How the Great Recession Continues to Affect Debtors' Homes

June 14, 2017

Mark D. Hildreth
Shumaker, Loop & Kendrick, LLP; Sarasota, Fla.


[1]In yet another example of the lingering impact of the recession on the residential mortgage industry, the U.S. Bankruptcy Court for the District of Hawaii has weighed in on the meaning of a debtor's election to "surrender" his or her residence in a chapter 7 case. Taking issue with the Eleventh Circuit's recent decision in In re Failla,[2] the court ruled in In re Ryan[3] that the debtors' election to surrender their homestead in their 2009 chapter 7 case did not impact their ability, in 2016, to sue the mortgage lender for wrongful foreclosure under Hawaii law.


The Ryans filed a chapter 7 bankruptcy petition in January 2009. At the time of the filing, they owned property encumbered by a first mortgage in favor of OneWest Bank (the “property”). In their § 521(a)(2)(A) statement of intention, the Ryans listed the property as “surrendered” and also filed a declaration surrendering and relinquishing “any and all legal, equitable and possessory interests” in the property. In September 2010, OneWest was granted stay relief to foreclose on the property. The Ryans received their discharge in October 2009, and their case was ultimately closed. OneWest foreclosed on the property through a nonjudicial foreclosure in January 2010.[4]

In January 2016, the Ryans sued CIT (successor-in-interest to OneWest) in state court seeking money damages for wrongful foreclosure of the property in 2010.[5] CIT moved for dismissal of the Ryans’ complaint, arguing that they were judicially estopped from pursuing their claims because the bankruptcy court relied on their “surrender” filings in entering their discharge. CIT also argued that the Ryans lacked standing to bring their claims, as the effect of their surrender was to divest them of title to the property and, therefore, they could not have been injured by any alleged wrongful foreclosure. The Ryans then moved to reopen their bankruptcy case and sought an order determining the effect of the discharge order and the final decree on their state law claims.[6]


After disposing of the jurisdictional and procedural challenges to the reopening of the Ryans’ case, Judge Robert Faris considered CIT’s argument that the term “surrender” in § 521(a)(2)(A) operated as a relinquishment of the Ryans’ interest in the property. The court initially noted that the Code does not define the term “surrender,” nor does § 521(a)(2)(A) prescribe to whom such property is to be surrendered or what a “surrender” requires of the debtor. Relying on the “surrender to the trustee” language contained in § 521(a)(4), the Ryans argued that “surrender” for purposes of § 521(a)(2)(A) merely required “surrender” of the property to the trustee. This argument was rejected, however, because the “absolute duty” of the debtor to surrender property of the estate under § 521(a)(4) could not be circumvented by a debtor’s election to redeem or reaffirm a secured debt on the property as permitted under § 521(a)(2)(A). As such, the court determined that “surrender” must have different meanings in these two subsections of § 521(a).[7]

The court then addressed CIT’s argument that the Failla decision compelled a finding that the Ryans’ surrender of the property precluded them from contesting a post-discharge foreclosure. Initially, Judge Faris found that the Eleventh Circuit’s reliance on a dictionary definition of “surrender” — the “giving up of a right or a claim” — was deficient because it did not identify “what right or claim [was] being given up.”[8] Instead, the court found that it was “most logical” to answer this question by reference to the “immediate statutory context” in which it was used — namely, “that the ‘right or claim’ that the debtor gives up is the right to redeem collateral or to reaffirm the secured debt” set out in § 521(a)(2)(A). Judge Faris further challenged the Eleventh Circuit’s reasoning that there is an inherent dichotomy in permitting a debtor to surrender property, obtain a discharge and then “enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.” Rather, according to Judge Faris, the more limited definition of “surrender” as constituting a choice by the debtor to forego redemption or reaffirmation was a “perfectly plausible definition.” Moreover, the court disagreed with Failla in that the debtor’s right to a discharge was contingent upon his surrender of collateral, finding that the only consequence of a failure to surrender was the termination of the automatic stay — a point buttressed by the fact that the Bankruptcy Code only gives the trustee the authority to compel a debtor to file a statement of intention.[9]

