Surrendering Property: The Consequences of Surrender Are … Take Your Pick

In re Elkouby, 561 B.R. 551 (Bankr. S.D. Fla. 2016)

A chapter 7 debtor filed a statement that he intended to surrender real property securing a loan. After the bankruptcy case was closed, the debtor continued actively opposing a foreclosure action. In response the mortgagee moved to reopen the case and asked the bankruptcy court to compel the debtor to surrender the property. The central issue was the meaning and consequences of “surrender.”

Under section 521(a)(2) of the Bankruptcy Code if an individual chapter 7 debtor schedules debts secured by property of the bankruptcy estate, he must file a statement as to (1) whether he intends to retain or surrender the property, (2) if the property is claimed as exempt, and (3) if he chooses to retain the property, if he intends to redeem the property or reaffirm debts secured by the property.

In this case the debtor filed bankruptcy after the mortgagee commenced a foreclosure action. The bankruptcy petition included a statement that he intended to surrender the property. The debtor did not claim an exemption, nor did he identify the secured debt as disputed. The debtor received a discharge and the case was closed. The debtor never turned over the property to the mortgagee, and after the bankruptcy continued to defend the foreclosure action.

Almost a year after the bankruptcy case was closed, the mortgagee moved to reopen the case and compel surrender – arguing that the debtor’s election to surrender the property barred the debtor from defending the foreclosure action. The debtor countered that (1) it was required to surrender to the trustee, not the mortgagee, (2) the property was abandoned back to the debtor since the trustee did not administer the surrendered property, and (3) thus he should not be barred from defending the foreclosure.

As a starting point, everyone agreed that surrender was not synonymous with physical turn over of the property. As a next step, the court noted that there are provisions of the Bankruptcy Code that apply only to individual debtors, and some that apply only to chapter 7 individual debtors:

  • Generally section 521(a)(4) provides that if a trustee has been appointed a debtor is required to “surrender to the trustee all property of the estate.” However, individual debtors in chapter 11, 12 and 13 cases are excused from this requirement. Chapter 7 does not include the same exception, although it is implicit that an individual debtor that seeks to retain property by reaffirmation, redemption, or exemption is not subject to the surrender requirement.
  • If an individual chapter 7 debtor does not timely file or perform a statement of intention, for personal property, the personal property loses its character as property of the bankruptcy estate so that the automatic stay is lifted and the secured creditor can pursue its state law remedies.

With respect to the property that secures debt, assuming (1) a chapter 7 debtor does not retain the property, (2) the debtor has not successfully claimed an exemption, (3) the secured creditor has not already obtained relief from the automatic stay, and (4) the property has not already been abandoned, the court read section 725 to require that the chapter 7 trustee dispose of the property to the lien holder. However, if the trustee does not administer scheduled property before the case is closed, that property is generally abandoned to the debtor.

With this as background, the court concluded that if property is personal property and the debtor does not timely state or perform his intention to redeem or reaffirm the debt, generally the chapter 7 trustee cannot retain possession and the stay is automatically lifted. However, this does not apply to real property. The secured creditor must affirmatively obtain relief from the stay if the debtor fails to perform his statement of intention.

Also, both real and personal property are surrendered to the chapter 7 trustee, who may or may not administer the property during the case. If not, the property goes back to the debtor when the case is closed subject to the nonbankruptcy rights of the lien holder.

Accordingly the court ruled that a chapter 7 debtor is not obligated to surrender property to the lien holder whether or not it is administered by the chapter 7 trustee. Thus, the debtor adequately performed his intention to surrender the real property by not interfering with the chapter 7 trustee’s administration of the property, and was not precluded from defending the post-bankruptcy foreclosure action.

This decision is contrary to a number of other decisions on several points (as discussed in extensive footnotes). The opinion also highlights the independent perspective often taken by bankruptcy judges in the denial of the debtor’s motion to stay ruling on the case until a district court appeal was resolved. The judge declined to wait because in his view the holding of the district court would not be binding on bankruptcy judges. However, that does not mean that decisions of other bankruptcy or district courts are irrelevant: they may provide persuasive analysis, and the relevant district court has a practical impact in that it may reverse on appeal.

Although I included this case because there are some interesting twists on the analysis of the surrender/foreclosure issue, note that it is probably not good law given a subsequently issued 11th Circuit opinion. See Property Surrender: Surrender Means Surrender – No If’s, And’s or But’s.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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