CYNTHIA C. JACKSON, Bankruptcy Judge.
This case came before the Court for a two-day trial on Creditors PRN Real Estate & Investments, Ltd. and Nancy A. Rossman's (collectively "PRN") Objection to Debtor's Claimed Homestead Exemption (Doc. No. 104) ("PRN's Objection") and Chapter 7 Trustee Lori Patton's (the "Trustee") Objection to Debtor's Claim of Homestead Exemption (Doc. No. 116) ("Trustee's Objection") (together, the "Objections"). After considering the evidence admitted at trial and the governing case law, the Court concludes that the Objections should be sustained in part. Debtor William W. Cole, Jr. ("Debtor" or "Mr. Cole") will not be denied his homestead exemption outright. But Mr. Cole's exemption must be limited to a half of an acre out of a total of 2.95 acres.
This Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157 and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
The real property at issue in this matter is located at 608 Bentley Lane, Maitland, Florida, 32751 (the "Property"). The Debtor owns the Property under a revocable self-settled trust. Joint Pretrial Statement (hereafter "Jnt. Stip.") ¶¶ 2-8. (Doc. No. 373). The Property is located within the City of Maitland, Florida and consists of approximately 2.95 acres, which sits upon and extends into Lake Minnehaha. Jnt. Stip. ¶¶ 9, 16. The Court will refer to the approximate .765 acres of the parcel that is above the ordinary high water mark and upon which Debtor's 10,000 square foot home is located as the "Upland Property." The Court will refer to the remaining 2.185 acres of the parcel that is below the ordinary high water mark and which extends into Lake Minnehaha as the "Submerged Land." See Jnt. Stip. ¶ 9.
1. Whether the Debtor's homestead exemption should be denied outright because of the Debtor's prepetition efforts to "gerrymander" the exemption.
2. If the Debtor is entitled to claim a homestead exemption at all, (a) whether the Submerged Land should be considered in determining the total acreage of the Debtor's homestead and (b) the proper method of allocating value to the homestead exemption.
The procedures for claiming any property as exempt and for the resolution of any objection to the exemption are governed by Rule 4003 of the Federal Rules of Bankruptcy Procedure ("Rule(s)"). Because a debtor's claim of exemption is presumptively valid under 11 U.S.C. § 522(1),
At issue here is the Debtor's claim of exemption in his homestead, asserted under Article X § 4 of the Florida Constitution, which provides in part:
This exemption from forced sale is "designed to protect and preserve the family home."
The relevant date for determining whether a debtor is entitled to a claim of exemption is the petition date.
Mr. Cole acquired the Property in 2001.
Mr. Cole holds title to the Property under a self-settled revocable trust, which held title to the Property — as a single intact parcel — in a series of deeds until approximately three months prior to the petition date.
Mr. Cole designated the boundary line used to split the Property. In late January 2015, Mr. Cole emailed Kevin Cavone, a surveyor, a copy of an old survey of the Property and asked that Mr. Cavone "have [it] broken out into two surveys."
At various times, Mr. and Mrs. Cole have listed the Property for sale.
In May 2009, Mr. and Mrs. Cole executed an "Affidavit of Trustee" in conjunction with a request for Fidelity National Title Insurance Company to issue a title insurance policy on the Property. The affidavit provides a legal description consisting of the entire Property and states the Property is the "homestead property" of the trust's settlor (Mr. Cole) or his family. No reference is made to a potential interest held by the State of Florida to the Submerged Land.
Mr. Cole has paid the real property taxes assessed against the Property since acquiring it through the petition date. The Property is taxed as a single parcel.
Mr. Cole filed this chapter 7 case on July 27, 2015.
Schedule A lists two parcels of real property. First, "608 Bentley Lane, Maitland, Florida 32751", in which Mr. Cole claimed ownership via the trust and homestead status. Mr. Cole estimates the value of this parcel at $2.5 million. Second, a parcel in Orange County described in an attached exhibit, "A-1", in which Mr. Cole again claimed ownership under the trust but no homestead status. Mr. Cole estimates the value of this parcel at $1,000. Exhibit A-1 contains a legal description which is identical to the legal description contained in the June 2015 special warranty deed.
Schedule C claims the "608 Bentley Lane, Maitland, Florida 32751" parcel as exempt pursuant to Article X § 4(a)(1) of the Florida Constitution. Mr. Cole claims the "Full Value" as exempt, which, consistent with his Schedule A, is estimated at $2.5 million.
