People throughout the country are learning about the Florida Supreme Court case of Havoco v. Hill and its importance for Florida asset protection planning. Havoco says that if you take non-exempt money otherwise subject to creditor attack and use the money to purchase, expand, or repair a house or to pay a mortgage on the house with the purpose of hiding that money from creditors, the payment toward the house cannot be undone or reversed even if the payment would otherwise be considered a “fraudulent conveyance.”
Many people make the mistake in asset protection planning of assuming that the license and planning opportunity created by Havoco carries over into a bankruptcy proceeding. It does, and it does not. If a bankruptcy debtor applied non-exempt funds to his homestead property over a year before filing bankruptcy then, yes, Havoco v. Hill would probably protect that application of funds from being undone in a bankruptcy proceeding.
But, if the transfer was within a year prior to bankruptcy there would be potential problems. Bankruptcy Code section 727(a)(2) gives the bankruptcy court the power to deny bankruptcy discharge (i.e,., allows debts to survive bankruptcy) if the bankruptcy debtor transfers property within the year of filing with intent to hinder, delay, or defraud a creditor. The court could order the transfer reversed and the transferred amount paid to creditors either from other funds of the debtor or through a sale of the homestead. The court may issue additional sanctions including prohibiting subsequent bankruptcy filings for a period of time.
Havoco v. Hill may not work as a defense in bankruptcy court against denial of discharge for a fraudulent conveyance. Therefore, if someone applies non-exempt money to a house or mortgage a creditor in a state court collection proceeding cannot undo the transfer of money, and the transfer does not otherwise subject the debtor to risk. If that same debtor files bankruptcy within the year of house purchase or mortgage payment the same money transfer could the debtor to a denial of discharge. The bankruptcy court could possibly order the house liquidated and proceeds applied to pay creditors to the extent of the fraudulent conveyance made within the preceding year.
Whether Florida bankruptcy judges would allow a debtor to assert the ruling in Havoco v. Hill as a defense in bankruptcy court is unclear. To date, there is not reported written bankruptcy decision from a Florida bankruptcy court on this issue.