In Non-Bankruptcy Court, Florida’s Homestead Exemption “Rules”

The Florida Homestead exemptions “rules” – at least generally in non-bankruptcy courts. In the recent case of Brian Dowling v. Davis, Slip Copy, 2007 WL 1839555 (M.D. Fla. June 26, 2007), Plaintiff Dowling held an Illinois judgment and filed a three count complaint in the District Court of the Middle District of Florida for 1. fraudulent asset conversion under Fla. Stat. Section 222.30, 2. to impose an equitable lien, and 3. to avoid fraudulent transfers Fla. Stat. Section 726.101, et. seq. The Illinois judgment was obtained in 2002 and the married defendants purchased real property in Florida in 2003 as tenants by the entirety. The purchase money was comprised of a bank loan and personal funds. The Defendants maintained that Florida’s constitutionally-created homestead exemption protected their Florida residence.

The Court concluded that the Plaintiff’s claims failed as the Florida Supreme Court has expressly held “[t]hat the 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″ of the Florida Constitution. 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). The Court stated that “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. Lung, 898 F. Supp. 883,887 (S.D. Fla. 1995); In re Adell, 321 B.R. 562,569-70 (Bankr. M.D. Fla. 2005).

The Court further noted that equitable liens may only be imposed in limited circumstances where a debtor fraudulently procured funds to invest in, purchase, or improve a homestead. See Palm Beach Savings & Loan Assoc. v. Fishbein, 619 So. 2d 267, 270 (Fla. 1993) (affirming imposition of equitable lien against wife’s residence where debtor husband obtained mortgage by fraud); Jones v. Carpenter, 106 So. 127,129-30 (Fla. 1925) (affirming imposition of equitable lien in action by trustee of bankrupt corporation against former president for embezzling funds used to improve homestead). The Plaintiff did not argue that this type of fraud was perpetrated against him but only alleged that Defendant purchased a homestead knowing that a judgment was imminent and used funds that could have been used to satisfy the judgment. The Court further noted that the exceptions to the homestead exemption are to be strictly construed. Havoco I, 790 So.2d at 1021-22.

One may query what the result may have been if these facts and issues had arisen in a bankruptcy case (voluntary or involuntary) under the full panoply of the BAPCPA amendments. See e.g. section 522(o) (reduction of homestead for dispositions made during prior 10 years with intent to hinder, delay, or defraud a creditor), 522 (p) (cap on homestead acquired within 1215 with certain exceptions), 522(b) (domicile and exemptions). Perhaps the homestead exemption would have been reduced or capped. Perhaps the Florida homestead exemption would not have applied at all and the Defendant/Debtor would have been required to use the Illinois or Federal exemptions. Perhaps an attempt to exempt the real property as tenants by entireties property under 522(b)(3)(B) would have been subject to avoidance.

Non-Rented Partially Detached Unit Held Part of Exempt Homestead

In reviewing the recent decision of In re Ensenat, Case No. 06-15979-BKC-LMI (S.D. Fla. Isicoff 2007), one is reminded how fact specific may be the determination of the extent of a Florida homestead exemption under Article X, Section 4(a)(1) of the Florida Constitution. The case involved a parcel of real property with two buildings. The first building was the debtors’ home and the second building was a partially detached unit that was occupied by the debtors’ niece, her son, and her boyfriend. The partially detached unit was a separate building with its own kitchen and utility meters that was attached to the main house by a covered patio. The Court found that there was no payment of rent, but that the boyfriend paid their separate water and electric bill, mowed the lawn, and made various contributions, including the buying of groceries.

The Chapter 7 trustee argued that the second building was not part of the Debtors’ “residence” and that the Debtors’ niece (actually “half-niece”) was not a member of the Debtors’ “family.” Article X, Section 4(a)(1) limits the homestead exemption to that of the residence of the owner or his family.

The Court stated that a separate structure on what is otherwise homestead property is not disqualified merely because it is a separate structure. The Court cited a 1917 Florida Supreme Court Decision that observed that the homestead exemption would “doubtless include outhouses, barns, wagon houses, wood or coal sheds, chicken houses, fences, etc. as were appurtenant and subsidiary to and used in connection with the residence as conveniences and auxiliaries.” Armour & Co. v. Hulvey, 74 So. 212 (Fla. 1917). Such improvements would be protected as “improvements” to the homestead. The Court also cited another decision that held that the homestead included a garage and overhead apartment used for storage and laundry. White v. Posick, 150 So. 2d 263, 265 (Fla. 2d DCA 1963).

The Court observed that “to the extent court have found abandonment or waiver of the homestead exemption in a separate structure it was because the homeowner at some time used that portion of the property to generate income.” But the Court further noted that if the business purpose ceases, the homestead status may be regained.

