The U.S. Court of Appeals for the Eleventh Circuit recently held that the word "surrender" in the Bankruptcy Code, 11 U.S.C. § 521(a)(2), requires that debtors relinquish all of their rights to the collateral.
In so ruling, the Court ordered the borrowers to "surrender" their house to the mortgagee in a foreclosure action, and held that the bankruptcy court had the authority to compel the borrowers to fulfill their mandatory duty under 11 U.S.C. § 521(a)(2) not to oppose a foreclosure action in state court.
A copy of the opinion is available at: Link to Opinion
A mortgagee filed a foreclosure action, which the borrowers opposed. The borrowers filed for bankruptcy, admitting that they owned the house, that the house was collateral for the mortgage, that the mortgage was valid, and that the balance of the mortgage exceeded the value of the house.
The borrowers also filed a statement of intention, 11 U.S.C. § 521(a)(2), to surrender the house. Because the house had a negative value, the bankruptcy trustee abandoned it back to borrowers under 11 U.S.C. § 554. Borrowers continued to live in the house while they contested the foreclosure action.
The mortgagee filed a motion to compel surrender in the bankruptcy court. The mortgagee argued that the borrowers' opposition to the foreclosure action contradicted their statement of intention to surrender the house. The borrowers argued that their opposition to the foreclosure action was not inconsistent with surrendering the house.
The bankruptcy court granted the mortgagee's motion to compel surrender and ordered borrowers to stop opposing the foreclosure action. The bankruptcy court explained that if borrowers did not comply with its order, it might "enter an order vacating [their] discharge."
The district court affirmed the bankruptcy court's ruling on appeal, and borrowers then appealed to the U.S. Court of Appeals for the Eleventh Circuit. The Eleventh Circuit affirmed.
First, the Eleventh Circuit explained that section 521(a)(2) prevents debtors who surrender their property from opposing a foreclosure action in state court. Second, it explained that the bankruptcy court had the authority to order borrowers to stop opposing their foreclosure action.
Section 521(a)(2) states a bankruptcy debtor's responsibilities when his schedule of assets and liabilities includes mortgaged property:
(a) The debtor shall ...
(2) if an individual debtor's schedule of assets and liabilities includes debts which are secured by property of the estate—
(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property; and
(B) within 30 days after the first date set for the meeting of creditors under section 341(a), or within such additional time as the court, for cause, within such 30-day period fixes, perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph; except that nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor's or the trustee's rights with regard to such property under this title, except as provided in section 362(h).
11 U.S.C. § 521(a)(2).
Subsection (A) requires the debtor to file a statement of intention about what he plans to do with the collateral for his debts. See Fed. R. Bankr. P. 1007(b)(2). The statement of intention must declare one of four things: the collateral is exempt, the debtor will surrender the collateral, the debtor will redeem the collateral, or the debtor will reaffirm the debt. See In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993). After the debtor issues his statement of intention, subsection (B) requires him to perform the option he declared. Id.
The question that Eleventh Circuit faced was whether borrowers satisfied their declared intention to surrender their house under section 521(a)(2)(B).
To answer that question, the Court had to decide to whom borrowers had to surrender their property and whether surrender requires them to acquiesce to a creditor's foreclosure action. The district court and the bankruptcy court concluded that the borrowers violated section 521(a)(2) by opposing bank's foreclosure action after filing a statement of intention to surrender their house.
The Eleventh Circuit agreed with both the district court and the bankruptcy court that section 521(a)(2) requires debtors who file a statement of intent to surrender to surrender the property both to the trustee and to the creditor. Even if the trustee abandons the property, the borrowers' duty to surrender the property to the creditor remains.
The Court held that interpreting the word "surrender" to refer only to the trustee of the bankruptcy estate rendered section 521(a)(2) superfluous in connection with section 521(a)(4). Under the surplusage canon, no provision "should needlessly be given an interpretation that causes it to duplicate another provision." Antonin Scalia & Bryan A. Garner, Reading Law 174 (2012).
Section 521(a)(4) states that "[t]he debtor shall ... surrender to the trustee all property of the estate." 11 U.S.C. § 521(a)(4). The Eleventh Circuit concluded that because section 521(a)(4) already requires the debtor to surrender all of his property to the trustee so the trustee can decide, for example, whether to liquidate it or abandon it, section 521(a)(2) must refer to some other kind of surrender.
