On the Lighter Side: Florida Consumer Levies on Assets at Local Bank of America Branch

I've been told that the subjects we usually discuss here are boring to many readers. With that in mind, it's nice to be able to post something funny (ok, it's probably still boring).

I recently read a story on naked capitalism about a Florida consumer levying on the assets of Bank of America to satisfy an attorney's fee award. The bank instituted a foreclosure case that it shouldn't have (hard to believe, I know), because the house they were seeking to foreclosure had actually been purchased cash. The homeowner obtained an attorney's fee award based on the meritless lawsuit, but the bank didn't pay (again, shocking). As a result, the homeowner invoked its rights under Chapter 56, Florida Statutes, which we encourage our creditor clients to consider under certain circumstances, and sent the sheriff to a local bank branch to levy upon the property there. At that point, as I understand it, the bank manager cut a check for the attorney's fees.

The story is funny to me, because it represents a reversal of the roles typically played by consumers and institutions; but there is also a lesson to be learned from it: creditors and debtors alike need to be mindful of their rights and available remedies.

Florida Court Holds that Creditor, Not Creditor's Attorney, Must Sign Sworn Denial of Garnishment Exemption

A very recent ruling by Florida's Fourth District Court of Appeals discusses the procedure for denying a judgment debtor's head of household exemption to garnishment, and spells trouble for creditor's attorneys, especially attorneys representing major banks and credit card companies. At issue in Caproc Third Ave., LLC v. Donisi Ins., Inc., ___ So. 3d ____ (Fla. 4th DCA June 1, 2011) (pdf), was Fla. Stat. § 222.12, which provides that,

"When such an affidavit [of head of household] is made [by a judgment debtor facing a writ of garnishment], notice of same shall be forthwith given to the party, or her or his attorney, who sued out the process, and if the facts set forth in such affidavit are not denied under oath within 2 business days after the service of said notice, the process shall be returned, and all proceedings under the same shall cease. If the facts stated in the affidavit are denied by the party who sued out the process within the time above set forth and under oath, then the matter shall be tried by the court from which the writ or process issued, in like manner as claims to property levied upon by writ of execution are tried, and the money or thing attached shall remain subject to the process until released by the judgment of the court which shall try the issue."

The creditor's attorney attempted to file an affidavit denying the exemption himself, rather than having his client do so. Most creditors attorneys that we know have in the past done it that way. After this case, however, that practice appears to be no longer viable. The court ruled that the attorney was not "the party who sued out the process," and therefore he could not sign the affidavit of denial. As a result, the writ of garnishment was immediately dissolved without the need for an evidentiary hearing. The court also noted that the affidavit filed by the attorney was insufficient because he himself had no basis for personal knowledge as to the defendant's claim of exemption.

As a practical matter, given the strict time constraints for filing the sworn denial - 2 days - the requirements imposed by this case will make it difficult for the attorney who represents a hard to reach client to defeat a claim of head of household exemption [regardless of the claim's merit].

Florida Legislature Updates Limited Liability Company (LLC) Statute in the Wake of Last Year's Olmstead Decision of the Florida Supreme Court

Asset protection attorney Jonathan Alper, Esq. has posted an article on the Florida Asset Protection Blog reporting that the Florida Legislature has amended the LLC Statute to limit the reach of the holding of the Supreme Court's decision in Olmstead v. Federal Trade Commission, 44 So. 3d 76 (Fla. 2010), which we previously blogged about here.

The holding expanded the remedies available to creditors of the members of an LLC to include the forced sale of the member's interest. The new legislation limits application of the Olmstead remedy to single member LLCs only. It provides that the charging lien is the only remedy available to creditors of a member of a multi-member LLC.

The new legislation can be viewed here. Prior articles discussing Olmstead can be read here, here, and here.

