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Case Law Update: Homestead Exemption Cannot Be Use to Facilitate Unjust Enrichment

Posted Wednesday, December 17, 2014 by Christopher L. Thayer

alt textIn a recent decision by Division I of the Washington Court of Appeals, Gass v. Abdel-Wahed, the Court addressed the “abuse” of the homestead exemption in the context of a divorce proceeding. The court specifically held that, where a party has wrongfully obtained funds belonging to another and there is a sufficient connection between the wrongfully obtained funds and the homestead property, a court may impose an equitable remedy of a constructive trust on proceeds received from the sale of the property.

Washington’s Homestead Exemption applies to “real or personal property that the owner uses as a residence.” RCW 6.13.010(1). A Homestead is exempt from execution on judgments up to a specified amount. RCW 6.13.070(1). The exempt amount is currently $125,000. RCW 6.13.030. Meaning that if party A has a judgment against party B and Party B has a residence with only $125,000 in equity (after accounting for all liens), party A cannot execute on that equity. A judgment against the owner of the homestead becomes a lien on the value of the homestead property in excess of the homestead exemption from the time it is recorded. RCW 6.13.090; Wilson Sporting Goods Co. v. Pedersen, 76 Wn. App. 300, 304-06, 886 P.2d 203 (1994).

It is well established that the Homestead exemption cannot be used to facilitate unjust enrichment or fraud, and the court in equity may impose a constructive trust.” Washington law has recognized a non-statutory exemption that “allows an equitable lien to be imposed against a homestead when the homestead claimant acquires the funds to purchase the homestead by fraud or theft.” Fed. Intermediate Credit Bank of Spokane v. O/S Sablefish, 111 Wn.2d 219, 229-30,758 P.2d 494 (1988).

Nancy Gass and Ahmad Abdel-Wahed, were previously married. A decree dividing their marital assets was entered on August 24, 2010. Each party was to receive an equal share of the community assets. The marital home was awarded to Abdel-Wahed. Gass’s offsetting award was to come from specified investment accounts held in Abdel-Wahed’s name. Abdel-Wahed was ordered to pay spousal maintenance. Abdel-Wahed continued to live in the house. He did not make spousal maintenance payments and he did not transfer funds to Gass. He used investment funds to pay living expenses, including mortgage payments – instead of paying Gass. The trial court issued an order and judgment of contempt against Abdel-Wahed for failing to pay spousal maintenance and judgment was entered against him. The judgment ordered that the marital home be sold. The home was sold but Abdel-Wahed refused to agree to let Gass receive sale proceeds towards satisfying the balance of her judgment. He asserted protection of the homestead statute.

The Court of Appeals noted that under the unique facts of the case there was a “clear connection between the wrongfully obtained funds and the property claimed as an exempt homestead”. The dissolution decree gave Abdel-Wahed sole ownership of the home. He was held in contempt for failing to comply with an order to transfer money to Gass from the investment accounts to equalize the distribution of marital assets. The court found this to be “intentionally culpable” conduct and imposed a constructive trust in favor of Gass over the sale proceeds.

The Homestead Exemption was intended to protect judgment debtors from losing all of their presumably hard earned equity in their residence. As the Gass decision makes clear, this exemption is not absolute and the Court will not allow a party to use this exemption as a shield to protect from fraudulent activity or other “intentionally culpable” conduct that relates specifically to the property at issue. It should be noted that this is a narrow exception to the rule, and will most likely only apply in situations where there is a “sufficient connection” between the debt and the property subject to the exemption.

Questions about the Homestead Exemption? Call Chris Thayer at (206) 805-1494 or email him at CThayer@PivotalLawGroup.com.

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