Self-Dealing, Decedent’s Intent and Estate Administration

December 28, 2009 | Erin Herbold

 

A mother died owning Iowa farmland and her will appointed her youngest son as executor.  Her will also gave the executor the right to purchase farmland from the estate for its value for Iowa Inheritance Tax purposes (interest rate was set at rate equal to rate charged by Farm Credit Services on real estate mortgages in the county). The executor and the estate’s attorney chose an appraiser for the property. The appraiser was informed that the appraisal was for estate and inheritance tax purposes, but did not know that the executor had the chance to purchase the property. In 2004, the executor signed the real estate contract to purchase the property based on the appraisal value, less a reduction for special use. The interest rate on the transaction was 3.15 percent.  He also granted himself the homestead on which his parents had lived. He never asked for court approval for these two actions. 

The executor’s sister asked the court to invalidate and set aside the real estate contracts, and asked the court for a declaration that the estate was not bound by the appraised value of the land and that the court set an appropriate rate of interest.  

At trial, the court found that the executor had engaged in self-dealing without court approval and notice to interested parties, but did not invalidate the contracts. The trial court also determined that the interest rate should be fixed at 5.25%. The sister appealed and the Iowa Court of Appeals invalidated both real estate contracts, based upon the executor’s self-dealing.  
The following spring, the executor filed a petition for authority to sell the real estate and gave proper notice of the exercise of his option. Two of the executor’s other siblings consented, but his sister, once again, objected. The trial court, over the sister’s objection, granted the petition and approved the sale. 

On appeal to the Iowa Court of Appeals, the sister claimed that trial court erred in “failing to give preclusive effect to the court’s prior decision invalidating the identical transaction.” Thus, the sister was arguing that the prior trial and appellate court decisions should have precluded her brother from further attempting to acquire the property. However, the court said that the contract was invalidated, not as to its terms, but because the brother didn’t follow the proper procedure. Thus, the real estate contract was enforced.

Further, the sister claimed that the trial court’s decision violated public policy. However, the appellate court disagreed and state that “it does not violate public policy for a fiduciary who has innocently and mistakenly neglected to comply with the Iowa Code.”  The overarching basis for the court’s decision here was that the mother’s intent, under her will, was that the executor be given a chance to purchase the land.  In re Estate of Kerns, No. 9-922/09-0346, 2009 Iowa App. LEXIS 1622 (Iowa Ct. App., Dec. 17, 2009).