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Sunshine State Welcomes Deadbeats


Estate planners have long recommended the purchase of a residence in Florida as a sound asset protection strategy. Florida's antiquated and unusually complex homestead provisions provide virtually impenetrable protection from creditors. A recent U.S. district court case highlights just how far that protection goes -- and reaffirms that even people who move to Florida for the express purpose of evading their creditors will find a haven. Dowling v. Davis, Slip Copy, 2007 WL 1839555 (M.D. Fla. June 26, 2007).

On May 1, 2002, an Illinois court entered judgment in favor of Brian Dowling and against Michael Davis for about $282,280.46. On Oct. 29, 2002, the court entered further judgment against Davis for attorneys' fees for about $535,550.

On Feb. 24, 2003, Davis and his wife of four days, Emily Seibel, purchased a residence in St. Petersburg, Fla., as tenants by the entirety. The purchase money of about $1.904 million for the Florida residence was comprised of a loan from North Shore Bank in the amount of $1.664 million as well as Davis' personal funds from several bank accounts. Davis also arranged to transfer about $35,000 in furniture, art, rugs and the remaining personal property from his Illinois residence to Seibel.

Upon closing on the sale of the Florida residence, $200,000 was placed into a Florida escrow account (also purportedly under the protection of the Florida homestead laws) for "renovations" that Dowling alleged never occurred. Seibel testified at trial that they intended to refinish the pool, redo the patio, replace carpeting, reconfigure space, change walls, add a bath and change a staircase. Only the first two items were completed.

In the Florida action, Dowling alleged that Davis and Seibel were aware of Dowling's pending judgment against Davis. Dowling's Florida complaint alleged fraudulent asset conversion under Florida law and requested imposition of an equitable lien. The defendants moved for summary judgment and maintained that Florida's constitutionally created homestead exemption protected their Florida residence.

Notwithstanding the fact that all parties apparently conceded that Davis purchased the Florida home with the intent to hinder a creditor (Dowling), the court concluded that Dowling's claims failed, as the Florida Supreme Court has expressly held "[t]hat the transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay or defraud creditors is not one of the three exceptions to the homestead exemption provided for in article X, section 4" of the Florida Constitution. Those three exceptions to homestead protection include: (1) payment of taxes or assessments on the homestead; (2) obligations contracted for purchase, improvement or repair of the homestead; and (3) obligations contracted for house, field or other labor performed on the homestead. The court stated that these exceptions are to be strictly construed and that the 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.

The court also held that equitable liens may only be imposed in limited circumstances when a debtor fraudulently procured the funds to invest in, purchase or improve a homestead and not where the debtor legitimately owned the funds used to purchase the residence (as was the case here.) Dowling did not argue that this type of fraud was perpetrated against him but only alleged that the defendant purchased a homestead knowing that a judgment was imminent and used funds that could have been used to satisfy the judgment.

As a result, the court entered summary judgment in favor of Davis and Seibel, holding that the homestead exemption barred Dowling's claims for fraudulent conversion/transfer as well as his claim for an equitable lien.

As to whether Dowling could recover personal property owned by Seibel individually or funds on deposit held by Seibel and Davis as tenancy by the entireties, the court stated the general Florida legal principle that no property owned by spouses as tenancy by the entireties may be used to satisfy the individual judgment debt or obligation of one of the spouses. However, the court did note that this protection would not hinder a creditor's ability to proceed under other theories of recovery, such as Florida's Uniform Fraudulent Transfer Act (FUFTA). Apparently, neither party briefed the issue of whether FUFTA applied; therefore, the court declined to enter summary judgment on the plaintiff's attempts to recover personal property.

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