Junior Creditor Allowed To Snatch Surplus Sale Proceeds As Court Says Foreclosed Owner Not Entitled To Homestead Protection While Away In Jail

The following facts are taken from a recent ruling from a division of the Washington State Court of Appeals:

1. Homeowner Susan cops guilty plea for embezzling $300K+ from employer and is incarcerated for 24 months;



2. While incarcerated, Susan's home falls into foreclosure, is sold in a public sale, and yielded $57,381.30 in excess of what was necessary to satisfy the obligation owed to the primary lien holder;



3. After a proper distribution of approximately $25,000 owed to a 2nd mortgage holder, the trial court awarded 50% of the remaining balance of the excess sale proceeds (ie. the 'overbid') to homeowner's ex-husband (a co-owner of the property who was not implicated in Susan's embezzlement), and the remaining 50% to Susan's (presumably now-former) employer, the victim of her embezzlement (presumably, the victimized employer was treated as a judgment creditor on account of a restitution lien that attached to her 50% share of the home after her conviction).



4. Susan objected and appealed the trial court ruling, claiming that she was entitled to her 50% share of the proceeds by reason of the homestead protection against claims by lienholders holding non-consensual judgments, and unsecured creditors.(1)

In an unpublished ruling,(2) the state appeals court affirmed the ruling of the trial court, saying that because Susan:

• had not filed a declaration of homestead, and



• had not lived on the premises for more than six months before the foreclosure sale

RCW 6.13.050 of the Washington State statute established her abandonment of the homestead. Accordingly, the remaining proceeds from the sale of her home was not entitled to the homestead protection provided under state law.

For the ruling, see In re Trustee's Sale of the Real Prop. of Arrington, No. 66103-5-I (Wn. App. 1st Div. March 26, 2012).

(1) The appeals court points out that homestead protection extends to the surplus proceeds generated in a foreclosure sale:

• RCW 61.24.080(3) provides, in relevant part: "Interests in, or liens or claims of liens against the property eliminated by sale under this section shall attach to the surplus in the order of priority that it had attached to the property."
  
  But, as this court held in Sweet, a home owner's interest attaches to the surplus proceeds from a nonjudicial foreclosure sale under a deed of trust such that a judgment creditor's claim is limited to funds in excess of the homestead, if any. In re Trustee's Sale of the Real Prop. of Sweet, 88 Wn. App. 199, 200, 944 P.2d 414 (1997); see also In re Trustee's Sale of the Real Prop. of Upton, 102 Wn. App. 220, 223, 6 P.3d 1231 (2000) ("Generally, a property owner's homestead interest in property takes priority over the interests of other creditors.").

(2) When an appeals court issues a ruling that it characterizes as unpublished, it typically does so because it has determined that the ruling is a narrow one, limited to the particular facts of the case, and consequently, is of no value as precedent and should therefore not be cited as such in future cases.

It may be that the court felt that had the facts been slightly different in this case, it would have reached a different outcome.

Alternatively, the court may have felt that one or more issues relating to this particular fact pattern either went unraised or were inadequately briefed by the parties which, had they been properly raised or more adequately briefed, the court would have been compelled to reach a different outcome, one more favorable to the homeowner. If such was the case, the court may not want this ruling to be viewed as binding precedent to be applied in all cases involving an incarcerated homeowner claiming the homestead protection afforded him/her under state law.

Note that it is not uncommon for the homestead laws of other states to treat a homeowner who has been incarcerated as not having abandoned his/her homestead rights, regardless of how long the homeowner is incarcerated for. See, for example:

• Holden v. Cribb, 349 S.C. 132, 561 SE 2d 634 (S.C. App. 2002) (applying South Carolina law):
  
  Holden also argues Singleton is not entitled to the homestead exemption because he is currently in jail. We disagree. [...] We hold that Singleton, though incarcerated, is entitled to the protection of the homestead exemption.
  
  "The act and intent as to domicil, and not the duration of residence, are the determining factors." Miller at 129, 149 S.E.2d at 339. Clearly, Singleton had no intent to transfer his residence to the detention center and, in fact, was being involuntarily detained.
  
