Wednesday, June 10, 2015

Florida Appeals Court To Cash-Snatching Judgment Creditor: Hands Off Debtor's $458K In Home Sale Proceeds! State Exemption Against Certain Collection Activity Protects 'Homeless' Homeowner In Between Abodes

The following facts have been adapted from a recent ruling from a Florida appeals court:

  1. In 2010, a judgment creditor obtained its judgment for over $740,000 against homeowner.
  2. Under Florida law (Florida Constitution, Article X, Section 4), the homeowner's home (with certain limitations not relevant here) is generally exempt from collection actions from creditors holding non-consensual liens (ie. non-mortgage judgment creditors). Consequently, the creditor's judgment did not create a lien on the home.
  3. On October 28, 2013, in connection with a divorce from his co-owner/wife, the marital home was sold. Until he could buy himself a new home, the 'now-homeless' homeowner took his $458,000+ share of the sale proceeds and dumped it into an account with a financial institution (ie. Wells Fargo), which he entitled "FL Homestead Account" and was split into three sub-accounts.
  4. As of February 28, 2014, a cash sub-account held $139,000+, and two securities/brokerage sub-accounts containing mutual funds and unit investment trusts held a total of $322,000+. Apparently, the value held in these accounts (now totaling $461,000+) had appreciated by a couple of thousand dollars.
  5. Early in 2014, the judgment creditor (obviously in the mood to get paid, now that the homeowner sold his home and his share of the now-liquidated home equity therein is being held in the form of cash and marketable securities with Wells Fargo) makes a grab for the loot sitting in the brokerage accounts by serving garnishment writs on Wells Fargo directed at those accounts (it left the $139,000+ in the cash account alone).
  6. The judgment creditor claimed that, because this "now-homeless" homeowner used a portion of his home sale proceeds to buy securities instead of reinvesting it in a new homestead, that portion of the money forfeited its homestead protection and should be made available to satisfy the $740,000+ money judgment.
Under Florida case law, a homeowner has a "reasonable period of time"(1) (although no court has specifically defined exactly how much time is reasonable) to reinvest the proceeds of a home sale into a new homestead without subjecting the money to creditor claims. In this case, the courts decided that taking some of the sale proceeds and temporarily investing it in mutual funds and unit investment trusts until a new home could be purchased was not inconsistent with the purposes of homestead and. accordingly, held that the funds did not lose their protected status(2) (although in its ruling, the appeals court did say that the exemption should not be applied in a way that encourages excessive speculation with the proceeds of a sale. Here, the court pointed out that there was no evidence that the securities in the brokerage account were particularly risky and the funds were kept "separate and apart" from the homeowner's other funds(3)).

Consequently, the trial court dissolved the garnishment writs, and told the judgment creditor to come back in over a month to check on the status of the money held in the accounts and that it could feel free to reassert its claim on the money at that time or thereafter.

The Florida appeals court affirmed the lower court ruling (although it did specifically point out that it was not necessarily ruling that the appreciation in value of the securities held in the accounts was also protected, since that point was not argued by the parties; maybe this was the appeals court's way of telegraphing an invitation to the judgment creditor to argue in the future that, even if the sale proceeds maintain their protected status, the accrued appreciation on those funds does not).(4)

For the appeals court ruling, see JBK Associates, Inc. v. Sill Bros., Inc., No. 4D14-3049 (Fla. App. 4th DCA, March 11, 2015).

See also:

(1) The appeals court recited the case law applying the Florida homestead exemption protection from certain creditors' claims to the proceeds of a voluntary sale of the homestead:
  • Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201 (Fla. 1962), is the seminal case on the application of the homestead exemption to the proceeds of the voluntary sale of a homestead. The Supreme Court held that

    the proceeds of a voluntary sale of a homestead [are] exempt from the claims of creditors just as the homestead itself is exempt if, and only if, the vendor shows, by a preponderance of the evidence an abiding good faith intention prior to and at the time of the sale of the homestead to reinvest the proceeds thereof in another homestead within a reasonable time. Moreover, only so much of the proceeds of the sale as are intended to be reinvested in another homestead may be exempt under this holding. Any surplus over and above that amount should be treated as general assets of the debtor. We further hold that in order to satisfy the requirements of the exemption the funds must not be commingled with other monies of the vendor but must be kept separate and apart and held for the sole purpose of acquiring another home. The proceeds of the sale are not exempt if they are not reinvested in another homestead in a reasonable time or if they are held for the general purposes of the vendor.
(2) The appeals court describes how Florida case law has dealt with non-cash proceeds from a homestead sale, and sale proceeds that may ultimately go uninvested:
  • Non-cash proceeds of a sale of a homestead "can be eligible for exemption, so long as they serve the same function that cash proceeds do, i.e., a temporary form of the homestead, to be reinvested, to be converted back into real-property homestead within the Orange Brevard reasonable time period." Sun First Nat'l Bank of Orlando v. Gieger, 402 So. 2d 428, 432 (Fla. 5th DCA 1981) (involving a note and mortgage received as part of the sale price of a homestead). Proceeds of a sale not invested in a new homestead are not entitled to homestead protection. See Shawzin v. Donald J. Sasser, P.A., 658 So. 2d 1148, 1151 (Fla. 4th DCA 1995); Rossano v. Britesmile, Inc., 919 So. 2d 551, 552 (Fla. 3d DCA 2005).
(3) In an ostensible attempt to discourage the use of homestead funds for speculative investment activities when a homeowner is in between abodes, the appeals court observed:
  • This case does not involve the speculative put and call option trading of up to 302 transactions per month that led a bankruptcy panel to conclude that such use of the proceeds was inconsistent with the purposes of Arizona's homestead exemption. In re White, 389 B.R. 693, 697, 704 (B.A.P. 9th Cir 2008).
(4) The court stated:
  • Because it was not argued, we do not reach the issue of whether any profits realized from the securities, over and above the proceeds from the sale, are "held for the general purposes" of the debtor so that they are "general assets" not entitled to homestead protection. Orange Brevard, 137 So. 2d at 206.

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