Court Opinion

ID: 59526
Source: CourtListenerOpinion
Date Created: 2010-04-26 03:20:46+00
Date Added: 2024-06-11T11:50:24.743355
License: Public Domain

[DO NOT PUBLISH]

               IN THE UNITED STATES COURT OF APPEALS

                          FOR THE ELEVENTH CIRCUIT           FILED
                           ________________________ U.S. COURT OF APPEALS
                                                           ELEVENTH CIRCUIT
                                 No. 06-16609               FEBRUARY 4, 2008
                             Non-Argument Calendar          THOMAS K. KAHN
                           ________________________             CLERK

                      D. C. Docket No. 05-80181-CV-JCP
                         BKCY No. 99-34954-BKC-SH

In Re: Lewis J. Hecker,

                                                             Debtor.

__________________________________________________

LEWIS J. HECKER,

                                                            Plaintiff-Appellant,

                                    versus

KOKOMO SPRING COMPANY,

                                                           Defendant-Appellee.

                           ________________________

                  Appeal from the United States District Court
                      for the Southern District of Florida
                        _________________________

                               (February 4, 2008)
Before ANDERSON, WILSON and PRYOR, Circuit Judges.

PER CURIAM:

       The Appellant, Lewis J. Hecker, appeals the district court’s affirmance of

two orders of the bankruptcy court: (1) the denial of Hecker’s claim of exemption

for the Lewis J. Hecker Retirement Trust (“LJH Trust”); and (2) the denial of

Hecker’s claim of homestead exemption.

                                   I. BACKGROUND

       On July 9, 1987, Kokomo Spring Company (“Kokomo”) entered into an

agreement to acquire stock from a company of which Hecker was the sole

shareholder.1 In connection with this sale of stock, the bankruptcy court found

Hecker to have engaged in a multitude of fraudulent misrepresentations and

omissions, which enabled Hecker to fraudulently acquire approximately $1.05

million in cash from Kokomo. Hecker proceeded to move these fraud proceeds

through multiple banks before eventually depositing approximately $500,000 in

his own personal account at NationsBank and $1,000,000 in the H.D.G.

Investments Corp. (“HDG”) account at NationsBank.2 Hecker then withdrew

       1
        At the time of the agreement, the Kokomo Spring Company was known as the Spring
Acquisition Company.
       2
        Hecker formed HDG in 1988, in which he owned all of its stock and served as its
president.

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$212,500 from the HDG account and invested it in Heritage Communications, Inc.

(“Heritage”). As a result of this capital investment, Hecker received Heritage

stock and a “consulting agreement.”

      From 1988 through 1996 or 1997, Hecker received payments from Heritage

under the “consulting agreement” of approximately $100,000, plus bonuses of

$50,000 or $60,000, per year. Hecker served as president of Heritage for a time,

but he disclaimed being an employee of Heritage and that the payments he

received from Heritage were a salary for his role as president. Hecker claimed that

he received the payments for his consulting services and that the amount of the

bonus was determined “depending on how things went.” After Hecker “retired”

from Heritage, a retirement agreement enabled him to continue receiving

approximately $100,000 per year from Heritage.

      On December 21, 1994, Hecker and his wife, Gloria, closed on a home (“the

Stonebridge Property”) for a total purchase price of $408,821.22. Of the total

purchase price, $125,321.22 was funded by cash from Hecker’s personal

NationsBank account, and the remaining $283,500 was funded through a

mortgage.

      On October 8, 1999, Hecker voluntarily filed for bankruptcy under Chapter

                                         3
7 of Title 11 of the United States Code. During the initial pendency of the

bankruptcy litigation, Hecker had control over all estate property, including the

LJH Trust which, at the time of filing, contained $540,608.65. Hecker sought to

exempt two assets from the bankruptcy estate: (1) the homesteaded Stonebridge

Property; and (2) the LJH Trust.

