Monday, September 26, 2011

'Forced Sale" Homestead Protection Pierced Where Out-Of-State Judgment Creditor Traces Cash Obtained Through "Constructive Fraud" To Florida Home

Lexology reports:

  • The District Court of Appeal of Florida upheld an exception to the Florida homestead exemption in a case where a trustee/deceased husband of the defendant breached his fiduciary duty as trustee in California, and the defendant later used the proceeds resulting from this breach to purchase real property in Florida.

  • Ordinarily the Florida homestead exemption law prevents the creditor of a Florida homeowner from taking the homeowner's residence in satisfaction of a monetary claim. In Hirchert, the defendant's deceased husband had been the beneficiary of a trust of which he was the trustee and was permitted to withdraw principal for his own benefit only if his personal assets had been fully dissipated.

  • After his marriage to the defendant, he withdrew a 75% interest in a California residence from the trust despite having other assets, sold the residence, and purchased a new California residence with the defendant. After the trustee's death, the defendant sold this residence and purchased a residence in Florida.

  • When the successor trustee of the trust learned that the defendant's husband had breached his fiduciary duty by withdrawing the 75% interest in the residence from the trust, he sued the defendant in California to recoup the proceeds received upon the sale of the residence. The successor trustee received a California judgment in his favor and sought to force the defendant to convey her Florida residence to a receiver to force a sale of the residence in satisfaction of his California judgment.(1)

  • The Florida court found that, while the Florida homestead exemption ordinarily protects a homeowner's equity from creditor claims, the exemption would not apply in this case because the trustee's original breach of his fiduciary duty was a "constructive fraud" that allowed for the application of an exception to the homestead protection. The Florida court then remanded the case to the trial court with instructions to enforce the injunction to convey title to the receiver and force the sale of the property.(2)

  • Although rare, this case illustrates one of the few exceptions in which an individual can lose the protection of the Florida homestead exemption despite no actual wrongdoing on their part.(3)

Source: Hirchert Family Trust v. Johnee Ann Alle Hirchert (District Court of Appeal of Florida, Fifth District, June 17, 2011) (may require subscription; if no subscription, GO HERE; or TRY HERE - then click the appropriate link for the story).

For the court ruling, see Hirchert Family Trust v. Hirchert, Case No. 5D09-3054 (Fla. App. 5th DCA, June 17, 2011).

(1) In addressing the enforceability of the foreign judgment in Florida, the court stated:

  • We do not believe that the Quitclaim Deed is entitled to full faith and credit because the California court did not have in rem jurisdiction over the property. However, the California court did have jurisdiction over Appellee and, therefore, the Postjudgment Order establishing a mandatory injunction requiring Appellee to convey the Kissimmee Property is entitled to full faith and credit.

    Robertson v. Howard, 229 U.S. 254, 261 (1913) ("[I]t may not be doubted that a court of equity in one state in a proper case could compel a defendant before it to convey property situated in another state." (citing Fall v. Eastin, 215 U. S. 1, 8 (1909))); Fall v. Eastin, 215 U. S. 1, 11-12 (1909) (holding that a court of equity can order a person over which it has jurisdiction to convey title to real property located in another state, but the court cannot itself transfer title because it does not have jurisdiction over such real property); Gardiner v. Gardiner, 705 So. 2d 1018, 1020 (Fla. 5th DCA 1998) (holding that a New York court had jurisdiction to a order a property owner to execute a quitclaim deed for property located in Florida); Hammond v. DSY Developers, LLC, 951 So. 2d 985 (Fla. 3d DCA 2007) (holding that a trial court outside of the circuit in which the subject property was located could order specific performance of a contract for sale of that land; but holding the portion of the order purporting to transfer title to that property unenforceable); Farley v. Farley, 790 So. 2d 574, 575 (Fla. 4th DCA 2001) (holding that an out-of-state order to sell real property located in Florida was not entitled to full faith and credit because enforcement requires the application of in rem jurisdiction; but noting that an out-of-state order directing one litigant to convey title to another would be entitled to full faith and credit (citing Sammons v. Sammons, 479 So. 2d 223, 225 (Fla. 3d DCA 1985); Gardiner)); Dusesoi v. Dusesoi, 498 So. 2d 1348, 1350 (Fla. 2d. DCA 1986) (holding that a decree from a foreign state purporting to award title to real property located in Florida was not entitled to full faith and credit; but stating in dictum that the portion of that decree ordering conveyance of the title "appears to be entitled to full faith and credit").

