On November 23, 2015, in the first appellate decision of its kind, the District Court for the Southern District of Florida affirmed a bankruptcy court order to compel chapter 7 debtors to surrender real property by directing the debtors to cease all foreclosure defense. The decision in Failla v. Citibank, N.A. (In re Failla), case no. 15-80328, marks the first decision from a federal appellate court to address the question of whether a bankruptcy court may enter an order directing a debtor to cease defending a mortgage foreclosure suit pending in state court.
On December 19, 2014, Judge Hyman from the United States Bankruptcy Court for the Southern District of Florida issued a written opinion and order compelling David and Donna Failla to cease defending a foreclosure action brought by Citibank, N.A. The Faillas had previously filed for relief under chapter 7 of the Bankruptcy Code, and with their petition, filed schedules listing the mortgage as an undisputed, non-contingent, and liquidated mortgage debt oversecuring their principal residence, as well as a statement of intention to surrender the property. Judge Hyman held that, by virtue of their bankruptcy filings, the Faillas no longer have an absolute right to defend a foreclosure action against their property, and that their continued foreclosure defense violated their statutory duty to surrender the property, could be considered a fraud upon the bankruptcy court, and put their bankruptcy discharge in jeopardy.
The Faillas appealed Judge Hyman’s decision to the District Court, arguing that they effectively surrendered their property to the bankruptcy trustee, who had abandoned the property at the close of the bankruptcy case. According to the Faillas, the legal effect of the trustee’s abandonment was a reversion of all rights in the property to the Faillas, including the right to defend foreclosure of the property. Judge Kenneth Marra disagreed.
In a ten-page opinion, Judge Marra re-characterized the “critical question” on appeal: “what is the legal effect of the debtor’s decision to surrender the property?” In a thorough exposition of relevant case law, including the Eleventh Circuit’s decision in In re Taylor, 3 F.3d 1512 (11th Cir. 1993), Judge Marra concluded that “once the debtor decides to ‘surrender’ secured property, the debtor has abandoned any interest or claim that he may have had to the property,” and “is precluded from taking any action which would interfere with the secured creditors’ ability to obtain legal title to, and possession of, the property through legal means.” Furthermore, Judge Marra rejected the Faillas’ argument that the trustee’s abandonment of the property operates to revert all property rights to the Faillas, instead holding that the trustee’s abandonment of the property only affects title ownership to the property. “[A]bandonment does not affect other aspects of the debtor’s rights and responsibilities relative to the property that flow from the bankruptcy,” including the debtor’s discharge of personal liability for the mortgage debt and the debtor’s relinquishment of rights in surrendered property.
The Failla decision deals a blow to the foreclosure defense firms that have created a cottage industry around defending foreclosures under similar circumstances. There are two other appeals currently pending in the Southern District of Florida that will address related issues, and the Failla decision should be persuasive in the outcome of those appeals as well as many other decisions currently pending before bankruptcy courts across Florida. If appealed again, the Eleventh Circuit may get the opportunity to weigh in on this issue, which would create a binding precedent for all to follow.
Click here to review the Failla decision from the District Court.
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