Ponzi-Scheming Boyfriend's $300K+ Cash Gift Leads To Florida Woman's Loss Of Home, Despite No Knowledge Of Fraud; Used Loot To Pay Off Mortgage

The following facts have been taken from a recent ruling from the U.S. Court Of Appeals - 5th Circuit:

• One, Hudgins, engages in Ponzi scheme, screwing investors out of a ton of loot.

• Hudgins gives Florida woman (presumably his girlfriend, mistress, etc.) cash gifts of $368,500, which came from the proceeds of his illicit business activities.

• Florida woman was unaware of the fraud.

• She used part of the money to pay off a $328,000 mortgage on her Florida condo, which was her homestead.

• A federal regulatory agency brought a legal action against Hudgins to enjoin his scheme and seek civil penalties and other relief.

• A U.S. District Court appoints a receiver to reclaim Hudgins's assets for the benefit of the defrauded investors.

• The receiver demanded that Florida woman return the loot gifted to her by Hudgins.

• Florida woman refused, responding that she used the money to pay off her mortgage.

• The receiver petitioned the district court to require Florida woman to turn over the condominium because it was purchased with fraudulently obtained money.

• Florida woman contended that the condominium was her homestead and protected by the Florida constitution's liberal homestead exemption.

• The district court rejected Florida woman's argument, holding that while Florida's homestead exemption did apply, state law nonetheless allowed the imposition of an equitable lien because the homestead was purchased with fraudulently obtained money.

• The court then directed that the woman turn over title to the condo to the receiver and gave her 30 days to vacate the premises.

• Florida woman appeals the ruling.

The 5th Circuit Court of Appeals interpreted Florida case law to conclude that Florida woman, although innocent of any fraud, was not entitled to the protection of the Florida homestead exemption from forced sales set forth in Article X, Section 4 of the Florida Constitution.(1) Accordingly, the lower court order directing her to turn over title to her homestead to the receiver and move out was affirmed.(2)

For the ruling, see Crawford v. Silette, No. 09-40641 (5th Cir. June 3, 2010).

(1) Not to be confused with Article VII, Section 6 of the Florida Constitution which, among other things, deals with the entitlement to a $25,000 real estate tax exemption available to Florida homeowners, and has absolutely nothing to do with the application of the exemption from forced sales under Article X, Section 4 (Contrary to what some in Florida mistakenly believe, the local County Property Appraiser has nothing to do with granting homestead exemptions from forced sales under Article X, Section 4. He/She merely approves applications for the tax exmption under Article VII, Section 6.).

(2) In interpreting Florida case law, the Federal appeals court made these observations:

• In Palm Beach Savings & Loan Ass'n v. Fishbein, the Florida Supreme Court held that, when imposing equitable liens, courts should focus on whether the party claiming the homestead exemption would be unjustly enriched. 619 So.2d 267, 270 (Fla. 1993).

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• [U]nder Florida law, to impose an equitable lien on a homestead, three conditions must exist: (1) the owner used fraudulently obtained funds to purchase or retire a mortgage interest in the homestead; (2) the owner was unjustly enriched; and (3) the owner would be no worse off if the court imposed an equitable lien in favor of the fraud victim. Each prong is met here. The funds were fraudulently obtained by Hudgins. Silette did not earn the money and was unjustly enriched. Silette will not be worse off; imposing an equitable lien for $328,000 puts Silette in the same position as if she had never met George Hudgins.

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• The Florida Supreme Court could not be clearer: a party's innocence in the fraud is not relevant to whether the court can impose an equitable lien. The only relevant factor is whether the party is unjustly enriched by fraudulently obtained funds. The Eleventh Circuit reached the same conclusion. In re Financial Federated, 347 F.3d at 890 ("Unjust enrichment can be the basis for the assertion of an equitable lien."). If the court does not impose an equitable lien, Silette will receive a $328,000 windfall. As Florida has not chosen to protect the innocent beneficiary of fraudulently obtained proceeds, the federal court may not do so.

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• The key factors, we believe, are that the fraudulently obtained funds can be traced directly into the homestead. Havoco carefully identified this situation — the Fishbein case — as the paradigmatic narrow exception to Florida's otherwise generous homestead laws. See Havoco, 790 So.2d at 1024-28 (discussing cases). This case is an application, not an expansion, of Havoco's principles.

Go here for links to all briefs filed in Palm Beach Savings & Loan Ass'n v. Fishbein, 619 So.2d 267 (Fla. 1993).

Go here for links to all briefs filed, and video of oral argument, in Havoco of Am., Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001).