Rogers Towers, PA welcomes readers to its new Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, PA and we look forward to your comments in response to our blog. Again, welcome to the Florida Banking Law Blog!
Florida’s homestead exemption protects a married couple’s primary residence from forced sale to satisfy a judgment lien, but what happens when spouses retain two properties as their individual primary residences, claiming homestead protection on each? The answer comes down to whether the spouses are “legitimately” separated, and creditors should take note of a recent decision out of the 4th DCA addressing Florida’s homestead tax exemption, Brklacic v. Parrish, that sheds light on what factors a court may consider in analyzing a couple’s separation and dual homestead protection claim.
When would a couple claim legitimate separation?
The issue arises in the context of both of Florida’s homestead provisions contained in Articles VII and X of the Florida Constitution. Article VII allows residents to claim a tax exemption on their primary residence, while Article X protects an individual’s or family’s primary residence from forced sale. Courts liberally construe Article X to maximize residents’ security in times of financial misfortune, supporting a public policy that promotes homeowner stability. When a couple marries, it is presumed the pair will live in a single household, enjoying a single homestead exemption on their mutual primary residence. But where a couple maintains two residences, each spouse residing permanently in one residence without the other spouse present, courts find that so long as the separation is “legitimate,” extending the homestead protections under Articles VII and X to both residences may be permitted as a matter of public policy. The court in Brklacic refined this concept in the context of Florida’s homestead tax exemption, and the court’s analysis of when spouses constitute “separate family units” eligible for individual homestead tax exemptions may be applied in the future to couples seeking protection from the forced sale of their claimed homesteads.
What is a “separate family unit,” and when is separation “legitimate”?
There is no statutory or regulatory guidance as to the definition of “separate family unit” or “legitimate separation.” The terms are most often invoked when a couple, although married on the books, is for all practical purposes estranged, living separately and intending to remain separated. The court in Brklacic attempted to outline a “separate family unit” checklist, explaining that to qualify as a “separate family unit,” a married couple must demonstrate that: each spouse maintains a separate permanent residence; neither spouse supports the other in some financial or emotional way; and the spouses do not present themselves as a married couple. The court drew a parallel to an earlier decision, Law v. Law, in which a man successfully argued that he and his spouse could both enjoy Article X homestead protection on their individual homes in the face of a creditor’s attempted forced sale. The spouses in Law succeeded because the court found they legitimately lived apart, evincing a bonafide separation. Albeit focusing on a different homestead provision in Brklacic, by further explaining the concept of legitimate separation discussed in Law, the court may have set the standard future courts will consider when addressing either homestead exemption in light of spouses claiming “separate family unit” status or legitimate separation.
What impact should creditors expect?
If a creditor runs into a married judgment debtor claiming homestead protection under “separate family unit” status or legitimate separation, the creditor can expect a highly fact-dependent determination by the court. The factors discussed in Brklacic will likely be construed narrowly moving forward, as the 4th DCA made clear that a couple would not qualify as a “separate family unit” if the couple merely spent a large amount of time in separate dwellings. The court emphasized that separation, meaning estrangement, represents the determining factor in the analysis. The 4th DCA envisioned numerous unforeseen consequences associated with the lack of a firm constitutional or statutory definition of “family unit,” anticipating legislative scrutiny in the future. Although the term “family unit” appears only in the tax exemption homestead provision, because courts move back and forth between both homestead provisions in determining when the exemptions apply, any legislative attention to the definition of “family unit” will potentially impact the Article X legitimate separation analysis.
In April of 2010, the Office of the Comptroller of the Currency closed First National Bank Myrtle Beach, S.C., a wholly-owned subsidiary of Beach First National Bancshares, a bank holding company, and named the FDIC as its receiver. As a consequence of the bank’s failure, Bancshares filed for Chapter 7 bankruptcy. Shortly thereafter, the Trustee filed an adversary proceeding asserting a derivative claim for breach of fiduciary duty and negligence against the officers and directors of the subsidiary bank for injury allegedly caused to the subsidiary bank.
As some readers may know, a bankruptcy Trustee succeeds to all rights of the debtor, including the right to assert any cause of action belonging to the debtor. Absent statutory modification, this power includes the right to assert the derivative claims of Bancshares (as the subsidiary bank’s sole shareholder) against the directors in their capacity as officers and directors of the subsidiary bank. However, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), the FDIC, when appointed receiver of a bank, succeeds to all rights, titles, powers and privileges of the insured depository institution, and of any stockholder of such institution with respect to such institution and the assets of the institution.
In light of FIRREA, the directors of Bancshares moved to dismiss the Trustee’s adversary proceeding, arguing in part that the Trustee lacked standing to pursue the derivative actions on behalf of Bancshares because FIRREA conveyed that standing to the FDIC. The Fourth Circuit agreed, finding that the FDIC, not the Trustee, succeeded to all of Bancshares’ derivative claims against the officers and directors of the subsidiary bank. The court concluded, however, that the Trustee could bring claims for direct harm to the debtor, Bancshares.
In an analogous case in the Eleventh Circuit, the Bankruptcy Trustee argued that the FDIC had essentially conferred standing on the Trustee to pursue derivative actions by declining to pursue those claims. The court was not swayed, holding instead that FIRREA provides no authority by which the FDIC may transfer its exclusive statutory rights to another party.
Therefore, both the Fourth and Eleventh Circuits held that a Bankruptcy Trustee has standing to bring claims for direct harm to a bank holding company debtor, but not derivative claims that the holding company would have for injury to its subsidiaries placed in receivership with the FDIC.
To avoid foreclosure, a borrower might agree to execute a deed in lieu of foreclosure to be held in escrow. In these circumstances, the borrower would execute a deed-in-lieu of foreclosure to the mortgaged property in favor of the lender. The deed would be held by the lender or other third party in escrow for the remainder of the loan term or some other specified time period decided between the parties. If the borrower defaults on payments or otherwise breaches the terms of the loan with the lender, the lender could then take the deed from escrow, record the deed, and effectuate a transfer of the property to the lender without foreclosing on the property or negotiating other workout possibilities with the borrower.
This practice was once considered an efficient alternative to a costly and time-consuming foreclosure. However, challenges in the courts to the validity of these conveyances and the resistance of title companies to insure these transactions over the past few years generally preclude these conveyances from continuing to be viable workout options.
Courts in a number of states have determined that a conveyance of a deed in lieu out of escrow is, in essence, an equitable mortgage because it acts as security for the loan and so should be foreclosed in the same manner as any mortgage. In these jurisdictions, the rulings significantly limit the ability of a lender to utilize a deed in lieu held in escrow as an efficient alternative to foreclosure.
A few years ago a number of national title companies further determined that they would not insure deeds in lieu delivered to the lender out of escrow. Title companies were concerned over the rising litigation involving these transactions brought by borrowers alleging that the bank prematurely released the deed. Title agents for these companies are directed not to rely on any deed in lieu delivered out of escrow and to obtain a new deed-in-lieu of foreclosure before insuring title.
Given the high potential for litigation surrounding the practice of holding deeds in lieu in escrow, the reluctance of title companies to insure these deeds and, in some jurisdictions, the questionable validity of these conveyances, it is recommended that lenders pursue other foreclosure alternatives instead of holding a deed in lieu in escrow. A deed in lieu (not held in escrow), loan modification, or another loan workout option should prove to be more viable options.