Florida's homestead exemption in the eye of the hurricane.

• Author: Webber, Richard Blackstone, II

One may sojourn on the beaches of the Gold Coast of Florida with property values reaching to the stars and keep a homestead of unlimited value free of claims of the trustee or creditors."(1) Accordingly, John Ayer once asked the following ethical question: "[W]hether and to what extent is it proper to use bankruptcy as a `planning tool?'"(2) The conclusion he reached indicated only that no clear consensus exists concerning the issue.(3) Moreover, judicial interpretation of the legislative history of the Bankruptcy Code has also contributed to the confusion regarding "pre-bankruptcy exemption planning." The often-quoted legislative history states:

As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition. The practice is not fraudulent as to creditors and permits the debtor to make full use of the exemptions to which he is entitled under the law.(4)

Thus, the legislative history appears to condone counseling a debtor to convert nonexempt assets to exempt assets on the "eve of bankruptcy." However, case law interpreting the legislative history differs from jurisdiction to jurisdiction,(5) and in Florida several bankruptcy courts have recently addressed the issues specifically associated with the "homestead" and "pre-bankruptcy exemption planning."(6)

Florida has long been regarded as a "debtor's haven" in large part due to Florida's generous homestead exemption. The protection of the homestead is mandated in the Florida Constitution, which provides in relevant part:

(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, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or, if located within a municipality to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or his family. . . ."(7)

Although the Florida Constitution does not define the term "homestead," it does provide various requirements and limitations which include an acreage limitation, an ownership requirement, and a residency limitation.(8) Thus, the Florida homestead exemption is absolute and each homeowner is permitted the full value of the residence, provided both domiciliary and size requirements also are satisfied.(9)

Florida Bankruptcy Case Law

Judge Paskay, the chief bankruptcy judge for the Middle District of Florida, in the case of In re Schwarb, 150 B.R. 551 (Bankr. M.D. Fla. 1992), retreated from his long-standing position that "conversion" of nonexempt property to exempt property is not fraudulent per se.(10) Judge Paskay denied the debtors' motion for summary judgment on the objection to the exemptions, finding that the conversion by the debtors of $210,000 from mutual funds (nonexempt assets under Florida law) to $85,000 of prepaid annuities and satisfaction of their home mortgage (both exempt assets under Florida law) was done specifically to place nonexempt property out of the reach of creditors before filing bankruptcy.(11) As a result, Judge Paskay denied the debtors an exemption to which they may otherwise have been entitled.(12)

All of the facts in Schwarb are extreme,(13) especially given the "conversion" of $210,000 of cash into exempt assets;(14) however, the ruling is still very significant. Judge Paskay discusses the legislative history of [sections] 522 of the Bankruptcy Code and the history behind a debtor's right to claim exemptions.(15) He concludes that the exemptions were meant to preserve the opportunity to have a fresh start(16) and to enable the debtor to maintain the ordinary means for conducting-one's day-to-day affairs.(17)

Judge Paskay agrees with Bankruptcy Judge Phelps, quoting him in part:

"[T]he conversion of non-exempt assets to exempt assets on the eve of bankruptcy is not, standing alone, fraudulent" and "the payment of regular monthly payments on the debtor's homestead . . . or various such payments in the usual manner of living of the bankruptcy, are perfectly appropriate" but Judge Phelps damns "the deliberate enlargement of an exemption out of the usual and customary manner of living in contemplation of bankruptcy" as "cheating" which "shocks one's conscience" and "bring[s] the whole bankruptcy process into disrepute."(18)

Judge Paskay also relies on general principles of equity to...