The U.S. Bankruptcy Court for the Middle District of Florida recently held that, at a minimum, “surrender” under Bankruptcy Code §§ 521 and 1325 means a debtor cannot take an overt act that impedes a secured creditor from foreclosing its interest in secured property.

In so holding, the Court found that actively contesting a post-bankruptcy foreclosure case is inconsistent with a “surrender” of the property.

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

The Court addressed two separate bankruptcy cases.  The first was a Chapter 7 bankruptcy case, in which the mortgagee instituted a foreclosure action five years before the bankruptcy case, but the foreclosure case had not concluded by the time the debtor filed bankruptcy.

In the Chapter 7 bankruptcy case, the debtor mistakenly believed she did not own the property at issue.  Accordingly, although she listed the mortgage debt on her bankruptcy schedules, she did not state that she owned the property.  Because of the debtor’s mistake about ownership of the property, she never filed a statement of intention regarding the property and never elected to surrender the property.

After the debtor received her Chapter 7 discharge, the mortgagee began prosecuting the foreclosure suit again.  An attorney began defending that foreclosure suit.  The Court’s opinion implies that it believed the debtor was not aware that the attorney had been contesting the foreclosure suit on her behalf.

The mortgagee moved to reopen the Chapter 7 bankruptcy case and compel the debtor to surrender the property, as the debtor had neither reaffirmed the mortgage debt nor redeemed the property.

The second case was a Chapter 13 bankruptcy with more straightforward facts.  Prior to the debtor’s filing the Chapter 13 case, the mortgagee had also instituted a foreclosure proceeding against the property at issue.

In the Chapter 13 bankruptcy case, the debtor submitted a plan — which the court confirmed — in which she stated an intent to surrender the property at issue.  In spite of this, the debtor contested the state-court foreclosure action the mortgagee began prosecuting post-confirmation.

The Court’s legal analysis began with a discussion of the actions Chapter 7 and Chapter 13 debtors must take regarding secured property.

For secured property, real or otherwise, Chapter 7 debtors must file a “statement of intention.”  This statement declares whether a borrower will (1) redeem – i.e., pay the present value for — the property, (2) reaffirm the debt, or (3) “surrender” the property.  The debtor must then perform her stated intention, usually within 30 days after the date first set for the meeting of creditors.  The Eleventh Circuit has interpreted these requirements to mean that a debtor cannot retain collateral unless he or she redeems it or reaffirms the debt it secures.  See, e.g., Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir. 1993).

A Chapter 13 debtor does not need to file a statement of intentions.  However, the debtor must file a plan of reorganization that addresses how the debtor would like to treat secured property.  A Chapter 13 debtor can (1) get the secured creditor’s consent to the plan, (2) “cram down” the secured debt – i.e., pay the total present value of the allowed secured claim over the life of the plan, or (3) surrender the secured property.  Absent consent from a secured creditor, a Chapter 13 debtor cannot retain collateral without paying for it.

Although the facts of each case differ, at issue in both the Chapter 7 and Chapter 13 cases was the effect of a debtor’s surrender of the secured real property, when the debtor still contested the post-bankruptcy foreclosure proceedings.

The Bankruptcy Code does not define the term “surrender.”  For guidance, the Court looked to opinions from the First and Fourth Circuits, which held that a debtor needed to relinquish all rights in the collateral, including the right to possess the collateral, to surrender it.

Applying that logic to the foreclosure context, the Court held that, to surrender a property, a debtor must “not tak[e] an overt act to prevent the secured creditor from foreclosing its interest in the secured property.”  Put another way, a debtor cannot contest a foreclosure after “surrendering” a property in bankruptcy.

Simply Dissolving Automatic Stay Does Not Mean Surrender

In making this ruling, the Court rejected the debtor’s argument that “surrendering” a property simply meant allowing the Bankruptcy Code’s automatic stay to dissolve.  The Court found that adopting the debtor’s reasoning would result in a windfall to debtors.

The Court held that “simply dissolving the automatic stay cannot be what ‘surrender’ means because it would effectively permit the type of ‘ride through’ that the Eleventh Circuit held was impermissible in In re Taylor.”

The issue in Taylor was whether a Chapter 7 debtor could retain possession of collateral property by staying current on his or her obligation to the secured creditor, but without reaffirming or redeeming the underlying debt – what in bankruptcy is known as a “ride through.” The Eleventh Circuit held that the plain language of 11 U.S.C. § 521 did not provide for a ride-through option, and besides, permitting a “ride through” would give the debtor a “head start”—not a “fresh start.”  The Eleventh Circuit also reasoned that if a ride-through option existed, it would render the other alternatives in 11 U.S.C. § 521 “nugatory.”

In addition, under the debtor’s theory, a debtor could do exactly what the debtor did here: “surrender” a property then delay the state-court foreclosure process, all while living in the house for free.

The Court found that both the Chapter 7 and Chapter 13 debtors had failed to “surrender” the respective properties at issue.  Not surprisingly, the Court found that the Chapter 7 debtor’s actions were forgivable, given the Court’s conclusion that the attorney had acted without the Chapter 7 debtor’s authorization.

In concluding, the Court held that, to surrender a property, “a debtor must relinquish [the] secured property and make it available to the secured creditor by refraining from taking any overt act that impedes a secured creditor’s ability to foreclose its interest in secured property.”