This elderly lady had guaranteed her son’s business loan which the son could not repay when the business failed. The business and loan was made in another state with a national bank. The bank just got a judgment against mother and son for several hundred thousand dollars. The mother lived in Florida in a home with a $40,000 remaining mortgage. She had about $60,000 savings in accounts at the same bank that got the judgment. She lived primarily off monthly checks from her deceased husband’s pension and social security.

Here are the post-judgment planning steps she is considering. First, she pays off her remaining mortgage leaving her with about $20,000 at the creditor bank. Paying a homestead mortgage cannot be reversed under Florida law. Next, she’ll move the financial account from the creditor bank to a small bank in Florida; she is not "hiding" the money, but she is removing the money from the "creditor’s doorstep." The mother’s litigation attorney can probably delay discovery of new bank accounts for a few months after judgment.

The mother will stop using her exempt pension proceeds and social security to pay monthly living expenses. Instead she will use her savings to pay expenses until the money is depleted and hopefully before it is located and garnished. She can use money to make repairs and improvement to her homestead as well as pay her legal bills and taxes.

The unspent pension and social security money can be used to purchase an immediate annuity. Florida statutes exempt from creditors annuities and all annuity distributions. Using pension and social security money to buy an annuity is not a fraudulent conversion because the pension and social security checks are themselves exempt from creditors. When her cash is spent, the debtor mother can revert to living off the pension, social security, and her new annuity.

Mike said that mediation in state court proceedings is usually a waste of time for his clients. He listed several reasons why foreclosure mediation infrequently results in successful mortgage modification and foreclosure forbearance. For example, he said that there are so many foreclosure mediation that lenders usually send a foreclosure "clerk" with minimal authority to offer anything other than the lenders "in-the-box" standard modification packages for which, he said, few clients qualify. He said that the lender’s attorney see mediation as a temporary hurdle in their march toward foreclosure judgment and possession of the property. There are so many different state court judges with their own procedures that there is little uniformity how trial court’s treat mediation.

Mike said he is having success in mediation ordered by the appellate court. When an appeal is filed our appellate court (the Fifth District Court) orders almost all foreclosure cases to mediation. No briefs are due until mediation is completed. The attorney says lenders send more senior representatives to appellate mediation and they take more seriously mortgage mediation ordered by an appellate court. Appellate mediation is uniform because there is just one appellate court in our district.

The challenge is getting a foreclosure case to the appellate level. Mike lays the groundwork for appeal in response to lenders’ motions for summary judgment. He says that most trial courts ignore technical defects in lenders’ summary judgment motions because the trial judge wants to move his large foreclosure docket and get cases to their inevitable conclusion of a foreclosure judgment. Trial judges do not scrutinize foreclosure summary judgments as closely as they do in a typical civil case, according to Mike. Mike says that he uses technical summary judgment defenses which he anticipates may be overlooked by the trial court judge, but these technical defenses if ignored are the basis for an appeal. His clients can file and appeal and get to appellate mediation for a relatively small investment in legal fees.

I posted a blog article earlier this week about prospective bankruptcy court mediation in Chapter 13 cases. It will be interesting to see if bankruptcy mediation is, like appellate mediation, a better forum to negotiate mortgage modifications.

This proposed procedural rule will not circumvent the bankruptcy code law and will not force reduction of first mortgage principal. What the Orlando local rule will do is enable Chapter 13 debtors by motion filed with the Orlando bankruptcy court to compel a bank representative with full authority to modify their mortgage to meet with the debtor and an independent mediator to negotiate in good faith a possible modification of the debtor’s first mortgage terms. This bankruptcy rule should make Chapter 13 bankruptcy attractive to homeowners who want to save their homes provided they can obtain a reasonable modification of their mortgage.

