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.
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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.
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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.
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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.
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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).
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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:

• Garnishing Non-Cash Proceeds from Sale of a Homestead,
• Homestead Proceeds Invested In Marketable Securities May Be An Exempt “Homestead Account."

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(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.

R.I.P. - Bankruptcy Strip Offs Of Underwater 2nd Mortgages In Chapter 7 Proceedings; Supremes Sound Death Knell For Slick, But Short-Lived Way To Wipe Out Subordinate Home Loans By Some Financially Distressed Homeowners Seeking Fresh Start; 'Green Light' Remains Steady For Similar Lien Stripping In Chapter 13, "Chapter 20" Reorgs

In Washington, D.C., Forbes reports:

• The U.S. Supreme Court reversed a lower-court decision allowing debtors to “strip off” underwater second liens in Chapter 7 bankruptcy, saying precedent required it to keep such mortgage claims intact.
  
  Justice Clarence Thomas, caught between his usual adherence to the strict wording of statutes and the competing doctrine of stare decisis, ruled that a prior decision carved out an exception from bankruptcy law for mortgage liens.
  
  The unanimous decision in Bank of America v. Caulkett is a victory for lenders who said it would be unfair to require them to give up potentially valuable claims simply because a home’s current value is depressed. It’s a defeat for consumer advocates who favor using bankruptcy to reduce the amount borrowers owe against their houses, although borrowers can still strip underwater second liens through the more costly and time-consuming process of Chapter 13 bankruptcy.(1)
  
  
  ***
  
  The Supreme Court already has ruled that in Chapter 13 reorganizations, where debtors with reliable income set up a plan to repay creditors over time, second mortgages with no collateral value to back them up can be stripped.(2)

For more, see Debtors Can't Void Underwater Mortgages In Bankruptcy, Supreme Court Rules.

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(1) See Why the Supreme Court Might Actually Rule Against the Corporate Interest:

• The reason it matters that you can strip off a second loan in Chapter 13 bankruptcy but not Chapter 7 is that Chapter 7 is a much more affordable part of the bankruptcy code.
  
  “Chapter 13 has a payment plan, you only get the strip-off if you complete the plan,” said bankruptcy expert Bob Lawless. Only about 40 percent of Chapter 13 cases complete the payment plan, which is three times as expensive as in Chapter 7.

Editor's Note: Strip-offs in so-called "Chapter 20" bankruptcies (the colloquialism for a debtor who first files Chapter 7 bankruptcy to get a discharge of his/her debts, then files Chapter 13 bankruptcy to obtain the lien strip off) also appear to remain unaffected by this Supreme Court ruling.

It notes reminding that, in the "Chapter 20 bankruptcy" context, while the law precludes a debtor from receiving a new discharge of his/her debts in a Chapter 13 bankruptcy within four years of a Chapter 7 petition that ultimately resulted in a discharge, a debtor can still file the Chapter 13 petition without seeking discharge, but to gain the other benefits that Chapter 13 offers - automatic stay, ability to cure arrearages, the ability to adjust interest rates under plan payments, ability to strip off liens that are completely underwater, among other benefits. See generally:

• Todd, Timothy M., To Lien Strip or Not to Lien Strip: Fourth Circuit Blesses Controversial 'Chapter 20' Valueless Lien Stripping in In re Davis (July 24, 2014). South Carolina Law Review, Vol. 65, Issue 4, p. 963 (2014). Available at SSRN: http://ssrn.com/abstract=2471249
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• Spector, Arthur J; Homer, Ilyse M; Avron, Paul A. Eleventh Circuit: "Chapter 20" Debtors Can Strip Off Liens. American Bankruptcy Institute Journal33.8 (Aug 2014): 54-55.
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• National Consumer Bankruptcy Rights Center: Debtors Enjoying Growing Consensus on Chapter 20 Lien Strip Cases.

(2) Ibid.

