MEMORANDUM OPINION DENYING WELLS FARGO'S MOTION TO ORDER DEBTOR TO DISMISS STATE COURT ACTION AND TO ENFORCE SWORN PROMISE TO SURRENDER PROPERTY TO WELLS FARGO OR OTHERWISE REAFFIRM OR REDEEM COLLATERAL
CYNTHIA A. NORTON, Bankruptcy Judge.
The court is asked to consider the meaning of the word "surrender" in § 521(a)(2)(A)
Findings of Fact
The court makes the following findings of fact based on stipulated facts and exhibits.
Description of the Real Estate Involved
At the time Ruby Gregory filed a chapter 13 bankruptcy in 2010, she owned a home in Stanberry, Missouri, known as 317 N. Willow Street, with her daughter, Rita.
Both properties were encumbered by deeds of trust securing a note Ruby executed in favor of Wells Fargo Financial Missouri several years earlier. Rita was not a signatory to the note, although she did sign both deeds of trust. The deeds of trust were properly recorded with the Gentry County, Missouri Recorder of Deeds. But here is where the trouble begins: apparently unbeknownst either to Ruby or to Wells Fargo at the time, the legal descriptions in the deeds of trust had been switched. The deed of trust for 317 N. Willow (Tract B, Ruby's home) listed the legal description for 313 N. Willow (Tract A, the lot); the deed of trust for 313 N. Willow (Tract A, the lot) listed the legal description for 317 N. Willow (Tract B, Ruby's home).
Treatment of the Real Estate in the Chapter 13 Case
In Ruby's chapter 13 bankruptcy case, she listed 317 N. Willow as her street address and claimed the property as her partially exempt homestead.
Ruby did not specifically schedule any property known as the lot at 313 N. Willow. Ruby did schedule a half-interest with her daughter Rita in property described as "Highway 169 1 Acre." Ruby scheduled the value of this property at $20,000, with a mortgage of $9,900 owed to U.S. Bank. It is not clear whether this second property is actually supposed to be the lot, 313 N. Willow, or whether the reference to U.S. Bank was intended to be Wells Fargo, and the parties unfortunately do not address this discrepancy in their stipulated facts.
In any event, Ruby's chapter 13 plan proposed to retain the property at 317 N. Willow and to cure Wells Fargo's mortgage arrears. With respect to the "Highway 169 1 Acre" property, the plan stated she would surrender it "in lieu of entire debt." The 313 N. Willow property was not addressed in the plan. After several plan amendments
Ruby did not complete her plan. After several suspensions of plan payments and motions to dismiss for default,
Pending at the time of dismissal was Wells Fargo's motion for relief to lift the stay for cause under § 362(d)(1) as against both 313 and 317 N. Willow.
Three weeks after the dismissal, new counsel entered an appearance for Ruby and filed a motion to reinstate the case for the purpose of converting it to a chapter 7. The motion to convert alleged that Ruby had decided to surrender her "home"
Ruby then filed an amended petition and conversion schedules. The amended petition lists a street address of "3526 Highway 169 South, Stanberry, Missouri." Schedule A describes "3526 Highway 169 S." as one acre worth $20,000 secured by a lien of $9,900, owned one-half with daughter Rita. 317 N. Willow and 313 N. Willow are scheduled together with the description as "Lot with Abandoned Structure," valued in aggregate at $30,000, and secured by a lien of approximately $100,000.
It is Ruby's statement of intention, however, that has become important in the context of this dispute. With respect to 317 N. Willow and 313 N. Willow ("Lot with Abandoned Structure"), Ruby checked the box that said "Property will be . . . Surrendered." The separate verification form states: "I declare under penalty of perjury that the above indicates my intention as to any property of my estate securing a debt and/or personal property subject to an unexpired lease."
