On May 13, 2015, Judge Michael G. Williamson, writing for the Middle District of Florida, issued a consolidated opinion of two bankruptcy cases:  In re Metzler and In re Patel (8:12-bk-16792-MGW & 8:13-bk-09736-MGW).  The issue in each case involved, at its center, the definition of “surrender,” and, if finding a surrender, whether a debtor could subsequently contest a foreclosure.  What makes this decision so potentially influential are the diverging factual scenarios but, mostly, one was a chapter 13 and the other a chapter 7.  Drawing from the 1st, 4th and 11th Circuit, the Middle District of Florida defined “surrender” as refraining from taking an overt act to prevent a secured creditor from foreclosing an interest in secured property.

In In re Patel, the chapter 7 case, Patel sought relief in bankruptcy ten years after jointly buying her home with her daughter.  After her daughter quitclaimed her interest in the property to the borrower’s ex-husband, Patel falsely assumed her interest in the property was dissolved.  Consequently, she never scheduled the property nor filed a statement of intention to indicate whether she reaffirmed, redeemed or surrendered it.  In an odd factual twist, Patel claimed a foreclosure defense attorney began to defend the pending foreclosure unbeknownst to her and went as far as filing an answer with affirmative defenses and a motion for summary judgment on her behalf seeking a judgment as a matter of law.  Of course, the lender objected to the defense and sought to reopen the bankruptcy to compel Patel to surrender the property since she neither reaffirmed nor redeemed the property.

In In re Metzler, the chapter 13 case, the facts are far more straightforward and with fewer twists.  The Lender began foreclosure proceedings against Metzler who filed an intervening chapter 13 bankruptcy in an effort to save her home.  At least that was her initial goal but after amending her chapter 13 plan several times she finally indicated her intent to surrender in her third amended plan, which was confirmed.  Naturally, after the Court confirmed her third amended plan, the lender resumed the foreclosure action; however, Metzler continued to defend against the lender’s efforts despite the surrender.  Lender proceeded to move for an order revoking the confirmation order.

Section 521 of the Bankruptcy Code requires a debtor to file a statement of intentions within thirty days of filing her petition or, on or before the first meeting of creditors.  The statement of intentions must indicate whether the debtor reaffirms, redeems or surrender’s secured property.  The Eleventh Circuit, in Taylor, has taken the position that Section 521 means a debtor cannot retain collateral unless he or she redeems it or reaffirms the debt it secures.

Although Section 521 doesn’t apply to a chapter 13 debtor, Section 1325 gives a debtor three options for treating secured debt in a plan:  gain secured creditor’s consent, cram down the plan treatment over secured creditor’s objection, or surrender the property.  What these options make clear is, without consent, the debtor cannot retain the property without paying for it.

So where does this leave us?

Back to the definition of surrender.  The Bankruptcy Code does not define the term surrender.  Therefore, we must rely on judicial interpretation.  The First Circuit Court of Appeals attempted to define the term “surrender” in Pratt and noted that Congress purposefully chose to use the term “surrender” rather than “deliver” in Section 521(a)(2).  Given the distinction, the First Circuit reasoned that “surrender” does not require the debtor to physically transfer the collateral to the creditor but simply make the property “available” to the creditor, i.e. to cede their possessory rights in the collateral.  Following the First Circuits opinion in Pratt, the Fourth Circuit Court of Appeals ventured to define “surrender” in White and, relying in part on Collier on Bankruptcy, defined it as “the relinquishment of all rights in property, including possessory right, even if such relinquishment does not always require immediate physical delivery of property to another.”

The First and Fourth Circuit’s interpretations were equally consistent with the Eleventh Circuit’s in Taylor and Judge Williamson, finding for the Middle District of Florida, agreed with them all.  He agreed with the First Circuit that a debtor need not deliver the collateral to the creditor as this might circumvent state law by allowing the creditor to bypass the foreclosure requirement.  And ultimately, that “surrender” means “not taking an overt act to prevent the secured creditor from foreclosing its interest in the property.”

In these two cases, both Metzler and Patel clearly took overt acts to prevent the lenders from foreclosing their mortgages.  By filing defensive pleadings, appearing in opposition at foreclosure hearings and actively and affirmatively contesting these cases, each borrower violated Sections 521 and 1325 by failing to commit to their surrender.  Moreover, the Eleventh Circuit has made clear that any debtor that surrenders the collateral on their statement of intentions, acknowledges the validity of the debt and benefits from the discharge, yet continues to resist the foreclosure, may be subject to revocation of their discharge for fraud on the court.

Secured Creditor’s, now armed with a clear definition of “surrender,” are free to enforce its meaning against any borrower who has surrendered the collateral in some form but continues to resist foreclosure.