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Bankruptcy is Not the Defense to Mortgage Foreclosures it Once Was: What Lenders Need to Know about § 702.12 Actions in Foreclosure
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Bankruptcy is Not the Defense to Mortgage Foreclosures it Once Was: What Lenders Need to Know about § 702.12 Actions in Foreclosure

May 11, 2021 Banking & Financial Services Industry Legal Blog

Reading Time: 3 minutes


Almost inevitably, on the eve of the foreclosure sale, borrowers file a chapter 7 or chapter 13 bankruptcy petition. Borrowers have two incentives to do so. First, borrowers may want to have the unsecured mortgage debt discharged so that they are not liable for any deficiency judgment. Second, borrowers often want to delay the foreclosure, and in the meantime, retain possession of the premises.

In the petition or the bankruptcy plan, the borrower must declare either their intention to surrender the premises, and have their mortgage debt discharged, or to retain possession of the premises. If the borrower/debtor declares an intention to surrender, the lender may force the surrender in a streamlined foreclosure case, as explained below. See In re Failla, 838 F.3d 1170, 1176 (11th Cir. 2016) (“We also agree with the bankruptcy court and the district court that ‘surrender’ requires debtors to drop their opposition to a foreclosure action”).

foreclosure proceeding borrower bankruptcy judicial notice of bankruptcy waiver of defenses and counterclaims foreclosure bankruptcy

Judicial Notice

After the lender obtains relief from the automatic stay, it may move the court in the foreclosure proceedings to take judicial notice of the bankruptcy case.  Section § 702.12(2), Florida Statutes, removes the discretion that trial courts otherwise would have to take judicial notice. Now, it is mandatory.

Waiver of Defenses and Counterclaims

Once the foreclosure court has taken judicial notice of the bankruptcy case, if the borrower opted to surrender the premises, there is a rebuttable presumption that the defendant has waived his or her affirmative defenses. This section partially codifies older caselaw holding that, where it is clear that the defendant surrendered the premises in the bankruptcy proceedings, judicial estoppel prohibits the borrower from raising affirmative defenses and counterclaims in the foreclosure case. See In re Lapeyre, 544 B.R. 719, 721–22 (Bankr. S.D. Fla. 2016) (finding that the assertion of affirmative defenses and counterclaims in the foreclosure case was inconsistent with the plan provision “surrendering” the property); Clay Cty. Land Tr. v. HSBC Bank USA, Nat’l Ass’n for FBR Securitization Tr. 2005-3, 219 So. 3d 1015, 1016 (Fla. 1st DCA 2017) (“We agree with Appellee that the stipulation rendered this appeal moot and that Appellant is judicially estopped from now proceeding with its challenge to the foreclosure judgment.”). In addition, Section 702.12, Florida Statutes, applies to counterclaims. Therefore, borrowers should also insist that the borrower/debtor drop any counterclaims to the foreclosure action.

Admissions

Lastly, Section 702.12(1)(a), Florida Statutes, provides that “any document the defendant filed under penalty of perjury in the defendant’s bankruptcy case” can be introduced “as an admission by the defendant.” This section can be extremely useful if the borrower opted to retain possession of the premises or if the borrower presents evidence to attempt to rebut the presumption that it waived its affirmative defenses or counterclaims.

Conclusion

In conclusion, Section 702.12, Florida Statutes, gives lenders another arrow in their quiver. It forces the borrower to make difficult decisions when it files a bankruptcy petition and streamlines the foreclosure proceedings. Proper use should lead to faster and more consistent foreclosures.


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