Consumer Finance Litigation

Foreclosure defense and bankruptcy often go hand in hand, but sometimes it seems like the left hand doesn't talk to the right. This has proven especially common with bankruptcy plans that propose to "surrender" real property encumbered by a mortgage. The term "surrender" is not defined in the bankruptcy code. As a result, lenders and borrowers often interpret the term differently. For example, most lenders interpret surrender to mean not defending a foreclosure. While this may seem like common sense, some borrowers have taken the view that surrender simply meant stay relief, and that foreclosure defense is still fair game after a "surrender" in bankruptcy. Such were the facts in In re Calzadilla, 14-11318-RAM, 25 Fla. L. Weekly Fed. B254a (Bankr. S.D. Fla. June 16, 2015). First, the debtor proposed a chapter 13 plan which required the parties would engage in mortgage modification mediation and if mediation were unsuccessful, the debtor would "surrender" the real property. Then after an impasse at mediation, the debtor moved to amend the plan to provide for treatment of the property outside the plan and stay relief. The lender objected in part to the proposed amendment since the court's mortgage modification mediation procedures required "surrender." Therefore, the lender requested language be included in the amended plan that the debtor may not contest the lender's right to complete its foreclosure. The debtor opposed adding such language. The Court denied the debtors' motion, and held that, "the Court's MMM Procedures explicitly require 'surrender' and 'surrender' means that debtors cannot thereafter take any overt action to defend or impede the foreclosure." This ruling is consistent with a growing body of case law that applies a common sense approach to the term "surrender" which prevents foreclosure defense. See e.g. In re Failla, 529 B.R. 786 (Bankr. S.D. Fla. 2014) (holding that debtors' defense of foreclosure action did "not comport with the definition of 'surrender'"), In re Metzler, 2015 WL 2330131 (Bankr. M.D. Fla., May 13, 2015); In re Trout, Case No. 13-39869 (S.D. Fla. 2014). For many years foreclosure practitioners saw bankruptcy largely through the lens of the automatic stay. Did the lender have stay relief or not? Few other questions were asked. However, given the increasing frequency in which borrowers are proposing "surrender" as part of their bankruptcy, a more nuanced and effective approach should be taken. Lender's should be wary of efforts, as was the case here, where debtors attempt to amend plans to take the teeth out of past commitments to surrender. Wherever surrender provisions are triggered as part of a debtor's bankruptcy, lenders should not hesitate to use the bankruptcy to squash any efforts to defend the foreclosure thereafter.