§ 3.04 RIGHT OF REIMBURSEMENT: THE EQUITABLE LIEN

• Jurisdiction: Washington

§ 3.04 RIGHT OF REIMBURSEMENT: THE EQUITABLE LIEN

The right of reimbursement is most easily understood by first identifying the three "estates" involved—the husband's separate property, the wife's separate property, and the community property. When a contribution is made by one estate to another estate, a right of reimbursement may arise in favor of the contributing estate, as discussed in § 3.04[1], below. Courts may enforce the right of reimbursement by means of an equitable lien. See § 3.04[2], below.

Fully understood, each of these "estates" may also include labor. Thus, during marriage, community labor contributed to a separate estate may generate a right of reimbursement for the community estate. And labor contributed to the community estate during a period when a marriage is "defunct" or after dissolution may generate a right of reimbursement for a separate estate.

[1] Right of Reimbursement

In this section, we examine the nature of the right of reimbursement, the elements of proof required to enforce the right, and available defenses.

There are three basic approaches to analyzing the nature of the underlying right of reimbursement: the debt approach, the equity approach, and the fiduciary approach. Under the debt approach, a spouse may not, by unilateral act, require the other spouse to become an investor in the acting spouse's property or in the community property. Therefore, the right of reimbursement should be regarded as an ordinary debt, including interest thereon at an appropriate rate. The debt approach remedies the loss of the time value of money to the appropriate fund without subjecting the property applied to the improvement to the hazards involved in the appreciation or depreciation of the particular property improved.

The equity approach proceeds on the assumption that the management system itself implies the right of each of the spouses to improve the property of one character with property of another character. In doing so, the spouse invests the latter in the former and thereby acquires an equitable share in the property to which the contribution is made. Under this approach, the equitable share participates pro rata in the appreciation or depreciation of the property. Neither return of, nor interest upon, the actual amount contributed is appropriate under this approach.

A third approach would subject the property to which contribution was made to debt treatment if it depreciated and equity treatment if it appreciated. This approach is normally applied to fiduciaries, and it would hold a spouse acting as a manager of community property to the highest fiduciary standards.

Comment: This third approach is most clearly applicable to cases in which the acting spouse has unilaterally contributed community funds to the acting spouse's separate property. When a nonacting spouse is not sufficiently upset to overturn the marriage to effect a remedy but nevertheless persistently withholds consent, holding the acting spouse to the highest fiduciary standards and requiring that the nonacting spouse (standing in the place of the trust beneficiary) be benefitted without risk seems entirely appropriate. Thus, the community contributions may be considered a loan when return of the contributions "lent" with interest would exceed the value added by those contributions. On the other hand, if the community contributions have caused the value of the separate property to appreciate in excess of the interest that might be returned on a loan theory, it seems unfair to allow the acting spouse to capture that excess appreciation without sharing it with the other spouse. In that instance, the nonacting spouse should be awarded a pro rata share of the appreciation attributable to the community contributions. In such cases, the fiduciary "heads-I-win-tails-you-lose" approach to benefit the nonacting spouse is a fair result.

[a] Transactions Creating the Right

The most common situation in which a right of reimbursement arises has involved a community contribution of funds or labor by a managing spouse for the benefit of that spouse's separate estate. When a spouse uses community funds to improve his or her separate property, the spouse creates the archetypical right-of-reimbursement case. The situation is susceptible of several resolutions: The improved property might be considered entirely separate property. The improved property might be considered partially community property and partially separate property. or the improved property could be transmuted into the character of the improving funds.

None of these solutions has appealed to the Washington courts. After some hesitation, the courts have concluded that the improved property should retain its original character, but that a right of reimbursement, based on the value of the funds or labor used to make the improvement, should be recognized. See, e.g., Conley v. Moe, 7 Wn.2d 355, 360-62, 110 P.2d 172 (1941). The Supreme Court therefore necessarily has concluded that the independent character of the funds or labor expended is submerged into the property being improved, subject to the right of reimbursement. The rationale derives from the fixtures concept in real property law, in which the land is the principal thing. The rationale falls short of explaining whether the right of reimbursement to which an improving "estate" is entitled should include either a share of appreciation in value or interest on the amount contributed, so it has remained for the court to decide in later cases how to measure the right of reimbursement. This is discussed in § 3.04[1][d], below.

