By: Edward L. Kelly

Cash proceeds obtained from the sale of a homestead property receive protection from creditors’ claims, provided the funds are not commingled with other assets and are intended in good faith to be reinvested in a new homestead.  In essence, courts treat the proceeds as a provisional homestead, temporarily protecting the proceeds from levy until they are reinvested in real property.  When a debtor converts the proceeds from the sale of homestead property into non-cash assets, such as securities, determining whether the proceeds remain inaccessible to creditors becomes more opaque.  Although creditors cannot garnish homestead proceeds merely because a debtor holds the proceeds in a form other than cash, the manner in which the debtor manages the non-cash proceeds may reveal a lack of intent to reinvest in a new homestead and provide an avenue for creditors to collect on their claims.

Homestead Protection on Proceeds from Sale

The protection from forced sale Florida residents receive on their homestead property under Article X of the Florida Constitution extends to the proceeds from a voluntary sale of the homestead, shielding the proceeds from creditors’ claims so long as:

  • The party claiming homestead demonstrates a good faith intent prior to and at the time of sale to reinvest the proceeds in another homestead property in a reasonable amount of time; and
  • The proceeds are not commingled with other funds or assets.

The Florida Supreme Court opinion interpreting Article X to extend the homestead protection to the sale proceeds, Orange Brevard Plumbing & Heating Co. v. La Croix , does not limit the type of “proceeds” that could be protected from creditors, and subsequent case law clarifies that cash and non-cash proceeds alike may be exempt from creditors’ claims.  A recent opinion from Florida’s Fourth District Court of Appeal, JBK Associates, Inc. v. Sill Bros., Inc. , reaffirms this position, rejecting a creditor’s argument that the debtor lost his homestead protection on the portion of the sale proceeds converted by the debtor from cash to securities.

Analyzing Investment Risk to Determine Intent

In the same breath that the court in Sill Bros., Inc. dismissed the argument that the form in which a debtor holds homestead sale proceeds dictates creditor access, the court also said the homestead exemption should not be applied in a manner “that encourages excessive speculation with the proceeds of a sale.”  The court highlighted a bankruptcy case considering Arizona’s homestead laws where the debtor engaged in intense speculative option trading with his homestead sale proceeds, consummating more than 300 trades in a single month.  The bankruptcy court found such risky investment behavior contravened Arizona’s homestead laws which, like Florida’s, are largely designed to provide security to the state’s residents in the face of financial hardship.  The court in Sill Bros., Inc. ultimately found no evidence that the Florida debtor purchased “particularly risky” securities with his homestead sale proceeds, and combined with the fact the debtor did not commingle his sale proceeds with other funds, the court held the homestead protection extended to the securities.

Reaching Profits Realized from Investments

The court in Sill Bros., Inc. did not address the issue of whether the creditor could reach any profits realized from the securities.  Precedent supports the position that any surplus above the amount of the homestead sale proceeds intended to be reinvested in a new homestead should be treated as the debtor’s general assets.  If a debtor cannot prove he intended, prior to and at the time of the sale of the homestead, to use the profits realized through investment of the sale proceeds to purchase a new homestead, a creditor may be able to access the profits to satisfy its lien.