  "`To effect a change of residence or domicile, there must be an actual abandonment of the first domicile, coupled with an intention not to return to it, and there must be a new domicile acquired by actual residence in another place or jurisdiction, with the intention of making the last acquired residence a [permanent] home.'" Reynolds v. Lloyd Cotton Mills, 177 N.C. 412, 99 S.E. 240, 242 (1919) quoted with approval by and followed in Ferguson v. Employers Mut. Cas. Co., 254 S.C. 235, 239, 174 S.E.2d 768, 769 (1970) (alteration in original).
  
  We daresay Singleton has no intent to make the detention center his permanent residence. To hold otherwise would thwart the underlying policy of the homestead exemption.
  



• Roberts v. Grisham, 493 So. 2d 940 (Ms. 1986) (applying Mississippi law):
  
  The question before us is whether the appellee, Wesley Grisham, was divested of his rights to claim homestead exemption by virtue of his conviction for murder and sentence of life imprisonment. The Circuit Court of Clay County held that such conviction and imprisonment did not deprive appellee of his right of homestead exemption. We affirm. [...] Under the law as it presently stands, absence occasioned by imprisonment — even a life sentence — does not defeat the claim of homestead. This Court therefore has no alternative but to affirm the holding of the trial court on all issues.



• In re Gerholdt, No. 11-01321 (Bankr. N.D. Iowa. 2011) (applying Iowa law and collecting cases from other states):
  
  A removal from a homestead is an abandonment of the exemption, unless the move was intended to be temporary. Kimball v. Wilson, 13 N.W. 748, 748 (Iowa 1882). The homestead right "will continue during a temporary absence while the owner has a fixed and definite intention of returning." In re Powers, 286 B.R. 726, 728 (Bankr. N.D. Iowa 2002), citing In re McClain's Estate, 262 N.W. 666, 669 (Iowa 1935). When an absence from the homestead is prolonged, the intention to return to the premises as a home should be clear and unmistakable. Fyffe v. Beers, 18 Iowa 4, 1864 WL 266, at *4 (Iowa 1864). The owner may meet this burden by showing a continued and fixed purpose to return with the question resting primarily on the owner's actual intent. In re Roberts, 450 B.R. 159, 169 (N.D. Iowa 2011). The party objecting to a homestead exemption has the burden to prove the exemption is not properly claimed. Fed. R. Bankr. P. 4004; In re Stenzel, 301 F.3d 945, 947 (8th Cir. 2002); In re White, 293 B.R. 1, 4 (Bankr. N.D. Iowa 2003).
  
  The Iowa Supreme Court has found that the incarceration of a wife in an insane asylum after her husband's death does not affect her homestead rights. Floyd County v. Wolfe, 117 N.W. 32, 34 (Iowa 1908).
  
  Minnesota courts have found exception to the physical occupancy requirement for homesteads under Minnesota law in cases involving imprisonment or mental incapacity. In re Mueller, 215 B.R. 1018, 1025 (B.A.P. 8th Cir. 1998).
  
  Texas courts have held a homestead is not abandoned merely because a person does not occupy the home during a prison sentence. Driver v. Conley, 320 S.W.3d 516, 519 (Tex. App. 2010).
  
  Likewise, Kansas courts have concluded that the fact the owner was incarcerated did not result in voluntary abandonment of the homestead. See In re Hall, 395 B.R. 722, 734 (Bankr. D. Kan. 2008); see also In re Crabb, 2007 WL 7209436, at *3-4 (Bankr. S.D. Cal. Jun. 21, 2007) (finding incarcerated debtor was entitled to California homestead exemption).
  
  ANALYSIS
  
  Based on the foregoing, and in light of the mandate that Iowa's exemption statutes be liberally construed, the Court concludes that Debtor is entitled to claim his real estate exempt as his homestead even though he is currently incarcerated. Testimony at trial establishes that Debtor lived at the homestead real estate prior to the time he was incarcerated and he intends to return after completing his sentence. AgVantage has the burden to prove Debtor's homestead is not properly claimed exempt. The only proof it has put forward is the fact that Debtor is incarcerated. This is insufficient to defeat Debtor's homestead exemption.

See also:

• Texas: Sexual Assault Victim's Attempt To Satisfy Money Judgment By Snatching Now-Vacated, Jailed Perpetrator's Texas House Squelched By Homestead Claim,


• Florida: 9 To 33 Year Sentence No Bar To O.J.'s Florida Homestead Exemption; Ex-Football Star To Keep Benefit Despite 'Scoring' Extended Stay In Nevada Prison.