Coster v. Crookham
Decision Date | 17 April 1991 |
Docket Number | No. 89-1075,89-1075 |
Citation | 468 N.W.2d 802 |
Parties | John COSTER, Eleanor Coster, Individually; Eleanor Coster, as Conservator of Johnathan Coster, a Minor; and David Coster, Appellants, v. Joe P. CROOKHAM, Myron Gordin, Iowa Trust & Savings Bank, and First National Bank of Muscatine, Appellees. |
Court | Iowa Supreme Court |
Tom Riley and Peter C. Riley of the Tom Riley Law Firm, P.C., Cedar Rapids, for appellants.
Robert G. Allbee and Edward W. Remsburg of Ahlers, Cooney, Dorweiller, Haynie, Smith & Allbee, Des Moines, for appellees Joe P. Crookham and Myron Gordin.
Kenneth L. Keith and Lloyd E. Keith of Keith, Orsborn, Bauerle, Milani & Neary, Ottumwa, for appellee Iowa Trust & Sav. Bank.
David J. Meloy and Patrick W. Driscoll of Stanley, Rehling, Lande & Van Der Kamp, Muscatine, for appellee First Nat. Bank of Muscatine.
Considered by HARRIS, P.J., and LARSON, SCHULTZ, SNELL, and ANDREASEN, JJ.
This is an action for civil damages brought by income and remainder beneficiaries of an inter vivos trust. Defendants are the trustee, the trustee's investment partner, the lender of a company in which the trustee and partner invested, and a bank which served the trust. A jury allowed recovery on many, though not all, of plaintiffs' several theories of liability. This appeal and cross-appeal present a wide variety of related questions. We cannot resolve all issues on the basis of the special verdicts and must remand some matters for retrial.
John Coster and his wife Eleanor farmed land in Mahaska County. John became acquainted with defendant Joe P. Crookham, an attorney practicing law in Oskaloosa, Iowa, when Coster purchased a farm from a seller for whom Crookham served as conservator.
In 1974 Coster was unable to obtain financing for his farming operation. Part of Coster's difficulties stemmed from spendthrift tendencies. After a local bank refused to finance his 1974 crop year, Coster met with Crookham to discuss his financial problems. Crookham advised the Costers to place their two farms in trust, with Crookham serving as trustee. It was suggested that the bank would feel more secure if legal title to the land and crops were in the hands of a trustee.
Garold Heslinga, another Oskaloosa attorney, prepared identical deeds of trust, one for each farm. Only one trust was created; it covered the Costers' farming and personal needs.
In 1976 Crookham negotiated for the personal acquisition of the stock of Muscatine Lighting Company (Musco). The transaction involved the stock transfer by the owners of Musco to purchasers Crookham, Myron Gordin, and G & L Industries (G & L was owned exclusively by Gordin and Crookham). In addition to Crookham, Gordin and G & L, who were major investors, five other investors 1 were to acquire some stock in Musco. In return the sellers were released from existing financial obligations to defendant First National Bank of Muscatine B. FNB had been a lender to Musco for a number of years prior to dealing with any parties involved in this suit. The closing took place July 9, 1976.
Before closing, George Shepley, president of FNB, reviewed the financial statements of Crookham, Gordin, and G & L Industries. FNB agreed to the proposal, and all investors gave FNB personal guaranties of the debt of Musco to FNB.
At the time of closing, Shepley stated he had learned that the small business administration (which had guaranteed part of the debt from Musco to FNB) would not release the personal guaranties of the prior owners. It was agreed it would be necessary to obtain the release of the small business administration. FNB then indicated it would require additional guaranties in order for it to provide the necessary financing.
Crookham responded by suggesting the Coster trust might guarantee the Musco debt. Crookham told Shepley he had authority to sign a guaranty on behalf of the trust and, after studying the trust deed, Shepley accepted his guaranty. Crookham, as trustee, executed an unlimited guaranty to the bank.
The parties vigorously dispute the effect of the guaranty. Plaintiffs contend that, without the guaranty, the purchase would not have been consummated. Defendants submitted impressive evidence, including Shepley's testimony, to show that the guaranty was made solely to obtain operating funds for Musco, and that Musco purchasers could have acquired the stock without it. We take it from the jury's special verdict that the plaintiffs' version of this dispute is established.
FNB never called upon the trust to make any payment under the guaranty, nor did the trust suffer loss. FNB eventually released the trust from the guaranty.