New Federal Rule Makes It More Difficult for Judgment Creditors to Garnish Consumer Bank Accounts

Florida is one of the most consumer-friendly States in the Union, when it comes to debtor-creditor relations. Article X Section 4 of the Florida Constitution exempts from forced sale a person's primary residence, without regard to the value (subject only to an acreage limitation that very rarely applies). Separately, Section 222.11 of the Florida Statutes provides protection over and above the Federal Wage Garnishment restrictions, exempting from garnishment 100% of the wages of a head of household, unless that person has agreed to have his wages garnished (a scenario I have yet to come across). And if that weren't enough, the commonlaw tenancy by the entireties form of property ownership protects the property of a married couple from creditors of one spouse. We have blogged about each of these exemptions here, here, and here, respectively.

One exception to this pro-debtor body of law is the Garnishment statute itself. Many states require either notice to the debtor or a specific showing by the creditor of entitlement to would-be-garnished funds - including the lack of any available exemption - prior to garnishing wages or bank account funds (some states may require both). Florida requires neither. The creditor need only show the existence of an outstanding judgment in order to obtain a Writ of Garnishment, and he can obtain the Writ without notice to the debtor. Only after the garnishee (the party possessing the debtor's property to be taken) has been served with the Writ does the debtor receive notice, and it is then up to the debtor to raise his exemptions in a timely fashion and prove them in accordance with the statute or lose the right to the funds. And while this litigation takes place, the funds are frozen in the debtor's bank account and are therefore unavailable to him for some time. As such, a bank account garnishment is an effective creditor's remedy in Florida.

New Federal Regulations becoming effective in May 2011 will lessen its effectiveness, however, at least as it pertains to Social Security payments and other Federal benefits. The interim final rule requires a bank, upon receipt of a Writ of Garnishment, to conduct its own inquiry into the source of the funds in the garnished account, and if it determines that the account contains Federal benefit payments, to release the freeze on two months' worth of payments immediately, without any showing by the debtor.

Both Florida and Federal law have for some time exempted many kinds of Federal benefit payments from garnishment, even after they are deposited into an account, so this interim final rule does not represent a drastic change in the law. But inasmuch as it relieves the debtor of the obligation to prove that the funds are exempt before regaining access to at least a portion of them, its effect will be felt by creditors- many times the debtor is unable to prove that the funds are exempt, has taken an action that would otherwise make the exemption unavailable, or (unfortunately) is simply unaware of or incapable of complying with the procedure for obtaining judicial recognition of the exemption. Additionally, this rule should be of interest to banks, who should be hard at work learning their duties under the regulations and implementing procedures to carry them out.

The interim final rule was published in the Federal Register, and is available, along with comments submitted to the implementing agencies, here.

Florida Court Rules Commissions are Wages for Purposes of State Garnishment Statute

Florida's Fourth District Court of Appeals recently ruled in Baker v. Storfer, --- So.3d ----, 2011 WL 222324 (Fla. 4th DCA 2011) that commissions are 'wages,' for purposes of Section 77.0305, Florida Statutes, and are therefore subject to a continuing Writ of Garnishment. Baker obtained a judgment against Storfer and attempted to collect the judgment by applying to the court for a Continuing Writ of Garnishment under Section 77.0305, which provides:

"Notwithstanding any other provision of this chapter, if salary or wages are to be garnished to satisfy a judgment, the court shall issue a continuing writ of garnishment to the judgment debtor's employer which provides for the periodic payment of a portion of the salary or wages of the judgment debtor as the salary or wages become due until the judgment is satisfied or until otherwise provided by court order."

The statute is useful to creditors because it requires the garnishee (the Defendant/debtor's employer) to make payments to the Plaintiff/creditor from each future paycheck (up to the maximum allowed by the Federal wage garnishment restrictions found in 15 U.S.C. § 1673), upon the service of a single Writ. The continuing Writ remains in effect until the judgment is paid in full, as opposed to an individual Writ of Garnishment under Section 77.04, Florida Statutes, which only requires that:

"the garnishee...serve an answer to it on plaintiff within 20 days after service stating whether he or she is indebted to defendant at the time of the answer, or was indebted at the time of service of the writ, plus sufficient time not to exceed 1 business day for the garnishee to act expeditiously on the writ, or at any time between such times."