Neither Schedule A, including Exhibit A-1, nor Schedule C make any reference to the size of the parcels.
Asked to explain the reason for executing the May and June 2015 special warranty deeds (together, the "Warranty Deeds"), Mr. Cole testified in his 2004 exam that it was "just to call out what was useable land and what was unusable land."
As to the lake parcel identified in Exhibit A-1 of his Schedule A,
Mr. Cole first stated that he believed that the City of Maitland would not care if he tried to sell the Submerged Land separately from the Upland Property. But he quickly qualified this statement, noting that the City had cared (and disallowed it) when he had shortly before requested to split a lot on the opposite side of Lake Minnehaha. Mr. Cole further claimed that at one point, the City had suggested he deed the submerged lands to the State of Florida. He could provide no details of this claim, other than to say that the matter "came up" at a zoning hearing.
Debtor, who holds a bachelor's in accounting from the University of Florida, has been a real estate investor and developer for more than twenty years. Mr. Cole has experience reviewing real estate documents such as surveys, tax maps, title commitments, and title insurance policies.
Mr. Cole identified several errors in his bankruptcy schedules and initial disclosures. But he indicated no errors on his Schedule A or C.
As to real estate taxes, Mr. Cole claimed that he believed that the taxes were assessed only as to the Upland Property. But he acknowledged that the Property was taxed as a single parcel.
Mr. Cole attended a mediation of his dispute with PRN on January 26, 2015. The mediation resulted in an impasse. Two days later, Mr. Cole sent the email to Mr. Cavone requesting the old survey of the Property be divided in two.
Mr. Cole admitted that he directed Mr. Cavone to use a boundary line other than ordinary high water mark because he wanted to ensure his boathouse was protected.
Regarding the splitting of the Property, Mr. Cole claimed he did not intend to create a second lot and denied that he did so pursuant to the City's code.
Mr. Cole acknowledged that he made no claim that the State of Florida owned the Submerged Land at his Rule 2004 examination.
Mr. Cole pointed to the sovereignty exception in his title insurance policy for the Property as the basis of his belief that the state owned the Submerged Land.
Ms. Blanchard, who holds a master's degree in Urban and Regional Studies, has been employed by the City of Maitland for thirty-two years. Ms. Blanchard is currently the City's Chief Planner and has served also as a planner, zoning administrator, and senior planner. In her current position, Ms. Blanchard oversees land development and growth management issues for the City, including reviewing proposed construction projects. She drafts ordinances related to these issues and is the representative to the City's planning and zoning commission.
Ms. Blanchard testified that where a property owner attempts to divide a single parcel of real estate into two, the City refers to this partitioning as a "lot split." The City's code requires that a lot split be approved by the City, except where the lot split involves a transfer of small portions of land between adjoining property owners.
As part of her regular duties, Ms. Blanchard is involved in the review of proposed lot splits. In this regard, Ms. Blanchard is responsible for ensuring that a proposed lot split is consistent with the requirements of the City's code and determining whether a variance is needed.
Consistent with her May 5 letter, Ms. Blanchard testified that Debtor's splitting of the Property would have required City approval.
Ms. Blanchard testified that the intent of a property owner is not considered in determining whether a particular act constitutes a lot split.
Mr. Dyer, a Vice President with First American Title, has been employed as an underwriter and title examiner for about 32 years. He is certified as a land searcher by the Florida Land Title Association and is licensed to sign title policies and commitments.
As to the Submerged Land, Mr. Dyer opined that the parcel was owned by Mr. and Mrs. Cole as co-trustees of the trust and not by the State of Florida.
Mr. Dyer explained that a sovereignty exception, like the one in Mr. Cole's title policy, is standard practice when a parcel includes lands submerged beneath a water body. As true with any title exception, however, a sovereignty exception may be removed from a policy (although it is rare) if removal is requested and supported by the research into the chain of title.
Now retired, Dr. Knetsch served for 28 years as a historian for Florida's Division of State Lands. His primary task was researching whether water bodies in the state were navigable at the time Florida became a state for purposes of determining whether the land underneath was owned by the State of Florida.
In researching whether Lake Minnehaha, and other water bodies more generally, was navigable in 1845, Dr. Knetsch stated there was not a wealth of witness accounts to rely on because Florida was not well developed at the time it became a state. He therefore examined other matters such as map history, surveys, and surveyor field notes. He also looked at military records, basically "whatever might apply to showing the existence or nonexistence of a water body."
