Failla v. Citibank, N.A.
542 B.R. 606
S.D. Fla.2015Background
- David and Donna Failla filed Chapter 7 after defaulting on a mortgage and listed the mortgaged real property on their schedules.
- In their statement of intention under 11 U.S.C. § 521(a)(2) they indicated they would surrender the property (they never reaffirmed, redeemed, or modified the loan).
- The Faillas later tried to amend the statement to reaffirm the mortgage, but the amendment was untimely; the Chapter 7 trustee ultimately abandoned the property under § 554(c).
- Citibank, the mortgagee, sought an order compelling the Faillas to surrender the property (arguing surrender must be to the lienholder and bars the debtor from defending foreclosure). The Faillas opposed, arguing surrender to the trustee and abandonment restored prepetition rights so they could contest foreclosure.
- The bankruptcy court ordered that surrender precludes the debtors from defending foreclosure and could jeopardize discharge if they did not comply; the district court affirmed on appeal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 521(a)(2) surrender must be made to the lienholder or may be to the trustee | Failla: Surrender to trustee (and trustee abandonment) restores prepetition rights; debtors may defend foreclosure | Citibank: § 521(a)(2) and Eleventh Circuit law require surrender to lienholder and bar retaining collateral without reaffirmation or redemption | Held: Surrender effects a relinquishment of debtor's interest against secured creditor; debtor may not contest foreclosure despite trustee abandonment |
| Legal effect of trustee abandonment under § 554(c) on a prior statement to surrender | Failla: Abandonment reverts title and fully restores prepetition legal status, allowing defense of foreclosure | Citibank: Abandonment does not negate debtor's prior surrender obligation or its effect vis-à-vis secured creditor | Held: Abandonment restores title as of prepetition status only; it does not undo the legal effect of a § 521 surrender (debtor cannot interfere with creditor's efforts) |
| Whether a debtor must physically deliver property to the secured creditor to effect surrender | Failla: Physical transfer required to effect surrender | Citibank: Surrender requires making property available to creditor (not necessarily physical delivery) | Held: Physical delivery not required, but debtor cannot take actions that impede creditor’s legal remedies to obtain title/possession |
| Whether failure to perform stated intention jeopardizes bankruptcy discharge | Failla: Trustee abandonment negates this risk | Citibank: Failure to perform surrender can threaten discharge | Held: Bankruptcy court properly warned failure to surrender could jeopardize discharge; affirmance supports that surrender obligations persist despite abandonment |
Key Cases Cited
- Taylor v. AGE Fed. Credit Union, 3 F.3d 1512 (11th Cir. 1993) (rejects "ride-through" option; treats surrender as ceding possessory rights to lienholder)
- Pratt v. G. D. Searle & Co., 462 F.3d 14 (1st Cir. 2006) (surrender sensibly means making collateral available to secured creditor)
- Dewsnup v. Timm, 908 F.2d 588 (10th Cir. 1990) (discusses limits of bankruptcy’s effect on secured liens and cites reversion doctrine)
- Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380 (5th Cir. 2008) (addresses effect of abandonment and cites precedent on reversion of title)
- Brown v. O’Keefe, 300 U.S. 598 (1937) (Supreme Court language that title "stands as if no assignment had been made" after trustee abandonment)
- Sessions v. Romadka, 145 U.S. 29 (1892) (early Supreme Court authority on reversion of title after abandonment)
- Wallace v. Lawrence Warehouse Co., 338 F.2d 392 (9th Cir. 1964) (describes post-abandonment reversion as a judicial fiction and warns against unjust results)