In re Hawkins

• Decision Date: 30 October 2007
• Docket Number: No. 05-22100-BKC-RBR.,05-22100-BKC-RBR.
• Citation: 377 B.R. 761
• Parties: In re Kenneth HAWKINS, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

377 B.R. 761

In re Kenneth HAWKINS, Debtor.

No. 05-22100-BKC-RBR.

United States Bankruptcy Court, S.D. Florida, Broward Division.

October 30, 2007.

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COPYRIGHT MATERIAL OMITTED

Ivan J. Reich, Esq., Fort Lauderdale, FL, Susan D. Lasky, Esq., Wilton Manors, FL, for Debtor.

Michael L. Feinstein, Fort Lauderdale, FL, for Jay Hoover and pro se.

ORDER FINDING VIOLATION OF THE DISCHARGE ORDER

RAYMOND B. RAY, Bankruptcy Judge.

THIS MATTER came before the Court for hearing on June 7, 2007 and July 12, 2007, upon the Motion For Contempt, Motion For Sanctions Pursuant to 11 USC 524a Discharge Injunction Violation Against Jay Hoover and Michael Feinstein (D.E.11) Filed by Debtor Kenneth Hawkins and the responses thereto (D.E.17). On June 7, 2007 the Court received into evidence testimony and exhibits. At the July 12, 2007 hearing the parties stipulated to several facts on the record. Based on the stipulated facts, testimony, admitted evidence, and arguments of counsel the Court makes the following findings of fact and conclusions of law. Findings of Fact

Jay Hoover lent money to Kenneth Hawkins, the Debtor. The loans occurred on more than one occasion. No monies were lent after 10th of December 2001. The loans are not substantiated by written notes. There are no mortgages. The debts are unsecured and they were not collateralized. No money was ever lent to the Debtor's wife. The first demand for repayment, after the last of the monies had been lent, occurred in January 2002. However, there were several collection attempts before the January 2002 date and after it. Turning to each of the loans.

There were three separate loans made by Hoover to the Debtor. The Debtor testified that the first loan occurred in 1994. This loan was in the amount of $100,000.00. The proceeds from the first loan were utilized for several purposes. A portion of the loan was used as a down payment on a home. This, the first home, was subsequently sold. The sale of the Debtor's first home did not result in any surplus after mortgage payment and sale expenses. Thus, no monies from the first home were rolled into the second home.

The Debtor then borrowed $200,000.00 in 1997. Later that year the Debtor married his current wife. Shortly after their wedding they purchased and moved into their current home. Only a portion of the $200,000 loan was used as a down payment on the new home.

The last loan occurred on July 19, 2000. It was for the amount of $288,567.36. This loan was used primarily for business expenses. The Debtor testified that none of the third loan was spent on the marital home. The Debtor borrowed a total of $588,567.36 over the course of 6 years.

However, the Debtor did make several payments. The Debtor testified that when he sold his first home in 1997, approximately $50,000.00 of the first loan had been repaid. Hoover had also demanded repayment of the balance. The Debtor testified that by August 27, 1998, he had repaid $112,000.00 on the second loan. He further testified that between August 27, 1998, and April 15, 1999, he made periodic cash payments totaling another $18,000.00. The balance of the second loan was paid in full on April 20, 1999. This balance was paid off when the Debtor refinanced his marital home. Finally, soon after the third loan was made Hoover made a demand for payment. Shortly after this demand the Debtor paid Hoover $160,000.00.

On April 14, 2005, the Debtor filed his no asset chapter 7 case. The Debtor listed the marital home as exempt, no objection to this claim of exemption was made. Hoover was listed as a creditor holding an unsecured, contingent, unliquidated and disputed debt. He further admits that he received notice and knew of Debtor's bankruptcy filing. On July 27, 2005, the Debtor received his discharge. Hoover acknowledges receiving notice of the discharge. Hoover took no action within the bankruptcy, or prior to it, to collect on his debt or to reduce it to judgment. No proof of claim was ever filed by Hoover.¹ Nor did he challenge the dischargeability of his debt. He never filed an adversary proceeding to impose his alleged equitable lien. Alternatively, he could have sought stay relief to pursue his alleged equitable lien claim in state court, this too was never done. Without Hoover raising any issue the Debtor's bankruptcy case proceeded to discharge (C.P.7, July 25, 2005) and subsequent closing (C.P.8, July 27, 2005).

Some 15 months after the closing of the bankruptcy case, Hoover filed a state court action seeking the imposition of: (1) a constructive trust and (2) an equitable lien over the Debtor's marital home. The basis for these causes of action are the prepetition monies lent by Hoover to the Debtor. There are no allegations of fraud made in the state court complaint, rather it seeks redress on the theory that Hoover lent money to the Debtor and the Debtor benefitted from the funds received. The Debtor asserts that any claim Hoover may have was discharged by his chapter 7 bankruptcy.

