Appeals Court Upholds Discharge Denial For Homestead Purchase and Improvement Shortly Before Bankruptcy

Purchasing a homestead in Florida shortly prior to filing bankruptcy could be deemed a fraudulent transfer and lead to a denial of your bankruptcy discharge. Purchasing or improving a Florida homestead and then filing bankruptcy soon thereafter is, by itself, not grounds for discharge denial or sanction. Only where the debtor evidences fraudulent intent in the transaction may the homestead purchase have bad consequences in an ensuing bankruptcy. The importance of demonstrable fraudulent intent separate from the homestead purchase just prior to bankruptcy is illustrated in a recent decision by the Eleventh Circuit Court of Appeals in a Florida bankruptcy case.

The facts in the bankruptcy of Bruce Jennings are summarized as follows. (Bkr Case No. 03-4926-JAF). A California lawsuit was filed against Jennings in 2001, and the trial was scheduled in May, 2003. In 2002 Jennings purchased a Florida homestead for $1 million and moved to Florida. In 2002, he invested $100,000 in refurbishing the house. Late 2002, he contracted with a builder to expand a hanger adjacent to the house for a total price of $200,000 with a $50,000 initial payment. In April, 2003, the California jury found Jennings liable for damages. Shortly thereafter, Jennings paid his builder $130,000 toward the hanger project even though no money was then due under their contact other than the initial $50,000 payment.

The appeals court stated that the sequence of events was insufficient to establish, by themselves, that Jennings intended to defraud his creditors. Even though Jennings purchased a Florida homestead after he was sued and refurbished and expanded the home after purchase a during the lawsuit, the court said the actions could be explained by considerations and motives other than creditor fraud. However, what convinced both the bankruptcy court and the appellate court was the debtor’s "lack of candor" during the trial when he was asked to give his explanations. While there were possible defensible explanations, the courts found that Jennings explanations were not credible.

I was surprised how much leeway the court extended to the purchase and improvement of a Florida homestead after a lawsuit was filed and within a year or two of filing bankruptcy. Apparently, just because a debtor invests large amounts of money in a Florida homestead is not per se fraudulent if there are credible reasons other than evasion of creditors. (21 Fla. L. Weekly Fed. C206).

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida