In re Plummer

• Decision Date: 25 March 2014
• Docket Number: Case No. 6:11–bk–09917–KSJ
• Parties: In re Frederick Kelly Plummer and Betty Ann Plummer, Debtors.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida

513 B.R. 135

In re Frederick Kelly Plummer and Betty Ann Plummer, Debtors.

Case No. 6:11–bk–09917–KSJ

United States Bankruptcy Court,
Orlando Division.
Orlando Division

Signed March 25, 2014

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Chapter 7 MEMORANDUM OPINION GRANTING DEBTORS' MOTION FOR SANCTIONS
KAREN S. JENNEMANN, Chief United States Bankruptcy Judge

Debtors, Frederick and Betty Plummer, seek sanctions ¹ against their creditor, William Hickey (“Hickey”), for obtaining a judgment against them in violation of the discharge injunction imposed by § 524 of the Bankruptcy Code.² The post-discharge judgment against the Debtors awarded the attorney fees Hickey incurred in a state court foreclosure action. Hickey argues the attorney's fee award did not violate the discharge injunction because the Debtors somehow failed to timely “surrender” the foreclosed real property.³ I now will explain why I reject Hickey's arguments, clarifying that the Debtors did everything expected of them to surrender the Property, and, further, will grant sanctions against Hickey and his attorney, jointly and severally, in the amount of $4,411.88.

Frederick Plummer and Hickey were friends and business associates for many years. In 2006, Hickey financed the Debtors' purchase of a residential rental property (the “Property”), and the Debtors executed a mortgage in favor of Hickey.⁴ It is this Property that is the source of dispute between the parties.

Debtors filed this Chapter 7 case on June 30, 2011.⁵ In their Statement of Intentions, the Debtors stated they intended to surrender the Property.⁶ During the pendency of the bankruptcy case, the parties disagreed about whether the Debtors were obligated to give Hickey a quitclaim deed or not.⁷ But, it is undisputed that neither the Chapter 7 Trustee nor Hickey filed any motion or other request with the Court seeking a clarification of the Debtors' surrender obligation relating to the Property.

Debtors received a discharge in their bankruptcy case on October 4, 2011. ⁸ Hickey later presented a warranty deed to the Debtors for them to sign.⁹ The proposed warranty deed required the Debtors to deed the Property free and clear of all liens to Hickey and expressly stated that the conveyance would not satisfy the note and mortgage signed in 2006. Essentially, Hickey was asking the Debtors to reaffirm

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their full monetary obligation to him under this warranty deed.

Debtors rightfully refused to sign the warranty deed. First, any personal liability of the Debtors to Hickey already was discharged. Second, a second lienholder, the Internal Revenue Service, had placed a substantial junior lien on the Property.¹⁰ No scenario exists that would have justified the Debtors signing this warranty deed.

On October 8, 2012, almost a year later, Hickey finally served his foreclosure complaint relating to the Property. During this long period when Hickey took no action to protect his interest in the Property, the Debtors allowed two tenants to stay in the home. One tenant, Simon Brazil, testified he would have been homeless but for living at the Property. He paid little if any rent to live in the home, and the Debtors informed him that rental payments, if any, were to be paid to the Chapter 7 trustee.

The other tenant was an employee for the Debtors. He also desperately needed a place to stay and paid little, if any, rent, although he did provide infrequent services, such as lawn care, to maintain the Property. When the tenants eventually received notice of Hickey's foreclosure action, the Debtors directed the two tenants to tender all future rent payments directly to Hickey, not to the Chapter 7 Trustee.¹¹

Hickey failed to prove how much, if anything, the Debtors collected in rent payments or the value of any services provided during the period in which he did nothing to take possession of the Property.¹² I specifically find that allowing these two tenants to reside in the Property during this period of uncertainty served only to preserve the value of the Property and in no way established that the Debtors intended to retain possession or any benefits of the Property. Debtors merely allowed two people in need to stay at an empty home. The tenants provided a value to Hickey insofar as they maintained and protected the Property for him.

Debtors further did not contest Hickey's foreclosure action. Granted, to protect the viability of their bankruptcy discharge, they did file a notice to ensure the foreclosure judgment was limited to in rem relief against the Property and not for in personam relief against the Debtors.¹³ Yet, on May 29, 2013, the state court inexplicably entered a very unusual Summary Final Judgment for Foreclosure in favor of Hickey (the “Foreclosure Judgment”). ¹⁴ In paragraph 10(b), the state court retained jurisdiction to impose monetary attorney fees and costs against the Debtors in personam stating:

However, due to the Defendants failure to surrender the property to the plaintiffs in accordance with their approved plan and 11 U.S.C. 722, the Defendants shall be liable for the costs and attorney's fees associated with this transaction as such costs and fees were incurred after the bankruptcy discharge and the property was not transferred by the defendants according to the approved

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plan during the bankruptcy proceedings.