Note the difference: the individual Writ only references amounts due at the time the answer is filed or before; the continuing Writ references amounts due in the future as well. The question in this case was whether the debtor's commissions constituted wages for the purposes of the garnishment statute. If so, Section 77.0305 would require the employer to make future commission payments to the creditor. If not, the employer would only be required to pay to the creditor what was due at the time of the answer for prior commissions. The trial court found that the commissions did not constitute wages, and therefore the garnishment action would not reach future commissions. The appeals court disagreed. It held that while discretionary distributions from closely held corporations, draws, expense reimbursements, and capital account disbursements do not constitute wages, commissions do. The court employed a plain meaning argument, finding that commissions are paid for labor or services and are therefore wages.

On the one hand, this is a victory for creditors. Had the court found that the debtor's commissions were not wages, Section 77.0305 would not have applied, and the creditor would have been forced to serve individual Writs of Garnishment in advance of each and every commission payment due to the debtor. This would be extremely costly, and crafty debtors could likely alter the timing of the commission payments and thereby avoid losing their commissions. On the other hand, since the debtor's commission payments are wages, they are subject to the head of household exemption found in Section 222.11, Florida Statutes. See Refco, Inc. v. Sarimiento, 487 So. 2d 75 (Fla. 3d DCA 1986). The Baker court did not discuss whether the debtor in that case was head of household; if so, the creditor would recover nothing in the garnishment, despite the court's ruling.

The Life of a Judgment (Lien) in Florida

A recent case decided by the Fifth District Court of Appeals discusses the statutory framework for perfecting and maintaining a judgment lien on real property in Florida. The opinion, Sun Glow Const., Inc. v. Cypress Recovery Corp., --- So. 3d ----, 2010 WL 4536803 (Fla. 5th DCA 2010) is found here.

According to Fla. Stat. § 55.10, a judgment becomes a lien on real property in any county when a certified copy of it is recorded in the official records or judgment lien record of that county and operates as a lien for an initial period of 10 years from the date of the recording; and the judgment creditor may extend the 10 year period by complying with Fla. Stat. § 55.10(2):

"The lien provided for in subsection (1) or an extension of that lien as provided by this subsection may be extended for an additional period of 10 years, subject to the limitation in subsection (3), by rerecording a certified copy of the judgment, order, or decree prior to the expiration of the lien or the expiration of the extended lien and by simultaneously recording an affidavit with the current address of the person who has a lien as a result of the judgment, order, or decree. The extension shall be effective from the date the certified copy of the judgment, order, or decree is rerecorded."

The question presented in the Sun Glow Construction case was whether the judgment creditor could rerecord its judgment after the expiration of the initial 10 year period, and thereby establish a new lien on real property. Because the statute doesn't specifically foreclose this possibility, the court allowed the judgment creditor to do so. According to the court, the only effect of the judgment creditor's failure to rerecord the judgment prior to the expiration of the initial 10 year period was to cause the judgment creditor to lose the priority over subsequent lienholders created by the earlier recording and to establish priority only over liens established after the later recording.

This ruling discusses the ability to maintain a judgment lien on real property for the life of the judgment, but it does not discuss the life of the judgment itself. That matter is contained in a separate statute- Fla. Stat. § 95.11(1), which sets a 20 year statute of limitations on judgment enforcement actions. But the analysis doesn't end there. There is caselaw allowing a judgment creditor to file an action on a judgment prior to its expiration and actually renew the judgment, by way of a new judgment, good for another 20 years. See Petersen v. Whitson, 14 So. 3d 300 (Fla. 2d DCA 2009). And presumably, based on the Petersen court's rationale, when the second judgment is set to lapse, the judgment creditor may file another new suit and obtain a third judgment (and so on).

