Iowa Court of Appeals Says that Executrix Engaged in Self-Dealing and Sold Estate Property Below Fair Value

Overview

In a case that should remind all executors that their duty is to maximize the value of the estate for the benefit of beneficiaries, the Iowa Court of Appeals has reversed a district court order that approved the sale of estate property and denied removal of an executrix for self-dealing.

Facts

The executrix was appointed to administer the estate of her father who died testate in 2012. The testator left 10 surviving children, including the executrix. The estate included farm machinery, motor vehicles, a small number of cattle, a bank account, and a 112-acre farm in Jackson County. The farm included cropland, pasture ground, hay ground, timberland, a house, and out-buildings.

Several weeks after the executrix's appointment, the neighbor who had been farming the testator’s crop ground for five years approached the executrix and offered to purchase the land, buildings, cattle, and farm machinery $481,600. The executrix, who had no experience with valuation, sought no professional advice and solicited no further offers on the property. She instead “sat down and thought about it and did figuring in [her] head and figured it was a pretty good deal.” Consequently, she accepted the neighbor’s offer to purchase the property. Contemporaneously, she and her brother (another beneficiary of the estate) entered into a repurchase agreement with the neighbor to buy back five acres of the property, including the house and out-buildings, for $10,000. She did not inform the other beneficiaries of the deal. The agreements were formalized, and the purchase agreement included a clause stating that the executrix and her brother were to have the first option to purchase the five-acres. No price was listed in the option provision. The $10,000 repurchase agreement and the purchase agreement were executed simultaneously.

District Court Proceedings

Ten days later, the executrix petitioned the court for approval of the sale of the property. She attached the purchase agreement to the petition (which included the option provision), but she did not disclose to the court that she and her brother had exercised the option for $10,000.

The other siblings learned of the repurchase agreement and filed an objection to the sale of the property. They also sought removal of the executrix for self-dealing. After a hearing, the district court approved the sale and denied the removal petition. The district court found that even though the purchase price was below the appraised value of the property, the sale was reasonable, particularly since the executrix was able to complete the sale quickly without paying real estate commissions.

Appellate Court Decision

The siblings appealed, and the Iowa Court of Appeals reversed, finding that the executrix materially mismanaged the estate and engaged in self-dealing.

The court found that the executrix made no attempt to fulfill her duty to maximize the value of the estate for the benefit of the beneficiaries. The evidence showed that she agreed to sell the property at $4,300 per acre, which was well below its appraised value of $4,800 to $4,850 per acre. The court found that, at a minimum, the executrix undervalued the property by at least 10 percent. That fact standing by itself, the court stated, would not necessarily mean that the district court abused its discretion in failing to remove the executrix. Because, however, there was clear evidence that the executrix had engaged in self-dealing, the court found she had to be removed.

The executrix misrepresented to her siblings that she had not reached a deal for the repurchase of the five acres when, in fact, she had. She also failed to disclose to the district court that she had executed a repurchase agreement for $10,000 at the time she petitioned for approval of the sale. Finally, the $2,000 per acre she paid for the property was 50 to 60 percent below fair market value. Her intent to clandestinely benefit from the estate could be inferred from her misrepresentation and non-disclosure. 

The court found that the executrix could not get around the charge of self-dealing because she purchased the property from the neighbor and not the estate. The transactions were inextricably linked. “Using a third party to wash the transaction” did not “remove the dirt of self-dealing.”

The court also found that the district court erred in approving the sale of the property. Based on appraisals, the sale undervalued the property by $58,400 to $78,791. Even assuming a substantial real estate commission, the sale detrimentally affected the total value of the estate.

The appellate court held that the district court abused its discretion in failing to remove the executrix and in approving the sale. On remand, the district court was to appoint a new executor to administer the estate.