Oftentimes, fraudulently transferred funds end up being invested in the debtor or subsequent transferee’s personal residence under the mistaken belief that creditors cannot reach it if it is the transferee’s homestead. However, it is well-settled law that the homestead and exemption laws of Texas were never intended to be, and cannot be, the haven of wrongfully obtained money or properties. 1)Pace v. McEwen, 617 S.W.2d 816, 818 (Tex. App.—Houston [14th Dist.] 1981, no writ); Baucum v. Texan Oil Corporation, 423 S.W.2d 434, 442 (Tex. Civ. App.—El Paso 1967, writ ref’d n.r.e.) 

Therefore, “funds wrongfully diverted from a corporation and subsequently diverted into property ordinarily exempt will be subject to a constructive trust.” 2)Baucum v. Texan Oil Corporation, 423 S.W.2d at 442. A constructive trust is “an equitable tool in the court’s power that can infer a fiduciary-like relationship within a transaction for the purpose of promoting justice.” 3)Harris v. Sentry Title Co., Inc., 715 F.2d 941, 946 (5th Cir.1983); see also Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App.—Corpus Christi 2002). The constructive trust will be for the benefit of the defendant’s creditors. Because the property was purchased with fraudulently transferred funds, it is not owned by the homestead claimant, rather it is owned by the trust. So, the homestead claimant cannot actually show ownership to prove up the homestead.

To attack a claim of homestead, a creditor should file a lawsuit that alleges violations of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) with regard to the homestead and request that a constructive trust be imposed. The creditor should also seek a preliminary injunction that would enjoin the debtor/subsequent transferee from further transferring the asset.

Furthermore, when a creditor has properly asserted that a debtor fraudulently transferred funds into a property designated as a homestead, a notice of lis pendens can be filed (as the creditor has asserted an interest in the alleged homestead property). 4)See Texas Kidney, Inc. v. ASD Specialty Healthcare, 2014 WL 3002425, at 9 (Tex. App.—Houston [14th Dist.] July 1, 2014, no pet.).   This will notice to all potential subsequent transferees, that conduct a title search, that the property is subject of a lawsuit.

If the jury finds that fraudulently transferred funds were used to purchase property designated as a homestead, the court can place the property in a constructive trust for the creditors and the creditors can sell it to satisfy their judgment.

References   [ + ]

1.Pace v. McEwen, 617 S.W.2d 816, 818 (Tex. App.—Houston [14th Dist.] 1981, no writ); Baucum v. Texan Oil Corporation, 423 S.W.2d 434, 442 (Tex. Civ. App.—El Paso 1967, writ ref’d n.r.e.) 
2.Baucum v. Texan Oil Corporation, 423 S.W.2d at 442.
3.Harris v. Sentry Title Co., Inc., 715 F.2d 941, 946 (5th Cir.1983); see also Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App.—Corpus Christi 2002).
4.See Texas Kidney, Inc. v. ASD Specialty Healthcare, 2014 WL 3002425, at 9 (Tex. App.—Houston [14th Dist.] July 1, 2014, no pet.).