Citibank Wins Foreclosure Appeal in Bankruptcy Test

Citibank Wins Foreclosure Appeal in Bankruptcy Test

Oct. 4 — Debtors who surrender property under the Bankruptcy Code can’t oppose foreclosure efforts by Citibank, a federal appeals court said Oct. 4 ( Failla v. Citibank N.A., 11th Cir., No. 15-cv-15626, 10/4/16 ).

The ruling by the U.S. Court of Appeals for the Eleventh Circuit eases foreclosures in that circuit in two ways. First, it means that a debtor who discharges mortgage debt by surrendering property under 11 U.S.C. 521(a)(2) can’t oppose creditors who then try to foreclose in state court.

The decision also speeds that process. Judge William Pryor, who wrote for a three-judge panel, said bankruptcy courts can order debtors who surrender property under Section 521(a)(2) to drop their opposition to foreclosure. The debtors said the bankruptcy court didn’t have that authority.

The case involved husband and wife David and Donna Failla, who defaulted on their mortgage in 2009 and filed for bankruptcy in 2011. They agreed to surrender their house to discharge the mortgage debt, but fought Citibank’s foreclosure proceeding in state court.

The bankruptcy court, on Citibank’s motion, ordered the Faillas to surrender the property, and a district court affirmed.

Bankruptcy Court’s Power

Among other points, the Faillas said they need only surrender to the bankruptcy trustee. But the Eleventh Circuit disagreed and upheld both lower courts, saying they have to surrender the property and drop their efforts to stop foreclosure.

“Section 521(a)(2) requires a debtor to either redeem, reaffirm, or surrender collateral to the creditor,” Pryor said. “Having chosen to surrender, the debtor must drop his opposition to the creditor’s subsequent foreclosure action.”

The appeals court also said bankruptcy courts may compel debtors not to fight foreclosure.

“The bankruptcy court had the authority to compel the Faillas to fulfill their mandatory duty under section 521(a)(2) not to oppose the foreclosure action in state court,” Pryor said.

The Faillas were represented by Peter David of the Ticktin Law Group in Deerfield Beach, Fla., and Michael E. Zapin of the Law Offices of Michael E. Zapin in Boca Raton, Fla.

Citibank was represented by John R. Chiles of Burr & Forman in Fort Lauderdale, Fla., and Jonathan M. Sykes in the firm’s Orlando, Fla., office.

8 Responses

  1. Anonymous – some states already have anti-deficiency statutes. In Nevada, for instance, if a lender wants a def j, it has to file for judicial f/c, foreclose, and then has 6 mos to pursue the deficiency in the same jud f/c action. Think that’s how it is. Don’t know about other states. Holy cow. Your comment caused me to surmise that in 2009, NV changed it’s laws to state (partly): (“deficiency allowed?”)

    “Not if all of the following conditions are met: (a) lender is a financial institution;”
    So if one’s lender is not a “financial institution”, a def j may be allowed?!! A trust isn’t generally if ever a “financial institution” and since all mtg loans are now allegedly sold to trusts, guess they clear this hurtle to seek a def j. That’s just not right and further rigs the contest.
    Here’s the link to states’ positions on deficiency judgments:

    Some years ago I researched the impact of a lender credit bid on the note and dot, but I’ve forgotten what I found. But when it comes to a “credit bid” v. arm’s length third party buyer, that impact matters as I recall.

  2. I guess what I’ve said is that I thought when one surrendered a property in a bk filing, it meant there would be a deed in lieu and if the lender doesn’t want it that way, he needs to contest it (the surrender / deed in lieu) in the bk court and if that’s successful, then he moves for stay relief to pursue a f/c action. I think a lender has a choice to make and it has to be made in the bk court: Accept the surrender (by way of a deed in lieu) or contest the surrender.

  3. Well color me confused. I always thought if one surrender’s the property, it meant one executed a deed to the lender and that this deed would contain words essentially assuring the borrower that this was the end of the matter. If one’s bk petition states that 1234 Green Street is being surrendered and what I thought is sop is followed, there shouldn’t be a lawsuit to defend or not defend, esp if the deed language states that it’s in total satisfaction of the debt. Wth?

  4. @PhilD,

    ….I think that’s just the one I’ve been looking for! Thanks.

    “Produce the note” is not just theatrics, it IS the artifact enabling foreclosure. If not surrendered, it remains in force, and then we can be subject to double jeopardy by whomever may choose to attempt to enforce it again. It MUST be surrendered to the Court as a transaction enabling foreclosure and terminating the contract. (All IMO, of course, but I think this case proves that.)

    Good topic for a Neil column.

  5. Even if property is surrendered the bank is obliged to return the note because under UCC they can not retain both property and the note.

    McCay v. Capital Resources Company
    , LTD. 96-200 S.W.2d 1997
    Where appellee apparently never possessed appellants’ original note as provided in Ark. Code Ann. 4-3-309(a)(i) (Repl. 1991), but was required, even if it had, to have proven all three factors specified in 4-3-309(a) and did not do so, appellee could not enforce the original note’s terms by the use of a copy; even if all three requirements in 4
    -3-309(a) had been proven, the trial court was still obligated to ensure
    that appellee provided adequate protection to the appellants from any future claim, and this, too, was not done. First, as previously discussed, we mention the unfairness in these circumstances that, if a duplicate was allowed in place of the original note, the McKays could later be subjected to double liability if the actual holder of the note appeared. Next, we add that the Rules of Evidence are rules of the court involving legal proceedings, while the UCC is composed of statutes of law that established the rights and liabilities of persons. Again, as previously discussed, Capital Resources, as an assignee of the McKays’ note, could not sue on the underlying debt the McKays owed to Landmark Savings. For Capital Resources to have prevailed in enforcing the McKays’ note, it was required either to produce the original or satisfy the requirements for a lost negotiable instrument under 4-3-309(a) and (b). Because Capital failed to do either, we must reverse and remand.

  6. Please write to your state senators to totally abolish deficiency judgement after foreclosure. Banks could only foreclosure on a collateral – not on people lives. . Multiplicative recovery is unfair and unjust, especially, when many mortgages contain outright clear fraud. Besides, banks simply sell properties at foreclosure sale for whatever money they could get to bury fraud from investors. Therefore, deficiency judgment is an insult to injury to these home owners. Please make it to stop, once for all.

  7. Reblogged this on Deadly Clear and commented:
    The Bankruptcy Act needs to be revised in so many areas it’s difficult to point to the most important. However, the “surrender” issue is paramount because the bankruptcy court has allowed the use of electronic signatures without forethought of the consequences. Bankruptcy attorneys regularly use the surrender form to alleviate the burden and cost of dealing with motions for relief of stay – and many times unbeknownst to the homeowner. As a foreclosure paralegal I have had a number of clients that had never signed the form and questioned how their bk attorney could surrender their home. In most cases they would be given some lame excuse – and when the foreclosure attorney would request a copy of the actual signed formed – 9 times out of 10 there wasn’t one.

    Bankruptcy has used electronic signatures to the point that the debtor’s bankruptcy attorney can commit unlawful acts with no penalties to be assessed. This needs to be changed. If a house and property are meant to be surrendered – a full explanation of the term “surrender” needs to be made clear and an actual signed form by the debtor document filed with the court. No electronic signatures!! Surrender that Dorothy!

  8. Or, pursuant to the statute, you put them on notice that the issue of title and valid mortgage will be contested, and the appropriate choice of exemption covers the real value of the homestead….
    google “chapter 20 debtors”
    Of course you must have some solid evidence and state law on your side.

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