DS News - Bank of America

92 Special Legal Report TYING BANKRUPTCY AND FORECLOSURE TOGETHER By Lauren Riddick In Illinois, the bankruptcy and foreclosure arenas may have become more closely aligned. Specifically, pursuant to a new case, a debtor's statements in a Chapter 7 bankruptcy petition might have a long lasting effect, even outside of a bankruptcy. e purpose of a Chapter 7 bankruptcy is to clear (or in bankruptcy vernacular, "discharge") debts from an overburdened debtor's shoulders. A Chapter 7 begins with a debtor filing a standardized document known as a "petition" in their presiding bankruptcy court to detail their income and expenses. Part of this petition is a "Statement of Intent," which is a declaration of how the debtor intends to handle secured debt (i.e., debt tied to a particular piece of property, such as a mortgage loan.) It requires the selection of one of three standardized options, namely, whether the debtor intends to "redeem the property" (i.e., pay the creditor back), "reaffirm the debt" (remain responsible for the debt), or "surrender the property." Although surrendering the property implies an intent to relinquish, in practice, at least in Illinois, this selection has historically had no true ascertainable meaning. In other words, many (if not most) Illinois jurisdictions have permitted mortgagors to select "surrender" in their bankruptcy petition, receive a debt discharge, and then proceed to fight the lender's subsequent foreclosure tooth-and-nail. A recent case, however, may change that. In the Bank of New York Mellon v. Rodriguez, 2020 Il App (2d) 190143, the 2nd District Court of Appeals held that debtors were bound by their stated intent. In Rodriguez, the debtors sought to void a foreclosure judgment due to improper service six years after declaring an intent to surrender and receiving a bankruptcy discharge—and after a foreclosure had not only been completed, but the property had changed hands twice over. e court was distinctly not receptive to the debtors' arguments. e 2nd District agreed with the trial court that the defendants' position in bankruptcy and the benefit of the discharge effectively served to preclude their pursuit of relief from judgment in the foreclosure." Id. at 17. Further stating that, "indeed, it is abhorrent to our sense of equity that, six years after the bankruptcy, defendants claimed injury and sought to recover a property in which they no longer held any legal or equitable interest." Id. at ¶22. e court also took note of a case from the 11th Circuit, which stated that "otherwise, debtors could obtain a discharge in bankruptcy based, in part, on their sworn statement to surrender and "enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.'" Id. at ¶19. However, before foreclosing lenders overly rejoice and begin ordering copies of filed Chapter 7 petitions ad nauseam, there is a caveat. e court appeared to wish to limit this holding by emphasizing that the case had "unique circumstances" because the "defendants filed for bankruptcy, having apparently already physically abandoned the property … " and that "they declared an intent to surrender the property" and "did in fact surrender the property without reaffirming or redeeming it." Id. at ¶24. Oddly then, the court seemed to separate the "intent to surrender" from a "surrender," which may call into question whether surrendering in a bankruptcy petition, absent physical property abandonment, is enough to preclude a debtor from seeking foreclosure relief—despite the court's apparent approval of case law from other jurisdictions not requiring physical vacature. Also, the Court went on to note that, "defendants did not take any other action, in the foreclosure case or otherwise, until six years had passed and two subsequent purchases of the property were completed," without explaining how this passage of time affected their analysis, or if it even did. Id. erefore, at least in Illinois, although the bankruptcy and foreclosure arenas are now more closely aligned, questions certainly remain as to whether a debtor's word alone truly is their bond. Lauren Riddick handles contested foreclosure matters as a member of the Codilis & Associates, P.C.'s Contested Litigation Unit and also assists with title matters. She joined the firm in August 2013. Prior to joining the firm, she was an Adjunct Professor of Law with several colleges and a Securities Attorney for a large broker- dealer in Florida. Many Illinois jurisdictions have permitted mortgagors to select "surrender" in their bankruptcy petition, receive a debt discharge, and then proceed to fight the lender's subsequent foreclosure tooth-and-nail.

• Cover