Clash of the Statutes: In Battle Between Homestead and Color of Title Protections, Common Law Spouse Emerges the Winner

June 9, 2014 | Kristine A. Tidgren

In re Waterman, No.12–0800, 2014 Iowa Sup. LEXIS 63 (Iowa Sup. Ct. June 6, 2014)

Overview

Faced with sorting out the rights of a surviving common law spouse and a couple who purchased the deceased husband’s home in a judicially-approved sale, the surviving spouse appears to have prevailed.

Facts and District Court Action

The appellant and the decedent, who had never been married, lived together in the house at issue for eight years before the decedent’s death in May of 2008. The house was owned by the decedent and was “in dire need of repair.” The decedent died without a will, and the district court appointed his parents to be the administrators of his estate. Nineteen days after his death, the parents, acting as administrators, served the appellant with a notice to quit, requiring her to vacate the house within 30 days. The appellant moved out, and the administrators moved in. More than a year later, in August of 2009, the district court, in response to documents filed by the appellant, determined that the appellant was the decedent’s common law spouse and that, as such, she held protected property interests in the estate under Iowa Code §633.211(1). Although it does not appear that appellant initially raised the issue before the district court, her status as a surviving spouse also granted her a protected homestead right under Iowa Code §561.11[i], which allowed her to “’continue to possess and occupy’ the marital home until it was ‘otherwise disposed of according to law.’” The district court entered no orders regarding the appellant’s right to possess the property, and she continued to live elsewhere. The order finding the appellant to be the decedent’s common law spouse was not challenged.

In November of 2009, the administrators listed the home for sale. The appellees, who procured a title opinion that did not raise the appellant’s interest as a possible cloud on the title, offered to purchase the home for $20,000. The district court approved the sale over the appellant’s objection in May of 2010. The appellant was not at the time represented by counsel. She then acquired counsel and appealed the district court’s order, arguing that the district court erred in failing to recognize her homestead interest and in failing to prevent the administrators from engaging in self-dealing.  

Shortly after taking possession of the house, the appellees made extensive improvements to the home, spending more than $65,000 to upgrade the roof, septic system, plumbing, wiring, and other aspects of the property. Even after the appellees’ $85,000 investment in the home, an appraiser valued the home at only $41,000.

Iowa Court of Appeals Decision and Remand to District Court

In March of 2011, the Iowa Court of Appeals reversed the district court’s order approving the sale to the appellees and remanded for consideration of appellant’s homestead interest in the property in determining a proper distribution of the property. In an April 2012 hearing before the district court, the appellees argued that they were bona fide purchasers with no notice of the appellant’s adverse interest and that, as such, they qualified as “occupying claimants” under Iowa Code §560.1. Iowa Code §560.4 grants “occupying claimants” or those persons occupying real estate under a “color of title” and in “good faith,” the right to compensation for improvements made to the property if they are later adjudged not to be the owners.[ii]

The district court determined that neither the appellant nor the appellees had acted in bad faith and stated that “neither deserved to suffer the inequity of being ousted from the home or being saddled with costs exceeding the appraised value of the home.” The district court then gave the appellant the option the district court believed was prescribed by Iowa Code § 560.4[iii]: (1) taking possession of the home upon paying the appellees $53,500 as compensation for their improvements or (2) receiving $20,000 from the estate in exchange for relinquishing to the appellees her ownership interest in the property. The district court denied the appellant any damages for lost rent during the appellees’ time of possession, finding that without the appellees’ improvements, the house had no rental value.

The appellant challenged the order, and the Iowa Supreme Court retained the appeal.

Iowa Supreme Court Ruling

Although technically affirming the order, as modified, the Iowa Supreme Court gutted the district court’s order, transforming the result into a victory for the appellant. Specifically, the Court ruled that the appellant was entitled to receive $250 per month compensation from the appellees as the rental value of the home during the time it was occupied by the appellees. Without addressing specific evidence from record, the court set this amount after reviewing case law and finding that “real estate will generally retain some rental value, regardless of the conditions of the fixtures.” Because the appellees lived in the house for 48 months, the Court’s ruling requires them to pay the appellant $12,000 in past rent, regardless of whether she reclaims the house or not.

The Court also analyzed Iowa Code § 560.4 and offered the appellant a choice: (1) She could pay the appellees the appraised value of the improvements they made to the house and retain the property or (2) she could allow the appellees to remain in the home and collect $20,000 from the estate and/or the appellees.

The Court determined that since the appraised value of the home after the improvements was $41,000 and the pre-improvement value of the home was $20,000 (the amount the appellees paid for the home), the appraised value of the improvements was $21,000.

In other words, the Court’s decision gives the appellant this choice (1) move back into the completely renovated home (now valued at $41,000) by paying the appellees $9,000 ($21,000 for improvements - $12,000 in rental credit) or (2) walk away from the home and collect $32,000 ($20,000 as the pre-improvement value of the home + $12,000 in rental credit).

The Court concluded its opinion by stating, “Although we recognize that this may appear a harsh remedy, we believe the [appellees] are not left without other prospects for remedy, as they may assert claims against any persons having legal responsibility for their damages.”

Harsh indeed. If the appellant chooses to reclaim the home, the appellees will receive $9,000 in exchange for their $85,000 investment. Although, as the Court suggests, the appellees can assert claims against any person legally responsible for their damages, it is unclear whether any such remedies would be available. Although the estate would no doubt owe the appellees a refund of the purchase price of the home, it is not clear whether the estate would have any funds remaining to make such restitution.

Conclusion

It is difficult to see how this case did not get resolved before so much damage was done. It is perplexing that the district court allowed the sale of the home after ruling that the appellant was the surviving spouse. Attempting to resolve legal matters without legal counsel (as the appellant did early on) will often lead to this type of result. A court cannot advocate for a party, and it is unclear whether the appellant even raised the issue of her homestead rights before the district court before the appeal.

But other red flags were missed. Although the abstract of title on the property included an entry revealing the district court’s determination in 2009 that appellant was the common law surviving spouse and was entitled to an interest of the estate, the title opinion did not reference this entry or raise a possible cloud on the title. It also appears from the facts that the appellees, although found to be acting in good faith, were not entirely unaware of the appellant’s possible claim to the property. The appellant objected to the sale to the appellees, and the district court approved the sale only after a hearing. The appellant immediately challenged that order, but while the case was on appeal, the appellees outlaid their $65,000 to improve the property.

This case emphasizes the strength of the homestead protection. In a battle of equitable statutory remedies, it clearly won this round. It is important to remember that the homestead includes up to 40 acres for rural property under Iowa Code §561.2. Buyers and their counsel are urged to take heed of the red flags missed in this case. Prudence up front saves much regret later.

 

[i] Iowa Code §561.11 provides: “Upon the death of either spouse, the survivor may continue to possess and occupy the whole homestead until it is otherwise disposed of according to law, but the setting off of the distributive share of the survivor in the real estate of the deceased shall be such a disposal of the homestead as is herein contemplated.”

[ii] Iowa Code § 560.4 provides: “The owner of the land may thereupon pay to the clerk of court, for the benefit of the occupying claimant, the appraised value of the improvements and take the property and an execution may issue for the purpose of putting the owner of the land in possession thereof. Should the owner fail to make such payment within such reasonable time as the court may fix, the occupying claimant may pay to the clerk of the court, within such time as the court may fix, for the use of the owner of the land, the value of the property exclusive of the improvements and take and retain the property together with the improvements.