Who's On First? Creditor's 'Anticipated' Judgment In Fraudulent Conveyance Suit Trumps Earlier-Recorded Lien Where Former Relates Back To Recording Of Lis Pendens; Debtor Used New Wife, Multiple Quit-Claims Of $10M Pacific Palisades Home In Failed Effort At Playing High Stakes Game Of "Keep Away" From Ex-Wife, Lender

In Los Angeles, California, The Recorder reports:

• [M]use Family Enterprises, Ltd. (Muse parties) made loans to BTM Funding, Inc., a company wholly owned by David T. Smith. In 2008, Smith used BTM to buy an expensive home [Editor's Note: $10 million, according to the court ruling; and formerly owned by NBA star Kobe Bryant, according to attorneys for the Muse parties]. David had BTM take title to hide the Property from his former wife during divorce proceedings.
  
  David later had the home deeded to himself by quitclaim deed from BTM. On the same day, he quitclaimed the property to his then-new wife. She later quitclaimed it to her revocable living trust. The quitclaim deeds were not recorded until 2009.
  
  David and his former wife settled their claims by having Mira Overseas Consulting Ltd., owned by David, transferred to her.
  
  In September 2010, the Muse parties filed suit against BTM and others in Los Angeles for breach of contract and fraud, and to set aside the quitclaim deeds as fraudulent transfers. The Muse parties recorded a lis pendens regarding their action and the property. A stipulated judgment on breach of contract was entered in October 2012. Upon trial of the fraudulent transfer claims, a jury found in favor of the Muse parties. An amended judgment was entered in January 2013 awarding damages and nullifying the quitclaim deeds as fraudulent transfers. The amended judgment was recorded in February 2013.
  
  In the meantime, about six months after the Los Angeles action began, Mira sued BTM and related parties in Santa Monica. The action resulted in entry of a stipulated judgment in June 2011. The Muse parties first learned of the Los Angeles action in August 2011.
  
  Mira sued the Muse parties, BTM, and others in early 2012, seeking a declaration that its judgment lien was superior to any lien that might be obtained by the Muse parties.
  
  The Muse parties cross-complained, contending that their anticipated judgment lien related back to the recording of their lis pendens. The trial court found that the Muse parties’ judgment did not relate back to the lis pendens. The Muse parties appealed.
  
  The court of appeal reversed, holding that the trial court erred in concluding the judgment did not relate back to the lis pendens.
  
  Code of Civil Procedure §405.24, relating to lis pendens, provides that the “rights and interest of the claimant in the property, as ultimately determined in the pending noticed action, shall relate back to the date of the recording of the notice.”
  
  In Kirkeby v. Superior Court (2004) 33 Cal.4th 642, the California Supreme Court that a fraudulent conveyance claim affects title to or the right to possess real property, thereby supporting the recording of a lis pendens. |
  
  Here, the action below involved the same type of property claim as that in Kirkeby. The plaintiff in Kirkeby filed a fraudulent transfer claim to void property transfers to the extent necessary to satisfy the claims set out in the plaintiff’s complaint. The court in Kirkeby reasoned that because the Uniform Fraudulent Transfer Act allows the remedy of avoidance of the transfer to the extent necessary to satisfy a creditor’s claim, a fraudulent conveyance claim seeking avoidance of transfer qualifies as a real property claim for purposes of the lis pendens statutes. The court here reasoned that a necessary corollary was that a successful claimant’s rights and interests in the property relate back to the recording of the claimant’s lis pendens.
  
  The Muse parties indisputably had the right to record a lis pendens with respect to their fraudulent transfer claim. Accordingly, their rights and interest in the property, namely, the avoidance of transfers of the property to satisfy their claims, related back to the date they recorded their lis pendens. This date was earlier than the date Mira recorded its abstract of judgment. Thus, the Muse parties’ judgment lien had priority.

Go here for the story.

For the ruling, see Mira Overseas Consulting Ltd. v. Muse Family Enterprises, Ltd., B254298 (Cal. App. Dist. 2, Div. 2, June 2, 2015) (certified for publication).