Consumer Finance Litigation

Chief Judge Karen S. Jennemann of the United States Bankruptcy Court for the Middle District of Florida, Orlando Division recently held in a soon-to-be published opinion that chapter 7 debtors who state an intention to surrender real property to the mortgagee must perform on that intention by not impeding or interfering with the state court foreclosure process. In the case, In re Plummer, - B.R. -, 2014 WL 1248039 (Bankr. M.D. Fla. March 25, 2014), the Bankruptcy Court also held that, while the statute is not a mere notice provision, surrender does not require a debtor to take any affirmative action to physically deliver the real property. In Plummer, the debtors filed a chapter 7 bankruptcy case. Pursuant to the Bankruptcy Code at 11 U.S.C. § 521(a)(2) and Eleventh Circuit precedent, the debtors were required to file a statement of intention as to all property of the bankruptcy estate serving as collateral for debts and to indicate whether they intended to: (a) retain such property by redeeming it (paying off the creditor's allowed secured claim in full); (b) retain such property by reaffirming the debt (agreeing to continue paying and to remain personally liable); or (c) surrender such property. On their statement of intention, the debtors stated that they intended to surrender certain real property to the mortgagee. The debtors indicated on their bankruptcy schedules that they had no equity in the subject property and the chapter 7 trustee subsequently filed a notice of his intention to abandon the subject property (as opposed to administering it for the benefit of unsecured creditors). After the debtors received their chapter 7 discharge of personal liability, the mortgagee demanded that the debtors perform their stated intention to surrender by signing a warranty deed transferring the subject property to the mortgagee free and clear of all liens. The proposed warranty deed also stated that the conveyance would not satisfy the note and mortgage. Because the Internal Revenue Service held a substantial junior lien on the property and because the debtors' personal liability had already been discharged, the debtors refused to sign the warranty deed. Nearly a year later, the mortgagee instituted a foreclosure proceeding as to the subject property. Other than filing a notice of the discharge of their personal liability, the debtors did absolutely nothing to contest the foreclosure proceeding. The state court entered summary judgment in favor of the mortgagee. At the mortgagee's urging, the state court awarded the mortgagee attorney's fees and costs and stated that the debtors' failure to surrender the subject property to the mortgagee had caused the mortgagee to incur those fees and costs, which the debtors would be liable for. The debtors filed a motion for sanctions against the mortgagee with the Bankruptcy Court, alleging that the mortgagee violated the Section 524 bankruptcy discharge injunction by seeking attorney's fees and costs against the debtors in the state court. The mortgagee defended by arguing that such attorney's fees and costs were appropriate because the debtors breached their obligation to surrender the subject property. Thus, the Bankruptcy Court had to determine what, if anything, a chapter 7 must do to comply with a stated intention to surrender real property to a mortgagee. The Bankruptcy Court began by surveying the existing case law regarding surrender under Section 521(a)(2). Some courts have held that Section 521(a)(2) is merely a notice statute designed to save creditors the trouble of filing actions to obtain their collateral when the debtor merely intends to surrender it. The Bankruptcy Court rejected this notion and cited Eleventh Circuit case law which holds that "the debtor must perform some act with respect to the property" under Section 521(a)(2). The Bankruptcy Court then surveyed the case law defining the term 'surrender'. First, the Bankruptcy Court noted that the Bankruptcy Code makes a distinction between the terms 'surrender' and 'deliver', with the latter used when the Bankruptcy Code intends "physical turnover of property." According to the Bankruptcy Court, 'surrender' does not mean physical turnover of property because such a meaning would allow creditors to avoid state law obligations and to circumvent state law foreclosure protections created for the benefit of borrowers, such as the equity of redemption and the right to obtain the foreclosure sale surplus. Having determined what surrender is not, the Bankruptcy Court then determined what surrender is. The Bankruptcy Court held that a chapter 7 debtor who states his intention to surrender under Section 521(a)(2) complies with that intention by "allow[ing] the secured creditor . . . to obtain possession by available legal means without interference. The debtor is not required to take any affirmative action to physically transfer the property. But the debtor cannot impede the creditor's efforts to take possession of its collateral by available legal means." The Bankruptcy Court went on to note that remedies available to secured creditors faced with debtors who refuse to surrender after stating an intention to do so include motions to compel compliance with the prospect of dismissal without discharge for continued noncompliance. The Bankruptcy Court determined that the debtors in this case complied with their statement of intention to surrender by not contesting the state court foreclosure proceeding and assessed sanctions against the mortgagee for violating the bankruptcy discharge injunction by pursuing attorney's fees and costs against the debtors in the state court.