Flinn v. Doty, — So.3d —-, 2017 WL 923508 (Fla. 4th DCA March 8, 2017)

If you’re trying to collect on a judgment by going after homestead property, one of the few theories of recovery available to you is Florida’s “equitable lien” doctrine, which allows you to foreclose on the debtor’s homestead property if:

  1. the money you’re chasing was obtained fraudulently or through egregious conduct, and
  2. those same dollars were used to invest in, purchase or improve the targeted homestead property (see here, here, here).

But is that the only equitable arrow we have in our homestead-busting quiver? NO.

Florida’s “equitable subrogation” doctrine:

Another line of attack to consider when targeting homestead property is Florida’s “equitable subrogation” doctrine, which is triggered when a debtor’s “unjustly enriched” by wrongfully taking your client’s money (or property) and using those same dollars to pay off a pre-existing mortgage on the targeted homestead property. A key aspect of this homestead-piercing theory is that it doesn’t require a finding of egregious conduct by the defendant, all you need to prove is unjust enrichment. That’s a big deal.

But you won’t understand this strategy if you don’t have a clear understanding of its operative terms, which are thoughtfully explained in Piercing The Homestead Veil, a must-read for any litigator trying to make sense of the 4th DCA’s Flinn opinion and its progenitor, Palm Beach Savings & Loan Ass’n v. Fishbein, 619 So.2d 267, 270 (Fla. 1993). Here’s an excerpt:

Subrogation means to put one party in the shoes of another, so equitable subrogation is ‘subrogation that arises by operation of law or by implication in equity to prevent fraud or injustice.’ In real property litigation, it is often used as a remedy that puts a wronged party in the shoes of a pre-existing lienholder. In a sense, this kind of subrogation is not the imposition of a new lien, but merely a shifting of power to enforce a lien from one party to another. . . . Unjust enrichment is a claim that the plaintiff conferred a benefit on the defendant that was knowingly accepted or retained by the defendant, and it would be unjust for the defendant to retain the benefit without paying the plaintiff the fair value of it.”

According to the Piercing authors, equitable subrogation’s at the heart of the Flinn case, but you wouldn’t know it from reading the 4th DCA’s opinion.

Case Study: Is “unjust enrichment” enough to pierce Florida’s homestead shield? YES

This case involves a family dispute over several properties deeded by a father to one of his children (a daughter). Daughter sold the properties and used $206,000 of the sales proceeds to pay off a pre-existing mortgage on her home and kept the remaining $185,000 for herself. The property transfers were challenged by her siblings, who claimed that dad lacked the capacity to execute the deeds and that he’d been the victim of daughter’s undue influence. The trial court ruled in favor of the challengers on the lack-of-capacity count, but not the undue-influence count.

The trial court then imposed two equitable liens on the defendant’s homestead property, one for return of the $206,000 she used to pay off her mortgage, and the second for $185,000 to collect on the remaining sales-proceeds funds. There was no finding of egregious conduct.

Defendant cried foul, arguing her homestead property is creditor protected and in the absence of an egregious-conduct finding, the equitable-lien exception doesn’t apply. On appeal the 4th DCA said YES to the first lien and NO to the second. Here’s why:

Applying [Palm Beach Savings & Loan Ass’n v. Fishbein, 619 So.2d 267, 270 (Fla. 1993)] to this case, the court did not err in foreclosing on the equitable lien of $206,000 because it was imposed to prevent unjust enrichment by appellant, who used the proceeds of the sale of her parents’ property to pay off her pre-existing mortgage on her home. While appellant contends that there still must be a showing of egregious conduct on her part, Fishbein clearly rejects such a finding. Unjust enrichment is sufficient in these circumstances to permit an equitable lien against a homestead.

The court did err, however, in including the $185,000 lien as part of the foreclosure proceeding. First, the complaint did not seek to impose that lien against appellant’s home. It only alleged that it was entitled to enforce the $206,000 lien. Second, the $185,000 lien did not satisfy any pre-existing obligations on the home. In fact, it appears to be unrelated to the home. Therefore, it could not be imposed under Fishbein.

Piercing The Homestead Veil, by Michael V. Hargett and T. Bradford Petrino:

You can’t really “see” something if you don’t have a word to describe what it is you’re looking at. For example, the ancient Greeks couldn’t see the color blue because they didn’t have a word for that color (see here). Same goes for lawyers, we can’t really understand (“see”) what our appellate courts are doing if they (and we) don’t use the right operative terms to describe the legal remedies they’re actually applying (vs. what they “say” they’re doing).

And according to the authors of Piercing The Homestead Veil, that’s exactly what’s been going on with Florida’s “equitable subrogation” doctrine as applied to homestead property, starting with the Florida supreme court’s 1993 opinion in Fishbein, and continuing 24 years later with the 4th DCA’s Flinn opinion (which is based entirely on Fishbein). In both cases the appellate courts described what they were doing as imposing equitable liens, but a careful examination of the facts of each case and the remedies actually granted by each respective court reveals that what they were in fact doing was granting equitable subrogation. Here’s how the Piercing authors deconstruct Fishbein:

“[O]n appeal to the supreme court, Palm Beach S&L didn’t argue that it was entitled to a constitutional exception, it argued because its loan proceeds were used to satisfy the prior liens, it stands in the shoes of the prior lienors under the doctrine of equitable subrogation.’ And so the Supreme Court reversed the Fourth DCA and allowed the equitable lien, but it never expressly declared that subrogation is how it got there—instead the Court based its conclusion on three points which we must piece together on our own: $930,000 of the $1.2 million mortgage was used directly to pay o liens on the homestead, Palm Beach S&L was entitled to a $930,000 equitable lien on the homestead—but not more than the amount used to benefit the homestead—and ‘Mrs. Fishbein stands in no worse position than she stood in before the execution of the [fraudulent] mortgage . . . .’

This remedy was subrogation in all but name. We conclude that Fishbein supports equitable subrogation as a remedy that pierces—or perhaps more aptly, bypasses—the homestead protection without a requirement that the party claiming the homestead exemption committed fraud or egregious conduct. Of course, the same essential conditions in Fishbein must be met: circumstances that support an equitable remedy in the first place, such as unjust enrichment, and direct application of wrongfully acquired funds to satisfy a pre- existing valid lien against the homestead.”

And here’s how the Piercing authors deconstruct the 4th DCA’s Flinn opinion as viewed through the equitable-subrogation prism:

“The court stated that it granted an equitable lien. However, the facts and remedy suggest that the doctrine of equitable subrogation was employed by the court because there was a prior lien on Ms. Flinn’s homestead, and the court limited the remedy to the amount of the prior lien. . . . Therefore, Flinn v. Doty was decided under the doctrine of equitable subrogation and resulted in the Doty estate stepping into the shoes of Flinn’s prior lienholder. The resulting $206,000 lien fell within a voluntary exception to the homestead exemption and passed constitutional muster.”

So what’s the takeaway?

We can’t do our jobs as attorneys if we can’t predict with some degree of certainty what a court’s likely to do when faced with a creditor claim involving homestead property. And it’s impossible to do that if you can’t fit the various strands of Florida’s large and unruly body of homestead law into coherent frameworks that can be logically applied to particular categories of facts. Step one in that process is making sure you’re using the right operative terms to understand the remedies courts are willing to apply in the homestead context. Fortunately, that’s exactly what the Piercing authors have done for us in their insightful and scholarly analysis of 4th DCA’s Flinn opinion.  Great stuff, a worthy addition to any litigator’s toolbox.