Limiting the Florida Homestead Exemption by Broadening the Application of the Fraud or Egregious Conduct Exception.

Author:Dorris, Mariane L.

Since 1868, the Florida Constitution has expressly shielded homestead property from forced sale except in certain delineated circumstances. (1) In 2001, in response to a certified question from the 11th Circuit Court of Appeals, the Florida Supreme Court, in the case Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001), reviewed over 100 years of jurisprudence to explain the historical and legal contours of the Florida Constitution's homestead exemption and its intersection, if any, with the Florida Uniform Fraudulent Transfer Act (FUFTA). As noted by the Florida Supreme Court, for over 150 years, the purpose of the homestead exemption has been to prevent absolute pauperism by protecting people of limited means from the consequences of "ill-advised promises," which they make due to their own poor judgment or due to inducement by others. (2) By guaranteeing the security of the home against the demands of general creditors, the homestead exemption promotes the stability and welfare of the state. (3) Although the exemption clearly benefits the homeowner and his or her family, it also serves "the public welfare and social benefit which accrues to the state by having families secure in their homes." (4) The Florida Supreme Court has described the exemption as the "bulwark of our social system," observing that "[t]he history of this law has clearly demonstrated that preservation of a domestic roof ... against the demands of creditors has contributed immeasurably to the happiness and solidarity of family life...." (5) It is the express intent of the Florida Constitution to place the security of families in their homes before the interests of unsecured creditors.

The Homestead Exemptions and its Exceptions

In Havoco, the creditor obtained a judgment against the debtor for $15 million based upon fraud, conspiracy, tortious interference with contractual relations, and breach of fiduciary duty. (6) Within two weeks of entry of the judgment, the debtor, previously a Tennessee resident, bought a $650,000 home in Florida using nonexempt assets. (7) The debtor subsequently filed for bankruptcy and claimed his Florida home was exempt from forced sale. (8) The creditor asserted it would be inequitable to apply the homestead exemption because the debtor acquired the homestead with the specific intent to hinder, delay, or defraud creditors. (9) The issue before the Florida Supreme Court was whether Fla. Const. art. X, [section]4, still protects 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 F.S. [section]726.105. (10)

Fla. Const. art. X, [section]4(a)(1), provides, in relevant part:

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.... (11)

The Florida Supreme Court, noting the policy of liberal construction of the homestead exemption and the rule of strict construction as applied to these exceptions, analyzed the intersection of the FUFTA and the homestead exemption in the context of civil and criminal forfeitures, and equitable lien cases. With respect to civil and criminal forfeiture cases, the Florida Supreme Court, citing Butterworth v. Caggiano, 605 So. 2d 56 (Fla. 1992), and Tramel v. Stewart, 697 So. 2d 821 (Fla. 1997), reasoned that art. X, [section]4, expressly provides for only three exceptions to the homestead exemption and forfeiture is not one of them. (12) The Florida Supreme Court held that according to the plain and unambiguous wording of art. X, [section]4, a homestead is only subject to forced sale for 1) the payment of taxes and assessments thereon; 2) obligations contracted for the purchase, improvement, or repair thereof; or 3) obligations contracted for house, field, or other labor performed on the realty. (13) "[F]orfeitures are not excluded from the homestead exemption because they are not mentioned, either expressly or by reasonable implication, in the three exceptions that are expressly stated." (14) The Florida Supreme Court found it irrelevant that the homestead was being used in the course of criminal activity or was purchased with funds derived from criminal activity. (15)

However, the Florida Supreme Court did recognize that with respect to the equitable lien cases, (16) the court has strayed from the literal language of the exemption where the equities have demanded it, albeit rarely, and always with due regard to the exceptions provided in art. X, [section]4. (17) The equitable lien cases are primarily based upon the doctrines of equitable subrogation and/or unjust enrichment. In Palm Beach Savings & Loan Ass'n v. Fishbein, 619 So. 2d 267 (Fla. 1993), the Florida Supreme Court granted an equitable lien against homestead property in favor of a lender, where the debtor husband fraudulently obtained a loan by forging his wife's signature on the mortgage and used the loan to satisfy three preexisting mortgages on the...

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