Conclusions of Law

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(l). The issue in this case is did the discharge injunction discharge a debt; when the debt was owed to a creditor who had actual notice of the bankruptcy, was scheduled as an unsecured Creditor, took no action at all, and after the case is closed and the, discharge granted seeks to assert a purported equitable lien on the Debtor's exempted homestead.

The analysis of this issue will require an examination into: (1) the effect of a chapter 7 discharge; (2) the basis, if any, of an equitable lien or constructive trust in favor of Hoover; (3) equitable doctrines that prevent Hoover from challenging his classification as an unsecured creditor.

Effect of a Chapter 7 Discharge

The first step in answering this question is to examine the effect of a chapter 7 discharge. A chapter 7 discharge, 11 U.S.C. § 727, voids all of the debtor's personal liability on a debt. See Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)(noting that a "bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an action against the debtor in rem"). The discharge further prevents a pre-petition debt holder from attaching or perfecting a lien on the debtor's property. See In re Birney, 200 F.3d 225, 228 (4th Cir.1999)(holding that a discharge extinguished the debt which would serve as the basis for the lien, as such the lien could not attach and the property could not be foreclosed on).

The clear conclusion from this line of law is that any personal obligation that the Debtor owes Hoover has been discharged. It is also clear that if Hoover's debt remains classified as unsecured then it was also discharged. Therefore if Hoover hopes to recover any of the money he lent, he must have a clear unavoidable, lien against the property and he must also not be bound by the Debtor's good faith classification of his debt as unsecured. In other words, he must have the ability to proceed strictly in rem against the debtor's home.

The general rule of law is that a properly secured claim holder may proceed against the collateral securing the debt notwithstanding the discharge. This rule stems from the Supreme Court decision of Long v. Bullard, which is codified in 11 U.S.C. § 522(c). See Johnson v. Home State Bank, 501 U.S. at 82-83, 111 S.Ct. 2150. Therefore, in order for Hoover to prevail or proceed in state court he must: (1) have an equitable lien and (2) an equitable lien must be strictly an in rem proceeding. However, even if Hoover may have an equitable lien, he may be barred by equitable doctrines from either: (a) asserting the lien; or (b) challenging his classification as an unsecured creditor which would render the debt discharged.

The Basis, If Any, For Hoover's Claim of an Equitable Lien or Constructive Trust

In Florida an equitable lien may be "founded upon two bases: (1) a written contract that indicates an intention to charge a particular property with a debt or obligation; or (2) a declaration by a court out of general considerations of right or justice as applied to the particular circumstances of a case." See Dewing v. Davis, 117 So.2d 747, 750 (Fla.Dist.Ct.App.1960)(citing Jones v. Carpenter, 90 Fla. 407, 106 So. 127, 129 (1925)); In re Aloisi, 261 B.R. 504, 509-10 (Bankr.M.D.Fla.2001). It is without question that no written contract upon which to impose an equitable lien exists in this case. Therefore, any claim that Hoover may have must fit into the second justification, namely, that the circumstances of the case require the imposition of an equitable lien.

The Florida Supreme Court has stated that an equitable lien may be imposed in limited circumstances where a debtor fraudulently procured funds to invest in, purchase, or improve a homestead. See Palm Beach Savings & Loan Assoc. v. Fishbein, 619 So.2d 267, 270 (Fla.1993); Dowling v. Davis, 2006 WL 2331070, at *3, 2006 U.S. Dist. LEXIS 55541, at *9 (M.D.Fla.2006); Isaacson v. Isaacson, 504 So.2d 1309, 1310(Fla.Dist.Ct.App.1987)(noting that "when an equitable lien is sought against homestead real property, some fraudulent or otherwise egregious act by the beneficiary of the homestead protection must be proven."); Havoco of Am., Ltd. v. Hill, 255 F.3d 1321, 1321 (11th Cir.2001).

Bankruptcy Courts have traditionally turned to equitable liens in response to some fraudulent act by an individual when the fraudulent act related to the acquisition or improvement of the homestead. See In re Grocki, 147 B.R. 274, 278 (Bankr.S.D.Fla.1992)(imposing an equitable lien on homestead where debtor used fraudulently obtained funds to pay down a mortgage); DIRECTV, Inc v. Deerey (In re Deerey), 371 B.R. 525, 536 (Bankr.M.D.Fla.2007)(refusing to impose an equitable lien with funds obtained from illegal activities...