In the meantime, the court entered an order granting Wells Fargo's motion for relief after no party objected. Wells Fargo's counsel filed a certificate of service stating he served the order on First National Bank of Omaha and a mortgage servicer in Florida (neither of whom appear to have any connection with the case); Ruby and Rita were not served. Ruby's chapter 7 trustee
Events Post Chapter 7
It is not clear from the record how long Ruby continued to live in the home at 317 N. Willow. The parties stipulated that "Ruby maintains" she has not regularly resided at 317 N. Willow since December 2015;
In any event, in July 2014, Wells Fargo sent a letter to Ruby addressed to 317 N. Willow with the subject line: "Release of secondary collateral used to secure your loan." The letter stated that Wells Fargo was releasing its lien on its secondary collateral, 313 N. Willow, but retaining its interest in the primary collateral, 317 N. Willow.
Wells Fargo had in fact recorded a "full deed of release" with the Gentry County Recorder of Deeds earlier in June 2014, before it sent the letter. The release states in the header that the property address of the deed of trust being released is 313 N. Willow; the body of the release directs the county recorder to "cancel of record said security instrument" and lists thereafter the legal description of Tract B (the description of 317 N. Willow).
Ruby's State Court Action against Wells Fargo
In March 2016, Ruby filed a four-count petition against Wells Fargo and its agent in Gentry County Circuit Court, Case No. GE-CC00033 (the "State Court Action"). The petition alleges generally that Wells Fargo, through its agent, broke into Ruby's home at 317 N. Willow, changed the locks, and damaged the property. Ruby seeks actual and punitive damages, attorney fees, and pre- and post-judgment interest for alleged trespass to land, trespass against chattels, and violations of the Missouri Merchandising Practices Act.
Wells Fargo's answer generally denied Ruby's allegations, and asserted thirty-one separately-enumerated affirmative defenses. Wells Fargo also counterclaimed against Ruby and third-party "defendant" Rita.
The Motion before this Court
It is unclear what transpired in the State Court Action after the counterclaim was filed, but some six months later and more than four years after the bankruptcy case was closed, Wells Fargo moved to reopen the bankruptcy case for the purpose of filing a motion to compel (the "Motion to Compel").
The Motion to Compel requests various forms of relief. It requests orders (1) requiring Ruby to dismiss the State Court Action; (2) ordering Ruby to refrain from filing any further claims against Wells Fargo relating to the N. Willow properties; (3) ordering Ruby to refrain from taking any other action to interfere with Wells Fargo's rights to foreclose the N. Willow properties; (4) enforcing Ruby's "sworn promise" to surrender 317 N. Willow to Wells Fargo; and (5) in the alternative, ordering Ruby to reaffirm Wells Fargo's debt or to redeem the property.
Wells Fargo argues that when a chapter 7 debtor signs a statement of her intention to surrender property, the debtor is effectuating a relinquishment of control and possession of the property to the secured creditor. Wells Fargo argues that for a debtor to later take any action in state court asserting ownership of the property is contrary to her representation to the bankruptcy court in the statement of intention. Wells Fargo argues a debtor's failure to relinquish possession and control of the surrendered property is an abuse of the bankruptcy system, and that this court has authority in effect to enforce the surrender. Finally, Wells Fargo argues that the overwhelming majority of courts, including courts in this district, follow its interpretation of the law.
Ruby counters that she did not surrender the property and cannot be compelled to do so when there is a non-debtor party (daughter Rita) who is not before the court, and that Ruby is not contesting a foreclosure action but seeking to enforce her rights in the properties in light of Wells Fargo's errors in the legal description and lien release. She also argues that § 521(a)(2) is a notice provision only, and that nothing in § 521 prevents her from exercising her state law rights to sue Wells Fargo for trespass and other theories. The court agrees with Ruby.
Introduction: Section 521(a)(2)
The court starts with the language of the Code.
Section 521(a)(2)(A) provides in relevant part that an individual debtor whose schedules include debts secured by property of the estate shall "file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property."
