Opinion ID: 2048394
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Heading: Tracing Trust Proceeds into Homestead Property.

Text: The first issue we address is whether the district court erred in holding that the homestead nature of the defendants' property does not prevent plaintiffs from tracing the proceeds of a constructive trust or equitable lien into the property. Defendants assert Iowa Code section 561.21 (1985) identifies the only exceptions to the homestead exemption and that principles of statutory interpretation require we find the express exceptions are exclusive. It is true that homestead property is ordinarily immune from the attachment of nonpurchase money judgment liens. Iowa Code § 624.23(2). However, it is clear that plaintiffs' interest in the property is greater than that of an ordinary judgment lien. As a general proposition, a party in whose favor a constructive trust has been established may trace the property to where it is held and may reach whatever has been obtained through the use of it, including profits or income generated through its use. Regal Ins. Co. v. Summit Guar. Corp., 324 N.W.2d 697, 705 (Iowa 1982). Where the trust funds have been invested in property, the beneficiary may have an equitable lien thereon established up to the amount of the trust funds invested. Jones v. Nicholas, 151 Iowa 362, 369, 130 N.W. 125, 128 (1911); see Farnsworth v. Muscatine Produce & Pure Ice Co., 177 Iowa 21, 30, 158 N.W. 741, 745 (1916). This court has already indicated that the homestead nature of property does not shield it from the right of a constructive trustee to trace proceeds of the trust property. In In re Munsell's Guardianship, 239 Iowa 307, 31 N.W.2d 360 (1948), we held that, where funds from a ward's bank account were wrongfully used to make a mortgage payment on the guardian's home, a constructive trust would attach to the homestead for payment of the wrongfully diverted funds. 239 Iowa at 321, 31 N.W. 2d at 367. In McGaffee v. McGaffee, 244 Iowa 879, 58 N.W.2d 357 (1953), we held that an equitable lien could be impressed against the defendants' homestead property to the extent that funds originating from a fraudulently acquired business were used to pay a mortgage and other charges against the homestead. 244 Iowa at 893, 58 N.W.2d at 360-61. The listing of specific exceptions to the homestead exemption in the statute does not change the analysis. Although exemption statutes are to be liberally construed in favor of the debtor, our construction must not extend the debtor privileges not intended by the legislature. Farmers' Elevator & Livestock Co. v. Satre, 196 Iowa 1076, 1078, 195 N.W. 1011, 1012 (1923). We conclude the legislature never contemplated or intended that a homestead interest could be created or maintained with wrongfully appropriated property. See Warsco v. Oshkosh Sav. & Trust Co., 190 Wis. 87, 93-94, 208 N.W. 886, 888 (1926), cited with approval in Munsell, 239 Iowa at 321, 31 N.W.2d at 367. Where wrongfully obtained funds are used to purchase property, the property does not belong to the purchasers, and therefore, to the extent of the illegal funds used, they never acquire a homestead interest. E.g., Long v. Earle, 277 Mich. 505, 520, 269 N.W. 577, 582 (1936); Maryland Casualty Co. v. Schroeder, 446 S.W.2d 117, 121 (Tex. Civ.App.1969); Baucum v. Texam Oil Corp., 423 S.W.2d 434, 442 (Tex.Civ.App. 1968). The same principle applies where the funds are used to retire debt against the homestead. E.g., Boroughs v. Whitley, 363 P.2d 150, 152 (Okla.1961); Tabish v. Smith, 572 P.2d 378, 380 (Utah 1977).