In recent years, there has been a hotbed of litigation across the nation, particularly in Florida state and bankruptcy courts, regarding a debtor’s ability to contest a secured creditor’s foreclosure notwithstanding the debtor’s previous “surrender” of the subject collateral in bankruptcy. The issue ultimately made its way to the Eleventh Circuit and, much to the delight of lenders and mortgage servicers, the Eleventh Circuit ruled in convincing fashion: “Debtors who surrender property must get out of the creditor’s way.” In re Failla, Case No. 15-15626, 2016 WL 5750666 (11th Cir. October 4, 2016).

In Failla, the debtors owned a home in Boca Raton, Florida, which was subject to a mortgage held by Citibank. The debtors defaulted on their home loan in 2009 and subsequently filed chapter 7 bankruptcy in 2011. During their bankruptcy, the debtors filed a statement of intention as required under Section 521(a)(2) of the Bankruptcy Code, pursuant to which they stated their intention to “surrender” the home. Because the home was fully encumbered by the mortgage and thus had no value for the bankruptcy estate, the bankruptcy trustee chose not to liquidate the home and instead “abandoned” the property back to the debtors.

Following these events in the bankruptcy, Citibank moved forward with its foreclosure action in Florida state court. However, when the debtors continued to contest Citibank’s foreclosure proceeding, Citibank returned to the bankruptcy court and requested that the court enter an order requiring the debtors to withdraw their defenses in the state court foreclosure proceeding due to their previous surrender of the home. The bankruptcy court granted Citibank’s motion, which the district court affirmed on the debtors’ initial appeal. The debtors then appealed to the Eleventh Circuit.

The Eleventh Circuit recognized that the overarching issue of whether a debtor who agrees to “surrender” his house in bankruptcy may subsequently contest the lender’s foreclosure action required the Court to address the sub-issues of (1) what “surrender” means within the context of Section 521(a)(2) and whether the debtors had satisfied their declared intention to surrender their home, and (2) in order to answer the first sub-issue, to whom the debtors must surrender the property.

Addressing these questions, the Eleventh Circuit first held that a debtor who chooses to “surrender” his house pursuant to Section 521(a)(2), surrenders the property to both the trustee and the creditor. Specifically, the debtor first surrenders the property to the trustee, who has the choice of either liquidating the property or abandoning the property. If the trustee abandons the property, the debtor then surrenders the property to the creditor. Second, the Eleventh Circuit held that while the term “surrender” does not require a debtor to physically deliver the property to the creditor, the term does require the debtor to relinquish his rights in the property and drop his opposition to a foreclosure action. Citing Black’s Law Dictionary, the Eleventh Circuit held that surrender means “giving up of a right or claim,” and that debtors who surrender their property can no longer contest a foreclosure action — “Otherwise, debtors could obtain a discharge based, in part, on their sworn statement to surrender and ‘enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.’” Highlighting the inequities of such a result, the Eleventh Circuit noted: “In bankruptcy, as in life, a person does not get to have his cake and eat it too.” Finally, citing Section 105 of the Bankruptcy Code, the Eleventh Circuit held that bankruptcy courts have the power to enforce the surrender by ordering debtors to withdraw their affirmative defenses and to dismiss their counterclaims asserted in a subsequent state court foreclosure proceeding.

While Failla was issued in the context of a chapter 7 bankruptcy, it appears that the Eleventh Circuit’s ruling as to the consequences of a debtor’s “surrender” of collateral will apply just the same in chapter 11 and chapter 13 bankruptcies. Notably, our firm actually litigated the issue of a debtor’s “surrender” of collateral within the context of a chapter 11 bankruptcy and obtained a published opinion from the United States Bankruptcy Court for the Northern District of Florida that is consistent with the Eleventh Circuit’s opinion in Failla. See In re Holoka, 525 B.R. 495 (Bankr. N.D. Fla. 2014).

With the Eleventh Circuit’s ruling now on record, the message is clear: “Debtors who surrender property must get out of the creditor’s way.” Fortunately for lenders and mortgage servicers in Florida, the path to foreclosing on surrendered collateral should be far less troublesome moving forward.