Family Feud Involves Administration of Family Trust and Farming Corporation
Here, three siblings appeal a trial court’s decision to remove them as co-trustees of a trust created by their parents. In this case, the parents owned 2000 acres of Iowa farmland which they operated through a farm corporation. They had three children. The son was the on-farm heir and worked on the farm all of his life. The son was paid a monthly salary by the corporation and was provided with employee benefits including health insurance. The two daughters were not involved in the farming operation. All three siblings own minority shares in the farming corporation.
The trust at issue was created in 1992. The corpus of the trust consisted of the majority shares in the corporation and debentures owed to the parents from their initial investment in the farming corporation. The father was the sole trustee to be succeeded by his wife. If neither parent was able to serve, then the son was to act as trustee along with two disinterested individuals. The successor trustees were all notified and sent a copy of the trust. The trust agreement acknowledged that there was a potential for family disputes and provided for equal distribution of the trust assets to all three children. The son was given the first right to purchase his sisters shares at 90% of the appraised fair market value. The son was also given the quarter section on which his residence was located.
The father died in 1997 and the son and grandson continued to run the farming operation. The mother moved into a nursing home and all of her expenses were paid for by the trust. The siblings filed a lawsuit in 2006, asking the court to remove their mother as trustee because she was no longer able to serve. The siblings appointed themselves successor trustees with “equal voting rights and management rights.” The agreement noted that the two disinterested trustees named in the trust did not wish to act.
The corporation held a board meeting and the sisters appointed themselves to the corporation’s board of directors and named themselves as officers. The brother abstained from voting. The sisters also passed a resolution terminating their brother and nephew’s employment and access to benefits. They also passed a third resolution requiring the trust’s land to be cash rented starting in the 2007 crop year. Further, the sisters passed a resolution stating that all of the machinery and equipment would be sold.
At some point, one sister had a change of heart and rescinded her votes in favor of the resolutions. She and her brother agreed that the family farm should be operated as it was when the father ran the farm. The second sister filed suit and sought the removal of the brother as co-trustee and as director and officer of the farming operation. She contended that the farming operation was being run by her brother’s benefit and was not generating sufficient profit.
The matter came to trial. (The mother passed away one month later amidst the family squabbling.) In August of 2009, the court ordered the removal of all three siblings as co-trustees and granted the second sister’s application for the appointment of a receiver. The trial court also ordered that the farmland be cash rented. Naturally, the brother appealed, claiming that the trial court erred in removing him as co-trustee, director, and officer and erred in ordering the trust’s land be cash rented. The second sister cross-appealed, claiming the trial court should have ordered her brother to produce full income tax returns, provide a full accounting of the farming corporation and to buy her shares or sell his shares to her. She also claimed that the trial court should have required the receiver to convert the C corporation into three Sub-S corporations for tax purposes.
The Iowa Court of Appeals first addressed the issue of whether the trustees should have been removed. They noted that a court’s power to remove a trustee is “closely circumscribed” and necessary only when the trust is in jeopardy. The court examined the brother’s actions and whether they endangered the trust. The sister accused the brother of misappropriating corporate funds, commingling trust assets with his own and employing imprudent farming practices.
The trust agreement contained a “prudent man rule” requiring the successor trustee to act prudently with investments and management of trust affairs. This rule requires the trustee to administer the trust as prudently as possible under the terms and circumstances of the trust. In Iowa, this rule has come to be known as the “prudent investor rule.” Iowa allows a prudent investor to make investment and management decisions as part of an “overall investment strategy.” The sister claimed that her brother was speculating contrary to the express terms of the trust and the brother could have made more money by cash renting the farm, but chose to operate the farm as their father had. The brother testified that he made those decisions to care for his mother and pay her nursing home expenses which rose to nearly $60,000 per year. Basically, he did not want to disturb the status quo and also desired to protect his father’s design to see the family farming enterprise continue after his death. The trust agreement reflected the parents’ wishes to see the family farm continue within the family. The court determined that the brother acted consistent with his parents’ wishes and consistent with the express terms of the trust. The court found no merit to the sister’s claims.
Next, the court addressed the trustee’s duty to provide an accounting to beneficiaries. The brother did not provide an accounting to his sisters when he was administering the trust on behalf of his mother. This omission constituted a “technical breach of the trust agreement.” However, the brother did provide his sisters with all corporate tax returns and after his sisters became trustees they had access to all corporate records. Though the brother did not technically provide an accounting, the information was made available and the effectiveness of the trust was not thwarted. The court found no abuse of discretion by the brother.
The court next examined the trustee’s duty of loyalty to the trust and found that the brother continued his father’s practices and did not misappropriate funds. The brother did commingle some assets, but the trust document expressly and impliedly stated that this was proper and consistent with the way the parents and brother had been doing business. The court found that while is wasn’t technically correct of the brother to commingle the corporate assets with his own, he did no damage to the trust or the other beneficiaries.
Finally, the court addressed the trial court’s order to cash rent the farm. The court found that the trial court’s decision to cash rent the farm for the 2010 crop year should be reversed. However, the trust specified that two years after the death of the last of the parents the farm should be cash rented. Thus, the appellate court ordered the farm cash-rented for the 2011 crop year. Thus, the brother could cash rent to himself, but would have to provide an accounting to his sisters. The court also found that the sister’s claims of fraud and request for her brother’s removal as corporate officer and director were unfounded. This claim and the sister’s other claims were dismissed by the court as merely speculative. Thus, the trial court’s appointment of a receiver in this case was in error. The brother did not employ oppressive conduct to the point that it violated Iowa law. His conduct was not harsh or wrongful and it did not violated fair play amongst the shareholders. This was not a “freeze-out” situation.
Thus, the on-farm heir ended up being protected. However, the expense associated with this complex litigation goes to show that it is difficult to protect the on-farm heir from conflict with off-farm siblings. Perhaps the parents should have considered negating the off-farm sisters’ involvement in the farming corporation and compensating them in other ways, such as life insurance policies, etc. Heidecker Farms, Inc. v. Heidecker, No. 0396/09-1541, No. 0-687/10-0273 (Iowa Ct. App. Oct. 6, 2010).
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