How does the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affect Florida homestead? Many unanswered questions.

AuthorNelson, Barry A.

For years, debtors have used Florida's liberal homestead exemption to protect significant equity in their homes, even on the eve of a bankruptcy proceeding. (1) In 2001, Florida's Supreme Court, in the case of Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001), addressed the following question of law: "Does Art. X, [section] 4 of the Florida Constitution exempt a Florida homestead, where the debtor acquired the homestead using nonexempt funds with the specific intent of hindering, delaying, or defrauding creditors in violation of Florida Statutes ...?" The court held that the conversion of funds by a debtor with the intent to avoid a creditor was not one of the three exceptions2 to the homestead exemption under the Florida Constitution. Havoco appeared to open Florida's housing doors to Florida debtors, as well as to those living in other states with less favorable homestead protection who realized that Florida's homestead exemption could serve to shield significant assets from creditors' claims, even if the homestead was purchased close in time to the filing of a bankruptcy petition.

Although the protection under Havoco was broad, it was not unlimited. In In re Financial Federated Title & Trust, Inc., 273 B.R. 706 (Bankr. S. D. Fla. 2001), aff'd. 347 F. 3d 880 (11th Cir. 2003), the Bankruptcy Court for the Southern District of Florida distinguished Havoco and changed direction. The court authorized a bankruptcy trustee to impose an equitable lien and constructive trust on the proceeds from the sale of homestead property on the grounds that most, if not all, of the funds used to purchase the property could be traced directly to fraud.

Havoco Opened Florida's Doors to Bankruptcy Forum Shoppers

In March 2005, the Havoco holding was followed by Florida's Third District Court of Appeal in the case of Conseco Servs., LLC. v. Cuneo, 904 So. 2d 438 (Fla. 3d DCA 2005). In Cuneo, a creditor sued to recover money loaned to the debtors. The borrowed funds were invested in stock that became worthless. There was no fraud involved in acquisition of the loan; the funds were simply lost in a bad investment. Rather than repay the loan (approximately $40 million), the debtors sold $8 million of securities (other than securities purchased with the funds they borrowed) and took a $2.45 million mortgage on their Connecticut residence. They then used the proceeds to purchase a $10.2 million home in Florida. The lender filed an action in Florida (not a bankruptcy court case) requesting a declaratory judgment ruling that the debtors' transfer of funds was fraudulent because they were attempting to "take advantage of the Florida homestead exemption" to "hinder, delay and defraud present or future creditors." The creditor also requested an equitable lien on the Florida home. The court, citing Havoco, held that "absent one of the three constitutional exceptions, an equitable lien is not permitted against homestead property unless the funds used to invest in, purchase or improve the homestead were obtained through fraud or egregious conduct" and that "the fraudulent transfer act has no effect on the homestead exemption." The Cuneo court went on to hold that "[i]t is not enough that the Cuneos transferred their nonexempt funds to an exempt asset in order to keep those funds from creditors. If a debtor acquires homestead property with the 'specific intent to hinder, delay, or defraud [a] creditor,' the property still enjoys Florida's constitutional homestead protection."

Act Hinders Benefit from Florida Law on Eve of Bankruptcy

In light of cases like Havoco and Cuneo, it is no surprise that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (3) includes provisions to reduce eve-of-bankruptcy homestead maneuvering. The remainder of this article addresses the provisions of the act that affect the Florida homestead exemption and raises several unresolved questions.

1) What Is the Effect of the 2005 Bankruptcy Act if There Is no Bankruptcy Proceeding?

Section 322 of the act sets forth the general rule that a debtor may not exempt any portion of an interest in real or personal property that: 1) was acquired by a debtor during the 1,215-day (or three years and four months) period preceding the date of filing the petition for bankruptcy; and 2) exceeds $125,000 in value, where the debtor or a dependent of the debtor uses the property as a residence or claims the property as a homestead. (4) However, the $125,000 limitation does not apply to limit the exemption claimed by a family farmer. (5) Additionally, the $125,000 limitation does not apply to any "interest" in property transferred from a debtor's previous principal residence (which was acquired prior to the 1,215-day period) into the debtor's current residence located in the same state.

Significantly, according to In re Robin...

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