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Federal Court Addresses Creditors’ Rights Following Borrower ‘Surrender’ in Bankruptcy

Over the past decade, the number of residential home foreclosures in the state of Florida has fortunately seen a steady decline. Whether due to increasing employment rates or stagnantly-low interest rates, homeowners have made great strides in remaining in their homes and avoiding the tragic pitfalls of the mortgage loan default.

Nonetheless, many mortgagees are still enduring the state foreclosure process, which often involves consumer bankruptcy laws as well. In one recent case ultimately decided by the U.S. District Court for the Southern District of Florida, the creditor-bank went to great lengths to protect its interest against two bankruptcy petitioners set on backpedaling on their Statement of Intent.

Moreover, the case involved the additional elements of an inattentive trustee and the legal abandonment of the property by the individual tasked with maintaining its status during the bankruptcy litigation – talk about a trust issue!

Details of Failla v. CitiBank, N.A.

The underlying facts of Failla v. CitiBank, N.A. began in 2007 as the homeowners entered into default of their residential mortgage loan. At that time, the mortgagee (CitiBank) initiated the foreclosure process and the homeowners initiated Chapter 7 bankruptcy proceedings shortly thereafter.

As part of the bankruptcy process, the debtors were required to disclose their secured debts, including the home encumbered by CitiBank – which they did, along with a statement affirming their intent to surrender the property (as opposed to redeeming the mortgage).

When a property is surrendered under bankruptcy laws, it is generally understood that the debtors no longer retain any rights to the property, possessory or otherwise. However, the subsequent facts of this situation tell a different tale, which was ultimately resolved by the District Court.

As the bankruptcy process continued, the trustee went on to abandon the property and the court awarded the debtors a discharge of the underlying mortgage debt, setting the stage for the state court foreclosure process to begin. However, the debtors then began the process of defending against the state foreclosure – a tactic historically prohibited pursuant to the terms of the surrender.

However, being that the word “surrender” does not actually occur in the Bankruptcy Code, creditors and courts alike were left unsure as to whether a debtor can actually reignite his rights to redeem the property despite receiving a discharge of the debt in a contemporaneous bankruptcy proceeding.

Court Clarifies Rights Post-Surrender

At the heart of the debtors’ argument was that, since the bankruptcy trustee abandoned the property, title and rights to the residence should revert back to the debtors – necessitating a full foreclosure defense. The court examined several cases stemming from other jurisdictions and ultimately concluded that once a debtor has espoused an intent to “surrender” the property, he gives up all legal rights or interests he may have had in the property.

Further, which is a big win for creditors, “the debtor is precluded from taking any action which would interfere with the secured creditor’s ability to obtain legal title to, and possession of, the property through legal means” – in other words, the debtor is precluded from defending against a post-bankruptcy foreclosure in state court.

More succinctly, the court held that “[d]efending against a foreclosure proceeding relating to the secured property would be inconsistent with the debtor’s stated intention to surrender the property.”

Contact an Experienced Creditors’ Rights Law Firm Today!

If you are facing a difficult issue as a creditor and would like to discuss your options, please do not hesitate to contact attorney Michael L. Feinstein today: (954) 767-9662.