A. The Stonebridge Property

      Upon Kokomo’s objection to Hecker’s claim of homestead exemption, the

bankruptcy court found that the funds used to purchase the Stonebridge Property

were drawn either from the NationsBank account or the revenues received from

Heritage, both of which were traceable to the fraud proceeds. Hecker had directly

deposited fraud proceeds into his personal NationsBank account, and the Heritage

revenues constituted an automated return on Hecker’s capital contribution—a

contribution composed of fraud proceeds. The court rejected Hecker’s argument

that the Heritage revenues represented new income in the form of compensation

for consulting services. Because a substantial amount of funds used to purchase

Stonebridge Property were traceable to fraud proceeds, the court held that the

property did not qualify for a homestead exemption and was subject to an

equitable lien in Kokomo’s favor. The district court affirmed.

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B. LJH Trust Exemption

      Kokomo also objected to Hecker’s claim of exemption for the LJH Trust

and, in March 2004, moved for a preliminary injunction on the withdrawal,

transfer, encumbrance, or disposition of trust assets. On March 17, the bankruptcy

court granted temporary injunctive pending further hearing and directed Hecker to

provide an accounting of the balance and transactions of the trust. On April 13,

the bankruptcy court entered the preliminary injunction.

      Upon receiving the LJH Trust account documentation, Kokomo discovered

that Hecker had withdrawn approximately $250,000 from the LJH Trust accounts

since the petition for bankruptcy had been filed. Kokomo filed an emergency

motion seeking a Writ of Attachment against all of Hecker’s assets for the

amounts withdrawn from the LJH Trust and further moved for the sanction of

striking Hecker’s claim of exemption for the LJH Trust. The bankruptcy court

issued a Writ of Attachment against all of Hecker’s property, including the LJH

Trust, but did not strike Hecker’s claim of exemption for the LJH Trust.

      Later, at a June 7 hearing, the bankruptcy court considered Kokomo’s

renewed motion to strike Hecker’s claim of exemption for the LJH Trust on the

basis of the recent Hecker deposition, which revealed, inter alia, that Hecker had

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disbursed a significant amount of LJH Trust funds well after the bankruptcy court

had entered its preliminary injunction. Hecker elected not to testify on his own

behalf or appear at the hearing. The court determined that Hecker had violated the

March 17, 2004 order prohibiting withdrawal of funds from the Trust. The court

again declined to strike Hecker’s LJH Trust exemption and instead afforded

Hecker the opportunity to replenish the money he had withdrawn from the LJH

Trust in violation of its order. A further hearing was scheduled for June 15, 2004

to determine Hecker’s compliance with the replenishment order. On June 15, the

court determined that Hecker had not complied with the replenishment order and

concluded that Hecker “willfully violated orders of this Court, and that he has

violated his duties as a debtor, and that lesser sanctions have not, and will not,

suffice.” The bankruptcy court accordingly granted Kokomo’s Motion to Strike

Defenses and entered judgment in favor of Kokomo. Upon review, the district

court again affirmed.

                                 II. DISCUSSION

A. Standard of Review

      “In a bankruptcy case, the district court functions as an appellate court,

rendering this court the ‘second court of review.’” In re Calvert, 907 F.2d 1069,

1071 (11th Cir. 1990) (quoting In re Sublett, 895 F.2d 1381, 1384 (11th Cir.

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1990)). “The factual findings of the bankruptcy court cannot be set aside unless

they are clearly erroneous; however, conclusions of law made by either the

bankruptcy court or the district court are subject to de novo review.” In re

Calvert, 907 F.2d at 1071.

B. Homestead Exemption

      Hecker argues that the bankruptcy court clearly erred in finding that the

Stonebridge Property was funded with fraudulent proceeds, and therefore did not

qualify for the homestead exemption. We state from the outset that Hecker carries

a heavy burden: A finding of fact is only clearly erroneous when the reviewing

court, after reviewing all of the evidence, is left with the “‘definite and firm

conviction that a mistake has been committed.’” In re Int’l Admin. Servs., Inc.,

408 F.3d 689, 698 (11th Cir. 2005) (quoting Lykes Bros., Inc. v. United States

Army Corps of Eng’rs, 64 F.3d 630, 634 (11th Cir. 1995)).

      Article X, section 4(a) of the Florida Constitution provides in pertinent part:

    (a) There shall be exempt from forced sale under process of any court, and
    no judgment, decree or execution shall be a lien thereon, except for the
    payment of taxes and assessments thereon, obligations contracted for the
    purchase, improvement or repair thereof, or obligations contracted for
    house, field or other labor performed on the realty, the following property
    owned by a natural person:

    (1) a homestead . . . .