Redemption of certain personal property is governed by § 722; reaffirmation of debts by § 524. The Code does not contain a separate section for surrender, however. Nor does the Code define the phrase "retention or surrender," specify what is required for a debtor "to perform his intention," or specify how a chapter 7 trustee should ensure performance of the intention. Given that Congressional intent is not apparent from the plain language of these sections, the court must turn to other sources to determine what "surrender" means in the context of § 521.
At the Threshold, a Discussion of the History of § 521(a)(2)
Courts have expended much ink and brain power on § 521(a)(2) and its predecessor, § 521(2). A discussion of what Congress meant when it used the term "surrender" must therefore begin with this history.
Congress first imposed the duty to file statements of intention and to perform the intention in the 1984 amendments.
Yet secured creditor frustration did not abate. Creditors argued that § 521(2) afforded debtors only three options: reaffirmation, redemption, or surrender of the collateral. Seizing on the phrase "if applicable," however, debtors argued that the ambiguity in § 521(2) and lack of a plain statutory remedy offered a fourth option — that of keeping the collateral without reaffirming or redeeming, so long as they remained current on payments.
This fourth option — sometimes called the option to "retain and pay" or to "pay and drive" — eventually became known as "ride-through." Ride-through derived its force from the fact that the Code as well as case law invalidated "ipso facto" clauses, so that a lender could not rely on the mere filing of the bankruptcy to declare default and repossess or foreclose.
The courts were violently split on the issue of ride-through, resulting in "retain-and-pay"
Against this backdrop, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") in 2005.
If Congress intended to abrogate ride-through with these changes, its efforts failed. Most courts agree that these changes, when read together, have for the most part eliminated ride-through on personal property, since a debtor's rights under the savings clause are now subject to the stay-lifting provisions of § 362(h).
Most importantly, the new duty "not to retain" and the new "penalties" (lift of stay and validation of the ipso facto clause) for retaining without reaffirming expressly apply only to a debtor's retention of personal property. Conversely, the express Congressional blessing of a creditor's ability to accept mortgage payments appears to codify ride-through for a debtor's home mortgage.
Turning Back to the Parties' Arguments in this Case
It is somewhat difficult to follow Wells Fargo's arguments about surrender. Wells Fargo both argues that Ruby has no ownership in the Willow properties because she already "surrendered" the properties (as though Wells Fargo now owns the properties), and also argues that that she should be compelled to surrender them. These verbal gymnastics do not help the court determine what § 521(a)(2) means. So the court will take each of Wells Fargo's arguments in turn.
§ 521(a)(2) Does Not Effectuate a Surrender; § 521(a)(2) is a Notice Statute
Wells Fargo's first argument is that § 521(a)(2) substantively effectuated a surrender of the N. Willow Properties, because Congress intended § 521(a)(2) to operate as something more than a notice statute. The court disagrees.
Returning to the interpretation of § 521(a)(2) and the meaning of the phrase "retention or surrender," the only logical way to interpret the word "surrender" is in contrast to what Congress thought was its opposite — "retention." The plain meaning of "retention" is to retain or keep as opposed to relinquishing or giving up. So when Ruby filed a statement of intention that she was surrendering the N. Willow properties, she expressed her intention to relinquish or to give up — as opposed to keeping — those properties.
But nothing in § 521(a)(2)(A) accomplished transferring 313 and 317 N. Willow to Wells Fargo, for multiple reasons. First, if § 521(a)(2)(A) effectuated a surrender upon the filing of the statement of intention, then § 521(a)(2)(B) would be superfluous — there would be no reason for the Code to set a deadline for the debtor's performance of the intention. Second, there would also be no need to vest chapter 7 trustees with a duty to ensure performance of debtors' intentions. And third, the savings clause preserving debtors' and trustees' rights would be unnecessary, since neither would have any rights in the "surrendered" property. Wells Fargo's argument that § 521(a)(2) effectuated a surrender also ignores Missouri law requirements for transferring real estate.
Interpreting § 521(a)(2) to effectuate a real estate transfer would in fact deprive trustees of their statutory rights to administer property of the estate and avoid liens. And when Congress intended that a party surrender property "to" another party, it knew how to do so: § 521(a)(4) imposes a duty on the debtor to "surrender to the trustee all property of the estate . . . ." (emphasis added).
