Failla v. Citibank, N.A.

• Decision Date: 23 November 2015
• Docket Number: CASE NO. 15–80328–CIV–MARRA
• Citation: 542 B.R. 606
• Parties: David A. Failla and Donna A. Failla, Appellants, v. Citibank, N.A., as Trustee for the Certificate Holders of Structured Asset Mortgage Investment II Inc., Bear Stearns Alt–A Trustee, Mortgage Pass–Through Certificates Series 2006–7, Appellee.
• Court: U.S. District Court — Southern District of Florida

542 B.R. 606

David A. Failla and Donna A. Failla, Appellants,

v.Citibank, N.A., as Trustee for the Certificate Holders of Structured Asset Mortgage Investment II Inc., Bear Stearns Alt–A Trustee, Mortgage Pass–Through Certificates Series 2006–7, Appellee.

CASE NO. 15–80328–CIV–MARRA

United States District Court, S.D. Florida.

Signed November 23, 2015

Michael E. Zapin, Boca Raton, FL, for Appellants.

Eric Scott Pendergraft, Shraiberg, Ferrara & Landau, P.A., Boca Raton, FL, Jonathan Michael Sykes, Burr & Forman LLP, Orlando, FL, for Appellee.

OPINION AND ORDER

KENNETH A. MARRA, United States District Judge

This cause is before the Court on the appeal by David A. Failla and Donna A. Failla ("Appellants" "Faillas") of the order of the bankruptcy court granting Citibank, N.A.'s ("Appellee" "Citibank") amended motion to compel debtors to surrender real property pursuant to statement of intention. (DE 1.) The Court has carefully considered the appeal, the briefs of the parties, the entire record on appeal, and is otherwise fully advised in the premises.

I. Background

The facts, based upon Appellants and Appellee's statement of facts in their appellate briefs and the appellate record, are as follows:

In 2009, the Faillas defaulted on their note and mortgage for real property and Citibank initiated a foreclosure action. The Faillas opposed the foreclosure, but then filed a chapter 7 bankruptcy case on August 31, 2011. As part of that bankruptcy proceeding, the Faillas stated they own real property, encumbered by a mortgage. They also stated that the mortgage is a valid first mortgage lien on the property and represents an undisputed, non-contingent, liquidated and secured claim over the Faillas and the property. The Faillas stated further that the amount they owned pursuant to the loan exceeded the value of the property. The Faillas filed their statement of intention with respect to the property and represented that they would surrender the property.¹ Thereafter, the Faillas attempted to amend their statement of intention and sought to declare an intention to reaffirm the mortgage and loan. The amendment was untimely and invalid. Ultimately, the chapter 7 trustee abandoned the property. On December 16, 2011, the bankruptcy court issued an order discharging the debtors. Subsequently, the state court set a non-jury trial for August 21, 2013 regarding the foreclosure. The Faillas opposed Citibank's foreclosure action and have retained possession and title to the property.

In response to the Faillas' defense of the foreclosure action, Citibank moved the bankruptcy court to compel surrender of the property. The Faillas opposed this motion, contending that they already surrendered the property to the bankruptcy trustee, who abandoned it. According to the Faillas, once the trustee abandoned the property, it reverted to them and they were restored their prepetition rights. In other words, the Faillas claim that the "surrender" was properly made to the trustee, not Citibank, and that as a result of the trustee's abandonment of the property, they are free to defend against the foreclosure.

On December 19, 2014, the bankruptcy court addressed the following issues: "(1) [w]hat actions or inactions, if any, are required of the [Faillas] to effectively and sufficiently perform their Statement of Intention to surrender the property?; (2) [w]hat remedies or rights are available to Citibank for the [Faillas'] failure to comply with their obligation to perform their Statement of Intention to surrender the Property?; and (3) [d]oes the ‘exception’ language of 11 U.S.C. § 521(a)(2)(B) —which states that ‘except that nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor's or trustee's rights with regard to such property under this title, except as provide in section 362(h)’—implicitly permit a debtor to lawfully defend a foreclosure action as a matter of ‘right’ of such property ownership?"

