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Sunday, August 28, 2022

Landmark Florida Supreme Court Decision on Homestead Protections Has Been Written Out of the Law by Two Appellate Courts, and No One Appears to Have Noticed

 SUMMARY: In Havoco of America, Ltd. v. Hill, the Florida Supreme Court ruled that the Florida constitutional protections of homestead property against creditor claims trump Florida's fraudulent transfer laws. Thus, homestead protections include nonexempt assets that are added to or invested in a homestead, even if added with the intent to delay, hinder or defraud creditors. However, in a recent appellate opinion, this recognition was effectively ignored and, in practice, vitiates the holding of Havoco. And this is the second time an appellate court has done so in recent years.

FACTS: Article X, section 4(a) of the Florida Constitution exempts from forced sale the homestead of a natural person, 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. Aside from these explicit three exceptions to homestead protection, over time, Florida case law has developed some additional exceptions, principally relating to equitable liens for bad acts of the owner. In Havoco, the Florida Supreme Court limited the scope of this equitable lien exception for protection, holding that a transfer of assets into a 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. It further provided Florida's Uniform Fraudulent Transfer Act (FUFTA) has no effect on the constitutional protection. However, the court did allow that an equitable lien could arise when the funds invested were obtained through theft, fraud, or egregious conduct – something akin to a source of funds exception.

Havoco specifically provided: 

The federal courts which have addressed the applicability of section 726.105 [Florida's Uniform Fraudulent Transfer Act] to homestead claims have concluded that it has no effect on the constitutionally created homestead exemption … We agree.

So unless the funds invested in the homestead were obtained through theft, fraud, or egregious conduct, the homestead remains protected per Havoco. One conceptual way to summarize this is that a fraudulent transfer is not the fraud, theft, or egregious conduct that vitiates constitutional protection. Such fraud must be something beyond the incidents of a fraudulent transfer, such as common law fraud (generally requiring a misrepresentation or intentionally false statement or concealment) or similar egregious action.

In Renda v. Price, a recent Florida appellate decision, a $10 million judgment was obtained against a corporation relating to an automobile accident. Arrangements were made for corporate assets to reach the wife of the corporation's owner, after which the wife sold the assets and invested them in homestead property. The judgment holder sought to reach the homestead assets. The trial court allowed the equitable lien, predicated on the defendant's conduct constituting "badges of fraud" as enumerated by FUFTA, but would not allow the judgment creditor to foreclose on it. Florida's Fourth District Court of Appeals upheld the lien and also allowed foreclosure to proceed. The appellate court noted that under Havoco, an equitable lien on homestead property could attach and be foreclosed when the property was acquired with funds generated by fraudulent or egregious activity. It effectively found that the homestead was purchased with funds obtained by fraud and thus could be reached by the creditor. The appellate court did not indicate what the fraud was, other than indirectly, by reference to the trial court's finding of fraud via the existence of badges of fraud under FUFTA. So, while Havoco specifically provided that a fraudulent transfer is not the fraud that vitiates constitutional protection, the trial and appellate courts found the "fraud" that Havoco allowed to allow an equitable lien was the indicia (badges of fraud) that are used to establish a fraudulent transfer. 

COMMENT: Havoco says the application of FUFTA, even with the intent to defraud, does not override the constitutional protection – the subject assets must have been obtained by fraud or other egregious behavior. That is, the subject assets must be obtained by fraud or egregious behavior beyond the behavior that gives rise to a fraudulent transfer under FUFTA. If the only bad behavior is the behavior described in FUFTA (which appears to be the case in Renda), then the holding in Havoco is written out of the law when the only "fraudulent behavior" are badges of fraud indicia under FUFTA. That is, the Renda courts are saying that the "fraud" exception to Havoco is met by a mere finding of a fraudulent transfer under FUFTA by reason of badges of fraud thereunder that are used to prove requisite intent. With that logic, the Florida Supreme Court's holding that a mere fraudulent transfer under FUFTA is not enough to void the constitutional protection is vitiated since only elements of FUFTA are being used to demonstrate fraud outside of FUFTA. While Havoco also allows an equitable lien when the subject proceeds are obtained by egregious behavior, the defendant's conduct, whether called egregious or not, is not bad behavior beyond the badges of fraud provided in the fraudulent transfer statute, so the egregious label should not weaken the continued constitutional protection. There is no suggestion in the opinion that the subject assets were obtained via "theft."

