The Ninth Circuit Bankruptcy Appellate Panel declined to say whether Bankruptcy Judge Robert J. Farris of Honolulu was right or wrong when he 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 allegedly improper foreclosure.
Although the BAP, technically speaking, vacated Judge Faris’ opinion, there is no hint that the BAP disagreed.
In Failla v. Citibank NA (In re Failla), 838 F.3d 1170 (11th Cir. 2016), the Eleventh Circuit held 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.
Two weeks later, Judge Farris addressed the same question, albeit in a procedurally different posture. The Hawaii debtors had similarly stated their intention under Section 521(a)(2) to surrender their residence. But the similarities with Failla ended there. In Hawaii, the debtors did not oppose the lender’s motion to modify the automatic stay, nor did they oppose the ensuing nonjudicial foreclosure. In Failla, the debtors had opposed foreclosure at every step.
After the Hawaiian debtors received their discharges and the court closed the case, the lender completed nonjudicial foreclosure. The debtors filed a wrongful foreclosure suit a week later in state court. The lender filed a motion to dismiss, contending that the intention to surrender precluded a challenge to foreclosure.
To obviate a state court ruling on a complex bankruptcy question, the debtors reopened their bankruptcy case, leading Judge Faris to rule that their intention to surrender did “not deprive them of any substantive right to litigate their wrongful foreclosure action.” He also said that the Eleventh Circuit’s reasoning was “flawed” and disagreed with Failla’s holding that a stated intention to surrender requires “‘debtors to drop their opposition to a foreclosure action.’”
A day after Judge Faris’ decision, the Hawaiian court granted the lender’s motion to dismiss, based entirely on the statute of limitations. The state court did not decide any issues regarding the intention to surrender. The debtors appealed, but the state appellate court is yet to rule.
Although having won in state court, the lender appealed to the BAP, hoping to eradicate an unfavorable ruling that might persuade other judges in the Ninth Circuit and beyond. Not content with asking the BAP to adopt Failla, the lender went a step further. In the words of the appellate panel, the lender wanted the BAP “to interpret relevant law as completely immunizing secured lenders from liability for violation of state foreclosure law if a debtor surrenders real property in a pre-foreclosure bankruptcy.”
In a nonprecedential, per curiam opinion on Jan. 4, the BAP dismissed the appeal as being constitutionally moot.
Without insinuating whether the Eleventh Circuit was right or wrong, the BAP did say that Failla was “neither factually or legally applicable.” Although the parties and amici urged the BAP to reach the merits because Judge Faris’ opinion “drew outsized attention,” the BAP “decline[d] the invitation.”
Under established Ninth Circuit authority, the BAP said the appeal was moot because it could not “grant any effective relief” if it were to reverse. Since the state court dismissed entirely on the statute of limitations, upholding Judge Faris would not reinstate the debtor’s suit.
Also under established Ninth Circuit authority, the BAP said it was constrained to vacate Judge Faris’ opinion because the case had become moot during the appeal. If the appeals court in Hawaii were to reverse and reinstate the suit, the BAP went on to say that the lender could raise the bankruptcy surrender issue in state court.
After indicating that the lender could litigate the bankruptcy issue anew in state court if the suit were reinstated, the BAP made a 180-degree turn in a footnote near the end of the opinion, saying that “nothing stops either party from returning to the bankruptcy court and petitioning for a new opinion. In the event the bankruptcy court reissues a similar opinion, [the lender] may then re-appeal.”
The BAP panel was composed of Bankruptcy Judges Laura S. Taylor, William Lafferty, and Julia W. Brand.
For ABI’s discussion of Failla, click here. For commentary on Judge Faris’ opinion in In re Ryan, 560 B.R. 339 (Bankr. D. Haw. Oct. 19, 2016), click here.
The Ninth Circuit Bankruptcy Appellate Panel declined to say whether Bankruptcy Judge Robert J. Farris of Honolulu was right or wrong when he 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 allegedly improper foreclosure.