For all these reasons, "surrender" in the phrase "retention or surrender" cannot mean surrender to Wells Fargo; indeed, both parties here ultimately reach a similar definition of surrender as being merely a relinquishment, which is consistent with the definition reached by the majority of courts.
The focus then must be on what it means for a debtor to "perform the intention," and what happens when a debtor does not perform, a nuance both parties have overlooked. Here is where the BAPCPA amendments and the pre-BAPCPA case law must be viewed together, and the obvious question asked: given that a majority of courts and the leading commentator
First, the amendments related to ride-through did not change other provisions of the Code governing Ruby's and Wells Fargo's respective rights in the N. Willow properties throughout the bankruptcy case. All legal and equitable interests Ruby had with respect to the N. Willow properties became property of the estate under § 541(a) and Wells Fargo was automatically stayed from enforcing its liens under § 362(a). The Code also vested Ruby with certain limited avoidance powers with respect to these properties under § 522(f) and (g). Ruby timely filed a statement of intention to surrender, and did not oppose Wells Fargo's motion to lift the stay to allow Wells Fargo, as it put it, to "seek the return of [the] property." Ruby received a discharge, extinguishing her personal liability under § 524. When the trustee abandoned his interests in the N. Willow properties, all of Ruby's legal and equitable interests were abandoned back to her under § 554(c) and § 521(a)(2)'s savings clause. These rights included any equitable rights Ruby might have had under Missouri law to challenge the switched legal descriptions.
Second, the reason Ruby had a fourth option to "retain" notwithstanding her stated intention to surrender is that Congress provided that option in § 524(j), when it authorized Wells Fargo to accept periodic payments in lieu of foreclosing its in rem interest. In other words, as explained above, § 524(j) codified the ride-through option that the majority of courts recognized pre-BAPCPA with respect to home mortgages such as Ruby's.
The Code thus sets up a dichotomy in treatment between creditors with liens in personal property and creditors with liens in real estate, particularly home mortgages. Yet, the Code has long drawn distinctions between secured creditors depending on the nature of their security.
The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially-created concept, it makes that intent specific. Courts have followed this rule with particular care in construing the Bankruptcy Code.
Wells Fargo's Argument that Ruby has Asserted a Contrary Position in State Court
Wells Fargo next asserts that by making a "sworn promise" to surrender the N. Willow properties in the bankruptcy court, Ruby cannot take a contrary position in the State Court Action and this court should therefore "enforce" the sworn promise. Wells Fargo appears to suggest that the statement of intention is a contract, the breach of which entitles it to the contractual remedy of specific performance. For the reasons set forth below, the court rejects Wells Fargo's argument in part, and on its own motion abstains in part.
First, the court rejects Wells Fargo's argument that Ruby's statement of intention was a "sworn promise" to surrender the N. Willow properties. The statement of intention itself belies the notion that it created an enforceable contract. A filed statement of intention (Official Form 108) is indeed executed under penalty of perjury,
Second, statements of intention are just that — of intent. Debtors have limited rights to amend their statements of intention.
What Wells Fargo is in essence arguing is that Ruby — having converted her case on a representation she was surrendering her home and signing a statement of intention to that effect — should be judicially estopped from taking a contrary position in the State Court Action.
Judicial estoppel is an equitable doctrine created to protect the integrity of the judicial process.
Here, this court cannot determine based on the stipulated facts whether Ruby should be judicially estopped in the State Court Action from challenging Wells Fargo's liens. Yes, Ruby through counsel represented she was converting to chapter 7 to surrender her "home," but Ruby claimed different properties at different times as her homestead and did not describe which property she was referring to in the motion to convert. There is no evidence before this court that Wells Fargo relied on the statement in the conversion motion or was even served with the motion.