This is not the only appellate court to make a similar argument. In 2014, in the bankruptcy case of In re Bifani, a debtor in bankruptcy fraudulently transferred property to his cohabitating girlfriend. The girlfriend sold the property and invested $669,233 of the proceeds to purchase a home in Sarasota, Florida. The debtor and the girlfriend then resided together at the home, which qualified as homestead property of the debtor's girlfriend. The bankruptcy trustee went after the girlfriend and persuaded the Bankruptcy Court to impose an equitable lien on the homestead. The Bankruptcy Court imposed the lien and did this based on general equitable principles, noting "the court may impose an equitable lien if the general considerations of right and justice dictate that one party has a special right to a particular property and there is an absence of an available lien or no adequate remedy at law." Interestingly, there is no reference to or consideration of the above-quoted language of Havoco declaring that the specific intent to defraud creditors does not void the homestead protection from creditors.

The Bankruptcy Court opinion was appealed to the U.S. District Court for the Middle District of Florida. Here, that court picks up on the limitations that Havoco imposed and reverses the Bankruptcy Court. The analysis is instructive: 

Florida's appellate courts have interpreted Havoco to limit equitable liens on homesteads to cases "in which the homesteads were purchased with the fruits of fraudulent activity." Willis v. Red Reef, Inc., 921 So. 2d 681, 684 (Fla. 4th DCA 2006). Those cases do not include situations where the homestead owner converted otherwise reachable funds into an exempt homestead, even if this is done through a fraudulent transfer made with the intent to hinder, delay, or defraud creditors. Id.; See Dowling, 2007 WL 1839555, at *4 ("[T]he homestead exemption does not contain an express exception for real property that is acquired in Florida for the sole purpose of defeating the claims of out-of-state creditors."); Conseco Servs., LLC v. Cuneo, 904 So. 2d 438, 440 (Fla. 3d DCA 2005) ("It is not enough that the Cuneos transferred their nonexempt funds to an exempt asset to keep those funds from creditors. If a debtor acquires homestead property with the 'specific intent to hinder, delay, or defraud creditor,' the property still enjoys Florida's constitutional homestead protection.”). Havoco and its progeny instruct that the fraudulent transfer of assets into a homestead does not provide a basis for the imposition of an equitable lien. The Bankruptcy Court, therefore, abused its discretion by imposing an equitable lien on LaMarca's homestead, as the lien infringes on the homestead exemption granted in article X, section 4 of the Florida Constitution.

All is well that ends well? Not quite. On appeal, the 11th Circuit Court of Appeals reversed the U.S. District Court and allowed the equitable lien to attach to the girlfriend's homestead property. The court noted that while Havoco allows homestead creditor protection to continue for funds put into a homestead, that is not the case where funds obtained through fraud or egregious conduct were used to invest in, purchase, or improve the homestead. The court went on to find "fraud" that allowed the equitable lien due to various badges of fraud under the fraudulent conveyance statute – exactly what also occurred in Renda in the first case discussed above – and with the same effective overwrite of the holding of Havoco.

It is the author's opinion that these appellate courts have confused the typical legal definition of "fraud" with "fraudulent transfer" and concluded that a fraudulent transfer constitutes fraud. They would not be the first courts to conclude that a "fraudulent transfer" constitutes fraud under law. Indeed, more modern fraudulent transfer statutes such as the Uniform Voidable Transfer Act intentionally eschew the terms "fraud" and "fraudulent" to avoid unintended characterizations. An article on the subject provides:

The driving force behind the change is the concept of "constructive fraud," which permits the avoidance of transfers made or of obligations incurred by an insolvent debtor in exchange for less than reasonably equivalent value. Although denominated as "fraud," a constructively fraudulent transfer involves neither fraud nor improper intent, creating confusion among some courts that have issued rulings improperly limiting the scope of the avoidance remedy. To address these concerns, the word "fraud" has been supplanted by the term "voidable" in nearly every portion of the UVTA and the Commission's official comments. Moreover, the UVTA adopts the more aggressive view that even "actually fraudulent" transfers do not require fraud. In lieu of the traditional standard applied to transfers made with the intent to "hinder, delay or defraud" creditors, the comments to the UVTA shift the inquiry to "hinder or delay" and substitute the idea of "unacceptably contraven[ing] norms of creditors' rights" as the measure for when efforts to hinder or delay render a transaction voidable. Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA, Jones Day Publications, September/October 2014.