(2) In addressing the application of the protection against forced sale in Florida under Article X, Section 4 of the state constitution, the court stated:

  • The courts recognize an exception to the homestead protection if the property was acquired with funds generated by fraudulent activity and a constructive trust is necessary to prevent unjust enrichment. See, e.g., Labelle v. Labelle, 624 So. 2d 741, 742 (Fla. 5th DCA 1993) (stating, "[T]he protection[s] afforded by Article X, Section 4 of the Florida Constitution . . . do not apply to properties which are purchased with fraudulently obtained, traceable proceeds and which are, therefore, subject to the imposition of a constructive trust."); see also Zureikat v. Shaibani, 944 So. 2d 1019, 1024 (Fla. 5th DCA 2006) (affirming an equitable lien placed on a homestead where proceeds obtained from fraudulent or reprehensible conduct were used to invest in, purchase, or improve the homestead (citing, inter alia, Havoco of Am., Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001))); In re Fin. Federated Title & Trust, Inc., 347 F.3d 880, 881 (11th Cir. 2003) (holding that the Florida Constitution does not protect a homestead purchased with fraudulently obtained funds from an equitable lien or constructive trust).

    The exception to homestead protection applies even "where funds obtained through one spouse's fraud are used to invest in, purchase, or improve the homestead . . . despite the other spouse's innocence or ignorance of wrongdoing."
    Zureikat, 944 So. 2d at 1024 (citing Palm Beach Savings & Loan Ass'n v. Fishbein, 619 So. 2d 267 (Fla. 1993)).

    Contrary to the trial court's conclusion, we believe that a breach of fiduciary duty is "constructive fraud" and thus may form the basis to apply the exception to the homestead protection. As this court explained in
    First Union National Bank of Florida v. Whitener, 715 So. 2d 979, 982 (Fla. 5th DCA 1998):

    Constructive fraud is the term typically applied where a duty under a confidential or fiduciary relationship has been abused, or where an unconscionable advantage has been taken. Constructive fraud may be based on misrepresentation or concealment, or the fraud may consist of taking an improper advantage of the fiduciary relationship at the expense of the confiding party.

    Allie v. Ionata, 466 So. 2d 1108, 1110 (Fla. 5th DCA 1985), this court further explained:

    Florida courts have recognized that constructive fraud may exist independently of an intent to defraud. It is a term which is applied to a great variety of transactions that equity regards as wrongful, to which it attributes the same or similar effects of those that follow from actual fraud and for which it gives the same or similar relief.
    (Emphasis added)

    Moreover, the Florida Supreme Court has affirmed equitable liens on homes that qualify as homestead property to prevent unjust enrichment. See, e.g.,
    Fishbein, 619 So. 2d at 270 ("[I]t is apparent that where equity demands it this Court has not hesitated to permit equitable liens to be imposed on homesteads beyond the literal language of article X, section 4. . . . [T]here was no fraud involved in either La Mar [v. Lechlider, 185 So. 833 (Fla. 1939)] or Sonneman [v. Tuszynski, 191 So. 18 (Fla. 1939)].

    In those cases, the equitable liens were imposed to prevent unjust enrichment.");
    La Mar v. Lechlider, 185 So. 833, 836 (Fla. 1939) (affirmed equitable lien where defendants refused to give the plaintiffs an interest in their homestead, as promised, in exchange for improvements plaintiffs made to the homestead property); Craven v. Hartley, 135 So. 899, 901 (Fla. 1931) (equitable lien appropriate where homeowner borrowed money from lender to purchase property but failed to execute a mortgage in lender's favor as promised).

(3) The wrongdoing in this case was actually committed by the woman's now-deceased hubby. While she appears to have had nothing to do with improperly drawing the loot out of the trust that was ultimately traced into the Florida residence, she ends up picking up the tab by having to give up the home.

For additional background on this case, see the appeals court's earlier ruling in this litigation in Hirchert v. Hirchert Family Trust, 988 So.2d 63 (Fla. App. 5th DCA, 2008).

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