Consumer Finance Litigation

For the third time in less than two years, the Eleventh Circuit Court of Appeals has ruled that a chapter 7 debtor who does not reaffirm secured debt or redeem the property must surrender the property. In re Woide, No. 17-10776 (11th Cir. Apr. 5, 2018).

In Woide, the debtors filed a chapter 13 bankruptcy petition, and on schedule A, listed their real property and stated "to be surrendered." The case was later converted from chapter 13 to 7, and the debtors did not file any statement of intention with respect to the property. After the close of the debtors' bankruptcy case, the secured creditor initiated a foreclosure proceeding, which the debtors vigorously defended. The debtors also initiated other, separate lawsuits in state and federal court in an attempt to invalidate the note and mortgage, and they attempted to rescind the note and mortgage under the Truth in Lending Act, 15 U.S.C. § 1635. The bankruptcy court entered an order reopening the bankruptcy case and compelling surrender of the real property, specifically prohibiting the debtors from taking "any action to impede, contest, or dispute the validity or enforceability of the note and mortgage . . . including, but not limited to, any action to rescind the note and mortgage pursuant to the Truth in Lending Act, 15 U.S.C. 1635 . . . ."

After the bankruptcy court ordered the debtors to surrender the property, the debtors appealed the bankruptcy court's order compelling surrender to the district court, and the district court affirmed. In re Woide, 2017 WL 78798, 6:16-cv-1484 (M.D. Fla. Jan. 9, 2017). The debtors then appealed to the Eleventh Circuit. In re Woide, No. 17-10776 (11th Cir. 2017). The primary issue on appeal was whether the debtors, who did not file a statement of intention regarding their property, but represented during the course of their bankruptcy case that they would surrender their house, and who did not otherwise reaffirm the mortgage or redeem the property during the course of their bankruptcy case, were still required to surrender the property.

The Eleventh Circuit answered in the affirmative. Citing its In re Failla, 838 F.3d 1170 (11th Cir. 2016) decision, the Court explained: "[O]ur case law is clear that § 521(a)(2) provides only three options for a debtor who has property that serves as collateral for his debts: redeem the property, reaffirm the debt, or surrender the property." In re Woide, No. 17-10776 at *8. The Court added: "Doing nothing is not an option." Id. Rather, under both Failla and Taylor, a debtor must "choose (and complete) one of these options." Id. at *9.

The Court also rejected the debtors' argument that the creditor's motion to reopen the bankruptcy case was barred by laches. Although the bankruptcy case was closed in 2011, and the motion to reopen was not filed until 2016, the Court reasoned that the debtors "failed to show that they face any undue prejudice as a result of the delay." Id. Rather, the Court noted, the debtors "enjoyed free use of [the] property for years, a benefit to which they were not entitled." Id. (internal citations and quotations omitted).

The Eleventh Circuit's Woide decision confirms and clarifies its prior In re Taylor, 3 F.3d 1512 (11th Cir. 1993) and In re Failla, 838 F.3d 1170 (11th Cir. 2016) decisions, and affirms that a debtor must both choose and complete one of the three options specified in § 521(a)(2). As the opinion makes clear, a debtor who wishes to retain secured property must take action to retain those rights; otherwise, the debtor must surrender the property by relinquishing rights to the collateral, which include ceasing any opposition to the creditor's foreclosure proceeding or challenging the enforceability of the mortgage through other lawsuits. The opinion also makes clear that a debtor is not prejudiced by being compelled to comply with § 521(a)(2), even when years pass between the close of their bankruptcy case and the creditor's motion to reopen that case.

Click here to review the full Woide decision.