The Use of a Florida Homestead to Defraud Creditors
The current trend of case law in Florida permits a debtor with financial problems to acquire a homestead with nonexempt money and keep that homestead as exempt from the claims of his or her creditors.
The Florida Constitution provides that the homestead of a Florida resident is exempt from forced sale under process of any court. Art. X, §4 provides as follows:
(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:
(1) a homestead. . . .
Creditors may obtain a judgment against a debtor but may not levy execution on the debtor's homestead because of this exemption. The exemption from levy continues as long as the debtor lives in the homestead. If the debtor sells the homestead, the exemption continues on the proceeds if they are segregated and used within a reasonable time to acquire another homestead.1 If the debtor dies while residing in the homestead, the homestead passes to the debtor's heirs free of the claims of creditors.2
Therefore, the debtor may keep such an exempt homestead for his or her lifetime and even pass the homestead on to the heirs free of the claims of creditors.
Recent court decisions in Florida have applied this exemption for the homestead to prevent the state from obtaining a forfeiture of the homestead property when it was used in the commission of a crime and when the homestead was acquired with money from criminal activity.
The exemption also has been applied to allow a debtor to sell nonexempt assets and use the money to acquire a homestead or pay down the mortgage on a homestead, or make improvements to the homestead with nonexempt money and keep the homestead as exempt and thereby defeat creditors who are trying to collect their claims from the assets of the debtor.
In Butterworth v. Caggiano, 605 So. 2d 56 (Fla. 1992), decided by the Florida Supreme Court, Caggiano was convicted of racketeering in violation of the Florida RICO Act for bookmaking, some of which occurred at his personal residence. The state sought forfeiture of the residence in a civil proceeding under the Florida RICO Act on the ground that the property was used in the course of racketeering activity. The Supreme Court held that the state could not obtain forfeiture of the residence because it was Caggiano's homestead.
The court noted that under long standing case law the homestead exemption is to be liberally construed. The Florida Constitution provides for only three exceptions to the homestead exemption: 1) the payment of taxes and assessments on the homestead; 2) obligations contracted for the purchase, improvement, or repair of the homestead; or 3) obligations contracted for labor performed on the homestead.
Since the constitution contains no exception to the homestead exemption for civil forfeiture which would result in a forced auction sale of the property, the homestead is exempt from such forfeiture.
After Caggiano, the U.S. District Court for the Southern District of Florida decided the case of Bank Leumi Trust Company of New York v. Lang, 898 F. Supp. 883 (S.D. Fla. 1995).
In this case, Mr. & Mrs. Lang, who were being sued by Bank Leumi on a $1.8 million personal guarantee, sold their house in New Jersey for $940,000, came to Florida and purchased $500,000 worth of annuities, and bought a home in Florida for $522,000 cash. After Bank Leumi obtained its $1.8 million judgment, it filed a post-judgment petition in the U.S. district court to enforce its judgment against the homestead and the annuities.
The district court in its findings of fact decided that the Langs converted their nonexempt assets into exempt assets for the sole purpose of hindering their creditors and defeating their claims. Nevertheless, the court concluded that the homestead was exempt from the bank's judgment. A similar case was that of O.J. Simpson.
The court cited the Caggiano case for its holding that the homestead exemption was to be liberally construed and that there were only three exceptions to the exemption in the constitution.
The Bank Leumi court noted that there was no exception to the homestead exemption in the constitution for acquiring a homestead to hinder and defeat the claims of creditors. Therefore, the Langs were entitled to keep their homestead as exempt.
The court held that the bank could reach the annuities because their exemption status was granted by statute, not by the constitution, and case law and the recently enacted Florida statute3 on fraudulent conversion of assets indicated that annuities purchased to hinder, delay, or defraud creditors could be reached by the creditors.
In Tramel v. Stewart, 697 So. 2d 821 ( Fla. 1997), decided by the Florida Supreme Court in 1997, the Stewarts bought their homestead property with money obtained from growing and selling marijuana. The Florida Contraband Forfeiture Act provides for forfeiture of real property acquired with the proceeds of such activity.
The Supreme Court held that the state could not obtain a forfeiture of the home because there was no exception to the homestead exemption in the Florida Constitution for a homestead acquired with the proceeds of criminal activity, citing its holding in Caggiano.
The Supreme Court stated that permitting the state to obtain forfeiture of a homestead based upon criminal activity requires a change in the constitution and called this to the attention of the Constitution Revision Commission, which was then considering proposals for changes to the constitution. The commission decided not to propose such an amendment.