The Florida Supreme Court is requiring mediation in state court foreclosure cases. This state court rule is helpful, but the bankruptcy court rule could be better for homeowners. In state court procedures the homeowner has to be in a foreclosure case before having the opportunity to mediate with a bank agent with full authority. The homeowner first has to stop paying the mortgage for at least three months, wait for the bank to file a foreclosure lawsuit, hire a civil attorney to answer the lawsuit, proceed for several months in civil litigation, and then at some point, arrange for a court ordered mediation.

Chapter 13 mediation should be faster and more definitive. A debtor probably can get an order requiring mediation with their mortgage lender very soon after filing a Chapter 13 bankruptcy petition. The borrower/debtor will not have to miss several mortgage payments and fall farther behind on their mortgage. The bankruptcy rule probably will permit a court order adopting any mediated mortgage modification which order can be recorded in the public real estate records.

I will report on the details of the Chapter 13 mortgage mediation as they become available. However, the bankruptcy procedure may provide homeowners more negotiating power and a much quicker resolution of mortgage problems.

This individual formerly worked for a government task force which prosecuted banks for improper lending practices. His government agency enforced actions against lenders for their violations of the many technical regulatory requirements and consumer protection rules applicable to mortgage or commercial. He uses this experience today in private practice to defend bank lawsuits by raising technical defenses based on the bank’s failure to comply with same applicable rules and regulations he previously enforced on the government’s behalf. He states that there are so many rules and regulations applicable to bank lending that in almost every loan or guarantee the plaintiff bank is in violation of some government requirement. He said he can find a bank violation in almost every bank lawsuit and use the violation as an effective defense or even threaten the bank with a counter-claim.

Most real estate attorneys I know can delay, but ultimately never win, bank collection suits. This attorney described above is the first one I found with the legal knowledge and experience to give the borrower a chance of victory and real negotiating power. I’m sure he’s not the only attorney with this experience. Perhaps borrowers should search out attorneys with experience as bank regulators and prosecutors to defend bank lawsuits. These attorneys will not be inexpensive, but its worth the money if they can find significant legal defenses against bank deficiency claims and collection lawsuits.

Massachusetts law enables the state to suspend your driver’s license if you don’t pay state taxes. The law makes principal owners of a corporation liable for the corporation’s income tax. After this client’s corporation filed bankruptcy owing state corporate income tax the state of Massachusetts listed the individual principal on a national registry of corporate tax deadbeats. It turns out that Florida checks the national registry, and our state respects suspensions imposed by other states for tax liability. This unsuspecting owner of a failed Massachusetts business finds himself unable to drive in Florida or Massachusetts until he pays his bankrupt corporation’s state income tax.

I received different opinion from another experienced collection attorney from the Tampa area who writes:

 This attorney's  opinion is consistent with my own experiences in bankruptcy practice. I have a few bankruptcy clients who say they are filing bankruptcy because their wages have been garnished, but I don’t find that wage garnishment is a primary cause of bankruptcy. Most bankruptcy debtors I deal with anticipate collection. In other words, most people file bankruptcy before a creditor gets a judgment which would subject their wages to garnishment. If a creditor attorney garnishes wages then in most cases the debtor cannot file Chapter 7 bankruptcy for one reason or another.

I recently had a lunch with one of Orlando’s preeminent collection lawyers. We discussed collection practices and asset protection strategy, and I found some of his comments to be interesting. I asked him what was the most effective debt collection tool. His answer was, without hesitation: bank account garnishments. Bank garnishments, he explained, was the only way to capture a significant amount of a debtor’s cash quickly and without lengthy legal proceedings. Bank accounts are where the money is. Bank garnishments strike a surprise blow to debtors which freeze their funds and usually force them to settle the remaining debt.

I next asked him whether wage garnishments were effective assuming the debtor is not head of household. He said that garnishments were not a good collection tool. First, the creditor collects small amounts of money each month toward the judgment, and his clients are not interested in long-term payback. Next, he explained, that wage garnishments usually force debtors to file bankruptcy because debtors will not work for an indeterminate future for the benefit of creditors. Wage garnishment, he felt, usually backfire against his clients' debt collection.

