The U.S. Bankruptcy Court for the Southern District of Florida recently denied a creditor’s motion to compel the debtor to surrender mortgaged property and also denied the debtor’s motion to stay the case, holding that a chapter 7 debtor who indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee.

Disagreeing with other judges in the same district and elsewhere on this issue, the bankruptcy judge held that “[c]ompulsory surrender of real property collateral by a debtor to a lienholder in chapter 7 is not supported by, and indeed ignores, the express provisions of the Bankruptcy Code.”

A copy of the opinion is available at:  Link to Opinion.

The debtor faced a pending mortgage foreclosure action and filed a voluntary petition under Chapter 7 of the Bankruptcy Code in June 2014. The petition included a statement of intention reflecting that the debtor intended to surrender the mortgaged property. The property was not claimed as exempt and the debtor did not dispute the debt. The debtor also did not oppose the motion for relief from stay filed by the mortgagee.

The debtor received a discharge in September 2014 and the case was administratively closed shortly thereafter, but the debtor never turned the property over to the lienholder and continued to defend against the foreclosure action.

The creditor filed a motion to reopen the case, arguing that the debtor’s statement of intention barred him from contesting the foreclosure action. In response, the debtor argued that he was not barred from defending the foreclosure action because “‘surrender’ only required the Chapter 7 Debtor to ‘surrender to the trustee,’ and that the Bankruptcy Code clearly provides that since the trustee did not administer the surrendered Property, the Property was abandoned back to the Debtor when the bankruptcy case was closed.”

Bankruptcy Judge Isicoff began by analyzing the text of section 521 of the Bankruptcy Code. Subsection 521(a)(2) “sets forth the obligations of an individual debtor in a chapter 7 case with respect to debts secured by property of the estate. The individual debtor must advise in a statement of intention whether he or she intends to keep the property of the estate or surrender the property and whether the debtor claims the property is exempt. If the debtor is going to keep the property then the debtor must advise whether he will be redeeming the property or reaffirming the debt secured by the property.”

The bankruptcy judge further explained that subsection “521(a)(4) of the Bankruptcy Code directs any debtor to surrender all property of the estate to the trustee, if a trustee has been appointed. … However, to the extent that any trustee has not administered property scheduled by the debtor under 11 U.S.C. § 521(a)(1) prior to the closing of a bankruptcy case, that property is ‘abandoned to the debtor … subject of course to any non-bankruptcy rights reserved to a lienholder, including the right to foreclose its security interest if appropriate.”

Bankruptcy Judge Isicoff then noted, however, that “[n]otwithstanding the express provisions of the Bankruptcy Code, cases around the country, including cases in this district, have held that a chapter 7 debtor who indicates in his statement of intention that he is surrendering property, has, by so stating, agreed that he is surrendering to the lienholder and has, therefore, forfeited his right to contest any post-discharge action to foreclose the lienholder’s security interest.”

The court refused to follow the other rulings, instead holding that “there is no Bankruptcy Code section that provides that if a chapter 7 trustee doesn’t administer surrendered real property what follows is a second surrender—surrender to the lienholder. Rather, what the Bankruptcy Code specifically provides is that what follows is the property is abandoned to the debtor.”

Bankruptcy Judge Isicoff concluded that because “[t]hat result is what the Bankruptcy Code provides, and any modification to that result is up to Congress, not the courts,” a chapter 7 debtor who “indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee. Compulsory surrender of real property collateral by a debtor to a lienholder in chapter 7 is not supported by, and indeed ignores the express provisions of the Bankruptcy Code.”

As a result, the court found that “there is no purpose in reopening the bankruptcy case” and denied the creditor’s motion to compel as well as the debtor’s motion to stay.