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].

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.

Update: Florida Supreme Court Answers Certified Question re: Homestead Owner's Ability to Claim the Wildcard Personal Property Exemption in Bankruptcy

Earlier today, we published an article composed last week regarding the ability of a bankruptcy debtor who owns a homestead but does not claim a homestead exemption under the Florida Constitution to claim the enhanced personal property exemption set forth in Fla. Stat. § 222.25. In the article, we referenced a pending case in the Florida Supreme Court regarding the meaning of 'receives the benefits' for the purposes of the personal property exemption statute. This morning, we received news that that case has been decided by the Florida Supreme Court. A link to a pdf of the opinion, Osborne v. Dumoulin, --- So.3d ----, 2011 WL 320986 (Fla. 2011), is available here.

The Court decided that, "if under the facts of the case the article X homestead exemption does not otherwise present an obstacle to the bankruptcy trustee's administration of the estate, then the debtor in bankruptcy is not receiving the benefits of the homestead exemption and is eligible to claim the statutory personal property exemption of section 222.25(4)."

This ruling does not appear to be limited by its wording to the specific facts set forth in Dumoulin, where the debtor chose to surrender his homestead in the bankruptcy, but applies more broadly to any bankruptcy case in which the trustee is not prevented by the homestead exemption from administering the property as part of the estate, including the Iuliano case (pdf), discussed in our previous blog post, where the debtor actually stated an intent to keep the property.

The Supreme Court rephrased the question certified by the Eleventh Circuit in In re Dumoulin, 326 Fed. Appx. 498 (11th Cir. 2009) as follows:

"Whether for the purpose of the statutory personal property exemption in section 222.25(4), a debtor in bankruptcy receives the benefits of Florida's article X, section 4, constitutional homestead exemption where the debtor owns homestead property but does not claim the homestead exemption in bankruptcy and the trustee's administration of the property is not otherwise impeded by the existence of the homestead exemption."

The court answered the rephrased question in the negative.

The Availability of Florida's Wildcard Personal Property Exemption to Debtors Owning Homestead Property and Not Claiming a Homestead Exemption in Bankruptcy

Recently, a Florida Bankruptcy Court discussed whether a debtor in bankruptcy who owns a home worth less than the balance on his mortgage may claim the wildcard personal property exemption found in Fla. Stat. § 222.25 and still keep his homestead in his bankruptcy case. In re Iuliano, 2010 WL 5452726 (Bkrtcy. M.D. Fla. Dec 28, 2010) (pdf).

The facts of the case are unfortunately very common in 2011. The debtor purchased his primary residence several years ago, when the housing market was booming, and established the property as his homestead under Art. X, s. 4(a)(1) of the Florida Constitution, which exempts from forced sale and from judgment lien the primary residence of an individual and his family, and therefore excludes the residence from property of the individual's bankruptcy estate. The debtor mortgaged the property up to the then-current value, but since then, the property value has decreased at a rate much higher than the rate at which the mortgage is being paid down. As a result, the property is 'underwater'- the balance on the mortgage is substantially higher than the current value of the property, and the debtor therefore has no equity in the property.

At some point, the debtor ran into financial difficulties and filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, seeking a discharge of his debt. In completing his bankruptcy schedules, the debtor did not claim the homestead exemption. If he had, the bankruptcy trustee could make no claim on the debtor's residence under the Florida Constitution. However, if the debtor claimed the homestead exemption on real property, the debtor could only exempt his personal property up to $1,000 in value, under Art. X, s. 4(a)(2) of the Florida Constitution. Choosing not to claim the homestead allows the debtor to exempt personal property up to $4,000 in value, according to Fla. Stat. § 222.25(4) (the "wildcard exemption"), which exempts:

"[a] debtor’s interest in personal property, not to exceed $4,000, if the debtor does not claim or receive the benefits of a homestead exemption under s. 4, Art. X of the State Constitution."

The bankruptcy trustee objected to the debtor's wildcard exemption claim and moved in the alternative for an order directing the debtor to turnover his homestead property, arguing that the debtor can't have his cake and eat it too- he is not entitled to claim the wildcard property exemption and keep his homestead. The debtor countered that he is not "claim[ing] or receiv[ing] the benefits of" the homestead exemption, inasmuch as there is no equity in his property for him to exempt, and he is therefore entitled to the wildcard exemption.

