The Reaffirming Dead
Part Two – read Part One here.
Kudos to the Honorable Judge for taking the matter seriously and addressing a legitimate question of law … and then coming quickly to the inevitable and obvious conclusion.
From the Middle District of Florida, In re Charles James McHale, Jr., and Susan McHale, Case #10-02527. Entered March 9, 2018.
No Relief is Possible against Mr. McHale or His Estate
The Eleventh Circuit Court of Appeals in Failla recently addressed the issue of possible relief to grant creditor when a debtor fails to perform his intent to surrender property. The Faillas owned a home, filed a Chapter 7 bankruptcy case, indicated they intended to surrender the home, and got a discharge. Yet, post-bankruptcy, they continued to fight their lender’s foreclosure action. The Eleventh Circuit concluded that when a debtor says they intend to surrender property they must surrender it to both the trustee and to the creditor and that “surrender” necessarily prohibits a debtor from contesting a foreclosure action post-bankruptcy.
The authority of bankruptcy courts to craft appropriate remedies when debtors fail to perform their intentions under § 521(a)(2) is found in § 105(a) of the Bankruptcy Code giving bankruptcy courts the discretion to enter any order “necessary or appropriate to carry out the provisions of this title” and the “broad authority…to take any action that is necessary or appropriate ‘to prevent an abuse of process.” The Eleventh Circuit then affirmed the Bankruptcy Court’s order directing the Faillas to stop contesting the pending state court foreclosure action.
However, the Eleventh Circuit did not opine that forcing a debtor to relinquish all defenses in a pending foreclosure action is the only relief possible when a debtor fails to perform his intention under § 521(a)(2), particularly when a debtor indicates he intends to reaffirm a debt as opposed to surrendering his interest in a home. The power granted to bankruptcy courts under §105 is to use their discretion guardedly fashioning an appropriate remedy that preserves the integrity of the bankruptcy system but does not overreach.
When a debtor says he is going to surrender his home and then continues to fight a foreclosure action, in most cases, the appropriate remedy is for the bankruptcy court to squelch the debtor’s defenses. The debtor is doing the exact opposite of what he promised. But, when a debtor states he intends to reaffirm a debt but fails to act, other remedies often are more appropriate, such as confirming the creditor can continue to pursue collection in state court forums irrespective of the debtor’s discharge.
Debtors who agree to reaffirm a debt want to pay their creditors. With a home mortgage, they are not trying to escape financial liability. They are trying to honor their promises to pay. This is different from a debtor who says he intends to surrender his home, has not made a payment for years, and then fights a pending foreclosure action simply to get more time to live for free in a house.
Here, Mr. McHale acted entirely consistent with his intent to reaffirm his debt to Bank of America. He was current on his mortgage payments at all times during the bankruptcy, kept his payments current post-discharge for many months, modified the mortgage with Bank of America when his illness advanced, and only stopped making payments when he died. He was not trying to “game” the system or get any “head start.” Instead, this was an honorable man who tried desperately to preserve the family home until the day he died. The testimony of Mrs. McHale was particularly poignant on the number of calls he made to Bank of America, literally on his deathbed.
Mr. McHale was not trying to flout his obligations to reaffirm the debt. He was trying to pay his creditor.
If the lender, like every other diligent creditor, timely had asked for the Court’s help to compel Mr. McHale to sign a reaffirmation agreement when he was still alive, the request would have been granted. Debtors who state they want to retain property secured by a lien must either sign a reaffirmation agreement or redeem the property. However, Christiana Trust or its predecessor did not make a timely request. They waited over four years after Mr. McHale died before filing their motion to reopen this case. Christiana Trust simply waited too late to ask. I cannot now compel Mr. McHale to do anything. He is dead and beyond the injunctive reach of this or any other court.
Nor is relief possible against Mr. McHale’s estate. The law is clear that bankruptcy courts lack jurisdiction to intercede in non-bankruptcy probate and domestic actions. I appropriately lack jurisdiction to order Mr. McHale’s estate to do anything. Bankruptcy courts may not interfere with the administration of a probate estate. The Eleventh Circuit Court of Appeals has explained that it is inappropriate for bankruptcy courts to decide issues that are better left to specialized state courts. “This idea has been extended to prevent [b]ankruptcy [c]ourts from deciding issues [that] should be decided by a state probate court.” The issue then is whether Christiana Trust has shown good cause why they are entitled to reopen this case to get relief against Mrs. McHale as the surviving widow.