Based on these statutes and cases, read together, a judgment in Florida can essentially be good forever. Likewise, a judgment lien can be good forever, limited by its recording only in terms of its priority. This analysis applies equally to judgments originating in Florida, judgments entered in other states recorded in Florida pursuant to the Uniform Enforcement of Foreign Judgments Act, see Haigh v. Planning Bd. of Town of Medfield, 940 So. 2d 1230 (Fla. 5th DCA 2006), and judgments entered in foreign countries recorded in Florida pursuant to the Uniform Foreign Money Judgments Recognition Act, see Nadd v. Le Credit Lyonnais, S.A., 804 So. 2d 1226 (Fla. 2001).

Recent Florida Appeals Court Decision Construes Assignment for the Benefit of Creditors Statute

In Moffatt & Nichol, Inc. v. BEA International Corp., --- So.3d ---- (Fla. 3d DCA 2010), decided last week, Florida's Third District Court of Appeal held that Florida's Assignment for the Benefit of Creditors statute, Chapter 727, Florida Statutes, precludes a creditor from bringing an action against a third party under the Uniform Fraudulent Transfer Act when an assignment has been filed. The case highlights recent amendments to the assignment statute aligning it with Federal Bankruptcy law. There have been few reported cases discussing the assignment statute, so this case presents a rare opportunity for practitioners to educate themselves on this apparently underutilized tool.

Chapter 727 allows a debtor to assign its assets to an assignee of its choosing for the purposes of liquidating the assets and satisfying the claims of its creditors from the proceeds, similar to Federal Bankruptcy law. A written assignment is executed between the assignor and the assignee in the statutory form, listing all known creditors and describing their claims, and a proceeding is commenced (in State court), where creditor claims, with certain exceptions, must be filed or be forever barred. The proceeding acts as a stay against levy, execution, attachment or the like in respect of any judgment against assets of the estate in the possession, custody, or control of the assignee, similar to the Bankruptcy Code's automatic stay provision, with the exception that unlike the Bankruptcy Code, the assignment statute does not stay foreclosure proceedings based upon a consensual lien. The court before which the assignment is pending is given numerous powers under Fla. Stat. § 727.109, including the power to adjudicate claim priority in accordance with the statute and to hear actions brought by the assignee to require third parties to turn over assets belonging to the estate and to avoid fraudulent conveyances.

Which brings us to the instant case. A judgment creditor of the assignor sought, in a case separate from the assignment action, proceedings supplementary to execution to implead third parties alleged to have received fraudulent transfers from the assignor. Under Chapter 726, Florida Statutes, Florida's Uniform Fraudulent Transfer Act, a debtor may not transfer assets to third parties with the actual intent to hinder, delay, or defraud current or known future creditors or without receiving reasonably equivalent value when the debtor knows it is insolvent or will soon become insolvent.

The creditor in this case argued that it should be allowed to proceed against third parties alleged to have received fraudulent transfers despite the existence of the assignment proceeding, because the assets sought in the third party action were not assets of the estate. The court disagreed. According to amendments to the assignment statute passed in 2007, "asset" as defined under Fla. Stat. § 727.103(1), includes "claims and causes of action, whether arising by contract or in tort, wherever located, and by whomever held at the date of the assignment." The court held based upon this definition that once an assignment proceeding is instituted in which all assets are assigned, only the assignee has standing to pursue fraudulent transfer claims on behalf of the estate. To hold otherwise, reasoned the court, would allow one creditor to improperly 'cut in line', in contravention of the spirit of the assignment statute. Analogy was drawn to Bankruptcy law, under which the trustee has exclusive authority to prosecute avoidance actions on behalf of the estate and its creditors.

In some instances, an assignment for the benefit of creditors provides an economical alternative to business bankruptcy, and businesses considering bankruptcy should explore this and all other options. Similarly, creditor's attorneys should familiarize themselves with their clients' rights under the assignment statute, as reorganization becomes necessary for more and more small businesses in this economy.