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Fla. Const. art. X, § 4.

While this provision grants an exemption from the forced sale of a homestead, the

exemption is inapplicable where “funds obtained through fraud or egregious

conduct were used to invest in, purchase or improve the homestead.” In re Fin.

Federated Title & Trust, Inc., 347 F.3d 880, 888 (11th Cir. 2003) (per curiam)

(quoting Havoco of Am., Ltd. v. Hill, 790 So. 2d 1018, 1028 (Fla. 2001)). In such

cases, an equitable lien upon the property is a viable remedy for creditors. See,

e.g., Palm Beach Savings & Loan Ass’n., F.S.A. v. Fishbein, 619 So. 2d 267, 270

(Fla. 1993) (holding that creditor bank was entitled to equitable lien to the extent

the funds fraudulently procured from the bank benefitted the home).

      Hecker’s first argument relies on the following stipulated fact: “Debtor used

funds derived from 1994 income for the purchase of the property.” Hecker argues

that income created in 1994 could not have existed in 1987 (when the fraud

occurred), and therefore the fraudulent proceeds cannot be traced to the purchase

of the property. The bankruptcy court found, however, that substantially all of

Hecker’s income from 1987 onward was derived from fraud proceeds either in the

form of Heritage investment returns or interest and dividend income from

NationsBank accounts under his control. Thus, the stipulated fact that funds

derived from 1994 income were used to purchase the property does not matter if it

                                          8
is found, as here, that such income was derived from fraudulent proceeds. Hecker

fails to pinpoint any clear error in the bankruptcy court’s tracing of fraudulent

proceeds to the Heritage disbursements or the NationsBank accounts.

      Hecker also takes issue with any reliance by the bankruptcy court upon the

testimony of Douglas Bailey, a shareholder and director of Kokomo, as to the

tracing of funds. Hecker contends that Bailey was without personal knowledge of

Hecker’s funds, and that Bailey’s testimony was not supported by adequate

documentation. Upon review of the record, however, it is clear that the

bankruptcy court’s factual findings were not based solely on Mr. Bailey’s

testimony; rather, the findings were based in substantial part upon Hecker’s own

testimony and on the documentary evidence presented at trial.

      In addition, Hecker believes that the bankruptcy court committed clear error

by failing to account for the stipulated fact that Hecker posted two letters of credit

in favor of Kokomo in 1989 for approximately one million dollars. As Kokomo

points out, the stipulation clearly states that Kokomo received these funds and

credited them against an outstanding judgment it had against Hecker. Hecker

makes no effort to show how such funds were applied to the Stonebridge Property

or how they disrupt the bankruptcy court’s tracing of fraudulent funds to the

property.

                                          9
      Hecker’s final argument is that the bankruptcy court’s imposition of an

equitable lien upon the Stonebridge Property was improper because Hecker co-

owns the property with his wife, Gloria. Hecker argues that since Gloria was not

made a party to this action, and since Gloria contributed some of her own funds to

purchase the property, imposition of an equitable lien upon the property is

improper. Hecker cites no authority for this position, nor is it clear that Hecker

raised this objection below.

      Both this Court, in In re: Fin. Federated Title & Trust, Inc., 347 F.3d 880

(11th Cir. 2003), and the Florida Supreme Court, in Palm Beach Savings & Loan

Assoc. v. Fishbein, 619 So. 2d 267 (Fla. 1993), have explained why an equitable

lien may be imposed upon property benefitted by fraudulent proceeds even where

one co-owner spouse is innocent and ignorant of the fraud. The answer is

straightforward: if an equitable lien is not placed on the property to the extent

Hecker’s fraudulently obtained funds benefitted the land, Gloria would be unjustly

enriched. In re Fin. Federated Title & Trust, Inc., 347 F.3d at 890; Fischbein,
619 So. 2d at 270-71. Gloria would effectively receive a “windfall” by way of

Hecker’s decision to disburse the fraudulently obtained funds to the benefit of the

family home. In re Fin. Federated Title & Trust, Inc., 347 F.3d at 890. The

homestead exemption would be used as a sword, rather than a shield. Fischbein,

                                          10
619 So. 2d at 271. For this reason, the focus of the equitable lien analysis is “the

fraudulent nature of the funds,” not whether the co-owner of the property had

knowledge of the fraudulent activity. In re Fin. Federated Title & Trust, Inc., 347
F.3d at 890.