Second, there is likewise no evidence Wells Fargo relied on the statement of intention. There is no certificate of service in the court record that shows Ruby gave notice of the statement to Wells Fargo as required by Rule 1007(b)(2). And, Wells Fargo's motion for relief was already pending when the statement of intention showing surrender was filed and Wells Fargo did not amend its motion for relief to reference the statement.
Finally, and most importantly, this court cannot say it was misled by Ruby's statements in the conversion motion or the statement of intention. Other cases have found it appropriate to judicially estop a debtor where the debtor obtained a discharge notwithstanding a failure to disclose assets, for example, on the grounds the bankruptcy court in granting the chapter 13 debtors a discharge had accepted the debtors' representation that they had no undisclosed assets.
That being said, there are certainly inconsistencies — by both parties — in their statements to this court: Ruby's discrepancies in which property or properties constituted Ruby's homestead and which properties she owned with Rita, and Wells Fargo's inaccurate recitation of the nature of liens, failure to serve Rita with the motion for relief, and later release of its lien. But the parties have presented no evidence regarding these inconsistencies and whether the inconsistencies were caused by inadvertence or mistake. They have presented no evidence about whether Ruby's apparent change of mind about keeping the home was inspired by Wells Fargo's lien release or something else. The court therefore believes that it is the state court that is in the best position to determine whether either party should be judicially estopped with respect to their respective positions, particularly given that this court has no jurisdiction over the parties' state law claims.
In sum, the court denies Wells Fargo's request to compel Ruby to surrender or to otherwise comply with the statement of intention, and abstains
Ruby's Failure to Relinquish Possession and Control of the N. Willow Properties is Not an Abuse of the Bankruptcy System
Wells Fargo argues that Ruby's failure to relinquish possession and control of the N. Willow properties is an abuse of the bankruptcy system, such that this court should employ its equitable powers to require her to reaffirm its debt, redeem the properties, or, in the alternative, vacate her discharge and enjoin her from pursuing the State Court Action. The court disagrees.
Section 105(a) provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." Section 105(a) powers are not, however, to be employed in contravention of express provisions of the Bankruptcy Code.
Section 524(c)(1) requires that any reaffirmation agreement be entered "before the granting of the discharge." Rule 4008 sets a deadline to file a reaffirmation agreement "no later than 60 days after the first date set for the meeting of creditors. . . ." Many courts recognize authority to vacate a discharge order for the purpose of filing reaffirmation agreements.
Likewise, the court has no authority to require a debtor to redeem real property under § 722 since that section applies solely to personal, not real, property. And, there is certainly no authority to vacate or even deny a discharge for an alleged "failure to surrender"; the grounds to deny or revoke a discharge are expressly set forth in § 727 and none of the grounds even refer to filing or performing a statement of intention.
The court, in sum, does not have the equitable power to compel Ruby to reaffirm Wells Fargo's debt, to order her to redeem, or to vacate her discharge, since all of those requests contravene express provisions of the Code. The court likewise does not have authority to enjoin Ruby from pursuing her State Court Action, since § 105(a) powers are limited to those necessary to carry out the provisions of title 11, and Ruby's actions in state court do not implicate any Code provisions.
As a final matter, even if this court had such equitable powers, it would not employ them in this case. Ruby signed a statement indicating her intention to surrender the N. Willow properties five years ago; Wells Fargo in turn obtained relief from stay on the grounds it intended to seek return of the property. Yet Wells Fargo has still not foreclosed and in fact released a portion of its lien. After the release and seeming inaction on the part of Wells Fargo, Ruby seeks a declaration of her rights and other damages arising out of that lien release. For her to do so in no way abuses the bankruptcy system.
The Majority of Courts and Previous Cases in This District do not Support Wells Fargo's Position
Wells Fargo's final argument is that by reason of the overwhelming weight of authority, this court should grant its motion. Wells Fargo has not accurately reported the state of the law.