The court finalized its critique of Failla by discussing the so-called “hanging paragraph” in § 521(a)(2). The Eleventh Circuit in Failla reasoned that the hanging paragraph simply spells out an order of operations whereby the debtor surrenders property to the trustee who either liquidates it or abandons it before surrendering it to the secured creditor. This order does not affect the trustee or the debtor’s Bankruptcy Code right, however, because the property remains subject to the automatic stay and the secured creditor cannot foreclose until the trustee abandons the property. Judge Faris, by contrast, sees the hanging paragraph differently, noting that the debtor has other Bankruptcy Code rights, besides the protection of the automatic stay, including the right to object to a secured creditor’s claim and the right to challenge its liens. He describes § 521(a)(2) as simply a “notice provision” that does not affect the rights of the debtor or any creditor. In short, he sees “no good reason to construe” the hanging paragraph as limiting the debtor’s post-bankruptcy rights and defenses with respect to surrendered property, nor to read the ambiguous word “surrender” to “give secured creditors a free pass to violate the foreclosure laws.”[10]

The court also rejected CIT’s argument that the bankruptcy court should not grant the Ryans’ request to clarify that the entry of their discharge was not made in reliance on their statement of intention to surrender the property. This factor was critical to CIT’s state court judicial estoppel argument. Judge Faris found that, as a matter of bankruptcy law, entry of the Ryans’ discharge was entirely independent of their “surrender” of the property. noting that none of the conditions that justify denial of discharge under § 727 have anything to do with a debtor’s statement of intention.[11]


The court’s ultimate holding in Ryan is that a chapter 7 debtor’s surrender of encumbered property means only that he gives up the right to redeem, reaffirm or exempt the surrendered property — nothing more.[12]

Judge Faris notes that the Ryan decision does not address the the question of whether a debtor can challenge a foreclosure after discharge in a chapter 13 case where the confirmed plan surrenders the property. Section 1325(a)(5)(C) permits a debtor to surrender secured property to the holder of a secured claim, and case law has recognized that a surrender in such circumstances not only prohibits the debtor from later challenging the secured creditor’s foreclosure action, but also justifies an order from the bankruptcy court directing the debtor to withdraw such challenges.[13] The Lapeyre decision was rendered several months before Failla, but it relies on essentially the same reasoning used by the Eleventh Circuit in the chapter 7 context. Given that the Ryan decision finds two meanings for the term “surrender” within § 521(a)(2), it seems possible that a “surrender” in a chapter 13 case in Hawaii may be subject to an additional interpretation should a chapter 13 debtor later challenge a foreclosure on “surrendered” property. The Ryan decision is presently on appeal to the Ninth Circuit BAP.


[1] Cheap Trick, “Surrender,” 1978.

[2] In re Failla, 838 F.3d 1170 (11th Cir. 2016).

[3] In re Ryan, 560 B.R. 339 (Bankr. D. Haw. 2016).

[4] Ryan, 560 at 342-43.

[5] While not addressed in the opinion, the record in the bankruptcy court includes the Ryans’ allegations that the lender violated Hawaii’s strict timing and notice requirements for nonjudicial foreclosures. See In re David and Melissa Ryan, Case No. 09-01604, Dkt. # 32-1, pp. 13-17.

[6] Id. at 343.

[7] Id. at 347-48.

[8] Id. at 348.

[9] Id. at 348-49.

[10] Id. at 349-50.

[11] Id. at 351.

[12] Id. at 349.

[13] See, e.g., In re Lapeyre, 544 B.R. 719 (Bankr. D.S.D. 2016).

This article was originally published in the March 2017 edition of the Real Estate Committee Newsletter. Participation in ABI's committees is one of the many benefits of becoming a member.  Committees provide networking and leadership opportunities.  For additional information on how you could become involved in ABI and our Committees please visit 
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