Florida Bankruptcy Court- Funds Held by Chapter 13 Trustee Are Subject to Garnishment When the Case is Dismissed

A colleague has posted an interesting article on the Bankruptcy Law Network regarding a case decided last month in the United States Bankruptcy Court for the Middle District of Florida. According to the holding, when a Chapter 13 case is dismissed, a creditor may subject the Trustee to a writ of garnishment under Florida law and require the Trustee to turn over to the creditor all postpetition payments made by the Debtor pursuant to a proposed repayment plan. The case, In re Fischer, No. 6:09-bk-07498-KSJ, 2010 WL 2947165 (Bkrtcy. M.D. Fla. July 16, 2010), is available here. The blog article can be accessed here. Comments aren't available on that blog, and the holding should be of interest to Bankruptcy practitioners and creditors in Florida, so I'll discuss it here.

The relevant background is not particularly complicated: the Debtor filed a Chapter 13 Bankruptcy case, and at some point, the case was dismissed because the Debtor could no longer make the plan payments. The court entered an order dismissing the case and requiring the Trustee to return to the debtor the money that the debtor previously paid to the Trustee, as required by 11 U.S.C.A. §1326(a)(2), which provides:

"A payment made under paragraph (1)(A) shall be retained by the trustee until confirmation or denial of confirmation. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b)."

After the case was dismissed, but before the Trustee got around to finalizing the administration of the estate and returning the money to the Debtor, a Florida judgment creditor ran to state court and obtained a writ of garnishment, requiring the Trustee to turn over the money in its possession belonging to the Debtor to the creditor.

While the Bankruptcy case is pending, obviously that wouldn't work, because any money in the possession of the Trustee at that time would be in custodia legis, and because the automatic stay under §362 of the Bankruptcy Code would prevent the creditor from obtaining the writ of garnishment in the first place. According to the Fischer court, however, the stay is lifted when the dismissal order is entered, and as a result, the Trustee essentially becomes a general debtor of the Debtor at that point, which means it may be subject to garnishment under state law. The court didn't feel compelled to discuss the issue at length, but it did cite a number of cases, some allowing the garnishment and some refusing to allow it.

The courts refusing to allow the garnishment generally looked no further than the plain language of §1326(a)(2) - "the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b)." This language, 'shall return,' appears absolute and qualified only by the requirement to deduct administrative expenses. Some of these courts also ruled on policy grounds, finding that dismissal of the Chapter 13 case is supposed to leave the creditors on equal footing as they were before the Bankruptcy was filed, and promoting a race to the Trustee would not further the policies of encouraging debtors to file Chapter 13 or ensuring orderly and efficient disposition of the Bankruptcy case. Additionally, resort was made to presuming that Congress likely foresaw that creditors would attempt to make claims on funds held by the Trustee under the circumstances at hand, and that through the language requiring the Trustee simply to return the funds to the Debtor, Congress intended to foreclose this possibility. Some courts also held that returning the money to the Debtor does not conflict with state law, because any lien on the funds could follow the funds to the Debtor and be adjudicated in state court subsequent to the Trustee's disbursement. Most of these arguments are compelling, save, in my opinion, for the last. We all know that as soon as the money is returned to the Debtor, it will if at all possible be gone before the creditor can get back to state court, especially where the Debtor knows the creditor will attempt to make a claim. Here are the cases available on Google Scholar: In re Sexton, 397 B.R. 375 (Bkrtcy. M.D. Tenn. 2008); In re Inyamah, 378 B.R. 183 (Bkrtcy. S.D. Ohio 2007); In re Bailey, 330 B.R. 775 (Bkrtcy. D. Ore. 2005); In re Oliver, 222 B.R. 272 (Bkrtcy. E.D. Va. 1998); In re Walter, 199 B.R. 390 (Bkrtcy. C.D. Ill. 1996); In re Clifford, 182 B.R. 229 (Bkrtcy. N.D. Ill. 1995).