Presently, a motion for rehearing, for rehearing en banc, and/or certification of the issue to the Florida Supreme Court is pending in Renda. One can only hope that the issue is revisited, and the improper overwriting of the holding in Havoco is recognized and reversed. Or barring that, that an appeal is taken to and accepted by the Florida Supreme Court to protect its holding in Havoco.

CITES: Fla. Const. Article X, section 4(a); Florida Statutes Chapter 726; Havoco of America, Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001), Renda v. Price, No. 4D21-534, 2022 WL 2962564 (Fla. Dist. Ct. App. July 27, 2022); In re Bifani, 493 B.R. 866 (Bankr. M.D. Fla. 2013); Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA, Jones Day Publications, September/October 2014.

Sunday, July 31, 2022

IRS COLLECTION ACTIVITIES AGAINST OVERSEAS ASSETS

The IRS Chief Counsel's Office has issued a Program Manager Technical Advice regarding questions about IRS activity to collect tax delinquencies from assets located outside of the U.S. While some of the Advice is fairly technical, it does provide some interesting information on what the IRS can and cannot do in this arena and some of the approaches they will take.

Some of the collection avenues the IRS may take include:

  • The input of a Treasury Enforcement Communications System (TECS) Lookout Indicator. This is a mechanism to help locate a taxpayer's location.
  • Initiation of an outbound Mutual Collection Assistance Request (MCAR) to a treaty partner.
  • Levy on a domestic branch of a foreign bank 
  • Bringing a lawsuit to repatriate assets.
  • Issuance of Letter 6152, Notice of Intent to Request U.S. Department of State to Revoke Your Passport.
  • Referral to U.S. Dept. of State (DOS) for passport revocation after Letter 6152 issuance.
The IRS can proceed along multiple lines at the same time, except the final item above can commence only after Letter 6152 is sent. The Advice notes that if lien or levy action has already occurred to collect a seriously delinquent tax debt under the passport revocation procedures, the IRS does not have to undertake further collection action after issuing a Letter 6152 before referring the matter to the DOS for passport revocation.

The IRS may use FATCA data from taxpayer filings to assist in locating foreign assets, but with some limitations on FATCA data obtained under a treaty.

The Advice also discusses the ability of a taxpayer to obtain information on these collection processes in discovery in a federal lawsuit or in a Freedom of Information Act (FOIA) request, and what objections to disclosure can be made by the IRS to such disclosure attempts.

Program Manager Technical Advice 2022-006

 

Thursday, July 21, 2022

New Retirement Plan Distribution Rules Likely on the Way

Several years ago, the SECURE Act was passed, which had major changes to the tax rules relating to retirement plan distributions. Another act on that subject is working through Congress - the Enhancing American Retirement Now (EARN) Act. A version has passed the House of Representatives, with the Senate working on its own version. Given the almost unanimous passage by the House, there is a very good chance that the Act will make its way into law.

We cannot tell what all the provisions will be, but here is a list of items that are in one or both of the House and Senate bills and thus have a reasonably good chance of being in the final version:

  • extending the date on which the required beginning date is based, from the year in which the employee or IRA owner reaches age 72 to the year in which he or she reaches age 75, effective after 2031
  • allowing up to $2,000 per year of 401(k) assets to be used for long-term care insurance
  • reducing the  Code Sec. 4974 50% excise tax on the failure to take a required minimum distribution to 25% and reducing it to 10% for an individual who, during a correction window, corrects the shortfall and submits a return reflecting the tax
  • indexing for inflation the $100,000 limitation on qualified charitable distributions from an IRA and permitting a one-time election to treat up to $50,000 in distributions (also indexed for inflation) from an IRA to a charitable remainder trust or charitable gift annuity as if they were made directly to a qualifying charity
  • excluding from the additional 10% tax on early distributions under Code Sec. 72(t), distributions made to a terminally ill individual; 
  • excluding from the additional 10% tax on early distributions under Code Sec. 72(t), distributions of up to $1,000 per year to meet expenses relating to personal or family emergencies
  • excluding from the 10% additional tax on early distributions under Code Sec. 72(t), eligible distributions of up to $10,000 (or, if less, 50% of the account balance) for distributions to domestic abuse victims