contradicted their statement of intention to surrender their residence, thus they were in violation of Bankruptcy Code § 521.[4] After the bankruptcy court and the district court ruled in favor of the creditor, the debtors appealed to the Eleventh Circuit, which considered the interplay of the various subparts of § 521.
Section 521(a)(2)(A) requires a debtor to file a statement of intention about what he or she plans to do with the collateral securing his or her debts.[5] The debtor must indicate his or her intention to (1) claim the property as exempt, (2) redeem the property, (3) reaffirm the debt secured by the property or (4) surrender the property.[6] Section 521(a)(2)(B) gives the debtor 30 days after the 341 meeting to act upon his or her election.[7]
But as the Failla debtors observed, § 521 does not specify to whom a debtor must surrender the property. Because the debtors had already abandoned their residence to the chapter 7 trustee, the debtors argued that they had already satisfied their obligation to perform their statement of intention and therefore were not in violation of § 521.
The Eleventh Circuit considered the debtors’ argument that “surrender” only refers to a debtor surrendering property to the bankruptcy trustee and concluded that neither the text nor the context of the statute supported this interpretation.[8] Employing the canon that no statutory provision should be interpreted so that it duplicates another provision, the court noted that reading “surrender” to refer only to the trustee would render superfluous § 541(a)(2)(4),[9] which specifically requires a debtor to “surrender to the trustee all property of the estate.”[10] The court noted that because § 541(a)(4) already requires the debtor to surrender all property to the trustee, § 521(a)(2) must refer to a surrender other than exclusively to the trustee.[11] Moreover, the court recognized that when the Code “means a debtor must surrender his property either to the creditor or the trustee, it says so.”[12] By not identifying to whom a creditor must surrender secured property under § 521(a)(2)(A), Congress intended that the property must be surrendered to both the trustee and the creditor.[13] What’s more, the court concluded, because context is an especially important way to determine meaning, “surrender” likely refers to a relationship with a creditor.[14]
After concluding that § 521(a)(A)(2) was not limited to requiring surrender solely to the trustee, the court also addressed the fact that the Code does not define the term “surrender.”[15] After exploring the use of “surrender” and “deliver” in different places in the Code and various definitions of “surrender,” the court concluded that the most contextually appropriate ordinary meaning is the “giving up of a right or claim.”[16] For that reason, a debtor who surrenders property “must get out of the creditor’s way.”[17] Any other conclusion would allow a debtor to obtain a discharge, based in part on his sworn statement to surrender, yet continue to occupy his or her residence while dragging out the foreclosure proceeding in state court.
Finally, the court considered the essential fairness of the situation. The debtors declared that they would surrender their residence, that the mortgage was valid, and that the creditor had the right to foreclose. By ordering the debtors to stop contesting the foreclosure, the court concluded that the debtors were simply being compelled to honor their declaration.[18]
The court concluded that § 521 requires debtors to make specific choices with respect to any of their property that is subject to a lien: redeem, reaffirm or surrender. If debtors choose to surrender, then they cannot oppose a creditor’s foreclosure of the surrendered property. In this regard, the court noted, “In bankruptcy, as in life, a person does not get to have his cake and eat it, too.”[19]
[1] In re Failla, No. 15-15626, 2016 WL 5750666, at *2 (11th Cir. Oct. 4, 2016).
[2] Id. at *1.
[3] Id.
[4] Id.
[5] 11 U.S.C. § 521(a)(2)(A).
[6] Id.
[7] 11 U.S.C. § 521(a)(2)(B).
[8] Failla, 2016 WL 5750666, at *2.
[9] Id.
[10] 11 U.S.C. § 521(a)(4) (emphasis added).
[11] 11 U.S.C. § 1325(a)(5)(C).
[12] Failla, 2016 WL 5750666, at *3.
[13] Id.
[14] Id.
[15] Id.
[16] Id. at *5.
[17] Id. at *4.
[18] Id. at *5.
[19] Id.