The Court observed that when the bankruptcy code intends that a debtor must surrender his property either to the creditor or the trustee, it says so. On the one hand, the Court noted that although section 1325(a)(5)(C) states that "the debtor surrenders the property securing such claim to such holder," which clearly contemplates surrender to a creditor, Congress did not use that language in Section 521(a)(4). On the other hand, section 521(a)(4) states that "[t]he debtor shall ... surrender to the trustee all property of the estate," which clearly contemplates surrender to the trustee. Congress did not use that language in Section 521(a)(2) either.
The Court observed that what Congress said in section 521(a)(2) is "surrender," without specifying to whom the surrender is made, but noted that the lack of an object made sense because a debtor who decides to surrender his collateral must surrender it to both the trustee and the creditor. The debtor first surrenders it to the trustee (under § 521(a)(4)) who decides whether to liquidate it under Section § 704(a)(1), or abandon it under Section § 554. If the trustee abandons it, then the debtor surrenders it to the creditor under § 521(a)(2).
The Court observed that the word "surrender" in section 521(a)(2) is used with reference to the words "redeem" and "reaffirm," and those words plainly refer to creditors. The Court further noted that a debtor "redeems" property by paying the creditor a particular amount, and "reaffirms" a debt by renegotiating it with the creditor. 11 U.S.C. §§ 524(c), 722.
Because context is a primary determinant of meaning, the Court concluded that the word "surrender" likely refers to a relationship with a creditor as well, noting that it said as much in dicta in In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993).
Additionally, the Court observed that other provisions of the Bankruptcy Code that provide a remedy to creditors when a debtor violates section 521(a)(2) suggest that the word "surrender" does not refer exclusively to the trustee.
The Court also noted that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109–8, § 305, 119 Stat. 23, added two sections to the Bankruptcy Code that provide remedies for creditors with respect to personal property. 11 U.S.C. §§ 362(h), 521(d).
Section 362(h) punishes a debtor who violates section 521(a)(2) by lifting the automatic stay to allow the creditor to pursue other remedies against the debtor immediately. Section 362(h) allows the trustee of the bankruptcy estate to override this remedy, but only if the trustee moves the court to "order[ ] appropriate adequate protection of the creditor's interest." Id. § 362(h)(2). In addition, section 521(d) allows a creditor to consider the debtor in default because he declared bankruptcy if the debtor violates section 521(a)(2).
The Court held as irrelevant the fact that these remedies apply only to personal property, noting that section 521(a)(2) uses the generic word "property" and draws no distinction between real and personal property.
The Eleventh Circuit further noted that Congress provided additional remedies for creditors secured by personal property, but the contextual clue remains the same: these remedies for creditors reflect an obvious point about section 521(a)(2) -- it is a provision that affects and protects the rights of creditors.
The Court also agreed with the bankruptcy court and the district court that "surrender" requires debtors to drop their opposition to a foreclosure. Although the bankruptcy code does not define the word "surrender," the Court gave it its "contextually appropriate ordinary meaning."
The Eleventh Circuit noted that Webster's New International Dictionary defined "surrender" as "to give or deliver up possession of (anything) upon compulsion or demand", and the Oxford English Dictionary defined "surrender" as "to give up (something) out of one's own possession or power into that of another who has or asserts a claim to it," but held that this meaning was not contextually appropriate. The Court noted that when the Bankruptcy Code means "physically turn over property," it uses the word "deliver" instead of "surrender." The Court cited as examples 11 U.S.C. §§ 542(a), 543(b)(1) and § 727(d)(2), which uses the phrase "deliver or surrender," suggesting they are different.
The Eleventh Circuit also noted that Black's Law Dictionary defines "surrender" as "[t]he giving up of a right or claim," noting that Webster's New International Dictionary defines it as "to give up completely; to resign; relinquish; as, to surrender a right, privilege, or advantage."
The Court noted approvingly that this meaning describes a legal relationship, as opposed to a physical action, which makes sense in the context of section 521(a)(2) — a provision that describes other legal relationships like "reaffirmation" and "redemption," and was in line with existing authorities, citing In re Pratt, 462 F.3d 14, 18–19 (1st Cir. 2006); In re White, 487 F.3d 199, 205 (4th Cir. 2007); and In re Plummer, 513 B.R. 135, 143–44 (Bankr. M.D. Fla. 2014).
Relying on In re White, 487 F.3d at 206, the Court concluded that because "surrender" means "giving up of a right or claim," debtors who surrender their property can no longer contest a foreclosure action.
The Eleventh Circuit also held that, when the debtors act to preserve their rights to the property "by way of adversarial litigation," they have not "relinquish[ed] ... all of their legal rights to the property, including the rights to possess and use it."
