BANKRUPTCY COURT DISMISSES CHAPTER 13 CASE BASED ON DEBTOR’S PRIOR SURRENDER OF PROPERTY IN CHAPTER 7 CASE
The Bankruptcy Court for the Middle District of Florida dismissed a Chapter 13 bankruptcy proceeding brought by a debtor (“Johnson”) in an effort to “repay his mortgage debt.” In re Johnson. In Johnson, the Debtor and his wife defaulted on their mortgage and Charles Schwab Bank (“Schwab”) initiated foreclosure proceedings. Thereafter, the Johnsons petitioned for bankruptcy protection under Chapter 7. In their “Statement of Intention” filed in the Chapter 7 case, the Johnsons stated their intention to surrender their mortgaged property, a home in Jacksonville Beach, Florida, (“the Property”) in the bankruptcy proceedings. The Johnsons received a discharge of their debts in December 2013.
Contrary to their stated intention to surrender the property, the Johnsons “vigorously fought Schwab’s Foreclosure Case for several years.” While the foreclosure litigation was pending, the Eleventh Circuit Court of Appeals issued its decision in Failla v. Citibank, N.A. where the court clarified that “a debtor who surrenders property in a Chapter 7 bankruptcy case must relinquish all legal interest in the property to both the trustee and the creditor.” Pursuant to the holding of Failla, the Johnsons entered into an agreed order at the foreclosure trial which explicitly precluded “them from defending the Foreclosure Case or taking any other action to delay the foreclosure of the Property…”
The state court entered an In Rem Final Judgment against the Johnsons and scheduled a foreclosure sale for March 7, 2018. The day before the sale, Thomas Johnson petitioned for bankruptcy protection under Chapter 13 indicating he hoped “to keep his home and to modify the Mortgages[i].” The Bank moved to dismiss the bankruptcy petition “arguing the Debtor filed [his] case in bad faith and lost and right to retain his home when he surrendered the Property in his Chapter 7 Case and then again when he agreed a second time to surrender the Property under the Agreed Order [in the foreclosure proceedings].”
On appeal, the Middle District framed the issue as: “[W]hether Failla’s strictures prevent a debtor, who surrendered property in a Chapter 7 bankruptcy case and obtained a discharge, from filing a Chapter 13 bankruptcy case the day before a scheduled foreclosure sale in a desperate attempt to keep the ‘surrendered’ property.” The Court discussed its prior holding (based on similar facts) wherein it concluded that a debtor forfeits his “right to change his mind” regarding property surrendered in a bankruptcy proceeding because opposition to foreclosure proceedings after a promise to surrender property “contradicted [the debtor’s] Chapter 13 plan and the Court’s confirmation order.”
Applying that reasoning to the facts of Johnson’s Chapter 13 proceedings, the Middle District concluded that Johnson was “attempting to enjoy indefinite possession of the Property while simultaneously hindering and prolonging the state court process.” The Court noted Johnson’s decision to wait until the day before the foreclosure sale to file his Chapter 13 case demonstrated his true intention was delay, not modification of the Schwab mortgages especially since “he could have [modified the loan] without filing a new bankruptcy case.” The Court surmised Johnson’s actions in this regard abused the provisions and purpose of the Bankruptcy Code and that he did not file his Chapter 13 petition in good faith. Despite finding Johnson filed his Chapter 13 petition in bad faith, the Court declined to award sanctions concluding that the bankruptcy filing did not rise “to the level of frivolity” nor was it “filed to harass Schwab.” The Court did enjoin the Johnsons from filing for bankruptcy relief for a period of 180 days.
This case further solidifies the very limited rights of a debtor once he voluntarily agrees to surrender mortgaged property in a bankruptcy proceeding. The Court properly determined that once receiving the benefit of his bargain via discharge or reorganization of his debts, a debtor should not be allowed to “change in his mind” in direct contravention of his stated intention and the bankruptcy court’s orders.
[i] The Johnsons obtained a first and second mortgage with Schwab on the Property.