Did You Just Pledge Everything You Own? The Eleventh Circuit’s Surprising Decision Opens Avenue for Creditors to Access Exempt Assets

Chapter 222 of the Florida Statutes contains the statutory exemptions that protect certain assets from attachment or garnishment under Florida law.  Historically, the statutory exemptions have been liberally construed in favor of protecting the debtor against creditor claims to exempt assets.  A recent, albeit unpublished decision from the United States Court of Appeals for the Eleventh Circuit, raised doubts as to whether an individual can waive the protections afforded by the statutory exemptions under Chapter 222 by signing a security agreement containing a “blanket” collateral definition.

In Florida, the wages, life insurance proceeds, annuities, and funds held in retirement accounts of an individual are exempt from attachment or garnishment by a creditor.  Pursuant to the “wage exemption” set forth in Fla. Stat. § 222.11, all of the disposable earnings of a “head of family” equal to $750 or less per week are exempt, and any disposable earnings greater than $750 per week may not be attached or garnished unless such person has agreed in a writing satisfying the requirements of Fla. Stat. § 222.11(2)(b).  When an individual dies, the proceeds of an insurance policy are exempt from the claims of creditors of the insured decedent under Fla. Stat. § 222.13 unless the insurance policy states otherwise.  Section 222.21(2)(a), Florida Statutes, provides that retirement funds held in qualified plans under the Internal Revenue Code, including IRAs and Roth IRAs, are exempt from attachment by the creditors of a beneficiary or participant.  In Florida, the general rule is an individual can only waive their rights to protect exempt assets in a written waiver.

When an individual obtains a loan, the lender will typically require such individual to sign a security agreement under which the individual pledges specified assets as collateral in exchange for the lender extending credit to the individual.  If the individual defaults under the security agreement, the lender can seize the pledged collateral to satisfy the debt.  Under Florida’s Uniform Commercial Code, the collateral must be sufficiently described and identified in a security agreement.  A security agreement may limit the pledged collateral to a specific asset, such as shares of corporate stock, but oftentimes the collateral definition is broadly worded to include all of the assets of the debtor.  Incorporating such a “blanket” collateral definition is routine despite Fla. Stat. § 679.1081(3) providing that a description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” does not reasonably identify collateral for purposes of a security agreement.

In Kearney Construction Company, LLC v. Travelers Casualty & Surety Company of America, 795 Fed. Appx. 671 (11th Cir. 2019), the Kearney family obtained approximately $11,000,000 related to injuries suffered by a family member.  The Kearney family formed an LLC to invest the settlement proceeds.  The LLC granted Bing Charles W. Kearney (“Kearney”) a line of credit in the amount of $5,000,000 in exchange for Kearney’s execution of a promissory note and a security agreement.  Pursuant to the security agreement, Kearney pledged a security interest in “[a]ll assets and rights of the Pledgor, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof . . . .”  Kearney accumulated large debts over the next few years with several creditors.  In 2015, two creditors served a writ of garnishment on the bank where Kearney held several accounts, including an IRA titled in Kearney’s name, individually.  Among other positions, Kearney argued the funds held in his IRA were exempt from garnishment under Fla. Stat. § 221.21(2).  The trial court ruled against Kearney, and the case was appealed to the United States District Court for the Eleventh Circuit.

In a surprising decision, the Eleventh Circuit concluded the broad language in the security agreement constituted an unambiguous pledge of Kearney’s assets, including the IRA, which meant Kearney waived the protections afforded by Fla. Stat. § 221.21(2) because he signed the security agreement containing a “blanket” collateral definition.  In reaching its conclusion, the Eleventh Circuit disregarded the statutory protections afforded by Florida law and Fla. Stat. § 679.1081(3).  The security agreement in Kearney did not specifically identify Kearney’s IRA as part of the collateral.  The Eleventh Circuit did not identify the collateral category in the security agreement that purportedly covered the IRA.  Under Florida’s Uniform Commercial Code, the “blanket” collateral definition should not have applied to Kearney’s exempt assets.  Unfortunately for Kearney, the Eleventh Circuit concluded that Kearney waived his statutory rights under Chapter 222 with respect to his IRA.

Kearney’s Impact

The ripple effects from the Kearney holding could undermine the statutory protection afforded to exempt assets.  Although the Eleventh Circuit only examined whether Kearney waived his statutory exemption with respect to the IRA, the Kearney holding could be cited by intrepid creditors attempting to pursue other exempt assets when the debtor has signed a security agreement containing a similar, broadly worded collateral provision.  As of the date of this post, no Florida court has cited to the Kearney holding.  However, the lack of citations has not prevented the Florida Legislature from proposing legislative fixes in the previous two legislative sessions.

In the 2022 Florida Legislative Session, the Florida Legislature unanimously passed Senate Bill 406 and House 451, which sought to insert a new subsection (d) to Fla. Stat. § 679.1081(5).  The proposed Fla. Stat. § 679.1081(5)(d) intended to clarify that a general description only by type of collateral would be an insufficient description to pledge certain assets and entitlements that are exempt from creditors under Chapter 222 of the Florida Statutes, including proceeds from an annuity or life insurance contract, unemployment compensation benefits, disability insurance, funds held in qualified retirement accounts, and funds held in qualified tuition programs.  Under the proposed bill, the aforementioned assets would remain exempt unless the security agreement specifically identified such exempt assets.  Unfortunately, on June 24, 2022, Senate Bill 406 was vetoed. 

It is possible the Florida Legislature will introduce a modified bill addressing Kearney in the 2023 Florida Legislative Session.  Until a legislative fix is enacted, practitioners should meet with their clients to review the collateral definition in any existing security agreement.  If possible, practitioners should negotiate with creditors to explicitly carve out statutorily protected exempt assets from the definition of collateral definition and what is actually pledged.

If you have any questions regarding the Kearney decision or need assistance in reviewing your security agreement, you can reach Devon Goldberg at 561-626-2101 or dgoldberg@comitersinger.com.