Several Florida bankruptcy court decisions have followed Bank Leumi and have held that homesteads acquired in Florida to defeat creditors are exempt. Similarly, where the debtors used nonexempt money to pay down the mortgage on the homestead, thereby increasing their equity in it, creditors could not reach the increase in equity in the homestead. This issue arises in bankruptcy cases because debtors filing bankruptcy in Florida are entitled to exemptions provided under Florida law.4
In In re Miller, 188 B.R. 302 (Bankr. M.D. Fla. 1995), the debtors sold commercial property and used $168,250 of the proceeds to purchase a homestead. They later filed bankruptcy. The bankruptcy trustee objected to the debtor's claim of exemption of their homestead. Chief Bankruptcy Judge Alexander L. Paskay allowed the homestead as exempt noting that the Florida Supreme Court in Caggiano held that the constitutional provision for exemption of the homestead contained only three exceptions, none of which include the conversion of nonexempt property to a homestead. Therefore, the debtors were entitled to keep the homestead as exempt notwithstanding that the court concluded that the purchase of it was a fraudulent transfer as to creditors. Judge Paskay reached the same result in In re Lazin, 221 B.R. 982 (Bankr. M.D. Fla. 1998).
In In re Clements, 194 B.R. 923 (Bankr. M.D. Fla. 1996), the debtor was a lifelong resident of the state of Alabama , which has a limited homestead exemption. The debtor sold his home in Alabama , purchased a home in Jacksonville , Florida , moved into it, and one year later filed bankruptcy. The debtor claimed the Florida home as exempt as his homestead.
A creditor objected to the claim of exemption on the ground that the debtor acquired the homestead with the intent to defraud creditors. Bankruptcy Judge Jerry A. Funk held as a matter of law that the debtor was entitled to keep the homestead as exempt even if it was acquired in fraud of creditors.
Judge Funk noted that in Caggiano the Florida Supreme Court held that the homestead exemption was to be liberally construed and the exceptions to it in the constitution were to be read narrowly. The only exceptions in the constitution are for unpaid property taxes, obligations for the purchase or improvement of the homestead, or obligations for work on the homestead.
Judge Funk noted that there was no exception for property acquired to defeat the claims of creditors and stated that he was unwilling to graft an additional exception onto the exemption.
The creditor argued that the homestead exemption should not be allowed because of F.S. §222.29 which provides that, "an exemption from attachment, garnishment or legal process provided by this chapter is not effective if it results from a fraudulent transfer or conveyance as provided in chapter 726."
Judge Funk held that this statute did not apply to the Florida constitutional exemption for two reasons. First, the statute by its own language applies only to exemptions "provided by this chapter." The homestead exemption is found in the Florida Constitution and not in Ch. 222.
Secondly, Judge Funk held that under the basic rules of construction, statutory laws enacted by the legislature cannot impair rights given under a constitution and that it would take an amendment to the Florida Constitution to restrict the right to the homestead exemption.
Judge Funk distinguished cases such as Palm Beach Savings & Loan Ass'n. v. Fishbein, 619 So. 2d 267 ( Fla. 1993), in which the Florida Supreme Court placed an equitable lien on the homestead in which a husband obtained a mortgage loan on the homestead by forging his wife's signature on the loan documents. The mortgage loan was used to pay off existing mortgages on the homestead. The Supreme Court held that the defrauded mortgage holder was entitled to an equitable lien on the property because the money obtained by the fraud was used to pay off the old mortgages. Judge Funk distinguished other Florida cases similar to Fishbein which imposed equitable liens on homesteads when the funds obtained from the creditor fraudulently or illegally had been invested in the homestead property.
Judge Funk noted that while the debtor was entitled to keep the homestead as exempt, the acquisition of the homestead in fraud of creditors could be a ground for denial of the debtor's discharge in bankruptcy which would result in the debtor still owing his debts. That result was reached in In re Pomerantz, 215 B.R. 261 (Bankr. S.D. Fla. 1997).
Denial of the discharge in bankruptcy is not a complete remedy for the creditor because it does not put any money in the creditor's pocket but simply results in the debtor's remaining liable on the debt after bankruptcy. The debtor will still be able to keep the homestead as exempt. A debtor who acquires a homestead in fraud of creditors accomplishes his or her goal of keeping property away from creditors even if the debtor cannot obtain a discharge of his or her personal liability for the debts in bankruptcy. The value of the homestead is protected from the creditors for the life of the debtor so long as he or she lives in it. After death, it will pass to his or her heirs free of the claims of the creditors.