Hickey argues that this post-discharge assessment of personal liability against the Debtors for attorney fees and costs is appropriate because the Debtors breached some affirmative duty to execute and deliver a deed transferring title of the Property to Hickey. Based on this alleged failure, Hickey continues to seek payment for the attorney fees and costs he incurred in the foreclosure action. Debtors vociferously disagree, contending they did everything expected of them in their bankruptcy case to surrender the Property and now seek sanctions against Hickey for the costs incurred in bringing the issue back to this Court to resolve.¹⁵ The real issue between the parties is what exactly were the Debtors expected to do to surrender the Property.

What Constitutes Surrender?

If a Chapter 7 debtor lists in his schedules a debt secured by property of the estate, § 521(a)(2)(A) of the Bankruptcy Code requires the debtor to file a “statement of his intention with respect to the retention or surrender” of that property.¹⁶Section 521(a)(2)(B) requires the debtor to perform his stated intention within the specified time period, also emphasizing that “nothing in paragraphs (A) or (B) ... shall alter the debtor's or the trustee's rights with regard to [the collateral] under this title.” ¹⁷ Hence, § 521(a)(2) “does not affect nor create substantive rights.” ¹⁸

In many jurisdictions, including the Eleventh Circuit, if the debtor chooses to retain nonexempt collateral under § 521(a)(2), he only has two options: reaffirmation or redemption. ¹⁹ He may “reaffirm” his agreement with the secured creditor to pay the prepetition debt, or “redeem” the collateral by paying the allowed secured claim amount in full. But, “[w]here the debtor decides not to reaffirm, or the parties cannot negotiate a reaffirmation, or redemption is not economically feasible, the debtor has but one option: ‘surrender’ the collateral.” ²⁰

Most of the case law discussing § 521(a)(2) focuses on the retention options mentioned above and only briefly mention “surrender.” ²¹ One example is In re Taylor, in which Eleventh Circuit Court of Appeals, discussing whether a “ride-through” is permitted, noted that “[s]urrender provides that a debtor surrender the collateral to the lienholder who then disposes of it pursuant to the requirements of state law.” ²² As one court observed,

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“[t]he footnote in Taylor notes debtor has the option to surrender but does not define the term surrender.” ²³ Consequently, the Eleventh Circuit's dictum in Taylor provides little guidance.²⁴

Many courts have determined that § 521(a)(2) is primarily a notice statute, designed to provide creditors notice of a debtor's intention with respect to their collateral early in the case without having to incur substantial costs, such as filing an adversary proceeding, to discover the debtor's intentions. ²⁵ However, as the Eleventh Circuit stated in Taylor, “the plain language” of § 521(a)(2) “indicates that the debtor must perform some act with respect to the property within a specified period of time.” ²⁶ Section § 521(a)(2) indeed does serve to notify secured creditors of the debtor's intention as to their collateral, but the statute also requires the debtor then to act consistent with their intentions. What does § 521(a)(2) require the debtor actually to do in order to effectuate his or her intent to surrender?

“Surrender” is not defined in § 521(a)(2) or elsewhere in the Bankruptcy Code. ²⁷ “Where the words in the statute are not defined terms, the court should look to their ordinary, dictionary-defined meaning.” ²⁸ Black's Law Dictionary defines “surrender” as “[t]he act of yielding to another's power or control” or “[t]he giving up of a right or claim.” ²⁹

Few courts have examined “surrender” in the context of § 521(a)(2). ³⁰ The

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First Circuit Court of Appeals, in In re Pratt, stated “the most sensible connotation of ‘surrender’ ... is that the debtor agreed to make the collateral available to the secured creditor- viz., to cede his possessory rights in the collateral.” ³¹ And in In re Cornejo, Judge Arthur Briskman similarly observed that unless a valid exemption is claimed, “the [d]ebtor relinquishes its interest in the collateral when an intention to surrender is communicated” and “the collateral becomes part of the bankruptcy estate.” ³² Ultimately, because fully encumbered collateral is likely of little value to the estate, the trustee in almost all cases abandons the property. ³³

The Bankruptcy Code however makes a clear distinction between delivering and surrendering property.³⁴ “Surrender” does not require the debtor...