Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 1 of 10 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

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1 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 1 of 10 DAVID A. FAILLA and DONNA A. FAILLA, Appellants, vs. UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA CASE NO CIV-MARRA CITIBANK, N.A., as Trustee for e Certificate Holders of Structured Asset Mortgage Investment II Inc., Bear Stearns Alt-A Trustee, Mortgage Pass-Through Certificates Series , Appellee. / OPINION AND ORDER This cause is before e Court on e appeal by David A. Failla and Donna A. Failla ( Appellants Faillas ) of e order of e 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 e appeal, e briefs of e parties, e entire record on appeal, and is oerwise fully advised in e premises. I. Background The facts, based upon Appellants and Appellee s statement of facts in eir appellate briefs and e appellate record, are as follows: In 2009, e Faillas defaulted on eir note and mortgage for real property and Citibank initiated a foreclosure action. The Faillas opposed e foreclosure, but en filed a chapter 7 bankruptcy case on August 31, As part of at bankruptcy proceeding, e Faillas stated ey own real property, encumbered by a mortgage. They also stated at e mortgage is a valid

2 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 2 of 10 first mortgage lien on e property and represents an undisputed, non-contingent, liquidated and secured claim over e Faillas and e property. The Faillas stated furer at e amount ey owned pursuant to e loan exceeded e value of e property. The Faillas filed eir statement 1 of intention wi respect to e property and represented at ey would surrender e property. Thereafter, e Faillas attempted to amend eir statement of intention and sought to declare an intention to reaffirm e mortgage and loan. The amendment was untimely and invalid. Ultimately, e chapter 7 trustee abandoned e property. On December 16, 2011, e bankruptcy court issued an order discharging e debtors. Subsequently, e state court set a non-jury trial for August 21, 2013 regarding e foreclosure. The Faillas opposed Citibank s foreclosure action and have retained possession and title to e property. In response to e Faillas defense of e foreclosure action, Citibank moved e bankruptcy court to compel surrender of e property. The Faillas opposed is motion, contending at ey already surrendered e property to e bankruptcy trustee, who abandoned it. According to e Faillas, once e trustee abandoned e property, it reverted to em and ey were restored eir prepetition rights. In oer words, e Faillas claim at e surrender was properly made to e trustee, not Citibank, and at as a result of e trustee s abandonment of e property, ey are free to defend against e foreclosure. On December 19, 2014, e bankruptcy court addressed e following issues: (1) [w]hat actions or inactions, if any, are required of e [Faillas] to effectively and sufficiently perform eir Statement of Intention to surrender e property?; (2) [w]hat remedies or rights are available 1 In e bankruptcy case, e Faillas claimed a wildcard exemption and never reaffirmed e mortgage, redeemed e property or modified e loan. 2

3 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 3 of 10 to Citibank for e [Faillas ] failure to comply wi eir obligation to perform eir Statement of Intention to surrender e Property?; and (3) [d]oes e exception language of 11 U.S.C. 521(a)(2)(B) - which states at except at noing in subparagraphs (A) and (B) of is paragraph shall alter e debtor s or trustee s rights wi regard to such property under is 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 wi a discussion of e term surrender, which 2 is not defined in section 521(a)(2) or anywhere else in e bankruptcy code. The bankruptcy court interpreted Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512 (11 Cir. 1993) as requiring a debtor who is unwilling to reaffirm or redeem e mortgage obligation to indicate an intent to surrender e home and tender e property to e mortgagee. The bankruptcy court also held at while e Faillas do not have to physically surrender e property to Citibank, ey could not defend against or contest e foreclosure in state court. Lastly, e bankruptcy court ruled at if e Faillas did not surrender e property, eir bankruptcy discharge would be in jeopardy. On appeal, e Faillas make e following arguments: (1) e bankruptcy court erred in finding at e Faillas were required under section 521(A)(2) of e bankruptcy code to surrender e property to Citibank as opposed to e bankruptcy trustee, as e Faillas did and (2) e bankruptcy court ignored section 554(c) and e ramifications of what an abandonment back to a debtor means. In response, Citibank asserts at section 521(a)(2) and Eleven Circuit case 2 Section 521(a)(2) addresses e debtor s statement of intention to surrender, reaffirm or redeem property in which a creditor has a secured interest. 3

