Florida Asset Protection Blog

Can Homestead Protection Defeat Prior Sales Contract?

A caller asked whether Florida’s homestead protection protected against suit for failure to perform under contract to sell the house to a third party. The caller while unmarried had owned a homestead property in is own name. Subsequently, he decided to sell the homestead and get married. He entered into a contract to sell. A month later he got married and his spouse moved into the house as her permanent residence. Thereafter, he and his wife realized that the house was worth more money than the contract price so they decided to default under the husband’s sale contract. They want to know if the buyer can get a judgment of specific performance to force sale of the house when the house is now homestead of the wife who was not party to the sales contract.

There are a few cases in this area which hold that the wife is bound by the terms of a pre-marital contract for sale. Essentially, the wife moved into the house subject to an already binding sale contract, and therefore, she cannot assert new homestead rights to defeat the husband’s prior contract. I think the buyers would win a specific performance lawsuit.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

New Partnership Statute Increases Asset Protection

This year the Florida legislature passed a new limited partnership act known as the Florida Revised Uniform Limited Partnership Act of 2005, as amended. The new law increases protection of limited partnership interest against judgment creditors. Until this point there had been some question whether the charging lien against distributions to a partner was the exclusive remedy available to a creditor, or whether a creditor could also foreclose the debtor’s partnership interest or ask the court for other collection remedies. Section 620.1703 of the new partnership law states that the charging lien is the exclusive remedy of a judgment creditor of a partner. As stated previously on this blog, the term “partner” is defined by the new law to cover both a limited partner and a general partner.

The new law also states that a partnership interest is personal property and that this property may be protected by other Florida exemptions such as tenants by entireties ownership by married owners. The new law also protects limited partners from liability to creditors of the partnership if the limited partner participates in the management or control of the limited partnership.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Can Florida Homestead Be Rented Temporarily?

Generally speaking, if you find a new house you want to buy, or build, you may sell your current homestead and protect the new sale proceeds in a bank account until you close on the purchase of a new homestead. A Florida client asked me if he could, instead of selling his current homestead, rent the property until the new homestead was available and sell the current homestead just before he closed on the new house. The question was whether the current house would lose its Florida homestead protection if it were rented for income.

I am not aware of any court decision directly on point. If a Florida resident moves out of his homestead, buys a new residence, and rents the former residence I think the former residence loses its homestead character. Where the person does not purchase a replacement homestead the issue is unclear and could be argued both ways. My best guess is that the answer to this person’s hypothetical facts is that the former residence, although rented temporarily, does not lose homestead protection. Florida courts uniformly and historically have liberally construed Florida homestead protection in favor of debtor homeowners. If this client had sold his house pending purchase of the replacement homestead there is no question but that the proceeds would be protected. The fact that he chose to rent the house, possibly in order to gain further appreciation pending the new purchase, should not disqualify his protection. Even though the house is rented, I do not see an intent to abandon the homestead, especially since his replacement homestead is identified and is pending purchase. At least, that’s how I would argue this point on behalf of this client in a hypothetical creditor dispute.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Fraudulent Transfers of Corporate Profits

One unresolved issue in common law of fraudulent conveyance concerns business profits or distributions from closely held corporations which are used to support the debtor’s family. For example, suppose a judgment debtor supports his spouse and children with earning from his business corporation of which he is the chief executive and sole stockholder. The business pays the debtor a salary and profit distributions. The debtor deposits all salary and profit distributions into a bank account owned jointly with his non-working wife. The money in the account is used solely to support his wife and children. The salary is exempt because the debtor is head of household. The question is whether the deposits of corporate distributions to the joint checking account are fraudulent transfers of the debtor’s corporate profits to the debtor and his wife.

I don’t know of any case that has addressed this issue in Florida. I do not think these transactions fall within the intent of fraudulent transfer law. My conclusion is based on, among other things, Florida marital law. All earnings of this debtor during the marriage are marital property, and therefore, the debtor’s wife would have a 50% interest in accrued corporate profits in the event of a divorce. Therefore, the profits are jointly owned when earned. The martial law is consistent with another argument that the deposit in the joint account is made for consideration- the working husband is providing financial support in exchange for his wife’s work at home in support of himself and his children. Transfers for reasonable consideration are generally not fraudulent as to creditors. To the extent corporate profits are deposited in regular amounts and at consistent intervals also supports arguments against their being fraudulent conveyances. I would arrive a different conclusion if the debtor historically accrued profits within the company and made a large, one-time transfer from the corporation to a joint account on the eve of a legal problem. I would be interested in anyone’s contrary opinion of this hypothetical because I am not sure how a courts would rule.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Salary Protection Question

A client asked an interesting question about Florida’s salary exemption. Florida Statute 222.11 exempts from creditors an unlimited amount of salary earned by a debtor who is head of household. A Florida resident is head of household if he provides more than 50% of the support for a dependent. The question was whether in determining the 50% support requirement all of the money used to support the dependent must come from salary earned by the debtor. Otherwise stated, if a debtor uses a combination of salary and investment income to provide 50% of a dependent’s support is the salary itself still protected from creditor garnishment.

The statute defines “head of family” as “any natural person who is providing more than one half of the support for a child or other dependant.” The statute include no requirement on the source of support money. If the head of family support threshold is met with funds from any source, in my opinion the salary exemption should apply. I am not aware of any case in Florida which holds otherwise, although I have not researched the issue.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Homestead After Divorce

A common asset protection question is what happens to homestead upon divorce. Typically, homestead property is owned jointly by husband and wife as tenants by entireties. Upon divorce, the tenants by entireties is broker and the homestead is owned by husband and wife as tenants in common. After one spouse moves out of the house the question arises as whether either spouse has homestead protection.

The answer probably is that the spouse who finds a new residence no longer has protection of their interest in the homestead against that spouse’s individual creditors. The moved spouse can no longer claim the property as primary residence and the divorce has terminated tenants by entireties protection otherwise available for all real estate, homestead or not homestead, owned jointly by married couples. The spouse who remains resident in the homestead still has homestead protection of their 50% interest in the equity. The fact that the property is owned now as tenants in common has no effect on homestead protection. As at least one Florida bankruptcy court has stated, “The homestead exemption provided for under the Florida Constitution makes no distinction between the types of ownership interests in land that qualify for the exemption, and has been interpreted as applying to any interest in land.” (emphasis added) In re Ballato.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida