Fraudulent Transfers Can Diminish Homestead Protection

Existing Laws on Florida Homestead Protection and Fraudulent Conveyance

It is well-settled Florida law that the purchase or improvement of a Florida homestead cannot be set aside as a fraudulent conveyance. The Florida Supreme Court in Havoco v. Hill said that a creditor cannot reverse a judgment debtor’s payments made toward a homestead property even if the payments were intended to protect the money from creditors. The Court said that there is an exception for payments made with money obtained by fraud or other egregious acts.

State courts, mostly, have construed the Havoco “fraud exception” to pertain to money obtained through criminal fraud or traditional common law fraud which involves intentional deceit. An example is the used of money acquired by a ponzi scheme or fraudulent business activity.

Homestead Purchased By Recipient of a Fraudulent Transfer From Bankruptcy Debtor

Bankruptcy courts have followed an more expansive definition of fraud that includes money received from a debtor’s fraudulent transfers; these are transfers that are not criminal and that do not subject the debtor to any money damages. Consider the actual unpublished decision involving a debtor was sued in Colorado and wanted to move to Florida to protect money in a Florida homestead. The debtor, an unmarried man, owned several Colorado properties among other assets with substantial amounts of equity. He had various unsecured debts including one creditor that obtained a large Colorado judgment. The debtor wanted to sell the Colorado real estate and protect the proceeds in a Florida homestead. He also wanted to use bankruptcy to wipe out his unsecured creditors to stop their collection actions.

The debtor considered selling all the Colorado properties, investing the proceeds in a Florida homestead, and then filing bankruptcy in Florida. The problem with this option is that bankruptcy law will not exempt the full value of his homestead until he has been a Florida resident for 730 days. He knew he could convert the Colorado real estate equity to a Florida homestead and not file bankruptcy, but he wanted the bankruptcy to discharge all his unsecured debts so he could start new businesses and investments in Florida.

The debtor devised a plan to file bankruptcy and protect all his assets. The debtor had a “girlfriend.” He transferred this Colorado real estate to his girlfriend. She then sold some of the properties, and she invested the proceeds in a Florida home. She moved from Colorado in to her new Florida home. The debtor moved in with his girlfriend but his name was not on the home title or mortgage note. The girlfriend had immediate homestead protection because she was not filing bankruptcy and not subject to a 730 waiting period for the homestead exemption.

Our debtor filed Chapter 7 bankruptcy in Florida. The bankruptcy trustee brought a fraudulent transfer adversary complaint against the debtor and his girlfriend alleging that the debtor’s conveyances of his Colorado properties to the girlfriend were fraudulent transfers. The trustee won the case, and the court issued a money judgment against the girlfriend for the value of the equity she received from the debtor’s real estate transfers. The trustee wanted to foreclose his judgment on the girlfriend’s new Florida homestead. The girlfriend objected on the grounds that the house was a protected Florida homestead. She said even if she received money to purchase the home as a result of the debtor’s fraudulent transfer the home was still exempt because Florida’s homestead laws according the above-mentioned Florida Supreme Court decision in Havoco.

This case eventually was appealed to the 11th Circuit Court of Appeals. The Court held that the girlfriend’s homestead was not exempt from the trustee’s claims. The Court said that because the money the girlfriend used to buy her Florida home was obtained as a result of the debtor’s fraudulent transfer the home was within the Florida Supreme Court’s “fraud exception” for conversions of money in to homestead properties. The appellate court said that a fraudulent conveyance is within the Havoco “fraud exception” even through the transfer of properties from the debtor to the girlfriend in Colorado was not a criminal act or part of a common law concept of fraud and deceit warranting additional damages.

Florida courts have never equated fraudulent transfers with the common law tort of fraud, nor have Florida courts considered a fraudulent transfer as an egregious act that could disqualify homestead exemption. But, this federal court interpretation of the Havoco case and the extent of Florida’s homestead protection is precedent in both state and federal future cases. The holding is not limited to bankruptcy cases.

Lesson For Planning Homestead Protection

This case is another example of complicated asset protection plans that drag third parties in to litigation as recipients of fraudulent transfer. This debtor would have had a better result if, instead of conveying assets to his girlfriend, he liquidated his properties and invested the proceeds in a Florida homestead. The Havoco decision expressly protects the debtor’s purchase of his own homestead without the intervening fraudulent transfer to a third party.

Attorney Client Privilege Involving Fraudulent Transfer Cases

Bankruptcy law also has reduced the extent of attorney client privilege in fraudulent transfer adversary cases. The U.S. Supreme Court held that debtor cannot assert attorney client privilege in their defense of fraudulent transfers because the transfers come under the “crime fraud exception. For purposes of the privilege, the Court said that there is no distinction between actual common law fraud and a scheme to defraud creditors.