      In light of Florida’s clearly enunciated desire to impose equitable liens

when the homesteads were purchased with the fruits of fraudulent activity, we see

no reason why Gloria’s absence as a party to this action or Gloria’s contribution of

her own funds to the homestead would preclude the imposition of an equitable

lien. The amount of the equitable lien can be no more than the amount

fraudulently obtained and used to benefit the land. In re Fin. Federated Title &

Trust, Inc., 347 F.3d at 892 (holding that amount of lien must be based upon the

amount of funds fraudulently obtained and used to purchase the property). In this

way, Gloria stands in no worse of a position than she would absent the transfer of

fraudulent funds to the homestead. See id. at 891 (explaining that equitable lien

put the defendants in “the same position” as they were before they purchased the

homestead with fraud proceeds).

C. LJH Trust Exemption

      Hecker contends that the bankruptcy court’s sanction disallowing his claim

of exemption for the LJH trust was improper. “Federal courts have the inherent

                                         11
power to impose sanctions on parties, lawyers, or both.” In re Sunshine Jr. Stores,

Inc., 456 F.3d 1291, 1304 (11th Cir. 2006). Such power is derived from the

court’s need to manage its affairs and achieve the orderly and expeditious

disposition of cases. Id. We review the court’s exercise of its inherent power for

abuse of discretion and, in doing so, we ask whether the court was clearly

erroneous in its factual findings or applied the wrong legal standard. Id. In

conducting this review, we are mindful that the “‘key to unlocking a court’s

inherent power is a finding of bad faith.’” Id. (quoting Byrne v. Nezhat, 261 F.3d
1075, 1106 (11th Cir. 2001)). A party demonstrates bad faith “‘by delaying or

disrupting the litigation or hampering enforcement of a court order.’” Id. (quoting

Byrne, 261 F.3d at 1121).

      Hecker complains that the sanction of striking his claim of exception was

too harsh because: (1) four-and-a-half years had passed between the time of filing

Kokomo’s objection to the LJH exemption and the time of the bankruptcy court’s

ruling and, as such, it was difficult to ascertain the exact amount to replenish

within the seven-day time period allowed by the court; and (2) a lesser sanction,

such as surcharge, would have been a more adequate punishment.

      The record of Hecker’s noncompliance in this case is clear and undisputed.

Upon Kokomo’s first motion to strike Hecker’s claim of exemption for the LJH

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Trust, the court declined to strike and instead issued a Writ of Attachment against

all of Hecker’s property. Upon Kokomo’s renewed motion to strike Hecker’s

claim of exemption, the court found that Hecker had, in fact, violated its previous

order prohibiting withdrawal of funds from the LJH Trust; however, instead of

granting the motion to strike, the court ordered Hecker to replenish the funds

improperly withdrawn. When Hecker failed to comply with the order to replenish,

the court determined that lesser sanctions would not suffice and struck Hecker’s

claim of exemption.

      Hecker’s complaint that he lacked the time needed to ascertain the amount

to replenish the LJH Trust is unpersuasive. Hecker, who improperly withdrew the

funds, was in the best position to know exactly the amount to be replenished into

the LJH Trust. Moreover, Hecker points to nowhere in the record where he moved

for an extension of time or otherwise made known his difficulties in ascertaining

the replenishment amount during the week leading up to the replenishment

hearing.

      Hecker’s call for a lesser sanction is also unavailing. The bankruptcy court

declined to strike Hecker’s claim of exemption on the first and second motions by

Kokomo, deciding to instead allow Hecker the opportunity to right the wrong he

had committed in violating the court’s order. The bankruptcy court only struck the

                                         13
claim of exemption when it became clear that lesser sanctions would not suffice in

light of Hecker’s “willful” noncompliance.

      Given Hecker’s clear record of noncompliance with the bankruptcy court’s

orders, we find, like the district court, no abuse of discretion.

Accordingly, we affirm.

AFFIRMED.

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