Many of my clients spend much time asking about charging liens a creditor could get against their LLC which operates their small business. This creditor attorney has not sought a single charging lien for many years. He cannot recall the last time he used a charging lien. From the creditor perspective, he explained, charging liens are ineffective against an LLC business managed by the debtor or the debtor’s family. The attorney explained that charging lien collection against a closely held LLC depends upon the honesty of the debtor; the creditor collects money only if the debtor voluntarily reports an LLC distribution subject to the lien. He found that most debtor LLC owners circumvent the charging lien with salary and loans, and that neither he nor his clients are able to monitor effectively the Debtor LLC distribution practices. It seems that an LLC properly formed and clear of fraudulent transfer challenges is practically a very effective asset protection too.

In Florida, a judgment creditor cannot garnish wages of a debtor who is head of household. In a traditional family setting only one spouse can be head of household where there are minor children. The general rule is that the higher earning spouse provides the majority of support for the children and is head of household, and the lesser earning spouse is vulnerable to wage garnishment. In this particular case, both spouses thought they were head of household in their family.

The facts in this case were unusual. Theirs was a second marriage. Each spouse had children from a prior marriage. Because they worked at jobs in different Florida  cities each spouse lived in their own house  with one or more of their own children. Each spouse supported their respective children in their homes. Each spouse owned their own home individually. Each spouse contended that they should be head of household and exempt from wage garnishment. Can there be two heads of household, exempt from wage garnishment, in the same family?

I think that each spouse should be able to exempt their own wages from garnishment in this situation. Florida law is that to be exempt from wage garnishment the debtor must be the primary source of financial support for someone to whom he has a legal or moral obligation. The exemption statute does not limit the qualifying heads of household in one family. Florida courts have held that two spouses living in separately owned and occupied homes each can claim their own home as their exempt homestead provided that each spouse actually uses in their own home as their primary residence. Similarly, I think two spouses can be head of household if they each serve as the primary source of financial support for a different qualifying dependent.

I consulted a creditor collection attorney who practices in another city about the practicalities of a creditor levying on the stock of a professional corporation. The creditor attorney agreed that P.A. stock is subject to levy, but he explained that there are often practical obstacles to his levy upon the stock of a debtor’s professional business and the garnishment of the P.A. receivables. For example, it is difficult to garnish receivables of a medical P.A. because of HIPAA privacy regulations which protect patient identity. A creditor would find it difficult to collect medical receivables without breaching patient confidentiality. The same privacy issues are involved when a creditor levies upon an attorney’s stock in his professional corporation. A creditor’s inspection of the law firm billing records and files would impinge upon attorney-client privileges.

In practice, this creditor attorney often attacks professional debtors with a motion for appointment of receiver over the professional’s stock and practice. The receiver has the task of dealing with confidentiality issues. The receivership accomplishes one of the creditor’s goals which is interference with the debtor’s professional practice and receivable collections, and this puts substantial collection pressure upon the debtor to negotiate a settlement.

Professionals who form practices as a professional liability company are better protected because a creditor’s collection remedy is limited to a charging lien on profit distributions. The creditor cannot levy upon LLC membership interests.

I have never spoke to any attorney who recommends their clients pursue short sales. Not one. I have almost never recommended short sales to my own clients. Credit rating is not a legal issue, but in terms of their legal effect, and particularly asset protection, I rarely see an advantage to a short sale. In the "old days" a short sale arrangement included a release of liability; the lender would accept less than the full mortgage balance and release the mortgage and the underlying promissory note. In today’s mortgage environment a homeowner who negotiates a short sale must remain liable on the promissory note. No release.

Alternatively, if a homeowner refuses a short sale and subjects his home to a foreclosure suit the homeowner can, by defending the foreclosure suit, position himself to negotiate with the lender. Defending a foreclosure suit deprives the mortgage lender of what it wants most of all- possession and control of the property. Attorneys who defend foreclosures - I do not- report to me that in more cases than not they are able during the foreclosure defense to negotiate a release of liability in exchange for the homeowner dropping foreclosure defense.