The earliest evidence of navigability of Lake Minnehaha that Dr. Knetsch located was a 1879 map of Orange County, issued by surveyor E.R. Trafford.
Most maps of the period between 1840 to 1860 do not detail the southern part of the state. Dr. Knetsch owns copies of several.
Other evidence of Lake Minnehaha's navigability included photographs obtained from the state archives taken around 1885 depicting a boat on Lake Minnehaha,
Dr. Knetsch also examined the field notes of surveyors of the time. He noted that in 1845, the majority of Florida had not been surveyed.
To his knowledge, the State of Florida has not asserted an ownership claim to the lake.
Based upon the sum of his research and experience, Dr. Knetsch opined that Lake Minnehaha was likely a navigable water way in 1845 when Florida became a state.
PRN (but not the Trustee) asks the Court to deny Mr. Cole his homestead exemption in its entirety based upon his prepetition split of the Property into the Upland Property and the Submerged Land. PRN asserts that this was an impermissible (and fraudulent) attempt to gerrymander his homestead exemption at the expense of his creditors. In support of its argument, PRN relies on In re Englander, 156 B.R. 862 (Bankr. M.D. Fla. 1992), aff'd, 95 F.3d 1028 (11th Cir. 1996).
Debtor responds that an outright denial of his homestead exemption based upon his prepetition conduct is not only contrary to the policies underlying the exemption but also unsupported by law. Debtor argues that based upon Law v. Siegel, 571 U.S. 415 (2014), and Havoco of Am., Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001),
Under the Florida Constitution, the Debtor's homestead exemption is limited to one-half acre because the Property lies within the City of Maitland. Debtor timely claimed the exemption on his Schedule C, albeit limited to the Upland Property. Accordingly, Debtor's homestead claim is presumptively valid. 11 U.S.C. § 522(1).
PRN argues that the Court should reject the claim of exemption outright due, essentially, to fraud. In support of its argument, PRN cites to the Debtor's failure to expressly note the acreage limitation on his Schedule C, his impermissible splitting of the Property on the eve of the bankruptcy filing, his illogical explanations for the illegal lot split, and his eleventh-hour change in position regarding the ownership of the Submerged Land. PRN analogizes Mr. Cole's conduct to the debtors' conduct in In re Englander. And PRN notes that the bankruptcy court in that case stated that debtors might have suffered a "total denial" of their homestead exemption had the issue not been one of first impression.
The facts in In re Englander are similar to the facts at issue here. In that case, the debtors lived on just over an acre of lakefront property in the City of Winter Park, Florida, a neighbor of Maitland. The Englanders attempted to gerrymander their exemption by designating as exempt a one-half acre plot containing the residence, which encircled the rest of the parcel. The property the debtors designated as non-homestead was useless, with no access to roads, utilities, or lakefront.
The bankruptcy court's suggestion that a homestead exemption might be denied in its entirety was dicta and was not adopted by the Eleventh Circuit on appeal. Rather, the Eleventh Circuit focused on and ultimately endorsed the bankruptcy court's "equitable solution" to the problem of how to honor a debtor's homestead exemption when the property claimed as exempt exceeds the acreage limitation in the Florida Constitution and is indivisible.
PRN has not identified any post-Englander case where a debtor was denied the homestead exemption outright because the court found the debtor had gerrymandered the exemption. And importantly, since the Englander decision, the Eleventh Circuit has issued its decision in Havoco, which forecloses PRN's argument.
Havoco began in the U.S. Bankruptcy Court for the Northern District of Florida. There, creditor Havoco of America, Ltd. objected to the chapter 7 debtor's homestead exemption on the basis that the debtor converted non-exempt assets into exempt ones, including the homestead, "with the intent to hinder, delay, or defraud his creditors."
The Florida Supreme Court answered the certified question in the affirmative. After a detailed review of its homestead related jurisprudence, including its cases involving equitable liens, the Florida Supreme Court concluded:
In reaching its holding, the court observed that "in harmony" with the liberal construction of the homestead exemption is the "strict construction as applied to the exceptions."
With the certified question answered, the Eleventh Circuit affirmed.
It is clear therefore that Florida law does not permit the outright denial of a debtor's homestead exemption based upon allegations of fraud, no matter how egregious, unless funds obtained through such fraud were then used "to invest in, purchase, or improve the homestead."