The courts allowing the garnishment generally relied on the interplay between §1326(a)(2) on one hand, and the automatic stay, which is lifted immediately upon entry of the dismissal order, and the definition of the estate, which is terminated upon dismissal, on the other. Interestingly, many of these cases dealt with Federal Tax liens, for which the analysis should be different, since there is no question of Supremacy and since the Federal Tax law is very clear: "Notwithstanding any other law of the United States, no property or rights shall be exempt from levy other than the property specifically made exempt by subsection (a). 26 U.S.C.A. §6334(c). The cited cases that are available on Google Scholar can be read at the following links: In re Mischler, 223 B.R. 17 (Bkrtcy. M.D. Fla. 1998); In re Schlapper, 195 B.R. 805 (Bkrtcy. M.D. Fla. 1996); In re Steenstra, 307 B.R. 732 (B.A.P. 1st Cir. 2004); In re Beam, 192 F.3d 941 (9th Cir. 1999); In re Brown, 280 B.R. 231 (Bkrtcy. E.D. Wis. 2001); In re Doherty, 229 B.R. 461 (Bkrtcy. E.D. Wa. 1999).

Whether you agree with the former group of cases or the latter, one thing is clear, especially given that all the Florida cases cited above have allowed the garnishment- the Florida creditor should diligently monitor the progress of the debtor's Bankruptcy case and should seek the advice of counsel with respect to the protection and enforcement of its rights and remedies in and out of Bankruptcy Court to the fullest extent allowable by law.

Florida Supreme Court Expands Remedies Available Against Judgment Debtors Owning an Interest in a Single Member Limited Liability Company

In a ruling with far-reaching implications for judgment creditors and debtors, on June 24, 2010 the Florida Supreme Court decided the case of Olmstead v. Federal Trade Commission (SC08-1009). The case came to the Supreme Court as a result of a question certified by the Federal Eleventh Circuit in F.T.C. v. Olmstead, 528 F.3d 1310 (11th Cir. 2008): "Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all “right, title, and interest” in the debtor's single-member limited liability company to satisfy an outstanding judgment."

A majority of the Florida Supreme Court answered the question in the affirmative (after rephrasing it). As a result, when a creditor obtains a judgment against an individual debtor who is a member of a single member Limited Liability Company, the judgment creditor may obtain an order from the court requiring the LLC to surrender its assets to satisfy the judgment against the member.

Prior to this ruling, a judgment creditor who wished to levy upon a judgment debtor's interest in a Limited Liability Company had to seek a charging order pursuant to Fla. Stat. § 608.433(4), which provides:

"On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest."

According to this statute, a court may order the LLC to apply distributions accruing to the judgment debtor toward satisfaction of the judgment. However, the court may not otherwise allow the judgment creditor to interfere with the operation of the LLC or take part in the decision to make distributions, because pursuant to Fla. Stat. § 608.432(1), a member's right to participate in the management of the LLC's affairs cannot be assigned unless the operating agreement provides for such an assignment and the other members of the LLC consent. This statute greatly limits the usefulness of the charging order as a creditor's remedy, because it leaves the decision to make distributions within the discretion of the members of the LLC, who have no duty to the judgment creditor and no interest in seeing the judgment get paid. A judgment creditor who wants to influence the decisions of the LLC can seek court appointment of a receiver (an extraordinary remedy that should rarely be granted), but otherwise the creditor has no control over the LLC.

After the Olmstead decision, however, the limitations created by § 608.432 no longer exist with respect to single member LLCs, as the charging order is not the only remedy available. When the judgment debtor is the sole member of an LLC, according to Olmstead, the judgment creditor may obtain an order under Chapter 56, Florida Statutes (the chapter generally covering Execution and Final Process), requiring the judgment debtor to surrender all title and interest in the LLC and to turn over the assets of the LLC to the judgment creditor. Thus, the affect of Olmstead is that a single member LLC provides no asset protection whatsoever for the member.

The Court's rationale for drawing a distinction between single member LLCs and multi-member LLCs is that the limitations placed on the assignability of the right to participate in the decisions of the LLC set forth in § 608.432 have no practical application to single member LLCs because there are no other members whose consent would be required in order to assign the right to participate. In other words, while a member's interest in a multi-member LLC is not freely transferable, a member's interest in a single member LLC is.