Although mortgage lenders and real estate salespeople have a different opinion, I think that the only people who benefit from short sales without a full release are the lenders who liquidate the property, the sales agent who makes a commission, and the buyer who gets a good deal on a home. The seller goes through lots of work to negotiate with buyer and lender and in the end he still is legally liable for the full mortgage amount.

Its nice to have a good credit score, but you can’t buy a loaf of bread with a credit score alone. Unless a lender will release your liability in a short sale I think most often the homeowner can negotiate a better deal in the foreclosure process.

A woman physician worked in a high-risk specialty. Her husband worked for a large company in a non-professional job. The couple bought investment real estate and titled all parcels in the husband’s name alone. Their bank accounts were in the husbands name, as were some non-retirement stock accounts. You can probably guess what happened.

The husband called me for asset protection advice because he had been at fault in a serious car accident. He had only $20,000 liability insurance. All of the assets titled in his name, and bought mostly with his wife’s earnings, were at risk. Fortunately, the car he was driving was also in his name only so his wife would not be liable for the car accident. What did they do wrong?

This couple made two mistakes. First, they should have titled their investment assets as tenants by entireties rather than in the husband’s name alone. Assets titled in the entireties would be exempt from the husband’s car accident liability as well as from the wife’s professional liability. Entireties protects against any judgment against just one spouse. If each spouse has a judgment from a different lawsuit and for a different reason the entireties protection works against all the judgments.

The second mistake is lack of adequate insurance. In Florida, both the driver and all car owners are responsible for car accidents. If one spouse is driving a car owned jointly or in the name of the other spouse both spouses are held liable for the full amount of damages. If you have significant assets in the family you must get a large umbrella insurance policy to cover automobile and homeowner liability.

You may think you know whom in the family is going to be sued and for what reason- such as, the dreaded professional malpractice liability. Sometimes its what you don’t expect that gets you. Both spouses and all assets must be protected in a property asset protection plan.

A Florida bankruptcy court considered whether tips earned by a head of household bartender are in the nature of earnings protected from garnishment. The debtor claimed as exempt wages and tips in a bank account. In this case the debtor’s employer charged all customer’s a flat service charge upon all of the debtor’s sales, and the employer paid the service charges as part of the debtor’s paycheck. The bankruptcy court held that the tip payments were exempt after deposit in the debtor’s account. The court noted that the tips were paid as par of a regular bi-weekly paycheck and that there was no allegation that the tips could not be properly traced and identified as earnings of a head of household. In re Holmes, Case No. 09-16564, Southern District of Florida.

The court did not address the issue of cash tips paid directly from customers. As a practical matter, a creditor could never garnish a cash tip before it is paid and most servers do not deposit cash tips in their bank account.

A decision by a Florida bankruptcy court found that a husband and wife with the above facts could destroy their entireties exemption by their actions and testimony after this account was opened and funds deposited. Here are the most important facts which undid the couple’s exemption.

After the deposit of the joint tax refund and money from the prior joint account the husband wrote a check for half the total amount to his wife who proceeded to deposit her half in her individual bank account. The husband testified that he viewed all remaining money in the account as his money, and he wrote all of the check on the account and was liable for all debts that were paid from the account. The court found that the husbands testimony and the facts established that the joint account was a joint tenancy with survivorship but not an entireties account. The court said that husbands actions had the legal effect of disclaiming entireties ownership and overcoming the legal presumption of entireties under Florida law.

I was surprised by the legal ruling because I had thought that once the couple established the account as an entireties account the funds therein were exempt regardless of what they chose to do with the money thereafter. However, I also see the judge’s point that the couples intended to segregate the wife’s half interest in the original deposits in the wife’s own account leaving what the couples believed was only the husband’s money. The case shows that couples should be careful to maintain entireties accounts under their joint custody and control, and not to split off the interest or funds belonging to the non-debtor spouse. The case is In re Underwood. No. 08-411, Adv No. 08-140, decided September 29, 2009.

