In Chauncey v. Dzikowski, No. 05-12543 (11th Cir. July 7, 2006), debtor, prior to filing for bankruptcy, received a personal injury settlement and had the proceeds sent directly to her mortgagee. This payment was applied to her principal and significantly increased the equity in her home. The debtor did not dispute that her intent was to protect, under Florida law, the equity in her homestead from unsecured creditors. There was no dispute that the debtor delayed her bankruptcy filing until after the transfer to the mortgagee was concluded.
The trustee requested that the Bankruptcy Court grant an equitable lien on the real property as a result of the debtor’s conduct, and the Court granted the lien. The District Court affirmed and the debtor appealed.
The Eleventh Circuit reversed with respect to the lien. The debtor did not obtain the funds by fraud or wrongdoing, and while her move was a blatant attempt to deceive her creditors and made in bad faith, it did not rise to the level of fraud or egregious behavior, as required for the imposition of an equitable lien under Florida law.