The Court does not condone Mr. Cole's conduct in this case. His sworn schedules in this case are misleading. His explanations for the lot split are not credible. But under Florida law, he is nevertheless entitled to his constitutional homestead exemption.
Both PRN and the Trustee argue that the Court should find that the Submerged Land belongs to the Debtor and must be included along with the Upland Property in evaluating Mr. Cole's homestead exemption claim.
Debtor, on the other hand, argues that the Submerged Land belongs to the State of Florida and may not be considered by the Court in apportioning the value due to his homestead claim.
Without doubt, the issues surrounding the ownership of the Submerged Land are both fascinating and complex. Both PRN and Debtor have presented reasoned arguments. And both PRN's and Debtor's experts provided compelling and credible testimony. But in the end, the Court finds that it need not decide the issue given the Eleventh Circuit's decision in In re Kellogg.
In Kellogg, a chapter 7 debtor claimed the homestead exemption on his Palm Beach oceanfront property, which was located within the city and was approximately 1.3 acres in size. The debtor claimed the entire parcel, which he noted was "indivisible," and valued his exemption based on the tax assessor's value for the entire parcel. The chapter 7 trustee objected to the debtor's claimed exemption. At trial, the court heard testimony from the Palm Beach zoning administrator. The administrator testified that under applicable zoning laws, the debtor could not legally subdivide his property.
On appeal, the Eleventh Circuit examined whether the debtor should be allowed to carve out a half-acre portion of his property to keep as his homestead.
In its analysis, the Eleventh Circuit held that where property claimed as homestead is located within a city and exceeds the one-half acre limitation, a debtor may reasonably designate a portion that is exempt "so long as the remaining portion has legal and practical use."
Unwilling to concede defeat, the debtor argued that the constitutional homestead exemption cannot yield to local zoning ordinances. Dismissing the argument, the court noted that after the sale, the debtor could use his share of the proceeds to purchase a new homestead.
Here, as in Kellogg, Mr. Cole seeks to circumnavigate local zoning regulations and protect his homestead claim by asking the Court to overlook the fact that his splitting of the Property was not allowed under local zoning laws. There is no dispute that Mr. Cole never sought a variance, even after the fact, to bless his partition of the Property. And it is undisputed that as of the petition date, Debtor had record title to both the Upland Property and the Submerged Land. Granted, Mr. Cole's partitioning of the Property was accomplished prepetition, but it is without dispute that the partition, without a variance, would not be legally permissible under the City of Maitland's zoning code. Further, Mr. Cole admits that the Submerged Land by itself is of little value and utility. Thus, by his own admission, the designated non-exempt portion of the Property would have no practical use to the Trustee.
The Court also declines to decide the issue of the ownership of the Submerged Land as a matter of equity. If the Court were to decide the issue, it would give support to Mr. Cole's blatant and inequitable actions in partitioning the Property on the eve of his bankruptcy filing. At trial, Mr. Cole attempted to explain away the Warranty Deeds, characterizing his actions as a mere "bifurcation of Deed," by saying he did not intend to create another lot and did not do so pursuant to the City's code.
In the end, Mr. Cole attempts to explain his splitting of the Property as simply trying to identify his homestead parcel. The Court does not find Mr. Cole's testimony on the issue to be credible. For that matter, Mr. Cole ignores the fact that the Upland Property in which he claims his homestead exemption by itself exceeds one-half acre, a fact he does not clearly identify in his bankruptcy schedules. Further, on the ownership issue, the Court cannot overlook the fact that he did not use the ordinary high water mark as the dividing line between the two parcels, as would be the case if Mr. Cole truly believed at that time that the Submerged Land belonged to the State of Florida. And despite ample opportunity to do so, Debtor has never amended his schedules to disclaim ownership of the Submerged Land, nor did he include, at trial, this among the inaccuracies he testified to in his schedules.
And last, as suggested by the Trustee, the Court does not believe that it is the proper court to determine the issue of title to the Submerged Land as between the Debtor and the State of Florida. If almost 150 years of record title history are to be tossed aside, particularly in the absence of a contrary claim to title, it is for a state court of competent jurisdiction to do so.
The State of Florida may well have a claim to the Submerged Land and to all of Lake Minnehaha for that matter. But according to Dr. Knetsch, it has yet to assert any such claim. The court is unaware of any authority that would allow it to place record title in the Submerged Land into the state against its wishes, much less without its participation.