The bankruptcy court began its analysis with a discussion of the term "surrender," which is not defined in section 521(a)(2)² or anywhere else in the bankruptcy code. The bankruptcy court interpreted Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir.1993) as requiring a debtor who is unwilling to reaffirm or redeem the mortgage obligation to indicate an intent to surrender the home and tender the property to the mortgagee. The bankruptcy court also held that while the Faillas do not have to physically surrender the property to Citibank, they could not defend against or contest the foreclosure in state court. Lastly, the bankruptcy court ruled that if the Faillas did not surrender the property, their bankruptcy discharge would be in jeopardy.

On appeal, the Faillas make the following arguments: (1) the bankruptcy court erred in finding that the Faillas were required under section 521(A)(2) of the bankruptcy code to surrender the property to Citibank as opposed to the bankruptcy trustee, as the Faillas did and (2) the bankruptcy court ignored section 554(c) and the ramifications of what an abandonment back to a debtor means. In response, Citibank asserts that section 521(a)(2) and Eleventh Circuit case law mandates that chapter 7 debtors not retain collateral securing a debt unless they reaffirm or redeem the collateral, even if the debtors are current on their payment obligations. Citibank argues that under section 521(a)(2), the duty to surrender requires relinquishment of rights to all persons having an interest in the collateral, including the secured creditor.

II. Legal Standard

The Court reviews the Bankruptcy Court's factual findings for clear error and its legal conclusions de novo . In re Globe Manufacturing Corp., 567 F.3d 1291, 1296 (11th Cir.2009) ; In re Club Assoc., 951 F.2d 1223, 1228–29 (11th Cir.1992). An appellate court may affirm the lower court "where the judgment entered is correct on any legal ground regardless of the grounds addressed, adopted or rejected" by the lower court. Bonanni Ship Supply, Inc. v. United States, 959 F.2d 1558, 1561 (11th Cir.1992).

III. Discussion

The Bankruptcy Code provides:

(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. If a debtor retains nonexempt collateral under section 521(a)(2), the debtor has the options of reaffirmation, redemption or surrender. In re Plummer, 513 B.R. 135, 141 (Bankr.M.D.Fla.2014) ; In re Steinberg, 447 B.R. 355, 357 (Bankr.S.D.Fla.2011).

The parties ask the Court to decide whether the bankruptcy court erred in finding that the duty to surrender is owed solely to the lienholder as opposed to another entity, such as the bankruptcy trustee. Several cases have held that surrender must be made to the lienholder, but those cases did not consider whether the bankruptcy code allows for surrender to any other entity, such as the bankruptcy trustee. See Taylor, 3 F.3d at 1514 n. 2 ("Surrender provides that a debtor surrender the collateral to the lienholder who then disposes of it pursuant to the requirements of state law."); In re Pratt, 462 F.3d 14, 18–19 (1st Cir.2006) ("the most sensible connotation of ‘surrender’ in the present context is that the debtor agreed to make the collateral available to the secured creditor-viz., to cede his possessory rights in the collateral-within 30 days of the filing of the notice of intention to surrender possession of the collateral"); Steinberg, 447 B.R. at 358 ("a debtor unwilling to reaffirm and unable to pay off the mortgage obligation is required to indicate an intent to surrender the home and to tender the property to the mortgagee.").

The Faillas rely upon In re Lair, 235 B.R. 1 (Bankr.M.D.La.1999). In Lair, the bankruptcy court held that "surrender" is an option for the debtor who chooses not to use the bankruptcy alternatives of reaffirmation or redemption and to allow the debtor to instead surrender rights in the asset to the bankruptcy trustee. Id. at 65. If the bankruptcy trustee abandons the asset back to the debtor during the case due to a lack of equity or if the property is returned at the end of the case by operation of law, then the debtor and creditor are left to state law remedies. Id. at 13. In other words, the debtor's surrender would have no effect on the debtor's state law rights with respect to the creditor.

Notably, Lair distinguished the Eleventh Circuit case of Taylor supra. In Taylor, the Eleventh Circuit rejected what was called the "ride-through option," which allowed a chapter 7 debtor to retain the collateral property and make payments without either redeeming the property or reaffirming the debt. Taylor, 3 F.3d at 1517. As stated by the Eleventh Circuit in Taylor, "[a]llowing a debtor to retain property without reaffirming or redeeming gives the debtor not a ‘fresh start’ but a ‘head start’ since the debtor effectively converts his secured...