4 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 4 of 10 law mandates at chapter 7 debtors not retain collateral securing a debt unless ey reaffirm or redeem e collateral, even if e debtors are current on eir payment obligations. Citibank argues at under section 521(a)(2), e duty to surrender requires relinquishment of rights to all persons having an interest in e collateral, including e secured creditor. II. Legal Standard The Court reviews e Bankruptcy Court s factual findings for clear error and its legal conclusions de novo. In re Globe Manufacturing Corp., 567 F.3d 1291, 1296 (11 Cir. 2009); In re Club Assoc., 951 F.2d 1223, (11 Cir. 1992). An appellate court may affirm e lower court where e judgment entered is correct on any legal ground regardless of e grounds addressed, adopted or rejected by e lower court. Bonanni Ship Supply, Inc. v. United States, 959 F.2d 1558, 1561 (11 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 e estate (A) wiin irty days after e date of e filing of a petition under chapter 7 of is title or on or before e date of e meeting of creditors, whichever is earlier, or wiin such additional time as e court, for cause, wiin such period fixes, file wi e clerk a statement of his intention wi respect to e retention or surrender of such property and, if applicable, specifying at such property is claimed as exempt, at e debtor intends to redeem such property, or at e debtor intends to reaffirm debts secured by such property; and (B) wiin 30 days after e first date set for e meeting of creditors under section 341(a), or wiin such additional time as e court, for cause, wiin such 30-day period fixes, perform his intention wi respect to such property, as specified by subparagraph (A) of is paragraph; 4

5 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 5 of 10 except at noing in subparagraphs (A) and (B) of is paragraph shall alter e debtor's or e trustee's rights wi regard to such property under is title, except as provided in section 362(h); 11 U.S.C If a debtor retains nonexempt collateral under section 521(a)(2), e debtor has e 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 e Court to decide wheer e bankruptcy court erred in finding at e duty to surrender is owed solely to e lienholder as opposed to anoer entity, such as e bankruptcy trustree. Several cases have held at surrender must be made to e lienholder, but ose cases did not consider wheer e bankruptcy code allows for surrender to any oer entity, such as e bankruptcy trustee. See Taylor, 3 F.3d at 1514 n.2 ( Surrender provides at a debtor surrender e collateral to e lienholder who en disposes of it pursuant to e st requirements of state law. ); In re Pratt, 462 F.3d 14, (1 Cir. 2006) ( e most sensible connotation of surrender in e present context is at e debtor agreed to make e collateral available to e secured creditor-viz., to cede his possessory rights in e collateral-wiin 30 days of e filing of e notice of intention to surrender possession of e collateral ); Steinberg, 447 B.R. at 358 ( a debtor unwilling to reaffirm and unable to pay off e mortgage obligation is required to indicate an intent to surrender e home and to tender e property to e mortgagee. ). The Faillas rely upon In re Lair, 235 B.R. 1 (Bankr. M.D. La. 1999). In Lair, e bankruptcy court held at surrender is an option for e debtor who chooses not to use e bankruptcy alternatives of reaffirmation or redemption and to allow e debtor to instead surrender rights in e asset to e bankruptcy trustee. Id. at 65. If e bankruptcy trustee 5