No Relief is Justified against Mrs. McHale
Mrs. McHale contends she has valid defenses to the pending foreclosure action prosecuted by Christiana Trust. Although she may or may not succeed, I cannot find any reason to compel her stop raising these defenses. Mrs. McHale never signed the promissory note payable to Bank of America. She was never personally liable to the lender and was never required to sign any reaffirmation agreement.
Moreover, just because she and her husband filed this joint bankruptcy case, she never assumed liability for her husband’s debts. Section 302(a) of the Bankruptcy Code allows a married couple to file a joint petition. When a joint petition is filed, Federal Rule of Bankruptcy Procedure 1015(b) provides that the Court may jointly administer a married couple’s bankruptcy estates.
Local Rule 1015-1 provides if a married couple files a joint petition, joint administration happens automatically without court order. When a case is jointly administered, “‘the estate of each debtor remains separate and distinct.” So, while this was a jointly administered bankruptcy case, Mr. and Mrs. McHale retained separate and distinct bankruptcy estates. Mrs. McHale did not assume personal liability on the promissory note due to Bank of America simply because she filed a joint bankruptcy petition with her husband.
And, even if another court determines that the principles articulated in Taylor and Failla somehow apply to Mrs. McHale’s situation, I would find that no relief is justified. First, the circumstances now are significantly different than when the bankruptcy was pending. During the bankruptcy case, Mr. McHale was current on his mortgage payments. The lender accepted all of these payments. No default had occurred. No foreclosure was pending or needed.
After the bankruptcy ended, everything changed. Mr. McHale was terminally ill. He lost his income. The lender modified the loan with Mr. McHale. The lender also continued to accept payments under the loan modification for ten months. They only refused these payments when Mr. McHale died. The lender waited two years to file a foreclosure action against Mrs. McHale and dismissed it because they could not prove their case. The lender then filed a second foreclosure action and has sought at least three continuances. Whatever debt was due in the bankruptcy case changed significantly post-bankruptcy due to the actions of both Mr. McHale and the lender. Any claim held by the lender or any defenses held by Mrs. McHale are dramatically different seven years later. Too much has changed to simply require Mrs. McHale to surrender the home because her husband failed to sign a reaffirmation agreement during the bankruptcy case.
Second, the Court critically questions the propriety of the Creditor’s actions. They could have asked for this Court to compel Mr. McHale to execute the reaffirmation agreement when he was alive. The stipulated facts indicate that the lender voluntarily dismissed its first foreclosure action and that they have repeatedly sought continuances in the second foreclosure action, waiting six years to ask the Bankruptcy Court to reopen this case. Mrs. McHale contends she has valid defenses to the foreclosure and that the lender cannot succeed. She very much desires her “day in court.” After listening carefully to the testimony and weighing the evidence, I believe Mrs. McHale’s concerns are valid, although I render no opinion as to whether any of Mrs. McHale’s defenses are legitimate.
Christiana Trust now is asking this Court to order Mrs. McHale to stop pursuing her foreclosure defenses primarily to shortcut their litigation so they do not have to actually prove their case in state court. The arsenal of enforcement powers granted Bankruptcy Courts under § 105 was never intended to reward such creditors trying to game the system.
The spirit of our Bankruptcy Code promises honest debtors a “fresh start.” Creditors are not entitled to use the extraordinary powers bestowed by § 105 as a cudgel to avoid having to actually prove their case in state court. As Bankruptcy Judge Colton held in Ayala, “Failla should not be viewed as carte blanche for post-bankruptcy lender misconduct. Instead, each case must be evaluated on its own facts, and careful consideration should be exercised before issuing any order the impacts pending state court proceedings.”
