Individual chapter 7 debtors filed a statement of intention electing to surrender their real estate. The mortgagee contended that they had failed to do so and filed a motion to compel to surrender.
Under Section 521(a)(2) of the Bankruptcy Code, if an individual debtor’s bankruptcy schedules show debts secured by property of the estate, then generally:
(1) within 30 days after the bankruptcy petition is filed the debtor must file a statement of intention as to whether it intends to retain or surrender the property, and if the property is to be retained, whether (a) the property is claimed as exempt, (b) the debtor intends to redeem, or (c) the debtor intends to reaffirm the debt secured by the property; and
(2) within 30 days after the first date set for the meeting of creditors the debtor must perform the intention specified. The section goes on to state: “except that nothing in [this section] shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as may be provided in section 362(h) [relating to failure to take timely action].”
Prior to bankruptcy the debtors had defaulted and the lender had filed a complaint to foreclose its mortgage. After filing bankruptcy, the debtors filed schedules under penalty of perjury that acknowledged the property was encumbered by a valid first mortgage lien that constituted a non‑contingent, liquidated and undisputed secured claim against the debtors and the property. They also declared that the property was underwater and that they intended to surrender it.
More than a month later they attempted to amend the statement of intention to elect to reaffirm the debt. However, the amendment was untimely and invalid. A couple of months after that the bankruptcy court issued an order discharging the debtors and closing the case.
Almost two years later the state court foreclosure was set for trial. After yet another year (which was three years after the bankruptcy case closed) the debtors still had possession and title to the property and were opposing the foreclosure action – leading to the mortgagee’s motion in the bankruptcy court to compel surrender.
The questions for the court were (1) what was required of the debtors to surrender the property, (2) what rights the lender had for the failure to perform and (3) whether the caveat that rights are not altered would permit a debtor to defend a foreclosure action.
The court reiterated that governing 11th Circuit law provides that a debtor who retains non-exempt collateral has two choices: reaffirmation or redemption. If the debtor initially chooses to reaffirm, but either decides not to or is unable to, then the only remaining option is to surrender the collateral.
Since there is no definition of “surrender” in the Bankruptcy Code, the court turned to Black’s Law Dictionary, which defines surrender as “[t]he act of yielding to another’s power or control” or “[t]he giving up of a right or claim.” Although Section 521(a)(a) does not expressly say to whom the property should be surrendered, most courts assume this means surrender to the lienholder, not to the trustee. However, the debtors argued that they surrendered the property to the Chapter 7 trustee, who then abandoned it so that the property reverted back to the debtors.
The mortgagee responded that it would be unfair to allow the debtors to retain the property while they contested the foreclosure, since this would be contrary to the Bankruptcy Code provisions allowing the debtor to retain property only if it reaffirmed or redeemed. As the 11th Circuit stated: “Allowing a debtor to retain property without reaffirming or redeeming gives the debtor not a ‘fresh start’ but a ‘head start’ since the debtor effectively converts the secured obligation from recourse to nonrecourse with no downside risk for failing to maintain or insure the lender’s collateral.”
If the debtor surrenders property, recognizes the lien and its validity and obtains an advantage by doing so (for example, by taking an additional wild card exemption), and then obtains a discharge while having no intention of giving up the property, the court agreed with the view that the discharge was obtained through fraud and should be revoked. In this case the debtors admitted the validity of the debt, did not claim their property as exempt, obtained the benefit of a “wild card” exemption, yet wished to contest the post-bankruptcy foreclosure even though they had not reaffirmed the debt or redeemed the property.
The court further agreed that, while they did not have to physically surrender the property, they could not continue to defend or contest the foreclosure. Using the bankruptcy court’s general power under Section 105 to issue any order that is “necessary or appropriate to carry out the provisions of this title,” the court granted the motion to compel and ordered the debtors to cease opposition to the foreclosure. The court further held that if the debtors continued to persist in their position, their discharge would be in jeopardy and the mortgagee could file a motion for an order vacating the discharge. The court found that the refusal to surrender was not only a fraud on the court, but also a violation of Section 521(a)(2)(B) requiring debtors to implement their statement of intention..
At several points in the opinion the court noted that the debtors did not contest the validity of the debt. That leaves one to wonder if the debtors had challenged the validity of the debt in the bankruptcy whether they might have been able to contest the foreclosure outside of bankruptcy under the caveat in Section 521 regarding retention of rights.