After noting that Florida law recognizes “families-at-law” and “families-in-fact”, the Court held that it was not clear whether or not the niece, son, and boyfriend qualified as the Debtors’ “family” under the Article X Section 4(a)(1) of Florida Constitution. But the Court concluded that whether are not these persons qualified as the Debtors’ “family”, the debtors were entitled to claim the entire parcel as exempt homestead as the second structure was not used for a business purpose.

One might query how the holding may have been different had the court found the boyfriend’s payment of the electric bill, mowing of the lawn, and various contributions, including the buying of groceries to be a form of constructive rent. Apparently this would have rendered the second structure to be considered as used for a business business and therefore non-exempt.

One may also note that the Trustee had initially argued that the two structures constituted a duplex, but at trial acknowledged that they were actually two separate structures joined by a roofed patio. Perhaps, the Court’s decision would have been the same even if the two structures constituted a duplex as long as the second unit was not rented out. The majority of the bankruptcy courts in Florida would not allow an exemption for a side of a duplex that is rented out. In re Bornstein, 335 B.R. 462 (Bkrtcy. M.D. Fla. 2005, In re Dudeney, 159 B.R. 1003 (Bankr.S.D.Fla. 1993).

The Florida Homestead – It Comes in Three Flavors

Two recent Florida Third District Court of Appeals decisions provide a review of the meaning of the Florida Homestead in three contexts. These decisions are Phillips et al. v. Hirshon, etc. el al., 32 Fla. L. Weekly D1151 (Fla. 3d DCA May 2, 2007)and Cutler v Cutler, 32 Fla. L.Weekly D538 (Fla. 3d DCA Feb. 28, 2007). In these decisions, the Court noted that homestead is given meaning in three different contexts under Florida law: 1. exemption from taxation per Art. VII, Section 6, Fla. Constit., 2. exemption from forced sale before and at death per Art. X, Section 4(a)-(b), Fla. Const., and 3. restrictions on devise and alienation, Art. X, Section 4(c), Fla. Const. See also Snyder v. Davis, 699 So.2d 999 (Fla. 1997)

The Court in Phillips observed in a footnote that the definition of homestead property for Article VII, section 6 purposes (taxation) is not the same as Article X, section 4 (forced sale and devise and alienation).

The Court in Cutler notes that neither the Florida Legislature nor the Florida Constitution provide a definition of what is homestead property for purposes of Art. X, Section 4 (a)(forced sale and devise and alienation). The Court states that based on the text of the Florida constitution and applicable case law, it is apparent that the following requirements must be satisfied for property to be determined as homestead property: 1. the property must be owned by a “natural person”, 2. the person claiming the exemption must be a Florida resident who establishes that he intends to make the real property his permanent residence, 3. the person claiming the exemption must establish that he is the owner of the property, and 4. the property claimed as the homestead must satisfy the size and contiguity requirements of the constitution. Furthermore, the Court noted that the Florida Constitution does not limit the types of estates that are eligible for homestead status. Therefore, the exemption may generally attach to any estate in land whether it is a freehold or lesser estate. A life estate has been expressly found to be among the property interests eligible for homestead status. Furthermore, the Court noted that real property held in trust can be impressed with the character of homestead, including revocable and irrevocable trusts.

A provision protecting homestead property first appeared in the Florida Constitution of 1868. Art. IX, Section 1, Fla. Const. (1868). The Court noted that historical materials indicate that it was originally inspired by a desperate attempt by Floridians to repel the invations of “Yankee carpetbaggers” at the end of the Civil War. The limitation on devise and aliention first appeared in the 1885 Constitution. Art. IX, Section 1-3, Fla. Const. (1868).

Wife’s Attorneys Fees Ordered Paid from Homestead Proceeds

In the recent case of Snell v. Snell, 32 Fla. L. Weekly D455 (3rd DCA 2007), the Court of Appeals reversed the lower Court which had denied the payment of the wife’s attorney’s fees from the proceeds of the sale of the former marital homestead residence. The Court of Appeal held that the wife’s attorney’s fee should be paid from such proceeds on various grounds.

First, the final judgment of dissolution of marriage expressly provided for the payment of the wife’s attorney fees and costs from the assets distributed, including the proceeds of the sale of the marital home.

Second, the Court cited Patridge v. Partidge, 912 So. 2d 649, 650 (Fla. 4th DCA 2005) for the proposition that because marital property was designated as homestead before the divorce does not bar imposition of a lien on marital property being distributed to one of the partners any more than the previous homestead character bars the distribution itself or partition, or sale.

Third, the Court held that the constitutional homestead exemption is not absolute. Homestead property may be subjected to equitable liens where fraud, reprehensible or egregious conduct is demonstrated as it was herein. See, Palm Beach Savings & Loan Ass’n v. Fishbein, 619 So. 2d 267, 270 (Fla. 1993), Gepfrich v. Gepfrich, 582 So. 2d 743 (Fla. 4th DCA 1991), and Robles v. Robles, 860 So. 2d 1014 (Fla. 3rd DCA 2003).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983