A ruling by U.S. Bankruptcy Judge Laurel Isicoff goes further than any other on the divisive surrender issue linking bankruptcy and foreclosure cases.
The 14-page ruling challenged other decisions forcing homeowners to stop fighting foreclosure on property they surrendered to get bankruptcy protection. The Miami judge ruled that surrendered property not administered by a trustee is abandoned to the debtor, not creditor.
“Compulsory surrender of real property collateral by a debtor to a lienholder in Chapter 7 is not supported by and indeed ignores the express provisions of the Bankruptcy Code,” Isicoff wrote. “And consequently I must disagree with my colleagues who have held otherwise.”
The judge heard a motion by mortgage holder AS Theia LLC to reopen a bankruptcy case and compel homeowner Abraham Elkouby to surrender his Sunny Isles Beach condo.
The case was the latest in an ongoing debate about the meaning and consequences of house surrenders in bankruptcy court. The central question is whether homeowners who surrender their property to get bankruptcy protection must stop fighting in state court to save the same homes from foreclosure.
Lender attorneys say they should give it up, but opponents argue a surrender in bankruptcy is not equivalent to returning the property to the creditor.
“If the property is not administered, it goes back to the debtor at the closing of the case,” Isicoff wrote.
The issue caused a judicial rift.
On one side Chief Bankruptcy Judge Paul Hyman Jr. in West Palm Beach and Judge Michael Williamson in Tampa threatened sanctions against homeowners who surrendered their homes in bankruptcy but continued to defend foreclosure suits.
On the other, U.S. Bankruptcy Judge A. Jay Cristol in Miami said it “would be unconstitutional, inequitable and unjust” to force homeowners to walk away.
“At this point, it gets murky because there are varying opinions from different judges, but the holdings are very fact-specific,” said Rocky Cohen, partner at Loan Lawyers, the Fort Lauderdale law firm that represented Elkouby.
Attorneys hoped an appeal on similar legal arguments in a Miami-Dade Circuit Court foreclosure would resolve the debate, and Elkouby requested Isicoff delay her ruling until then. But the judge refused.
“There is no reason to do so,” she wrote in an order issued Feb. 29. “The Southern District of Florida is not a single-judge district. Accordingly, the holding of one district judge in a case is not binding on a bankruptcy judge in any other case.”
Isicoff also seemed to disagree the issue was muddled, writing that lawmakers amended several Bankruptcy Code provisions but never specified what surrender meant or required relinquishment to creditors.
“Congress knew how to draft such a provision,” she wrote. “Notwithstanding the express provisions of the Bankruptcy Code, cases around the country — including cases in this district — have held that a Chapter 7 debtor who indicates in his statement of intention that he is surrendering property has … forfeited his right to contest any post-discharge action to foreclose the lienholder’s security interest.”
Question Of Compliance
No material facts were in dispute in Elkouby’s case.
The homeowner filed for bankruptcy protection in June 2014 after Theia’s predecessor, Newbury Place REO IBL LLC, brought a foreclosure suit. His statement of intention indicated he meant to surrender the property but never turned over the keys to Theia. At a hearing more than later, both sides conceded surrender was not synonymous with physical turnover.
Elkouby continued to defend the foreclosure, issuing discovery requests and filing an answer and affirmative defenses.
Theia asked to reopen the bankruptcy case, arguing Elkouby’s continued defense contradicted his stated intention to surrender the condo. But the homeowner argued that since no trustee administered it, the property was abandoned to him when the bankruptcy case closed, allowing him to continue to fight for it in state court.
Under federal law, debtors seeking personal bankruptcy protection must submit a statement of intention within 30 days of filing bankruptcy petitions or before the first meeting of creditors. The statement must clarify whether debtors will reaffirm or restructure the debt under a new repayment agreement, redeem or pay it in full, or surrender secured property in the hope of retaining collateral.
“What the Bankruptcy Code does not state anywhere is that real property surrendered by an individual Chapter 7 debtor is ever surrendered to the lienholder,” Isicoff wrote.
She ruled Elkouby satisfied his stated intention to surrender the property by not interfering with the trustee’s work and found “no purpose in reopening the bankruptcy case.”
In a similar 2011 case, In re Failla, Hyman ordered the borrowers to stop defending a pending foreclosure action. Hyman acknowledged the bankruptcy law didn’t specify whether a surrender was to the trustee or lienholder, but found the borrowers committed fraud by agreeing to surrender in one court but fighting to keep the property in another.
The district court upheld Hyman’s decision, ruling the critical question was the “legal effect of the debtor’s decision to surrender,” not whether the property went to the trustee or lienholder.
Isicoff suggested the ruling ignores a key factor: whether or not the debtors complied with the surrender by not interfering with the trustee’s administration of the property.
The “district court did not cite to any Bankruptcy Code section that would support its conclusion,” she wrote. “In fact there is no Bankruptcy Code section that provides that if a Chapter 7 trustee doesn’t administer surrendered real property what follows is a second surrender — surrender to the lienholder. Rather, what the Bankruptcy Code specifically provides is that what follows is the property is abandoned to the debtor.”
Cohen, who teamed with Loan Lawyers associate Michael Citron on the Elkouby case, celebrated the ruling.
“It gives homeowners the opportunity to have their day in court and makes the lender prove its case,” he said. “They cannot just come into the bankruptcy court and try to tie the borrowers’ hands from defending their property.”