In sum, the court views the matter of the state's interest, if any, in the Submerged Land as a potential cloud on title. This may impact the value the Trustee ultimately obtains for the Property upon sale or may impact some future owner if and when the state elects to lay claim to the Submerged Land or Lake Minnehaha more generally. But for purposes of this case and in determining Debtor's homestead exemption, the Court concludes that it must assume that Debtor owns all of the Property as a single indivisible parcel.
The Parties agreed not to include valuation issues as part of the trial on the homestead exemption claim. Accordingly, the Court decides only the method by which the Court will allocate the net proceeds of the sale once the Property's value is ascertained.
Both PRN and the Trustee contend that Florida law requires the Court to allocate the net sale proceeds on a percentage basis calculated by comparing the allowed exempt acreage to the total acreage of the Property. In support, they rely on Quraeshi v. Dzikowski (In re Quraeshi), 289 B.R. 240 (S.D. Fla. 2002). Applying the formula as argued by PRN and the Trustee, Debtor would be entitled to 16.9% of the net proceeds.
Debtor asks the Court to apply the methodology used by the Eighth Circuit in O'Brien v. Heggen, 705 F.2d 1001 (8th Cir. 1983), a case upon which the Eleventh Circuit relied for another reason in Englander. Debtor's proposed methodology for determining the Trustee's share would require a court to determine the value per square foot of the subject real property in its unimproved state — therefore allowing the Debtor to retain the full value of his residence — and then multiply that value by the number of square feet the property exceeds the allowed acreage exemption. Debtor acknowledges, but attempts to distinguish, In re Quraeshi.
Several cases, including Englander and Kellogg, hold that where a homestead property exceeds the acreage limitation and is indivisible, the appropriate means by which to honor the claimed homestead, while also providing value to creditors, is to direct a sale and allocate the net proceeds as between the debtor and the estate. But none of these cases goes further to discuss how that allocation is to be made.
The Quraeshi court, citing the homestead provision's plain language, including its express exceptions, stated that "it would seem that a debtor's homestead exemption would extend to a pro rata portion of the net proceeds of a sale of debtor's property, based on his acreage share of the property sold, rather than a pro rata portion of the gross sales price."
Notwithstanding the differing inquiry, this Court agrees with the Quraeshi court that the proper method of allocating the net proceeds in these circumstances should be a simple percentage of the exempt acreage to the total acreage of the subject property.
First, this method best aligns with the language of the Florida Constitution. "While the Florida Constitution does not define the term `homestead,' it does provide various limitations and requirements. Among these are an acreage limitation, an ownership requirement, and a residency limitation."
Second, this method is consistent with the approach used by courts when evaluating the residency limitation contained in the homestead exemption when the property is used for additional purposes other than the debtor's residence. For example, in In re Wierschem,
Third, this method is consistent with the public policies underlying the homestead exemption.
Fourth, this method provides a simple formula of easy application. It avoids expensive and protracted litigation over valuation issues, which likely would require the use of expert testimony. The method the Court adopts today conserves costs to the parties as well as judicial resources. It also avoids potential gamesmanship by debtors seeking in bad faith to increase their exemption at the expense of the bankruptcy estate and the trustee, who must defend such tactics. And because of the ease of application, the method also serves the Bankruptcy Code's goal of efficient administration of the estate.
Debtor's attempt to distinguish Quraeshi is not persuasive. And his reliance on O'Brien is misplaced. Although the Eleventh Circuit relied on O'Brien in Englander, it did not do so for the principals relating to the allocation of the sale proceeds.
For these reasons, the court concludes that the proper method of allocating the net proceeds in this case should be a simple percentage of the exempt acreage to the total acreage of the property.
Despite Mr. Cole's inequitable and incredulous attempt to gerrymander his homestead exemption, Florida law commands that he cannot be denied his constitutional homestead exemption on that basis. But the Court will disregard his illegal partitioning of the Property, treat the entire parcel as indivisible, and direct its sale and the allocation of the proceeds. The Court concludes that the net proceeds should be allocated as between the Debtor and the Trustee based on a simple percentage of the allowed exempt acreage to the total acreage of the Property.
The Court will enter a separate Order consistent with this Memorandum Decision.
Service of this Memorandum Decision, other than by CM/ECF, is not required as the interested parties are registered CM/ECF users. Local Rule 9013-1(b).