The couple's bank had branches in South Carolina which state does not recognize tenants by entireties ownership. The question was whether the South Carolina creditor could garnish the bank account at a South Carolina branch of the bank using a writ of garnishment issued by the South Carolina court that entered the judgment against the husband.

Florida exemptions can not be exported, so, for example, the husband’s creditor could probably garnish salary earned and paid in South Carolina even though the wages are exempt under Florida law. This debtor’s bank account is somewhat different in that the account was at a Florida branch and deposits were made in Florida. Not being sure of the answer, but intrigued by the question, I called a local creditor attorney who had garnished hundreds of bank accounts in his career.

The creditor attorney said that the best way to stop a South Carolina garnishment of the Florida account would be for the debtor’s wife to assert an exemption. Under Florida’s tenants by entireties law the non-debtor wife has an interest in 100% of the bank account. The South Carolina court has no personal jurisdiction over the non-debtor wife in this case. Therefore, the wife could raise a due process argument that the South Carolina court has no basis to garnish her money.

In this case, even assuming my creditor attorney friend is legally correct, at a minimum the non-debtor spouse would have significant costs to defend the account before a South Carolina judge who might not appreciate her argument and could garnish the account anyway. I always advise my clients never to bank at a national bank because its too easy for the creditor to attack the account outside Florida. I suggests that Florida residents concerned with asset protection bank only at small Florida community banks with no branches outside Florida. In addition to being creditor safe, these banks, I find, provide more personal service.

The Task Force reported that lack of communication between banks and borrowers was the most significant problem in foreclosure cases. Under the new managed mediation program all residential foreclosure cases will be referred to mediation by Supreme Court certified mediators. The bank must pay all mediation expenses.

Court-ordered mediation requires that both sides, including the large mortgage lenders, have someone present at mediation with full authority to resolve the foreclosure dispute. If the mortgage lender does not have someone with full authority at mediation the court may sanction the lender. Mediation is probably your best opportunity to make a fair deal with your mortgage lender if a deal is possible in your case.

Mediation has some negative consequences for the borrower. There is no mediation unless there is first a foreclosure suit after the borrower has stopped making his mortgage payments. Usually, banks will not foreclose until mortgage payments are at least three months late. By then, the borrower’s credit rating will have declined, and the rating will decline substantially when the bank forecloses. So, if you want to use court ordered mediation to negotiate with your mortgage lender you first will have to sacrifice your good credit. Your credit score is your "equity" or "payment" toward the mediation settlement process.

I have told many of my clients that mediation is the best venue to negotiate mortgage solutions. This process will now be more readily available to homeowners as a result of the Florida Supreme Court’s managed mediation program.

Brad said he attends monthly Bar meetings frequented by most of the civil court judges and most prominent attorneys in Lake County. He says that he has known most of the judges for many years. At the most recent meeting Brad told me he discussed the foreclosure environment with one of the local judges. This is what the judge told him. In Lake County, Florida, from the beginning of 2008 through the first half of 2009 (when statistics were last reported) there were approximately 11,000 first mortgage foreclosures against residential homeowners. The figure does not include foreclosures of commercial loans. Of the 11,000 first mortgage foreclosures, the number of motions for deficiency judgment was zero. No deficiency motions; no deficiency judgements.

Brad told me that in the past two years he defended about 100 lawsuits filed by second mortgage holders. The second mortgage lawsuits were suits based on the underlying promissory note rather than mortgage foreclosures. He said most of these lawsuits were settled, and that none of the settlements exceeded 20% of the second mortgage balance.

I came across a blog post in theLLC Law Monitor which discusses the Texas series LLC law enacted in 2009. The post gives a good overview of the advantages of series LLC planning as well as several undecided legal issues. The article concludes that, "The law of series LLCs is an infant, still a little unsteady on its feet."