First, the majority of cases do not support Wells Fargo's interpretation of the meaning of "surrender." The term is used in many provisions of the Code and in many contexts, and citing cases interpreting whether a debtor may surrender property to a creditor in the context of a chapter 13 plan, for example,
Second, Wells Fargo's argument that the Western District of Missouri has decided this issue is disingenuous. It is true that two bankruptcy judges in this district rejected ride-through pre-BAPCPA.
Next, Wells Fargo cites a post-BAPCPA case, In re Carter,
Carter, another case by my esteemed colleague Judge Federman, is a chapter 13 case. In Carter, the debtor proposed a plan to surrender certain real property "in lieu" of the first and second lienholder's claims. The plan was confirmed without objection. Later, the second lienholder objected to the chapter 13 trustee's notice to allow claims, arguing that it was entitled to file an unsecured deficiency claim once the first lienholder foreclosed.
In discussing the effect of the confirmed plan, Carter reasons that "the term `surrender' was contemplated by Congress to be a return of property and a relinquishing of possession or control to the holder of the claim."
Finally, Wells Fargo relies most heavily on the Eleventh Circuit's recent Failla case.
Superficially, Failla would seem to have great appeal.
In Failla, the debtors' lender had commenced a judicial foreclosure action against the debtors' Florida home before they filed their chapter 7 bankruptcy. The debtors' chapter 7 bankruptcy filing automatically stayed the state court foreclosure action. According to the Eleventh Circuit, the debtors admitted in the bankruptcy proceeding that they owned the home, that the house was collateral for a mortgage, and that the balance of the mortgage exceeded the value of the home.
The lender filed a motion with the bankruptcy court to compel surrender of the home, and the bankruptcy court granted the motion.
The Eleventh Circuit divided its discussion into two parts. It first held that § 521(a)(2) "prevents debtors who surrender their property from opposing a foreclosure action in state court."
The Eleventh Circuit in Failla held true to its pre-BAPCPA ride-through decision in Taylor,
First, the Eighth Circuit, unlike the Eleventh Circuit, does not have pre-BAPCPA law informing its interpretation of § 521(a)(2). Second, ride-through of home mortgages is now permitted — an argument apparently not raised in Failla. And third, this court has found, unlike the bankruptcy court in Failla, that Ruby did not abuse the bankruptcy process. Here, there was no pre-bankruptcy foreclosure. Here, Ruby originally filed a chapter 13 bankruptcy in an attempt to keep her home. Here, Wells Fargo obtained stay relief, but did not foreclose. And here, Wells Fargo has filed a deed of release.
Under the circumstances in Failla, the Eleventh Circuit could certainly conclude that opposing the foreclosure was in effect an impermissible ride-through in violation of the debtors' duties under Taylor. It follows then, that it was appropriate for the circuit court to affirm the bankruptcy court's use of equitable powers to enforce the debtors' duty to reaffirm or surrender.
A more recent case, In re Ryan,
The court can envision rare situations, during the pendency of a chapter 7 case, in which it might be appropriate to use its § 105(a) powers to compel a debtor to do something in connection with a statement of intention or to somehow enforce performance of the intention in the statement, particularly with respect to personal property. In this case, however, Wells Fargo obtained relief from stay during the bankruptcy case, reciting a need for immediate relief "to prevent irreparable harm," and yet did not (and has still not) foreclosed; Wells Fargo through agents allegedly intruded upon property after arguably releasing a lien; and Wells Fargo obtained relief from stay based on arguably inaccurate facts and without service on all proper parties. Wells Fargo cites no statutory or legal authority supporting a result that would enjoin Ruby or prevent her from having her day in state court.
The court therefore denies Wells Fargo's Motion to Compel. The court abstains from determining whether either party should be judicially estopped based on positions taken in the bankruptcy court. Given that the chapter 7 trustee has been informed of the State Court Action and has abandoned any interest of the estate in such action, the court also directs the clerk to enter an order reclosing the case.
A separate order shall issue.
370 F.3d 362, 370 (3d Cir. 2004) (internal quotations omitted).
139 F.3d 668, 672 (9th Cir. 1998).
Parker, 139 F.3d at 672.