Can a Creditor Get a Constructive Trust?

Creative creditors and their attorneys are looking for ways to get around debtor’s unlimited Florida homestead protection. There are exceptions to unlimited homestead protection.

One exception is when a debtor acquired money by fraud and used the proceeds of the fraud to buy a homestead. If the creditor can prove that the debtor purchased the homestead to protect the money from creditors the court may put an equitable lien on the homestead. The court will not force the sale, but the creditor will have a lien on the proceeds of a sale or refinance.

What does the creditor do if he is unable to prove the elements of fraudulent conversion? For example, the debtor may have invested the proceeds of fraudulent activity in a house, but the debtor may be able to demonstrate that he did not buy the house to protect the money from creditors. Maybe the debtor could not have anticipated the fraud allegation when he bought the house, or maybe the debtor could show financial reasons why he needed to avoid or minimize a mortgage.

An alternative to the equitable lien for fraudulent conversion of fraud proceeds is the remedy of a constructive trust. Courts may impose a constructive trust on property to achieve fair and equitable relief. Constructive trusts are used to remedy unjust enrichment, fraud, and duress. If a creditor can show that proceeds of civil fraud flowed into a debtor’s homestead, the court can impose a constructive trust on the property for the benefit of the defrauded creditor, notwithstanding the fact that the debtor did not invest in the homestead primarily to shield the fraud proceeds.