A new trend is emerging in the ongoing skirmishes between home mortgage lenders and homeowners involved in lengthy mortgage foreclosure proceedings, in which homeowners defending foreclosure actions have previously sought and received Chapter 7 bankruptcy protection. In an increasing number of cases, lenders are seeking to re-open homeowners’ closed bankruptcy cases in an attempt to use statements made by homeowners in those prior bankruptcy cases, referred to as statements of intention, to prevent litigation of defenses in pending foreclosure cases. Lenders express dismay when homeowners engage in protracted foreclosure litigation after indicating their intention in Chapter 7 bankruptcy to either surrender the home or to re-affirm their debt to their lenders.
Some lenders contend that a homeowner’s statement of an intention to surrender is an admission of the validity of the debt and is incompatible with ongoing efforts to avoid foreclosure. Lenders who seek to re-open a closed bankruptcy case on this basis, do so in an effort to obtain an effective remedy to prevent further defense of the foreclosure action. The bankruptcy judges in the Palm Beach area have been at the forefront in determining whether to provide lenders with an additional remedy to confront homeowners who continue to defend foreclosure actions after stating their intention in bankruptcy to do otherwise.
Some courts hold that such statements in bankruptcy operate as a waiver of the ability to subsequently defend a foreclosure action. Some have reasoned that the statement of intention amounts to a homeowner’s agreement to take some action with regard to the home within a specified time, precluding open-ended defense of a foreclosure effort. Other courts suggest that stating the intention to surrender a home or to re-affirm a debt in a bankruptcy case could rise to the level of judicial estoppel, likewise preventing continued defense of a foreclosure case. Pursuant to that reasoning, lenders have the ability to assert judicial estoppel directly in the foreclosure action itself, regardless of whether the effort to re-open the bankruptcy case is successful.
Other courts are hesitant to intervene in state court cases or to be seen as dictating to state courts how they should decide cases before them. Courts refusing to halt a homeowner’s right to defend a foreclosure action, despite their stated intention to the contrary, do so on a number of theories. Courts have justified refusal to enjoin homeowners from defending state court foreclosure cases based upon a more technical view of these so-called statements of intention, ruling that their purpose is to inform and give notice to creditors of a homeowner’s intention. Under that view, a statement of intention does not rise to the level of waiver of the right to defend a foreclosure action.
Some courts have ruled that the Bankruptcy Code empowers only a Chapter 7 trustee to compel a homeowner to honor their statement of intention, not creditors. Those courts observe that a lender does have the option during a bankruptcy proceeding to seek relief from the automatic stay in order to proceed with a foreclosure action. Other decisions rely on language in the Bankruptcy Code that suggests that the statements of intention are not intended, in and of themselves, to alter a homeowner’s property rights. Still, others invoke the doctrine of latches in declining to re-open bankruptcy cases that have been long closed.
While the courts that have ruled in favor of providing lenders additional remedies have not gone so far as to require a homeowner to deed over a surrendered property, their rulings have been effective in some cases in halting protracted efforts by homeowners to challenge otherwise lawful foreclosures. Dave Markarian