Obviously this holding should be of interest to judgment creditors and their attorneys. The dissenting opinion should also be of interest, because it discusses the remedies that may be available to judgment creditors in the context of both single member and multi-member LLCs- an order of insolvency of the judgment debtor, an order piercing the corporate veil of the LLC and attaching its property, and an order seeking judicial dissolution of the LLC. And the dissent does not necessarily disagree with the majority's holding that a single member LLC's property may be applied to a judgment against the member, it merely proscribes a procedure for reaching this property that does not require distinguishing between a single member and a multi-member LLC.

Remedies similar to those mentioned above are available to judgment creditors of partners in General Partnerships (Fla. Stat. § 620.8504) and Limited Partnerships (Fla. Stat. § 620.1703), although with respect to these entities, the charging order provides the exclusive remedy. And Chapter 56 sets forth the remedy available against a judgment debtor's shares of a corporation- levy and sale under execution pursuant to Fla. Stat. § 56.061. Jorge M. Abril, P.A.'s main practice areas include enforcing these and other creditor's remedies in state court and in Bankruptcy proceedings.

United States Bankruptcy Court Reclassifies Secured Claim as Unsecured Based Upon the Date the Creditor Filed the Judgment Lien Certificate Under Florida Law

A recent ruling by the United States Bankruptcy Court for the Southern District of Florida highlights the need for creditors and their counsel to perfect judgment lien interests under Florida law at the earliest possible opportunity. The case, In re Broward Kitchens & Baths, Inc., ___ B.R. ____ (Bankr. S. D. Fla. 2010) (decided May 21, 2009), is available on Westlaw at 2010 WL 2016533. It stands for the proposition that a judgment entered by a Florida court entitles the judgment creditor to a secured claim in a Bankruptcy proceeding only to the extent that the Judgment Lien Certificate has been filed in accordance with Fla. Stat. § 55.203.

The facts of the case are fairly straightforward, and in our experience commonplace. The creditor obtained a judgment in excess of $45,000 against the debtor in Florida state court on February 6, 2006. On May 19, 2006, the judgment creditor filed the Judgment Lien Certificate. Subsequently, in September 2006, the debtor filed its voluntary petition for Bankruptcy under Chapter 7. The judgment creditor then filed its claim with the Bankruptcy Court in December 2006. At some point during the Bankruptcy case, the Trustee brought an adversary proceeding under §§ 548 and 550 of the Bankruptcy Code, alleging that in December 2005 the debtor transferred a substantial portion of its assets to third parties, in exchange for payment in the amount of $215,000, in anticipation of and in order to avoid the impending judgment. These claims were eventually settled for a reduced amount. However, given that the property that would have secured the creditor's claim resided not in the hands of the debtor or of the estate, but in the hands of third parties (as a result of the fraudulent transfer), the Trustee objected to the nature of the creditor's claim. The Trustee's argument, which was adopted by the court, was that the judgment lien never attached to the fraudulently transferred property because the Judgment Lien Certificate was filed after the transfer.

The court reasoned that despite the well settled Florida law that legal title to property cannot pass to a fraudulent transferee of that property, a fraudulent transfer is not per se void, but merely voidable by the Trustee. In this case, the Trustee settled the adversary proceeding before there was an official determination that the transfer was in fact fraudulent, which means that the transfer was never actually voided. As such, the fraudulently transferred assets could not be considered part of the Bankruptcy estate. In fact, the only property comprising the Bankruptcy estate at the time the Judgment Lien Certificate was filed, which is when under Fla. Stat. § 55.202(2) the creditor became a secured creditor, was the remainder of the $215,000 paid in exchange for the fraudulent transfer; and since Fla. Stat. § 55.202(2) provides that a judgment lien does not attach to money, the creditor's claim must therefore be treated as an unsecured claim.

As a result, instead of being paid directly from the sale of collateral, the creditor's claim will be payable only to the extent funds remain available after the payment of all claims with a higher priority under § 507 of the Bankruptcy Code. Obviously this is not good for the creditor- there may in fact be no funds remaining to pay this claim. And while that outcome may have been unavoidable for this creditor, the lesson to be learned by creditors and attorneys from this case is that timely action must be taken after the entry of judgment in order to protect the creditor's interests.