Some time ago, in In re Dumoulin, 326 Fed. Appx. 498 (11th Cir. 2009), the Eleventh Circuit Court of Appeals certified a similar question to the Florida Supreme Court:

"Whether a debtor who elects not to claim a homestead exemption and indicates an intent to surrender the property is entitled to the additional exemptions for personal property under Fla. Stat. § 222.25(4)."

The issue in that case is similar, although not identical. In Dumoulin, the debtor indicated his intent to surrender his residence; in this case, he wants to keep it. The Florida Supreme court has not issued an opinion in Dumoulin, although oral argument has been concluded, and an opinion is therefore expected any time. The docket sheet can be accessed on the Florida Supreme Court's website (Case No. SC09-751), and the briefs, including an Amicus brief filed by the Business Law Section of the Florida Bar arguing that the debtor should be allowed the wildcard exemption under the facts of Dumoulin, can be accessed here.

A resolution of the issue turns on the meaning of 'receives the benefits' in the statute. The trustee argues that this phrase should be construed broadly to mean that anyone who owns a homestead and claims the homestead exemption for tax purposes and for asset protection purposes outside of bankruptcy, or otherwise treats the property as a homestead, has received the benefits of the homestead exemption and is therefore not entitled to the wildcard exemption, without regard to the debtor's intentions in the bankruptcy case. The debtor argues for a narrow construction of the phrase to mean that inasmuch as the debtor does not specifically schedule the property as exempt under the Florida Constitution in his bankruptcy case, the trustee may take it, and therefore the debtor is not receiving the benefits of the homestead exemption. There is a split among Florida bankruptcy courts on this issue, with substantial authority for both arguments. See In re Abbott, 408 B.R. 903 (Bkrtcy. S.D. Fla. 2009) for a brief survey of cases.

The Iuliano court refused to wait for the Florida Supreme Court, noting that the resolution of the certified question in Dumoulin would not be dispositive of the issue in Iuliano, inasmuch as the court's finding that the debtor can claim the wildcard exemption in a case where he is surrendering his homestead would not apply to a debtor who was keeping his homestead. Additionally, the Iuliano court found that the bankruptcy courts could not sit around and wait indefinitely for the Florida Supreme court, suggesting that an opinion in Dumoulin is overdue.

The Court chose to construe the statute narrowly, allowing the debtor to claim the wildcard exemption despite his stated intention to keep his residence. The Court reasoned that in general, exemptions are to be construed liberally in favor of the party claiming the exemption, and that where there is no equity in a property to exempt, the debtor does not receive the benefits of the homestead exemption. Therefore, the trustee's objection to the debtor's wildcard exemption was overruled. Incidentally, the court held that the debtor's declining to claim the homestead exemption subjected the property to the possibility of administration by the trustee as part of the estate, but that the trustee cannot liquidate property when doing so would have no benefit to the estate, and therefore, since the debtor has no equity in the property that would accrue to the estate through a sale of the property, the trustee must abandon the property. The court did give the trustee time to find a buyer for the property that would result in satisfaction of the mortgage and additional proceeds to the estate, but not surprisingly, no such buyer could be found.

Obviously this case has broad implications for debtors, as the circumstances here are all too common. Readers can expect to see more discussion of the issue on this blog to the extent this case, or one similar, is appealed. Furthermore, we await the decision of the Florida Supreme Court in Dumoulin, and will report on it when it is delivered.

The Availability of Florida's Tenancy by the Entireties Exemption to Nonresidents for Property Located in Florida

Recently, a client who resides in another state inquired into its ability to claim a tenancy by the entireties exemption for property owned jointly by the client and the client's spouse, in order to protect the property from the claim of a creditor of the client individually. The research revealed a paucity of caselaw resolving the question to my satisfaction, thus making for an interesting topic for this blog.  A brief discussion of the questions follows.