6 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 6 of 10 abandons e asset back to e debtor during e case due to a lack of equity or if e property is returned at e end of e case by operation of law, en e debtor and creditor are left to state law remedies. Id. at 13. In oer words, e debtor s surrender would have no effect on e debtor s state law rights wi respect to e creditor. Notably, Lair distinguished e Eleven Circuit case of Taylor supra. In Taylor, e Eleven Circuit rejected what was called e ride-rough option, which allowed a chapter 7 debtor to retain e collateral property and make payments wiout eier redeeming e property or reaffirming e debt. Taylor, 3 F.3d at As stated by e Eleven Circuit in Taylor, [a]llowing a debtor to retain property wiout reaffirming or redeeming gives e debtor not a fresh start but a head start since e debtor effectively converts his secured obligation from recourse to nonrecourse wi no downside risk for failing to maintain or insure e lender's collateral. Taylor, 3 F.3d at Taylor provided in a footnote at [s]urrender provides at a debtor surrender e collateral to e lienholder who en disposes of it pursuant to e requirements of state law. Id. at 1514 n.2 Lair disagreed wi Taylor, stating at e Eleven Circuit erroneously understands surrender to refer (or relate) to e debtor's relationship wi e creditor ( surrender provides at a debtor surrender e collateral to e lienholder ). Lair, at 43. Wheer secured property should be surrendered to e trustee or e secured creditor is, in is Court s view, not e critical question. Raer, e critical question is what is e legal effect of e debtor s decision to surrender e property? The Court concludes, consistent wi e bankruptcy court s determination, at once e debtor decides to surrender secured property, e debtor has abandoned any interest or claim at he may have had to e property as 6

7 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 7 of 10 against e trustee, if e trustee decides to administer e property, or against any secured creditor e debtor listed in e filed schedules as having a valid, undisputed, non-contingent and enforceable secured lien on e property. While e debtor need not physically deliver e 3 property to e secured party, e debtor is precluded from taking any action which would interfere wi e secured creditor s ability to obtain legal title to, and possession of, e property rough legal means. Defending against a foreclosure proceeding relating to e secured property would be inconsistent wi e debtor s stated intention to surrender e property wiin e meaning of 11 U.S.C. 521(a)(2). Accord Plummer, 513 B.R. at The Faillas, in reliance upon Lair, make much ado of e fact at e trustee in is case abandoned e property pursuant to 11 U.S.C. 554(c). Relying furer upon cases which state at after e trustee s abandonment, e property reverts to e debtor and stands as if no 4 bankruptcy petition was filed, e Faillas assert at because of e trustee s abandonment of e property, ey and Citibank were bo restored to eir prepetition status quo as ough no bankruptcy case had been filed. [DE 13 at 20-21]. Thus, e Faillas contend ey may now defend against e secured creditor s attempt to foreclose. This Court concludes at e Faillas misread e statements from courts relative to e restoration of rights at existed prepetition. If e Faillas position is correct, ere would be no discharge of eir personal liability on e note associated wi e mortgage on e property. Even e court in Lair recognized at 3 A debtor may have to deliver property to e trustee under 11 U.S.C. 542(a). Such a delivery was not required in is case since e trustee abandoned e property under 11 U.S.C. 554(c). 4 Dewsnup v. Timm, 908 F.2d 588, 590 (10 Cir. 1990); Kane v. Nat l Union Fire Ins. Co., 535 F.3d 380 (5 Cir. 2008). See DE 13 at 23. 7

8 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 8 of 10 after an abandonment by e trustee, ere is a lingering federal effect of discharge. Lair, 235 B.R. at 8, 6 and 46. So, are e statements from e courts cited by e Faillas to be taken literally, or must ey be read in e context of e cases which laid e foundation for eir pronouncements? This Court concludes e latter course is e correct one. Dewsnup, cited by e Faillas, relied upon e United States Supreme Court case of Brown v. O Keefe, 300 U.S. 598, 602 (1937) and e Nin Circuit Court of Appeals case of Wallace v. Lawrence Warehouse Co., 338 F.2d 392, 394 n.1 (9 Cir. 1964) in support of its broad statement regarding reversion to prepetition legal status. Dewsnup, 908 F.2d at 590. In Brown, when discussing e legal effect of an abandonment of assets by e trustee because ey were burdensome, e Supreme Court stated e title stands as if no assignment had been made, quoting from e earlier Supreme Court case of Sessions v. Romadka, 145 U.S. 29, 52 (1892)(emphasis added). In Wallace, e Nin Circuit stated [t]he ordinary rule is at, when a trustee abandons property of e bankrupt, title reverts to e bankrupt, nunc pro tunc, so at he is treated as having owned it continuously, citing bo Brown and Sessions (emphasis added). The court in Wallace went on to state [t]his is a fiction, and a fiction is but a convenient device, invented by courts to aid em in achieving a just result. It is not a categorical imperative, to be blindly followed to a result at is unjust. Kane, also relied upon by e Faillas, cited to Lair and 5 Collier on Bankruptcy [3] (Alan N. Resnick & Henry J. Sommers eds., 15 ed. Rev. 2008). Kane, 535 F.3d at Collier merely cites to Dewsnup wiout any analysis. 5 The oer cases cited by e Faillas also support e conclusion at e reversion to prepetition status after abandonment proposition only relates to title to e property. See Gasprom, Inc. v. Fateh, 500 B.R. 598, (B.A.P. 9 Cir. 2013)( These statements reflect 8

