An equitable lien may provide a Florida creditor relief in scenarios where Florida’s broad homestead protections would otherwise bar the forced sale of homestead property. But a string of cases following the 1993 decision of the Florida Supreme Court in the case of Palm Beach Savings & Loan Association v. Fishbeinpresents a misleading picture of what a creditor must prove to overcome the homestead protections and obtain an equitable lien.
Three Exceptions to Homestead Protection
Article X, Section 4 of the Constitution of the State of Florida, provides only three discrete scenarios where a homestead may be subject to forced sale:
- To pay taxes and assessments on the homestead;
- To satisfy obligations contracted for the purchase, improvement or repair of the homestead; and
- To satisfy obligations contracted for house, field or other labor performed on the homestead.
The sacrosanct nature of homestead protection under Article X, Section 4 is well known. The protection of a debtor’s homestead from forced sale is so ingrained and resolute that even the Florida Supreme Court, at one point, openly lamented its inability to curtail dubious conduct by debtors who convert non-exempt assets to homestead property for the sole purpose of avoiding creditors. This frustration may be why creditors, and several court opinions, have attempted to carve out exceptions to the homestead law where a debtor is unjustly enriched by accepting the payment of debts secured by existing liens on the debtor’s homestead, freeing up the homestead property, and then failing to repay the new loans. Supporters of this so-called “fourth exception” to the homestead protection relied primarily on Fishbein for support.
Equitable Liens on Homestead Property
In Fishbein, the debtor-husband forged his wife’s signature on a mortgage to obtain a loan on homestead property he owned with his wife, using a portion of the proceeds to satisfy their three preexisting mortgages on the property. The couple later sought to dissolve their marriage, and through a series of events, the property wound up in the hands of the then ex-wife, who claimed that the property qualified for homestead protection because she was not a party to the mortgage. Although the Court agreed with the ex-wife that the bank did not have a claim under the strict language of the three exceptions enumerated in Article X, Section 4, the Court nonetheless gave the bank an equitable lien on the homestead. The Court determined that equitable considerations required allowing the bank to step into the shoes of the three prior mortgagees that were paid off with the funds loaned by the mortgagee bank because it would constitute unjust enrichment to permit the ex-wife to receive a windfall because of the husband’s fraudulent execution of the mortgage.
Florida Supreme Court Rejects Fourth Exception
Despite a series of opinions that aimed to expand the Fishbein decision to create a fourth homestead exception, the Florida Supreme Court in Havoco of America, Ltd. v. Hill sought to limit and clarify its decision in Fishbein, reaffirming that the exceptions enumerated in Article X, Section 4 are the only exceptions to the availability of the homestead exemption. The Court in Havoco explained that equitable liens against homestead property are available only in cases where the funds had been obtained through fraud or similar egregious misconduct by the debtor. The decision in Havoco addressed a certified question from the United States Court of Appeal for the Eleventh Circuit as to whether the Florida constitutional exemption from forced sale extended to a case in which a debtor had used non-exempt assets to obtain property claimed as his homestead with the intent to hinder, delay or defraud his creditors. While acknowledging that it has, when equity demands, permitted equitable liens against homestead property where Article X, Section 4 does not explicitly sanction a lien, the Court in Havoco rejected any extension of its holding in Fishbein that would bar a debtor from converting non-exempt assets to homestead with the intent to shield the assets from creditors. The court emphasized that though it was “certainly loathe to provide constitutional sanction” to a debtor’s efforts to defraud creditors, the plain language of the Florida Constitution controls, and such conduct receives the full homestead protection.
The holding in Havoco, as applied to the treatment of fraud and the entitlement to homestead exemption from forced sale in bankruptcy proceedings, has been limited by subsequent amendments to the Bankruptcy Code in 2005, which, if applicable, may significantly limit a debtor’s homestead exemption in bankruptcy. Nevertheless, Havoco makes it clear that, in non-bankruptcy settings, a creditor is not entitled to an equitable lien against homestead property purely on the ground of unjust enrichment, as suggested in Fishbein. To overcome the debtor’s constitutional protection, a creditor must prove that the debtor obtained the funds through overt fraud or comparable egregious conduct. If confronted with a situation similar to that described above, creditors should be wary of relying too heavily on Fishbein and its progeny.