Nature of the Entireties Exemption

Property held as a tenancy by the entireties possesses six characteristics: (1) unity of possession (joint ownership and control); (2) unity of interest (the interests in the property must be identical); (3) unity of title (the interests must have originated in the same instrument); (4) unity of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must have been married at the time the property became titled in their joint names). Beal Bank, SSB v. Almand & Assoc., 780 So. 2d 45, 53 (Fla. 2001). When a married couple holds property as tenants by the entireties, each spouse is said to hold it “per tout,” meaning that each spouse holds the “whole or the entirety, and not a share, moiety, or divisible part.” Bailey v. Smith, 103 So. 833, 834 (Fla. 1925). Thus, property held by husband and wife as tenants by the entireties belongs to neither spouse individually, but each spouse is seized of the whole. Therefore, when property is held as a tenancy by the entireties, only the creditors of both the husband and the wife, jointly, may attach the property; it is not divisible on behalf of one spouse alone, and therefore it cannot be reached to satisfy the obligation of only one spouse. See Winters v. Parks, 91 So. 2d 649, 651 (Fla. 1956).

The tenancy by the entireties form of ownership exists with respect to real property and personal property. With respect to real property, “[a] conveyance to spouses as husband and wife creates an estate by the entirety in the absence of express language showing a contrary intent.” In re Estate of Suggs, 405 So. 2d 1360, 1361 (Fla. 5th DCA 1981). With respect to a bank account, “as between the debtor and a third-party creditor (other than the financial institution into which the deposits have been made), if the signature card of the account does not expressly disclaim the tenancy by the entireties form of ownership, a presumption arises that a bank account titled in the names of both spouses is held as a tenancy by the entireties as long as the account is established by husband and wife in accordance with the unities of possession, interest, title, and time and with right of survivorship.” Beal Bank, SSB, 780 So. 2d at 54. As such, when these elements are satisfied, the burden of proof is on the creditor to prove by a preponderance of the evidence that a tenancy by the entireties does not exist. Id.

All proceeds from the sale or rental of entireties property are also entireties property. Passalino v. Protective Group Sec., Inc., 886 So. 2d 295, 297 (Fla. 4th DCA 2004)

Application of the Entireties Exemption to Nonresidents

The tenancy by the entireties exemption is a creature of common law, not set forth in the Florida Constitution or in the Florida Statutes, and therefore not subject to their limitation to Florida residents. Beal Bank, SSB, 780 So. 2d at 53; In re Cauley, 374 B.R. 311, 316 (Bankr. M.D. Fla. 2007). The Cauley court reasoned:

“[The Florida Statutes do] not apply to tenancy by the entirety property and do[] not therefore preclude a non-resident of Florida from claiming property located in Florida as exempt as tenancy by the entirety. Additionally, the Court has not found any authority to support the proposition that an individual, claiming Florida real property exempt as tenancy by the entireties must be a resident of Florida. The Court finds that no such requirement exists.”

Accord Republic Credit Corp. I v. Upshaw, 10 So. 3d 1103 (Fla. 4th DCA 2009) (finding that judgment debtors could not claim a tenancy by the entireties exemption in Florida litigation for proceeds from the sale of real property located in California, because California law does not recognize such an exemption). This reasoning is consistent with the general principal that with respect to real property, the situs of the property dictates the laws that are applicable to it. See Connor v. Elliott, 85 So. 164 (Fla. 1920) (“So far as real estate or immovable property is concerned, the laws of the state where it is situated furnish the rules which govern its descent, alienation, and transfer, the construction, validity, and effect of conveyances thereof, and the capacity of the parties to such contracts or conveyances, as well as their rights under the same”).

Conversely, with respect to personal property, the domicile of the owners of the property dictates the laws that are applicable to it. See In re Estate of Siegel, 350 So.2d 89 (Fla. 4th DCA 1977). That means that if the proceeds from the sale of entireties property in Florida are removed to a jurisdiction that does not recognize the tenancy by the entireties form of ownership, the proceeds will lose their entireties protection. But it also means that they will not be subject to garnishment in Florida. See APR Energy, LLC v. Pakistan Power Resources, LLC, 2009 WL 425975 (M. D. Fla. Feb. 20, 2009); Skulas v. Loiselle, No. 09-60096-CIV, 2010 WL 1790439 (S.D. Fla. April 9, 2010).

Conclusion

Based upon the foregoing authority, it appears that Florida real property owned by a married couple as tenants by the entireties is not subject to execution to satisfy a debt owed by one spouse, no matter where the couple resides. Furthermore, any proceeds from the sale of said property will likely be protected by the tenancy by the entireties as long as the proceeds are located in Florida, and unreachable through a Florida garnishment once they are removed.