In addition, relying on In re Elowitz, 550 B.R. 603, 607 (Bankr. S.D. Fla. 2016), the Eleventh Circuit observed that ordinarily, when debtors surrender property to a creditor, the creditor obtains it immediately and is free to sell it: "[I]n order for surrender to mean anything in the context of § 521(a)(2), it has to mean that ... debtor[s] ... must not contest the efforts of the lienholder to foreclose on the property." Otherwise, the Court noted, debtors could obtain a discharge in bankruptcy based, in part, on their sworn statement to surrender and enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.
The Eleventh Circuit held that the hanging paragraph in section 521(a)(2) does not give the debtor the right to oppose a foreclosure action. The hanging paragraph states that "nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor's or the trustee's rights with regard to such property under this title, except as provided in section 362(h)."
Noting that the key words for purposes of this dispute are "under this title," the Court of Appeals held that the hanging paragraph means that section 521(a)(2) does not affect the debtor's or the trustee's bankruptcy rights. The hanging paragraph spells out an order of operations. It does not mean that a debtor who declares he will surrender his property can then undo his surrender after the bankruptcy is over and the creditor initiates a foreclosure action.
The Eleventh Circuit also held that the outcome was not unfair. During the bankruptcy proceedings, the borrowers declared that they would surrender the property, that the mortgage was valid, and that bank had the right to foreclose, such that compelling borrowers to stop opposing the foreclosure action only required them to honor that declaration.
Relying on In re Guerra, 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016), the Eleventh Circuit observed that in bankruptcy, as in life, a person does not get to have his cake and eat it too: borrowers may not say one thing in bankruptcy court and another thing in state court, thereby making a mockery of the legal system by taking inconsistent positions.
Section 521(a)(2) requires a debtor to either redeem, reaffirm, or surrender collateral to the creditor. Having chosen to surrender, the Eleventh Circuit held that the debtor must drop his opposition to the creditor's subsequent foreclosure action. The Court held that, because the borrowers filed a statement of intention to surrender their house, they cannot contest the foreclosure action.
For the first time on appeal, the borrowers argued that even if they breached their duty to surrender under section 521(a)(2), the only remedy available to the bankruptcy court was to lift the automatic stay for bank, which would allow the mortgagee to foreclose on the house in the ordinary course.
Although the mortgagee moved strike this portion of borrowers' briefs, the Eleventh Circuit chose to address the argument, and reject it. The Court held that bankruptcy courts are not limited to lifting the automatic stay. Bankruptcy courts have broad powers to remedy violations of the mandatory duties section 521(a)(2) imposes on debtors. Section 105(a), which includes section 521(a)(2), states that bankruptcy courts can "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title."
Relying on Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 (2007), which held that bankruptcy judges have broad authority to take any action that is necessary or appropriate to prevent an abuse of process, the Eleventh Circuit held that a debtor who promises to surrender property in bankruptcy court and then, once his debts are discharged, breaks that promise by opposing a foreclosure action in state court has abused the bankruptcy process.
Finally, the Eleventh Circuit noted that if a bankruptcy court could only lift the automatic stay, then debtors could violate section 521(a)(2) with impunity. Because the automatic stay is always lifted at the end of the bankruptcy proceedings, the Eleventh Circuit noted this remedy does nothing to punish debtors who lie to the bankruptcy court about their intent to surrender property.
Although a creditor may be able to invoke the doctrine of judicial estoppel in state court to force debtors to keep a promise made in bankruptcy court, its availability does not affect the statutory authority of bankruptcy judges to remedy abuses that occur in their courts. Accordingly, the Court concluded that there is nothing strange about bankruptcy judges entering orders that command a party to do something in a non-bankruptcy proceeding, because bankruptcy courts regularly exercise jurisdiction to tell parties what they can or cannot do in a non-bankruptcy forum.
The Eleventh Circuit held that, just as the bankruptcy court may order creditors who violate the automatic stay to take corrective action in the non-bankruptcy litigation, the bankruptcy court may order debtors to withdraw their affirmative defenses and dismiss their counterclaim in a foreclosure case.
Accordingly, the Court held that the bankruptcy court had the authority to compel the borrowers to fulfill their mandatory duty under section 521(a)(2) not to oppose the foreclosure action in state court, affirmed the order compelling borrowers to surrender their home to the mortgagee, and denied as moot the mortgagee's motion to strike.
Ralph T. Wutscher
Maurice Wutscher LLP
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