By Jonathan E. Gopman

EXECUTIVE SUMMARY:

A Florida appellate court has held that property held in trust and used by the grantor-beneficiary as her primary residence qualifies for the homestead exemption against forced sale under Section 4 of Article X of the Florida Constitution.

FACTS:

In Callava v. Feinberg, 2003 WL 22336421 (Fla. App. 3 Dist.), the defendant ("D"), a Florida resident, appealed a judgment of foreclosure of an equitable lien against her homestead. The lien was granted to D’s former attorney ("P") to satisfy P’s fees for representing D during the course of "a long and tortured" divorce. In 1993, as part of the divorce proceedings the trial court ordered a residence located in Florida to be transferred to D to satisfy child support and alimony owed to D by her former spouse. During a hearing relating to the transfer of the residence it was also discussed that D would be able to use the equity in the residence to pay her legal fees. The residence was not marital property and title was transferred to D only during the divorce proceeding.

In April of 1995, D sold the residence she received in the divorce and purchased a less expensive home. The new home was actually purchased in the name of a trustee for D’s benefit. A portion of the proceeds from the sale of the first home were used by D to pay her counsel fees, however none of the proceeds were used to satisfy legal fees owed by D to P.

In June of 1995, P commenced an action to collect her unpaid legal fees and obtained a judgment against P in the amount of $168,301.71, plus costs. Following the entry of the judgment the trial court imposed a lien on D’s residence for payment of the judgment because it determined that "D had been awarded a ‘distinct marital asset’ from which she was to pay her attorney’s fees." D did not appeal this order. Thereafter, the trial court entered a judgment of foreclosure on D’s residence that D appealed. The appellate court reversed, finding that the property was D’s homestead and therefore protected from forced sale to satisfy P’s judgment pursuant to Section 4 of Article X of the Florida Constitution, that is, the Florida homestead exemption.

P argued that D could not claim the benefit of the Florida homestead exemption because the legal title to the residence was not in her name, rather it was held in trust for her benefit. The court rejected this argument holding:

The constitutional provision "does not designate how title to the property is to be held and it does not limit the estate that must be owned…" [Citation omitted.] "[T]he individual claiming homestead exemption need not hold fee simple title to the property." [Citations omitted.] Thus, even if [D] owns only a beneficial interest in the property, she is entitled to claim a homestead exemption to the forced sale of the property and the trial court erred in foreclosing her interest in the property.

P also made other arguments in support of her foreclosure judgment which were all rejected by the court. One of these arguments suggested that D’s conduct in claiming the homestead exemption was egregious and amounted to fraud because she was supposed to use the equity in the home that the court awarded her to pay her legal fees. The court noted that the primary intent of the court in awarding D the residence in the divorce proceeding was to provide support for her child. Payment of legal fees was secondary. The court also noted that D sold the original residence and moved into a less expensive residence consistent with the intent of the trial court’s order.

P’s final argument claimed that D waived her right to claim the homestead exemption because it was only raised as a defense to the foreclosure of the property in a post-judgment motion. Rejecting this argument, the court stated:

"As a matter of public policy, the purpose of the homestead exemption is to promote the stability and welfare of the state by securing to the householder a home, so that the homeowner and his or her heirs may live beyond the reach of financial misfortune and the demands of creditors who have given credit under such law." [Citations omitted.] That being so, the defense of homestead exemption may first be offered at the time that a creditor attempts foreclose on the homestead.

COMMENTS:

Section 4 of Article X of the Florida Constitution provides in relevant part:

There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person: a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family; (Emphasis added.)

In re Bosonetto, 271 BR 403; 2001 Bankr.lexis 1667 (2001), reached a different conclusion from Callava. (The Bosonetto case is discussed in detail in an earlier LISI Newsletter. See ________.) Bosonetto held that real property located in Florida that was held by the trustee of a revocable trust and used as the primary residence of the grantor did not qualify for the homestead exemption. The grantor held the retained power of revocation and served as the trustee of her revocable trust. The Bosonetto decision was never appealed.

As mentioned in Callava, Florida courts hold that the homestead exemption should be liberally construed in favor of protecting the family home. See Southern Walls, Inc. v. Stilwell Corporation, 810 So.2d 566 (Fla. App. 5 Dist. 2002); Havoco of Am. Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001); Snyder v. Davis, 699 So.2d 999 (Fla. 1997); and Milton v. Milton, 63 Fla. 533, 58 So. 718 (1912). Seemingly ignoring this mandate, however, the court in Bosonetto focused on the fact that the property was not owned by a natural person. Thus, the debtor, an elderly woman, could not claim the benefit of the Florida homestead exemption. In Callava, the court focused on the meaning of the word "owned." Arguably, this approach is more consistent with construction of the homestead exemption in a liberal manner. Other courts in Florida have reached a similar conclusion. For instance, in construing the application of the homestead exemption the court in Southern Walls, Inc. v. Stilwell Corporation stated:

Although this definition [of a homestead] quantifies the amount of the real property that may encompass a homestead, it does not define "owned." In other words, it does not designate how title to the property is to be held and it does not limit the estate that must be owned, i.e., fee simple, life estate, or some lesser interest. (Emphasis added.)

Furthermore, other courts have held that the homestead exemption is applicable to a life estate in a residence. See Hill v First Nat’l. Bank, 73 Fla. 1092, 75 So. 614 (1917); and Anemaet v. Martin-Senour Co., 114 So.2d 23 (Fla. App. 2 Dist. 1959). It is certainly beyond argument that a residence held in a revocable trust and used as the primary residence of the person who holds the power of revocation is superior in legal rights to a life estate.

PLANNING TIPS:

Callava appears to reach the correct result; that is, a result that is consistent with the historical mandate of the application of the Florida’s homestead exemption. In theory Callava should also constitute stronger precedent than Bosonetto because it is the decision of a state appellate court. Nevertheless, until further authority exists, practitioners should continue to advise Florida residents to hold title to their primary residence in their individual names. Wealth protection should deal with certainty rather than speculation and the stakes are too high to advise clients in any other manner. It is possible that another Bankruptcy court could follow the Bosonetto court while it is clear that the homestead exemption will be applied in a consistent manner in a Florida state court and a Federal Bankruptcy Court when title to such property is held in an individual’s name.