In In re Popek, 188 B.R. 701 (Bankr. S.D. Fla. 1995), the debtor, while liable on a personal guarantee of $1.1 million, moved to Florida and, as alleged by a creditor, used $360,000 cash to purchase a Florida homestead. The debtor filed bankruptcy and claimed the homestead as exempt. Bankruptcy Judge Raymond B. Ray allowed the homestead as exempt following Caggiano and Bank Leumi. Judge Ray reached the same result in In re Lane, 190 B.R. 125 (Bankr. S.D. Fla. 1995). Judge Ray has similarly ruled that when a debtor paid off a $135,000 mortgage on the homestead, the debtor could keep the resulting equity as exempt even if the mortgage was paid to defeat the claims of creditors. In re Statner, 212 B.R. 164 (Bankr. S.D. Fla. 1997).
A minority of the current decisions have disallowed the exemption of the homestead when it was acquired in fraud of creditors or the equity in the homestead was increased by paying down the mortgage in fraud of creditors.
In In re Coplan, 156 B.R. 88 (Bankr. M.D. Fla. 1993), the debtors, while liable on a personal guarantee of over $1 million of a debt of their business which was deteriorating, sold their home in Wisconsin, and used $228,000 which was virtually all of the proceeds from the sale to purchase a home in Florida into which they moved. A year later they filed bankruptcy. Bankruptcy Judge C. Timothy Corcoran III concluded that the homestead was acquired in fraud of creditors and allowed only $40,000 of the value of the homestead as exempt which was the amount of homestead exemption provided under Wisconsin law which the debtors would have received if they had filed bankruptcy in Wisconsin .
In In re Bandkau, 187 B.R. 373 (Bankr. M.D. Fla. 1995), the debtors purchased a home in Florida , made a cash down payment of $66,043 and obtained a mortgage loan of $35,000. Judge Corcoran concluded that this transaction was one of a series which the debtors made to defraud a creditor. Judge Corcoran disallowed the homestead exemption to the extent of the nonexempt money that was used to pay part of the purchase price.
In In re Thomas, 172 B.R. 673 (Bankr. M.D. Fla. 1994), the debtors sold their automobile which was free of liens for $6,000. They used $5,400 of the proceeds to pay down the mortgage on their homestead. Two days later they filed bankruptcy.
Bankruptcy Judge Arthur B. Briskman concluded that the debtors paid down their homestead mortgage in fraud of creditors to increase their equity in the exempt homestead. The court noted the 1993 amendments adding F.S. §§222.29–30 which provide that an exemption is not effective if it results from a fraudulent transfer. Judge Briskman applied this statute in this case to deny the debtors the homestead exemption to the extent of the $5,400 used to pay down the mortgage.
In Coplan, Bandkau, and Thomas the opinions did not discuss the issue of whether the debtors were entitled to the homestead exemption notwithstanding the fraudulent transfers into the homestead on the ground that there is no exception in the Florida Constitution for the exemption of a homestead acquired by fraud.
This state of the case law in Florida has caused the U.S. Court of Appeals for the 11th Circuit to state that this is a significant issue of Florida law with respect to which the Florida precedent is not clear. In re Jost, 136 F.3d 1455 (11th Cir. 1998).
In Jost, a debtor sold a home in Missouri and used most of the net proceeds to purchase a home in Florida . The debtor then filed bankruptcy in Florida and claimed the home as exempt. A creditor filed an objection to the exemption on the ground that the debtor acquired the Florida homestead with the intent to hinder, delay, or defraud creditors.
The bankruptcy court allowed the exemption on the ground that there was no evidence of an imminent threat of levy on a judgment before the debtor bought the Florida homestead. The district court affirmed. The 11th Circuit remanded for the bankruptcy court to make findings of fact as to whether the purchase of the home was a transfer with the intent to hinder, delay, or defraud any creditor.
In the appeal, the debtor argued that under Caggiano and Bank Leumi the debtor was entitled to keep the homestead even if it was acquired in fraud of creditors. The 11th Circuit stated that Florida case law on this issue is not clear and that if the Bank Leumi issue was presented in the case, the 11th Circuit would certify the question to the Florida Supreme Court because a legal issue of such significance should be settled by that court.
Under the holding of Caggiano, it is likely that the Florida Supreme Court would conclude that a homestead acquired in fraud of creditors is exempt because there is no exception to the exemption for that in the constitution.
If the Caggiano doctrine stands, then any criminal or debtor can take the proceeds of the crime or fraud, invest them in a homestead, and defeat the claims of the state to obtain a forfeiture or the claims of creditors to collect their money. Every bankruptcy case may be a no asset case as well-advised debtors liquidate their stocks, nonhomestead real estate, nonexempt cars, and other nonexempt assets, and use the proceeds to acquire a homestead, pay down the mortgage on it, or make improvements to it.
1 Orange Brevard Plumbing & Heating Co. , 137 So. 2d 201, 206 ( Fla. 1962).
2 Fla. Const. art. X, §4(b).
3 Fla. Stat. §§222.29–30.
4 Fla. Stat. §222.20.
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