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There's No Place Like (A Florida) Home(stead)

Author johnbsims3
Admin Male

#1 | Posted: 15 Jan 2009 09:54 
The U.S. Bankruptcy Code (the "Bankruptcy Code") provides individual debtors with a number of exemptions for purposes of facilitating a "fresh start." It also allows states to "opt out" of the federal exemptions and provide state exemptions of their own. The State of Florida has opted out of the federal exemptions and provides what recent case law has turned into the most liberal homestead exemption in the United States. Even before the Florida Supreme Court's ruling in Havoco of Am., Ltd. v. Hill,1 Florida's complete exemption for most homesteads, regardless of value, could have been considered generous in light of the limited homestead exemptions provided by other states (e.g., New York's homestead exemption is limited to $10,000 in equity per record owner). Considering some of the exclusive neighborhoods that exist around Florida's beaches and golf courses, this valuable exemption could easily be used to shelter millions of dollars per debtor. This is even more evident in light of the Hill decision, in which the Florida Supreme Court held that the exemption must be sustained even where the homestead is acquired by a debtor with the specific intent to hinder, delay or defraud creditors.

Unlike the exemptions provided with respect to personal property such as cash, automobiles, furnishings, and the like, Florida's homestead exemption is not simply based upon statutory law—its roots are in Article X of the State's constitution. In particular, Florida's constitution exempts from sale or process any judgment, decree, or execution from being a lien upon a homestead except for those relating to the payment of taxes; obligations contracted for in the purchase, improvement, or repair of the homestead; or obligations relating to labor performed thereon. Having fallen outside the scope of these three limited exceptions, the Court in Hill concluded that it was "compelled" to honor the exemption.

In Hill, the plaintiff was awarded a $15,000,000 judgment against the debtor for claims relating to fraud, conspiracy, tortious interference with contractual relations, and breach of fiduciary duty in connection with a contract to supply coal to the Tennessee Valley Authority. Only days prior to the judgment becoming enforceable, the debtor, a long-time resident of Tennessee, purchased the subject property in Destin, Florida (the "Destin Property") for approximately $650,000 in cash. Approximately 18 months later, the debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code and claimed the Destin Property to be wholly exempt under the homestead provisions of Florida's constitution. As may have been expected, plaintiff filed an objection to the exemption claimed by the debtor, asserting that the transfer of non-exempt assets for purposes of purchasing the Destin Property was part of a larger scheme to defraud creditors. After a lengthy procedural process, the Bankruptcy Court held that Florida's fraudulent conveyance statute did not impair the debtor's right to claim the homestead exemption. This decision was affirmed by the District Court. Upon further appeal, the 11th Circuit Court of Appeals acknowledged the inconsistent treatment of this issue in bankruptcy courts and certified the question relating to the state homestead exemption to Florida's Supreme Court.

The Florida Supreme Court recognized the well established policy of liberally construing the homestead exemption in the interest of "protecting the family home2." Notwithstanding basic rules of statutory construction, the Court also recognized that the exemption is "not to be so liberally construed as to make it an instrument of fraud or imposition upon creditors3." Beginning with a review of forfeiture cases under Florida's civil and criminal codes, the Court held that Florida's constitution prohibited civil or criminal forfeiture of homestead property in light of a historic prejudice against such forfeiture, the constitutional protections afforded a homestead in Florida, and rules of construction requiring a liberal and non-technical interpretation of the homestead provisions. The Court stated the "homestead provision of our constitution sets forth exceptions and provides the method of waiving the homestead rights attached to the residence. These exceptions are unqualified. They create no personal qualifications touching the moral character of the resident nor do they undertake to exclude the vicious, the criminal, or the immoral from the benefits so provided. The law provides for punishment of persons convicted of illegal acts, but this forfeiture of homestead rights guaranteed by our Constitution is not part of the punishment4." The Court then considered the case law that allowed for the establishment of equitable liens against a Florida homestead. Refusing to extend such equitable principles, the Court held that the transfer of non-exempt assets into an exempt homestead with the intent to hinder, delay, or defraud creditors is not one of the three specific exceptions provided for under Florida's constitution. In the Court's opinion, the employment of equitable principles to create an equitable lien has limited application to those situations where funds obtained through fraud or egregious conduct are used to invest in, purchase, or improve the homestead. Without more, however, the Florida homestead could not be attacked.

In light of the fortification of the Florida homestead exemption by the Florida Supreme Court's holding in Hill, clients seeking to protect assets might consider calling Florida home.

1 790 So.2d 1018 (Fla. 2001)
2 Id. at 1020.
3 Id.
4 Id. at 1022.

Bankruptcy Florida Homestead Services - Florida Homestead Exemption Act Forum / Bankruptcy /
There's No Place Like (A Florida) Home(stead)
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