The use of the Florida homestead to defraud creditors.

• Author: Cohen, Jules S.

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, [sections] 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 longstanding 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 a 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 &hindering their creditors and...