Friday, August 10, 2018

Do Real Property Maintenance Expenses Constitute Investing In, Purchasing, or Improving the Homestead For an Equitable Lien?

Florida homestead property is generally protected against claims of creditors of the owner by the Florida Constitution, subject to some limited exceptions.

In Havoco of America, Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001), the Florida Supreme Court held that the homestead exemption protection will extend to include nonexempt assets that are added to or invested in a homestead, even if added or invested with the intent to delay, hinder, or defraud creditors.  That is, a transfer of assets into the homestead with the intent to delay, hinder or defraud creditors, is not enough, by itself, to give rise to an equitable lien that defeats the homestead protection.  In effect, the debtor's bad motive in acquiring or investing in the homestead is not enough by itself to result in an equitable lien.

However, Havoco recognizes the continued viability of an equitable exception to the exemption from forced sale when funds obtained through, theft, fraud or egregious conduct are used to invest in, purchase, or improve the subject homestead.  The Florida Supreme Court in Havoco noted the equitable lien jurisprudence for fraudulently obtained property that allows for an override of the constitutional protection was something separate and apart from the fraudulent conveyance issue before it, although it did not say that a mere fraudulent conveyance gives rise to an equitable lien.  Thus, if fraudulently obtained assets are used to purchase or improve a homestead, an equitable lien against the homestead applies and trumps the constitutional exemption from forced sale. A useful way of looking at this is a "source of assets" test - if the source of the assets going into a homestead were obtained through theft, fraud, or egregious conduct, then an equitable lien is allowable.

As noted, the equitable lien applies to funds that are used to invest in, purchase, or improve the homestead. Havoco allowed an equitable lien when the fraudulently obtained assets are used to pay down a mortgage on the homestead.  

In a recent case, the U.S. 11th Circuit Court of Appeals ruled similarly for mortgage payments, and also held that "insurance premiums, and other expenses to maintain" the property fit within either "investing in" or "purchasing" the homestead property.  The court thus allowed an equitable lien to apply to fraudulently obtained proceeds that were applied to pay such homestead expenses, enabling a creditor to reach the homestead property in having its obligations paid to the extent of such expenses. The court failed to act on an assertion that maintenance expenses are not improvement expenses for this purpose. Equating maintenance expenses to mean the same thing as investing in or purchasing real property may be a stretch that other courts may not choose to follow, however.

Federal Trade Commission v. American Precious Metals, LLC,  726 F. App'x 729, 734 (11th Cir. 2018).