Defendant Iowa Trust & Savings Bank (Iowa Trust) first began lending money to the Coster trust and the Costers individually in 1982. In 1985 Crookham and the Costers negotiated with Iowa Trust for the restructuring of the trust debt, and Iowa Trust agreed to purchase the trust debt from FNB.
Crookham and the Costers also desired Iowa Trust to become involved with managing the Coster trust because Crookham was often unavailable and sometimes needed assistance in trust matters. Iowa Trust thereafter provided bookkeeping and accounting services for the trust and for the Costers personally. One of the disputed issues in the case is whether Iowa Trust served in the capacity of cotrustee. Although Iowa Trust denies it did so, we take it from the jury verdict that the bank did serve in that capacity. We also take it from the jury verdict that plaintiffs established their allegation that the pledge of the trust resulted in enormous profits to Gordin and Crookham which they would not otherwise have obtained. Those profits appear to be over $3,000,000. Neither Crookham nor Iowa Trust ever sought or obtained court permission to engage in self-dealing, a requirement to do so under Iowa Code section 633.155 (1991). The trust was not submitted for court approval or supervision, though, as will appear, the trustees persuaded a district court judge to enter an order approving one transaction.
I. By a special verdict the jury found Crookham breached his fiduciary duty by engaging in self-dealing when he issued the trust's guaranty to acquire Musco stock. No damages were fixed for this breach because, by another special verdict, the jury found no loss resulted to the trust. In framing the special verdicts the trial court took the position that the trust beneficiaries could recover for the breach only to the extent the trust suffered a loss. Plaintiffs challenged this limitation at trial and assign the ruling as error on appeal.
The trial court relied on our decision in Estate of Klein v. Ware, 229 N.W.2d 753, 755 (Iowa 1975). The reliance was misplaced. Our holding in Klein, a probate case in which a fiduciary was allowed by unanimous consent to bid on estate assets, is limited to its facts. Klein does not limit recoveries to out-of-pocket losses in all cases where trustees have breached their duties to obtain personal gain. A trustee cannot use trust assets for personal gain and keep the profits. The beneficiaries' recovery for such a breach is not limited to those cases in which they can show the breach resulted in a direct loss to the trust.
We have repeatedly held that a trustee cannot use its position, directly or indirectly, for its own advantage or profit. Van Gorp v. Van Gorp, 229 Iowa 1257, 1261, 296 N.W. 354, 356 (1941); Becker v. Becker Bros., 202 Iowa 7, 11, 209 N.W. 447, 450 (1926); Linsley v. Strang, 149 Iowa 690, 694, 126 N.W. 941, 942 (1910). A fiduciary must account for any profits personally obtained by use of trust assets. See In re Johnston's Estate, 198 Iowa 1372, 1377, 201 N.W. 72, 75 (1924).
The law recognizes three alternative remedies available to beneficiaries when the trustee has breached the duty of loyalty to the trust. First, the trustee is obviously charged with any loss to the trust estate. Second, the trustee is liable for any profit made through the breach. Third, the beneficiary may recover from the trustee a profit that would have accrued to the trust if there had been no breach. Restatement (Second) of Trusts § 205 (1959); Bogert, Trusts and Trustees § 862, at 42-43 (2d rev. ed. 1982); Fratcher, Scott on Trusts § 205, at 237 (4th ed. 1988).
In determining which remedy is most proper the beneficiary "can choose the remedy that seems most advantageous...." Fratcher § 205, at 242.
The Restatement (Second) of Trusts is also instructive:
The trustee violates his duty to the beneficiary not only where he sells trust property to himself individually, but also where he uses the trust property for his own purposes. Thus, he cannot properly use trust money in his business, or lend trust money to himself, or lease to himself land which he holds in trust.
Restatement (Second) of Trusts § 170 comment 1 (1959).
The trustee is accountable for any profit made by him through or arising out of the administration of the trust, although the profit does not result from a breach of trust.
Restatement (Second) of Trusts § 203.
The trustee is chargeable with any profit made by him through the improper disposition or use of trust property. Thus, if the trustee makes an unauthorized investment with the trust's money which results in a profit, he is accountable for the profit.
Restatement (Second) of Trusts § 205 comment h.
If the trustee in violation of his duty to the beneficiary uses trust property for his own purposes and makes a profit thereby, he is accountable for the profits so made. Thus, if he uses trust money in his business, or if he lends trust money to himself and re-lends it to others at a rate of interest higher than that which he pays to the trust's estate, he is chargeable with the profit so made.
Restatement (Second) of Trusts § 206 comment j.
Other authorities are in accord:
[I]f the trustee commits a breach of trust that results in a gain, he is accountable for the gain. The...
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