Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

On June 24, 2010, I wrote a brief post announcing the Florida Supreme Court’s holding in the Olmstead v. Federal Trade Commission case, issued June 24, 2010,  wherein the Court held that judgment creditors are not limited to the charging lien as their only tool to attack a debtor’s interest in a single member LLC. Creditors have other remedies available to them including, without limitation, levy and sale proceedings under Florida Statute 56.061. The ruling, at a minimum, denies single member LLCs the same asset protection benefits as multi member LLCs.

The court’s ruling is based on two features of Florida’s LLC statutes. First, cites Section 608.433(1) to show why a charging lien is the appropriate collection tool against a debtor who owns a membership interest in a multi-member LLC. That statute states the basic rule absent contrary provisions in the LLC operating agreement that an assignee (creditors are assignees) of a membership interest may become a member only if all other members so consent. If a judgment creditor were to levy on a multimember interest the creditor could not take over the debtor’s interest and could exercise no management powers without the consent of the non-debtor members. This provision, the court said, is irrelevant in a single-member LLC because that member’s creditor takes the full title and powers of the debtor member upon levy without the consent of anyone other than the debtor.

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Exempting wages from garnishment under Florida’s head of household exemption is difficult for self-employed debtors. Business owners of sub-S corporations typically compensate themselves as employees and as owners. The owner pays himself salary as well as profit distributions. Self-employed business owners limit salary in order to minimize employment taxation, and instead, pay themselves mostly through profit distributions. This compensation arrangement raises issues when the self-employed owner tries to exempt his salary under Florida Statute 222.11 which exempts earnings paid to debtors who are head of household.

Many years ago, in the mid-90s, some bankruptcy courts denied the earnings exemption to self-employed business owners on the grounds that they did not pay themselves in a manner consistent with an employer-employee relationship. The issue just recently was addressed by a bankruptcy court in Florida’s middled district. (In re McDermott, 425 R.R. 848). At issue was an exemption of the debtor’s money in a self-described wage account funded with money received from the debtor’s wholly owned business.

The bankruptcy court denied this debtor an exemption for money in a bank account which the debtor had claimed as exempt wages. The court said the debtor’s compensation history and practice was inconsistent with that of an arms-length employee and employer relationship. The record showed significant variation in the timing and amount of the debtor’s claimed wages. The debtor substantially increased his wages in the months leading up to his bankruptcy in an apparent effort to exempt the money in a wage account. The pre-bankruptcy wages were almost twice the amount he received total in the prior two years. The debtor had complete control over distributions from his business and had no written employment agreement with his corporation.

The court held that, "A debtor who owns and runs his own business, without an arms-lenght employment agreement, and who has almost complete control and discretion over the timing and amount of his own compensation cannot rely on Section 222 (wage exemption statute) to exempt the funds."

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The Florida Supreme Court held today that Florida's LLC laws do not provide asset protection to a single-member limited liability company. The ruling was 3-2 with a strong and lengthly dissent.

The Court concluded,

"Section 608.433(4) does not displace the creditor's remedy available under Secion 56.061 with repsect to a debtor's ownership interest in a single-member LLC. Answering the rephrased certified question in the affirmative, we hold that a court may order a judgment debtor to surrender all right, title, and interest in the debtor's single-member LLC to satisfy an outstanding judgment"

I have not read the complete opinion, and I'll comment further after having done so.

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Many of my clients have used Nevis limited liability companies as part of an asset protection plan. One of my recent asset protection clients wanted to put several different rental homes in a newly formed Nevis LLC. The properties are currently titled in the name of one of several Florida limited liability companies. The client believes that the properties are better protected from creditors if they are owned by an LLC formed under Nevis law.

The client was concerned about Florida documentary stamps. Each property has a mortgage, and Florida requires doc stamps based on the mortgage balance when this client deeds the property deeds a property from the Florida LLC to a Nevis LLC.

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A client asks: " doesn’t the creditor have to find out if I’m head of household before they garnish my wages." In other words, is your creditor obligated to check out your exemptions before taking action to collect a judgment? The general answer is: "no."

Florida law does not require a judgment creditor to investigate and negate possible exemptions prior to making attempts to execute upon their judgment. In this clients case the creditor legally can serve a wage garnishment on the employer. The debtor has the burden of asserting head of household exemption and dissolving the garnishment in court. The same rule applies to garnishment of an exempt entireties account. The creditors writ of garnishment will freeze the account until the debtor takes action to dissolve the garnishment. In most cases, the debtor will need to pay an attorney if he wants the garnishment of an exempt asset removed quickly.

Florida law provides valuable exemptions; the law does not guarantee that the exemptions are self-executing or free.

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I did an interview with a reported from the Palm Beach Post about personal liability for deficiency judgments. The interview was part of an article published on Saturday, June 12, 2010, about debt collection firms which buy claims against homeowner’s who defaulted on home mortgages.

The article features a New York based company called Deficiency Judgment Recovery Network ("DJRN"). DJRN that is buying pools of deficiency claims from mortgage lenders for pennies on the dollar. The article states that this collection company is going after people who could afford their mortgage but who stopped payments because their property was upside down in value: the so-called strategic defaults.

