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According to a recent decision by a district court in Florida, a debtor’s homestead may not lose its exempt status from creditors even after the home is sold and the proceeds are invested in the stock market.

It has become a cliché to regard the state of Florida as a debtor’s haven, yet Florida has shown no signs of shedding this dubious distinction. Although there are a number of debtor-friendly statutory and common law provisions in Florida, the constitutional homestead exemption found in Article X, Section 4 has garnered the most attention. Under Florida’s homestead exemption, a qualified home is protected from a forced sale by all creditors except those holding a mortgage or lien on the home. In order to qualify for this exemption, the debtor must be a permanent resident of Florida, and the home must be the debtor’s primary residence. The intended purpose of the homestead exemption is to “protect the family, to provide it a refuge from the stresses and strains of misfortune.” Myers v. Lehrer, 671 So. 2d 864, 866 (Fla. 4th DCA 1996) (internal quotations omitted). Florida courts also construe homestead laws liberally so “that the family shall have shelter and shall not be reduced to absolute destitution.” Orange Brevard Plumbing & Heating Co. v. LaCroix, 137 So. 2d 201, 204 (Fla. 1962).

Although the exemption is subject to certain acreage restrictions, there are no limits on the value of the property that can be protected from creditors. The limitless dollar feature of the homestead exemption has given rise to some egregious examples of debt-laden, high net worth individuals sinking significant money into Florida homes in order to avoid creditors. Critics have argued that the purpose of the homestead exemptions has been perverted by the notion of debtors safely residing in multi-million dollar, palatial estates, which seems to run afoul of the picture of a family’s “absolute destitution.” Certain examples of homestead exemptions gone amok were partially responsible for Congress enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), which imposed residency and monetary restrictions upon homestead exemptions in bankruptcy proceedings.

Despite the limitations set forth in the BAPCPA, Florida continues to provide one of the most advantageous homestead exemptions to debtors. In addition to the lack of a monetary cap, Florida law holds that the protected homestead status may persist even after sale of the home. Recently, the Fourth District Court of Appeals reiterated that the proceeds from the sale of a qualified homestead may, under certain circumstances, continue to enjoy protection from creditors. In JBK Associates, Inc. v. Sill Bros., Inc., 40 Fla. L. Weekly D616 (Fla. 4th DCA March 1, 2015), JBK Associates obtained a judgment against Patrick Sill and others for $740,487.22 in 2010. Three years later, Sill and his wife sold their home as part of a divorce. Sill invested his portion of the proceeds ($458,696.67) into an account at Wells Fargo titled, “FL Homestead Account.” The proceeds were then allocated to three sub-accounts as follows: (1) $139,274.66 in a cash account, (2) $297,422.64 in a securities account, and (3) $25,136.89 in another securities account. A few months later, JBK Associates served a writ of garnishment upon Wells Fargo, and Sill filed a motion to dissolve the writ, arguing that the funds were protected by homestead exemption. The trial court granted Sill’s motion to dissolve the writ, but it ordered a status conference for the following month to determine the status of Sill’s use of the proceeds. JBK Associates appealed the order.

On appeal, the Fourth DCA referred to the “seminal” authority on the homestead status of proceeds from a voluntary sale. In the Orange Brevard case, the Supreme Court of Florida held that proceeds from the sale of a homestead will lose protection from creditors if: (a) the proceeds are not reinvested in a new home within a reasonable period of time, or (b) the proceeds are commingled with other monies of the debtor. Turning to the facts of the JBK Associates case, the Fourth DCA agreed with the judgment debtor, Sill, that his investment of the homestead proceeds in securities accounts “was not so inconsistent with the purpose of homestead that the funds lost their protected status.” The Court reasoned that the securities accounts were temporary repositories for the homestead proceeds, which could be reinvested into another homestead within a reasonable time to retain exempt status. In this instance, the homestead proceeds maintained their exempt status because they were kept separate and apart from the judgment debtor’s other funds as required by the Orange Brevard decision.

The Court also noted that there are no constitutional or statutory restrictions on how the proceeds of a sale of a homestead must be held temporarily before being reinvested in another home. Although the Court concluded that investing homestead proceeds in a securities account may be permissible, the Court commented that there “was no evidence that the securities in Sill’s account were particularly risky.” The Court found this fact to be distinguishable from In re: White, 389 B.R. 693, 697 (9th Cir. 2008), which involved “speculative put and call option trading of up to 302 transactions per month.” Unfortunately, the Court declined to examine whether the profits yielded by the securities accounts qualified for homestead exempt status because the issue was not raised by the litigants.

The JBK Associates case illustrates that the homestead exemption is a persistent quagmire for creditors in Florida. Even after the sale of the homestead, the proceeds are still protected from the watchful eyes of creditors if they are reinvested in a new home within a reasonable period of time and they are segregated from the debtor’s other monies. An apt analogy is the process of melting ice to water and then freezing it again. The Supreme Court of Florida described the process as “conversion” of the homestead. Orange Brevard, 137 So. 2d at 207 (“The funds resulting from the voluntary sale of the homestead are ‘converted’, and while ‘in transit’ assume the character of the exempt real property, dependent, however, upon a bona fide intent of the seller to reinvest such funds in another homestead within a reasonable time.”). The JBK Associates case, however, adds a potential new wrinkle regarding the temporary use of homestead proceeds. Debtors wishing to maintain the exempt status of the proceeds should use caution because in dicta the Court in JBK Associates suggested that investing the homestead proceeds in volatile investments could be considered inconsistent with purpose of the homestead exemption.

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