The right of reimbursement is by no means confined to the archetypical situation in which community funds or labor improve the separate real property of one spouse. The right has also been found to arise when the contribution has been made to personal property rather than real property. Further, the decisions indicate that the right arises when separate property of one spouse is invested in or expended to improve community property or the separate property of the other spouse. In re Marriage of Harrington, 85 Wn. App. 613, 630, 935 P.2d 1357 (1997) (stock options); In re Marriage of Sedlock, 69 Wn. App. 484, 849 P.2d 1243, review denied, 122 Wn.2d 1014 (1993) (when stock was purchased with community funds and credit, using community warrants or options, and separate property was used to pay off the debt for which community credit was pledged, separate property was entitled to reimbursement). But see In re Marriage of Chumbley, 150 Wn.2d 1, 74 P.3d 129 (2003) (exercise of community property stock options with separate property entitles separate property estate to a pro rata share of the stock purchased, rather than a right of reimbursement) (distinguishing Marriage of Sedlock, 69 Wn. App. 484).

Moreover, when community funds are used to satisfy separate obligations or when community personal property is devoted to the furtherance of a business that is the separate property of one of the spouses, a right of reimbursement for the value of community property so diverted is said to arise. It also applies in cases involving unmarried cohabitants whose CIR property is being divided under Connell v. Francisco, 127 Wn.2d 339, 898 P.2d 831 (1995). E.g., In re Black, No. 64903-5-I, 2010 Wash. App. LEXIS 1771, 157 Wn. App. 1019 (Wash. Ct. App. Aug. 2, 2010) (unpublished), review denied sub nom. Black v. Einstein, No. 85034-8, 170 Wn.2d 1018, 245 P.3d 772, 2011 Wash. LEXIS 15 (Wash. Jan. 4, 2011) (unpublished) (equitable lien securing a right of reimbursement in 20 percent of the proceeds from the sale of real property arose because CIR services had increased the equity of the property); Cunningham v. Burns, No. 47868-1-I, 2002 Wash. App. LEXIS 1727, 12 Wn. App. 1042 (Wash. Ct. App. July 22, 2002) (unpublished) (equitable lien arose in favor of unmarried partner who contributed her separate property as a down payment on domestic partnership property home).

In In re Marriage of Kile, 186 Wn. App. 864, 347 P.3d 894 (2015), community funds had been used to make payments on a separate property real estate contract. The court stated, "Community property contributions that retire a purchase obligation on separate property will give rise to a community right of reimbursement protected by an equitable lien, but they do not result in a transmutation of the property from separate to community property." 186 Wn. App. at 884 (citations omitted). As noted, Washington courts seem satisfied that when an improvement is made upon property of a character different from that used for the improvement, the character of the asset improved remains unchanged. The character of the improvement becomes the same as that of the improved property. As stated in Conley v. Moe, 7 Wn.2d 355, 360, 110 P.2d 172 (1941):

[T]he status of property, whether real or personal, becomes fixed as of the date of its purchase or acquisition, and remains so fixed unless changed by deed, by due process of law, or by the working of some form of estoppel.

Accord Baker v. Baker, 80 Wn.2d 736, 498 P.2d 315 (1972); Leroux v. Knoll, 28 Wn.2d 964, 184 P.2d 564 (1947); In re Pugh's Estate, 18 Wn.2d 501, 139 P.2d 698 (1943); Strand v. Pekola, 18 Wn.2d 164, 138 P.2d 204 (1943); In re Marriage of White, 105 Wn. App. 545, 553, 20 P.3d 481 (2001).

In the court's view, such improvements upon property do not change the legal title to it, but do subject it to certain equities that give rise to a right of reimbursement secured by an equitable lien on it. Conley, 7 Wn.2d at 361. Similarly, payments on a mortgage obligation or purchase contract give rise to a right of reimbursement. Fritch v. Fritch, 53 Wn.2d 496, 335 P.2d 43 (1959) (purchase contract); Merkel v. Merkel, 39 Wn.2d 102, 234 P.2d 857 (1951) (mortgage); Farrow v. Ostrom, 16 Wn.2d 547, 133 P.2d 974 (1943) (purchase contract).

CONLEY V. MOE, 7 Wn.2d 355, 110 P.2d 172 (1941). The trustee in

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