Debtor Cannot Defend Foreclosure After Surrendering Property

Last month, the District Court for the Southern District of Florida issued a bankruptcy court order to urge chapter 7 debtors to surrender real property by directing the debtors to halt all foreclosure defense. The decision in Failla v. Citibank, N.A., is the first of its kind from a federal appellate court to address the question of whether a bankruptcy court may enter an order directing a debtor to stop defending a mortgage foreclosure action pending in state court.

In 2014, a judge from the United States Bankruptcy Court for the Southern District of Florida delivered a written opinion and order directing David and Donna Failla to cease defending a foreclosure suit initiated by Citibank, N.A. Through the Faillas’ previous chapter 7 bankruptcy filing, the couple listed their mortgage as an undisputed, non-contingent, and liquidated debt, and submitted a statement of intention to surrender the property. The judge determined that due to their bankruptcy filing, the Faillas no longer had a right to defend a foreclosure action against that property. Furthermore, the judge ruled that their continued foreclosure defense violated their statutory duty to surrender the property, which could be considered fraud upon the bankruptcy court, and put their bankruptcy discharge in peril.

The Faillas appealed the Bankruptcy Court Judge’s decision, arguing that they effectively surrendered their property to the bankruptcy trustee, an individual who had abandoned the property at the close of the bankruptcy case. According to the Faillas, the legal effect of the trustee’s abandonment was a reversion of all rights in the property to them, including the right to defend foreclosure of the property. The appellate judge disagreed.