Third, Christiana Trust was not injured by Mr. McHale’s failure to sign a reaffirmation agreement. The remedy sought by the lender, requiring Mrs. McHale to forfeit her foreclosure defenses, is not a logical or justified punishment to impose on Mrs. McHale. Let’s assume Mr. McHale did perform his intention under § 521, and he signed a reaffirmation agreement with the lender during his bankruptcy. If he had, the post-bankruptcy events would have occurred exactly like they did regardless of whether a reaffirmation agreement was signed or not. Mr. McHale still would have defaulted on his payments post-bankruptcy, and the lender still would have filed a foreclosure action and still would have had to prove its case. So, the fact that a reaffirmation agreement was or was not signed is absolutely irrelevant to Mrs. McHale’s current situation.
Christiana Trust is not prejudiced. The lender is trying to get a “pass” on proving their case in state court, not seriously arguing that Mr. McHale’s failure to sign a reaffirmation agreement damaged them.
Christiana Trust relies heavily and mistakenly on a recent per curiam and unpublished decision of the Eleventh Circuit Court of Appeals−Jones v. Citimortgage. In Jones, the debtor, acting pro se, sued his mortgage lender and a state court judge in the United States District Court for the Northern District of Georgia. The procedural history is convoluted and confused. It is unclear if the Debtor intended to reaffirm, redeem, or surrender his home to Citimortgage during his bankruptcy. But, we know he did sue Citimortgage in federal district court in a 58-count complaint asserting various civil rights claims under U.S.C. §§ 1983 and 1985, the Fair Housing Act, a violation of his bankruptcy discharge, the Fair Credit Reporting Act, and various state statutes. The Eleventh Circuit dismissed the majority of Mr. Jones’s complaint with prejudice but sent the count relating to the discharge violation back to the appropriate Bankruptcy Court. In dicta, the Appellate Court cited In re Taylor and In re Failla for the established proposition that debtors must redeem or reaffirm their secured debts if they want to retain property.
But, the Eleventh Circuit in Jones is utterly silent as to what is the proper remedy under §105 of the Bankruptcy Code when a debtor fails to perform their stated intention, the issue in this case. Jones merely restates established law and imposes no new nuance with one possible exception. The Eleventh Circuit in Jones confirmed that a debtor who arguably failed to perform his intent under § 521(a)(2) still was entitled to return to the bankruptcy court to seek relief against his lender for violating his discharge. Significantly, the Eleventh Circuit opined that, even though the Debtor failed to surrender, reaffirm, or redeem, he could continue “to maintain mortgage liability payments on a principal residence after discharge without reaffirming the debt, and a creditor can take such payments rather than pursue an in rem foreclosure” under § 524(j) of the Bankruptcy Code. So, at least according to the Eleventh Circuit in this unpublished opinion, if a creditor voluntarily accepts payments post-bankruptcy, they may lessen or lose their ability to force a debtor to comply with his obligations under § 521(a)(2). The take-away lesson from Jones, if any, is that creditors who accept post-bankruptcy payments from debtors who do not sign reaffirmation agreements may lose their ability to force compliance with § 521 of the Bankruptcy Code when the debtor later defaults post-bankruptcy.
Christiana Trust has failed to establish cause to reopen this case. No relief is possible against Mr. McHale because he is dead and beyond the injunctive power of this or any other court.
No relief is possible against Mr. McHale’s estate because this Court lacks jurisdiction.
And, no relief is justified against Mrs. McHale. She is not now and never was personally liable to the lender. Mr. McHale’s failure to sign or to not sign a reaffirmation agreement caused no prejudice to the lender. They still would have to pursue a foreclosure action. And, given the change in circumstances due to the passage of time, Mr. McHale’s death, the lender’s post-bankruptcy modification of the loan, Mrs. McHale’s current foreclosure defenses necessarily are different from those during the bankruptcy when the Debtors were current on their payments. The only appropriate result in this case is to allow the Florida State Court to continue its in rem foreclosure action to conclusion. The only limitation is that Mrs. McHale, if she ever had any liability to the lender given she never signed the promissory note, certainly has no in personam liability to Christiana Trust or its predecessors after her bankruptcy discharge.
Accordingly, it is ORDERED that the Motion to Reopen Case and to Compel Surrender is DENIED.
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About the blogger:
Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
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