9 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 9 of 10 Upon a review of all of e cases cited by e Faillas in support of e restore to status quo proposition, e Court concludes at e underlying principle which is being espoused is at title to e abandoned property reverts back to e debtor to e same extent as it was held prior to e filing of e bankruptcy. Any suggestion in e cases at an abandonment by e trustee has a broader or more expansive legal effect on e relationship of e parties relative to e secured property is an overstatement wi no auoritative support. Hence, is Court concludes at an abandonment of secured property by e trustee to e debtor pursuant to 11 U.S.C. 554(c) only restores title to e debtor as if no bankruptcy petition had been filed. The abandonment does not affect oer aspects of e debtor s rights and responsibilities relative to e property at flow from e bankruptcy. Just as a discharge of personal liability to pay e obligation on e note survives after abandonment of e property by e trustee, so too does e legal effect of e debtor s decision to surrender e property pursuant to 11 U.S.C. 521(c)(2). This legal effect includes a relinquishment of e debtor s interest in e secured property as against e secured creditor, as well as a prohibition against interfering or impeding e secured e unremarkable proposition at, after an abandonment of estate property, e debtor holds e same legal interest in e abandoned property at it held at e time of its bankruptcy filing. ); In re Cruseturner, 8 B.R. 581, 591 (Bankr. D. Utah 1981)( The state of e law under e former Act appears to be at title to all property abandoned by e trustee stood as if no bankruptcy had been filed, citing Brown, Sessions and Wallace); In re Jandous Elec. Constr. Corp., 96 B.R. 462, 466 (S.D.N.Y. 1989)( This legislative reference and attendant definition are in keeping wi cases under e former law which hold at title and right to property reverts to its pre-bankruptcy status. Thus, whoever had e possessory right to e property at e filing of e bankruptcy again reacquires at right. ); In re CVA General Contractors, Inc., 267 B.R. 773, 780 n.7 (Bankr. W. D. Tex. 2001)( When a trustee abandons a cause of action, e cause of action is revested in e debtor as if it was never property of e estate, citing Dewsnup); Huren v. Employers Mutual Casualty Company, No. 2:07 CV 1255, 2008 WL , at *3(W.D. La. Oct. 22, 2008)(e trustee formally abandoned e claim pursuant to 554, and e interest in e claim reverted to e debtors as ough e bankruptcy had never been filed, citing Lair, In re CVA General Contractors, Inc., and Collier on Bankruptcy). 9

10 Case 9:15-cv KAM Document 55 Entered on FLSD Docket 11/23/2015 Page 10 of 10 creditor s efforts to take possession of e property by available legal means. Plummer, 513 B.R. at To hold oerwise would permit e debtor to use e fiction... invented by courts to... be blindly followed to a result at is unjust. Wallace, 338 F.2d at 394 n.1. For e foregoing reasons, e Court finds at e bankruptcy court did not err in granting e amended motion to compel debtors to surrender real property pursuant to e statement of intention. IV. Conclusion Based upon e foregoing, it is ORDERED AND ADJUDGED at e decision on appeal of e bankruptcy court is AFFIRMED. This case is CLOSED, and all pending motions are DENIED as moot. DONE AND ORDERED in Chambers at West Palm Beach, Palm Beach County, rd Florida, is 23 day of November, KENNETH A. MARRA United States District Judge 10