I have not heard from any of my clients that they had been pursued by a third-party collection firm to pay a claim related to their strategic mortgage default. I have not heard from any other attorney that DJRN has sued or threatened to sue their clients. The article says that entrepreneurs will start buying up mortgage delinquencies and that "it’s going to be a blood bath." That’s possible, but it’s also possible that these collection speculators may find that their rate of collection does not justify going to court to prove the amount of a deficiency claim.

Anybody with access to a computer keyboard or to a newspaper reporter can publish their opinions about deficiency collection, but no one knows for certain what other people will do in the future. The fact that I have not seen large amounts of deficiency collection by third-party investors leads me to believe that investment in deficiency claims may not be profitable.

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A reader asked me about using a long term care insurance product as an asset protection tool. The reader says that an insurance agent told him about long term care insurance that can be paid up front in a single premium payment. The insured makes a lump sum payment to the insurance company in return for long term care policy for the rest of his life. The age and health of the insured determines the amount of the lump sum payment.

Built up cash value in life insurance policies is exempt from creditors and bankruptcy trustees under Florida statutes. The statutes do not exempt cash value of any other insurance. Other insurance, such as health insurance and property insurance, if paid up to date is not an asset subject to creditors because no money is owed to the debtor prior to the event covered by the insurance (medical expense or property loss). Money spent to buy expensive insurance generally is not a fraudulent conversion because most people buy insurance for reasons other than asset protection. .

I have never seen a fraudulent transfer case dealing with the debtor’s single premium long term care insurance. In my opinion, the answer depends on whether the debtor/insured retains any right to cancel the policy and receive a refund. If the single premium is irrevocable with no right to cancel if the debtor changes his mind then I think the debtor has protected the money from his creditors. On the other hand, if the debtor is entitled to a refund or to borrow unused future premiums then I thank a creditor could levy upon the money. The creditor cannot attach any more than the creditor can get for himself.

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I’ll address two similar client questions in a single blog post. One caller told me he had lost his job and that credit cards had already sued him. He cannot afford an attorney to defend the lawsuits or to negotiate on his behalf with the credit card companies. He is concerned that after they get a judgment the credit card companies will garnish his unemployment check. This person is head of household.

A second person sent me an email recently because he was concerned a judgment creditor could garnish alimony payments from her ex-husband. She said she needs all of the alimony to survive financially including support of her child.

The Florida statutes exempt from garnishment earned income including wages, salary, and commissions. It appears that the legislature is protecting from creditors money the debtor earns from his or her job. Unemployment compensation is paid for "not working" and is not earnings from employment. Alimony is taxable income, but it too is not earnings from employment. Does Florida’s wage garnishment protection exempt unemployment compensation and alimony. The answer is: "no, but its ok."

Unemployment compensation and alimony are not protected from creditors by virtue of Florida’s statutory protection against garnishment of earnings of the head of household debtors. However, unemployment compensation and alimony is exempt from garnishment. There is a separate Florida statute which exempts all unemployment compensation from creditor claims, and Florida appellate courts have protected alimony from garnishment as a matter of good public policy.

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Debtors who are head of Florida households sometimes have writs of garnishments served on their employers, and Florida debtors that maintain exempt tenants by entireties financial accounts sometimes suffer writs of garnishment against their exempt accounts. These debtors have to explain their exemption to the judgment creditor, or they have to hire an attorney to file a motion to dissolve the writ based on the applicable exemption. Such debtors often ask me whether their judgment creditor prior to serving a garnishment is required to investigate whether the wages or accounts are exempt from garnishment and whether the creditor can serve a garnishment against an asset that could be exempt from garnishment . These debtors think it unfair for a creditor to make the debtors go to court to assert their exemption while the creditors surprise garnishment has frozen their accounts.

A judgment creditor is not required to check you your possible exemptions prior to serving a writ of garnishment on your employer or your financial institution. Prior to 1967, the predecessor to Florida’s garnishment statute required a judgment creditor to affirmatively negate the garnishment-defendant's ability to claim an exemption; however, the present version no longer requires any affirmative action to check the possible exemptions of a garnishment defendant before pursuing a writ of garnishment.

If you or your attorney notify the judgment creditor in advance that your wages or accounts are exempt and the creditor serves a garnishment thereafter which you subsequently dissolve, you may be able to sue your judgment creditor for the tort of wrongful garnishment.

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There is much discussion in local and national media about strategic mortgage defaults. Strategic default occurs when a homeowner decides to walk away from an upside down mortgage when the homeowner has the income to pay the mortgage payments. The homeowner decides that it is not in his best financial interest to continue to pay a mortgage on a home with no equity.

Locally, Orlando Sentinel report Beth Kassab has written several articles recently on the topic. She states that to date most banks have not pursued personal deficiency liability on first mortgage foreclosures, but she then quotes an attorney who claims that lenders will increasingly pursue or assign deficiency claims in the future. I have heard many attorney forecast that deficiency actions will become the norm in future years as either banks have more time as foreclosures decrease or as borrowers recover financially as the economy improves.

The national media has also recently run segments on strategic defaults. These are two examples from MSNBC and Fox News, respectively. Most of these reports emphasize the risk of rich people walking away from mortgages and warn against future deficiency judgments.

Maybe some other attorneys or reporters say they know what banks will do next year, but I admit I do not know for sure what actions banks will consider next year, or the year after, to be in their best interest. I cannot predict the future of deficiency claims.

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