Daily Development for Thursday, January 20, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

HOMESTEAD; PARCEL SIZE: Property which cannot be subdivided into a proper homesite under Florida law cannot be the subject of a debtor's homestead under state law.

In re Kellogg, 1999 U.S.App. LEXIS 32217, 13 Fla. Law. W. Fed. C 238 (11th Cir. 1999).

Although this case is in bankruptcy court, it purports to interpret Florida statutory and constitutional provisions.

There was no way to subdivide the property into two or more parcels which would each comply with the local zoning requirements of the City of Palm Beach. The zoning required lots no smaller than about 1.2 acres, and the parcel was about 1.3 acres. On the other hand, Florida homestead law establishes a limit of one-half acre for municipal homesteads. Under established Florida principles, when a debtor has municipal homestead property greater than one-half acre, the debtor can "select his property in any contiguous shape from his qualifying lands," but the balance must have "legal and practical use." Obviously that could not be done here.

Held: because the property as a whole could not qualify as a municipal homestead, it could not be protected by the exemption. The local zoning restrictions did not create an exception. Quoting from In re Baxt, 188 B.R.322, 324 (Bankr. S.D.Fla. 1995), the Court of Appeals held that protection of a municipal homestead extends to 'one-half acre,' not to 'one-half acre unless you live in [a particular city]'."

The consequence of the ruling was that the property was sold and the proceeds "equitably divided" between the debtor and the estate. This suggests that the debtor indeed received some protection of his homestead interest, but the facts do not make this clear. It may be that the bankruptcy was designed to protect against only one debt, which was somewhat lower than the full value of the property.

Reporter's Comment: The debtor's ocean front property was valued by the assessor at $799,432. Was there no complying, half-acre parcel available in Palm Beach for a quick purchase? But see Havoco of America, Ltc. v. Hill, below.

BANKRUPTCY; HOMESTEAD EXEMPTION; "BANKRUPTCY PLANNING": So troubled by the idea that a Florida homesite acquired with the intent to hinder creditors could be lawfully exempt, the Eleventh Circuit Court of Appeals has certified the question to the Florida Supreme Court for clarification.

Havoco of America, Ltd. v. Hill, 1999 U.S.App. LEXIS 32216 (11th Cir. 1999).

Creditor held a $15 million judgment against Debtor. Thereafter, Debtor, a long time resident of Tennessee, acquired for cash a $650,000 house in Florida with the asserted intention of retiring there.

Two years later, Debtor declared bankruptcy and claimed the Florida home as his homestead. Creditor offered to prove that the intent of the acquisition of the Florida home was to dodge creditors, and therefore the homestead should be set aside. But the court ruled this evidence irrelevant, concluding that Debtorr, under Florida law, had a perfect right to shield assets through a homestead declaration. The court ruled that under Florida law debters are not prohibited "from converting non-exempt assets into a homestead, even if done with the intent to place those assets beyond the reach of . . . creditors."

On ultimate appeal of the decision to the Eleventh Circuit, the case now has been bounced for an advisory opinion to the Florida Supreme Court.

Other federal courts have noted the "sacrosanct" nature of the Florida homestead exemption. See, e.g., Bank of Leumi Trust Co. of New York v. Lang, 898 F.Supp. 883 (S.D. Fla. 1995), and see Butterworth v. Caggiano, 605 So. 2d 56 (Fla. 1992) (which held that a Florida homestead exemption was good against RICO forfeiture). The Eleventh Circuit here decided, however, that the issue, which involves an important part of Florida law, should be formally addressed by the Florida Supreme Court pursuant to its advisory opinion powers under Fla. Stat. Ch. 25-031 (1997) and Fla. R.App.P. 9.150.

The Eleventh Circuit opinion ably reviewed the well-known set of Florida homestead-exemption cases, bankruptcy court rulings dealing with the question.

Also, the court held that an attack in bankruptcy on Florida's entireties-property exemption must be in the form of an adversary proceedings, so that the debtor's spouse (who is a co-beneficiary of the exemption) can be named and brought into court.

Reporter's Comment: Florida, along with Iowa, Kansas and some others, is a state with very resilient homestead laws. There is some argument that Florida recognizes a fraud exception to its homestead statute. For example, some cases regarding the exception are collected by the Dissent in Butterworth v. Caggiano, supra, 605 So. 2d 56, 61; but this line of cases appears not to have been applied decisively in the fraudulent transfer fact pattern. Here the 11th Circuit decides to force the issue by framing the question for certification in such a way that either the Florida Supreme Court will find that at least some bankruptcy-planned exemptions illegal or, by causing the Supreme Court to allow all exemptions to stand, will so embarrass the state that the legislature will act.

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