5th DCA: Does a trustee's breach of fiduciary duty = "fraud" for equitable lien on homestead purposes?
Hirchert Family Trust v. Hirchert, --- So.3d ----, 2011 WL 2415787 (Fla. 5 Dist. Jun 17, 2011)
The one crack in the almost impenetrable shield protecting Florida homestead property from creditors is the amorphous "equitable lien" doctrine. In In re Gosman, 2007 WL 707365 (Bankr.S.D.Fla. Mar 05, 2007), the bankruptcy court articulated the following two-part test for determining "the very narrow circumstances warranting the imposition of an equitable lien" on homestead property under Florida law:
- that the money was obtained fraudulently or through egregious conduct, and
- that the money obtained was utilized to invest in, purchase or improve the targeted homestead property.
Does a trustee's breach of fiduciary duty = "fraud" for equitable lien purposes? YES!
What's interesting about the linked-to case above, especially for trusts and estates litigators, is that the 5th DCA held that a trustee's breach of fiduciary duty is a form of "constructive fraud" warranting imposition of an equitable lien on the trustee's Florida homestead property if, as happened in this case, the money obtained as a result of the breach was used to invest in, purchase or improve the targeted homestead property.
Contrary to the trial court's conclusion, we believe that a breach of fiduciary duty is “constructive fraud” and thus may form the basis to apply the exception to the homestead protection. As this court explained in First Union National Bank of Florida v. Whitener, 715 So.2d 979, 982 (Fla. 5th DCA 1998):
Constructive fraud is the term typically applied where a duty under a confidential or fiduciary relationship has been abused, or where an unconscionable advantage has been taken. Constructive fraud may be based on misrepresentation or concealment, or the fraud may consist of taking an improper advantage of the fiduciary relationship at the expense of the confiding party.
In Allie v. Ionata, 466 So.2d 1108, 1110 (Fla. 5th DCA 1985), this court further explained:
Florida courts have recognized that constructive fraud may exist independently of an intent to defraud. It is a term which is applied to a great variety of transactions that equity regards as wrongful, to which it attributes the same or similar effects of those that follow from actual fraud and for which it gives the same or similar relief.
So what can you do with an equitable lien on homestead property? THINK FORCED SALE
Once you're granted an equitable lien on homestead property, your judgment or "debt" is now secured to the extent of the value of the homestead property. This debt can be satisfied just like any other secured debt, subject to whatever equitable conditions your trial judge may impose. For example, you could obtain a court order compelling a sale of the targeted homestead property by a court-appointed receiver to satisfy the debt owed to you. That's what the plaintiff/successor trustee in the linked-to case did.
[T]he [trial] court entered a postjudgment order (“Postjudgment Order”) that is in essence a mandatory injunction requiring Appellee to convey the Kissimmee Property to a court-appointed Receiver, who was instructed to sell the property.
By the way, this type of enforcement order isn't an outlier. It's exactly the type of order you'd expect to get if your judge follows the approach accepted in most jurisdictions, as reflected in section 56 of Restatement (Third) of Restitution & Unjust Enrichment, comment "c":
Enforcement of equitable lien. An equitable lien has the ordinary characteristics of a lien for security, the obligation secured being the defendant's liability for unjust enrichment in the amount determined by the court. The lien is accordingly subject to the defendant's right of redemption: the lien may be discharged, and the property freed from the encumbrance, if the defendant pays the claimant the amount of the underlying liability. If the judgment is not satisfied, the claimant/lienholder can obtain a judicial sale of the property subject to lien, the proceeds being applied to the satisfaction of the defendant's obligation to the claimant. If the proceeds are inadequate for this purpose, the claimant has an unsecured claim against the defendant for the deficiency.
. . .
Restitution via equitable lien is a flexible and adaptable remedy, because the court that imposes the lien can establish whatever conditions to its enforcement (or “foreclosure”) may be appropriate in the circumstances of the case. In particular, an equitable lien that may be foreclosed only on stated conditions can be used to shield an innocent recipient from the prejudicial effect of personal liability in various circumstances.