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Does Florida's homestead protection trump a fraudulent transfer?

Author johnbsims3
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#1 - Posted: 24 Jun 2008 18:37 
Does Florida's homestead protection trump a fraudulent transfer?

Posted on July 7, 2007 by Juan Antunez

Dowling v. Davis, Slip Copy, 2007 WL 1839555 (M.D.Fla. Jun 26, 2007)
Does Florida's homestead exemption from creditor claims extend to cases where all parties concede that the judgment debtor purchased a home in Florida with the intent to hinder creditors? As explained in this federal court decision, the Florida Supreme Court says YES it does:

Crooks Welcomed:
[T]he Florida Supreme Court has expressly held that "[t]he transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay, or defraud creditors is not one of the three exceptions to the homestead exemption provided for in article X, section 4." Havoco of Am., Ltd. v. Hill, 790 So.2d 1018, 1028 (Fla.2001) ( "Havoco I" ) (emphasis added); Havoco of Am., Ltd. v. Hill, 255 F.3d 1321, 1322 (11th Cir.2001) ( "Havoco II" ) (affirming that judgment debtor's purchase of home with intent to hinder creditors did not overcome homestead exemption, based on answer to certified question in Havoco I ). This is precisely what Plaintiff is alleging Defendants sought to accomplish by purchasing the Florida residence. For this reason, Plaintiff's claim fails.

But what about an equitable lien? Don't count on it:
Plaintiff argues that the fraud occurred when Defendants, knowing a judgment was imminent, purchased a house with proceeds that could have been used to satisfy Plaintiff s judgment against Davis. Again, however, the homestead exemption does not contain an express exception for real property that is acquired in Florida for the sole purpose of defeating the claims of out-of-state creditors. Havoco II, 255 F.3d at 1322; Havoco I, 790 So.2d at 1028; Bank Leumi Trust Co. v. Lang, 898 F.Supp. 883, 887 (S.D.Fla.1995); In re Adell, 321 B.R. 562, 569-70 (Bankr.M.D.Fla.2005).

Indeed, in one of the primary cases relied upon by Plaintiff, the court specifically distinguished those cases in which a debtor owned the funds-where an equitable lien is not proper-from those cases in which a debtor purchased a residence with fraudulently-obtained funds. In re Fin. Federated Title & Trust, Inc., 273 B.R. 706, 716 (Bankr.S.D.Fla.2001) aff'd 347 F.3d 880 (11th Cir.2003) (affirming imposition of equitable lien where funds were undisputedly obtained through fraudulent Ponzi scheme).FN5

FN5. Although not cited by Plaintiff, one court has imposed an equitable lien where a judgment debtor transferred funds to his daughter and son-in-law to satisfy a mortgage on their residence. Babbit Elecs., Inc. v. Dynascan Corp., 915 F.Supp. 335, 337 (S.D.Fla.1995).

The court held that the transfer was made to delay, hinder, and defraud the defendant's judgment creditor in collection of its judgment and that imposition of an equitable lien would not change the position of the daughter and son-in-law. Id. at 338. However, this pre- Havoco I decision appears to be in conflict with the Eleventh Circuit's ultimate holding in Havoco II that the homestead exemption shields a debtor's purchase of a residence with non-exempt funds, even when the purchase is made with the intent to hinder a judgment creditor. Havoco II, 255 F.3d at 1322.

Lesson Learned:
As this case proves -- again -- Florida's homestead laws are almost impenetrable creditor protection shields. And as I've written about before (see here), getting around this protective wall via an "equitable lien" theory almost never works. Bottom line: people who admittedly move to Florida for the express purpose of evading their just debts can get away with it.

I have to believe this result is an unintended consequence of Florida's outdated homestead laws. Until someone decides this is a crisis, I assume we'll be stuck with the status quo. So if you're looking to defraud your creditors, sunny Florida says "welcome home!"

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Does Florida's homestead protection trump a fraudulent transfer?
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