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.

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

 

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

Time Period to File Estate Tax Return to Make Portability Election Extended to 5 Years

If a spouse dies and his/her estate does not fully use the decedent's remaining unified credit, the surviving spouse can use the unused credit if certain conditions are met. One of the conditions is that an estate tax return is filed for the decedent that makes a portability election, even if no estate tax return is otherwise needed.

An estate tax return is due 9 months after death, with an automatic extension granted for 6 months if timely requested. When no return is required, a return being made solely to make a portability election can be filed late, up to two years after death of the first spouse, if the extension procedures of Rev.Proc. 2017-34 are followed (generally, filing a return within that time period while adding a specified legend to the top of the return).  

This two year period has now been extended to 5 years. This was principally due to the IRS receiving too many Form 9100 requests (requiring a private letter ruling) after the two year period but often within 5 years. To save IRS resources, the extension period is now 5 years.

Note that if it turns out that an estate tax return was otherwise required, the extension is null and void.

Rev.Proc. 2022-32

HUSBAND USES TENANCY BY ENTIRETIES PROPERTY TO MAKE A GIFT TO GIRLFRIEND - WHAT'S THE REMEDY?

In Florida, tenancy by entireties (TBE) property of two spouses provides various benefits. These include protection of the assets against creditors of only one spouse, avoidance of probate, and protection of one spouse from unauthorized disposition of TBE property by the other.

Regarding this last point, it is well settled in Florida that an estate by the entireties is vested in the husband and wife as one person, and neither spouse can sell, forfeit, or encumber any part of the estate without the consent of the other, nor can one spouse alone lease it or contract for its disposition without such consent. 

What happens if this is violated? If this rule is violated, can the injured spouse recover the assets from a third party recipient, or is the remedy of the injured spouse only a judgment against the wrongful spouse and collection from the assets of that spouse? Where the wrongful spouse has insufficient assets to make the injured spouse whole, the ability to collect against the transferred assets could be critical to the injured spouse.

A recent Florida case summarizes and applies the law in Florida on this issue. In the case, the husband diverted millions of dollars of TBE property to the husband's girlfriend. While a matter of dispute, the trial court believed this was done without the wife's consent.

The court allowed a constructive trust to be applied to the assets in the hands of the girlfriend. Interestingly, and importantly, the court noted that such a constructive trust can be imposed even if the recipient did not engage in any wrongful conduct. Thus, the case confirms that an injured spouse can go against the recipient of property to collect back any property transferred without the injured spouse's consent.

Wallace v. Torres-Rodriguez, 3rd DCA 5/11/22

WHAT DOMESTIC ESTATE PLANNERS SHOULD KNOW ABOUT BRUSSELS IV

 Ask many estate planners in the U.S. about Brussels IV, and you are apt to get the response “Brussels for what?” While in effect since 2015, it is more unknown than known. In most circumstances, Brussels IV will not impact estate planning in the U.S. But if a U.S. citizen owns assets situated in the European Union (“EU”), Brussels IV can provide substantial benefits and should always be considered by the estate planner.

Brussels IV is the common name used to refer to Regulation (EU) No. 650/2012 of the European Parliament and the Council of the European Union. It is an extensive provision enacted in 2012 that is intended to address the substantial differences in laws of succession that apply among various EU member states. For instance, the different members of the EU have different forced heirship provisions. A decedent residing in one state with property in another may find forced heirship applying to the property in one country even though that concept is not applied, or is applied with different rules and property divisions, in his or her country of residence. A key aspect is that it provides a default mechanism for determining which laws will apply to the succession of a decedent’s assets in the EU and to allow one EU nation’s laws to apply to the succession of all of a decedent’s EU property. The default provision under Brussels IV is that the law applicable to the succession of a decedent’s property as a whole will be the country in which the deceased has his or her habitual residence at the time of death.

So what does this have to do with U.S. citizens? U.S. citizens with property in an EU country (especially real property and other physical property, but not necessarily limited to that) may find that such property is subject to forced heirship that defeats the intent of the owner and may create U.S. transfer tax issues. For example, if the owner desires to leave all assets to a surviving spouse, or to have a standard A/B trust division between a marital gift and a family trust to use unified credit, the assets in the EU country may have to pass to in part to children under a forced heirship regime. This can defeat both the desired disposition and result in estate taxes that could have been avoided through a larger marital deduction gift. 

What Brussels IV allows is that a national of any country, even one outside of the EU, can elect to apply the succession law of his own nationality to property situated in the EU. Thus a U.S. citizen can elect to apply the law of a U.S. state to the succession of his or her property in the EU, even if the EU country in which the property is located has forced heirship laws that would force dispositions of some or all property to spouses and/or other family members in fixed shares. Therefore, estate planners with clients holding EU assets should give serious consideration to electing to apply U.S. state law to avoid EU forced heirship laws, and also avoid uncertainties about which country’s succession laws apply to which properties.

The election to apply U.S. state law goes beyond mere forced heirship planning. It can smooth the entire estate administration process, since the election of law of the national will result in having that law apply to all of these succession issues: (a) the causes, time and place of the opening of the succession; (b) the determination of the beneficiaries, of their respective shares and of the obligations which may be imposed on them by the deceased, and the determination of other succession rights, including the succession rights of the surviving spouse or partner; (c) the capacity to inherit; (d) disinheritance and disqualification by conduct; (e) the transfer to the heirs and, as the case may be, to the legatees of the assets, rights and obligations forming part of the estate, including the conditions and effects of the acceptance or waiver of the succession or of a legacy; (f) the powers of the heirs, the executors of the wills and other administrators of the estate, in particular as regards the sale of property and the payment of creditors; (g) liability for the debts under the succession; (h) the disposable part of the estate, the reserved shares and other restrictions on the disposal of property upon death as well as claims which persons close to the deceased may have against the estate or the heirs; (i) any obligation to restore or account for gifts, advancements or legacies when determining the shares of the different beneficiaries; and (j) the sharing-out of the estate. 

The election is made via putting a provision to that effect in a testamentary document (usually a Last Will), although the election can be implied. There are provisions that deal with which state’s law (within the U.S.) can be elected, which is generally resolved by U.S. conflict of law provisions.

There are some provisos. First, there are a few EU member states that have elected out of Brussels IV. Therefore, a review and determination are needed in planning that the EU member state that holds the property has not elected out. Second, presently France has enacted domestic legislation that under some circumstances may override Brussels IV and allow its domestic succession law to nonetheless apply. Whether that law will be allowed to override Brussels IV will likely be an issue litigated in the EU at some point. Third, Brussels IV does not affect the taxing jurisdiction of the EU member states. Lastly, there is some uncertainty about how this interfaces with marital law. Therefore, a planner should consider consulting with local counsel to confirm Brussels IV will apply, and what local tax and other consequences and issues may arise.

Planners may also want to consider a boilerplate provision in their estate planning documents making the election to apply U.S. succession law (after discussion with their clients) as most U.S. nationals would likely want to apply the U.S. succession law in lieu of the EU member state law. Having such a provision will also cover the situation of the acquisition of EU property after the estate planning documents have been prepared.

Regulation No. 650/2012