Most successful efforts to pierce a corporate veil occur when a "mom and pop" business owner intermingles personal and business finances, such as when he pays personal bills from a corporate account. The corporate veil is pierced in that case because the corporation is the legal alter-ego of the controlling owner. There is a famous Florida Supreme Court case on piercing the corporate veil called the Dania Jai-Alai case.

So what is "reverse piercing" of the corporate veil? Reverse piercing is a lesser known, and lesser used, concept whereby a creditor of an individual can execute on corporate assets to satisfy a civil judgment against the individual owners. A creditor can use the reverse-pierce remedy to hold a corporation liable for the debts of the controlling shareholder where the shareholder/debtor formed or used the corporation to secret assets and avoid preexisting personal liability. For instance, if an individual facing a possible individual judgment creates a corporation or LLC and transfers assets in to a controlled entity so the assets would be protected from a civil judgment then individual’s creditors could levy upon the corporate assets under the reverse-piercing theory.

Reverse-piercing is similar to fraudulent conveyance; both legal concepts are equitable remedies to execute a civil judgment. A creditor can sue a corporation that received the owner’s personal assets to help the owner evade personal liability under either theory. If you want to know more about reverse-piercing of a corporation, look at Braswell v. Ryan Investments, 389 So. 2d 38.

Two Florida attorneys wrote an interesting article in the current Florida Bar Journal about rental and homestead abandonment. The authors discussed how renting a homestead affects the owner’s homestead tax deduction. Their article equally is relevant to renting and homestead abandonment for creditor protection.

The article points out that Florida statutes include a "rental statute" that states that the rental of an entire dwelling constitutes an abandonment of the right of homestead. The authors distinguish the definition of rental from the legal concept of "license". They argue that the rental statute is not triggered when an owner permits a third party to use a homestead pursuant to a license and where no residential tenancy is created. When a property is rented, they state, the lessee has an exclusive right of use and possession for a period of time. Licenses permit use but they are revocable upon short notice and reserve the owner a co-terminus right of entry and possession.

The authors argue that a homestead owner could move away from his homestead and grant a third party a license to use the property without causing legal abandonment pursuant to the rental statute. They suggests using a license agreement that clearly disclaims the creation of a tenancy. Florida residents who want to "rent" their homestead during a temporary absence might consider asking an attorney to draft a license agreement in lieu of a standard residential lease if they are concerned about maintaining homestead creditor protection during their absence.

One day, while away from home on Christmas vacation, the debtor received an urgent call from a neighbor. The neighbor said that a sheriff and deputies had parked a van in front of the debtor’s house, had broken into the house, and were taking things out of the house. The neighbor also reported that the sheriff showed him a court order authorizing the break in with a title from the collection lawsuit. The creditor’s attorney had obtained a court order at an ex-parte hearing where the debtor’s attorney did not have the opportunity to appear. There was no advance notice to the debtor or to the debtor’s attorney of the hearing or the sheriff’s taking of the debtor’s property.

The debtor’s attorney asked me if there was any law authorizing the creditor to cause a sheriff to break in to a debtor’s home when the debtor was not present without any notice to the opposing counsel. I asked the question to Mr. Mitch Dinkins who is a well-known collection attorney in south Florida. Mr. Dinkins states that judges have discretion to issue break orders ex-parte with no notice. He is not aware of any appellate decisions or statutes authorizing this practice although he believes that the Florida attorney general office issued an opinion supporting the practice. Most judges, he says, will authorize surprise break-in orders when the creditor attorney emphasizes the moveable nature of the debtor’s valuable personal property.

In this particular case I think the creditor acted properly, albeit aggressively, because the debtor had already testified that he owned, and maintained in his house, valuable personal property owned individually. Most married debtors state that all furniture and other belongings in their homestead is owned jointly with their non-debtor spouse. In that case, a creditor would probably not invade a home without notice to take property the debtor has already claimed to be owned as tenants by entireties. A non-debtor spouse, or the debtor, might have a cause of action against a creditor who seized what he knew to be exempt entireties property. The lesson is that if a creditor asks you who owns the stuff in your house, be careful how you answer the question.