In re Estate of Funk, 4-03-1047.

• Decision Date: 23 December 2004
• Docket Number: No. 4-03-1047.,4-03-1047.
• Parties: In the Matter of the ESTATE OF Floyd W. FUNK, Deceased (The United States of America, Secured Creditor, Plaintiff-Appellant, v. Patsy Printy, Executrix and David Cherry, Defendants-Appellees).
• Court: United States Appellate Court of Illinois

822 N.E.2d 20

355 Ill. App.3d 466

290 Ill.Dec. 738

In the Matter of the ESTATE OF Floyd W. FUNK, Deceased (The United States of America, Secured Creditor, Plaintiff-Appellant, v. Patsy Printy, Executrix and David Cherry, Defendants-Appellees).

No. 4-03-1047.

Appellate Court of Illinois, Fourth District.

Argued September 23, 2004.

Decided December 23, 2004.

As Modified Upon Denial of Rehearing February 4, 2005.

Jan Paul Miller, United States Attorney, David H. Hoff, Assistant United States Attorney (argued), Urbana, for United States of America.

David R. Cherry (argued), Winchester, for David Cherry.

Patsy Printy, Executor, Whitehall, Pro Se.

MODIFIED ON DENIAL OF REHEARING

Justice APPLETON delivered the opinion of the court:

The United States of America appeals the entry of an order by the trial court, which was entered by the mandate of this court on a prior appeal. We affirm the trial court's interpretation of that mandate.

I. BACKGROUND

When Floyd Funk died in January 1983, he left a valid will naming his surviving spouse, defendant Patsy Printy, as the executrix of his estate. At the time of his death, Floyd owned a 62-acre farm in Scott County, Illinois, and a three-quarter interest in another farm. (Floyd's then 12-year-old son, Michael, owned the other one-quarter interest in that farm.) In February 1983, the trial court appointed Patsy as executrix of Floyd's estate.

In July 1983, the Farmers Home Administration of the United States Department of Agriculture (FmHA) filed an amended proof of debt in the probate proceeding, asserting that at the time of Floyd's death, he owed $234,106.86 to plaintiff, the United States of America, which was a secured creditor of Floyd's estate. (Between May 1980 and April 1982, Floyd had borrowed a total of $319,290 from the United States through FmHA. Floyd's FmHA loans were secured by mortgages on the 62-acre farm and Floyd's three-quarter interest in the other farm.)

In March 1998, Patsy, acting as executrix, filed an amended account of her actions as executrix, encompassing the entire period of January 7, 1983 (the date of Floyd's death), to March 2, 1998. Interim current reports had been filed with notice to all parties and approved in 1983, 1984, and 1989. In June 1998, the United States filed an objection to the amended account, in which it alleged that Patsy had violated fiduciary duties she owed to the United States by selling collateral pledged to the United States and distributing the sale proceeds and the interest that had accrued on those proceeds to third parties in violation of state and federal law. At a July 1998 hearing, the trial court determined that the United States' objection presented questions of law only, and the court later entered a written order approving the amended account.

The United States appealed to this court, and we reversed and remanded, concluding that a genuine issue of material fact existed that precluded the trial court from entering judgment on the pleadings. We directed the trial court on remand to conduct a hearing to determine whether the United States had agreed to discharge or subordinate its liens, thereby authorizing Patsy to use the proceeds from the sale of its secured collateral for estate administration expenses. In re Estate of Funk, No. 4-98-0640, slip order at 27, 303 Ill.App.3d 1117, 254 Ill.Dec. 702, 747 N.E.2d 1114 (April 14, 1999) (unpublished order under Supreme Court Rule 23) (Funk I).

In November 1999, the trial court conducted an evidentiary hearing on that issue, as well as other United States' objections to the amended account, and took the matter under advisement. In February 2000, the court approved the amended account, specifically finding that (1) the United States allowed Patsy to keep the estate open and manage the farm operations following Floyd's January 1983 death; and (2) under the Probate Act of 1975(Act) ( Ill.Rev.Stat.1981, ch. 110 1/2, par. 18-10; 755 ILCS 5/18-10 (West 2000)), executrix and attorney fees take priority over claims of the United States.

The United States appealed to this court, and we reversed and remanded for further proceedings, upon concluding that the trial court's order approving the amended account was erroneous as a matter of law. Estate of Funk v. Printy, No. 4-00-0178, slip order at 13, 316 Ill.App.3d 1306, 268 Ill.Dec. 915, 779 N.E.2d 529 (October 19, 2000) (unpublished order under Supreme Court Rule 23) (Funk II). In so concluding, we stated, in pertinent part, as follows:

"First, the [trial] court appears to equate the United States' agreement to allow Patsy to keep the estate open and operate the farms (from 1983 through 1988) with an agreement to discharge or subordinate its liens on its secured collateral. However, in [In re Estate of] Yealick, 69 Ill.App.3d [353,] 356 , 387 N.E.2d [399,] 401 [(1979)], this court held that a creditor's authorization for or acquiescence in a sale of secured property does not affect the creditor's rights to the sale proceeds as against the debtor. * * * The fact that the United States agreed to allow Patsy to operate the farms for a period of time simply does not affect the United States' rights to the sale proceeds in this case. (As earlier discussed, a secured creditor has a right to gross sale proceeds, subject to customary incidental costs appropriate to the sale of the collateral. See 7 C.F.R. § 1965.13(f)(2) (1998) (setting forth appropriate incidental costs).)

In addition, the trial court erroneously found that under the Act, the attorney fees and execut[rix] fees take priority over the United States' claims here. As discussed above, section 18-10 of the Act deals with the priority of claims of the United States for which it does not have liens. See 755 ILCS 5/18-10 (West 1996); Furness [v. Union National Bank of Chicago], 147 Ill. [570,] 573-74, 35 N.E. [624,] 625 [(1893)]; [In re Estate of] Philp, 114 Ill.App.[3d] [107,] 111 , 448 N.E.2d [535,] 537 [(1983)]; Yealick, 69 Ill.App.3d at 355-56, 25 Ill.Dec. 743, 387 N.E.2d at 400-01. Thus, under that section, estate administration expenses take priority over claims of the United States only if the United States' liens have been discharged, which they have not been in this case. Regardless of the reasonableness of the fees in this case, they do not set aside the United States' valid liens. See King [v. Goodwin], 130 Ill. [102,] 109-10, 22 N.E. [533,] 535 [(1889)]. The court's finding to the contrary was erroneous as a matter of law." (Emphasis in original.) Funk II, slip order at 11-13.

In December 2001, David Cherry moved to withdraw as Patsy's attorney. Following a mid March 2001 hearing, the trial court (1) allowed Cherry to withdraw and ordered that he remain in the case as an interested party; (2) continued the case for 21 days to allow Patsy an opportunity to obtain new counsel; and (3) ordered the United States to file, within 30 days following the above-mentioned 21-day period, a final account of Patsy's actions as executrix.

In April 2001, the United States filed a final account, which provided, in pertinent part, that (1) Patsy had wrongfully sold collateral pledged to the United States and distributed $89,666.49 in sale proceeds and accrued interest to third parties, including Cherry, in violation of state and federal law and without the United States' consent; and (2) Cherry wrongfully received $38,830.73 in attorney fees from those sale proceeds and accrued interest. The proposed report also requested that the court (1) enter a judgment against Patsy "in the amount of $89,666.49 [minus] $38,830.73 (amount attorney Cherry is ordered to repay [the] United States)"; (2) order Cherry to return $38,830.73 to the United States; (3) resolve the United States' two pending petitions seeking an assessment of penalty interest against Patsy; and (4) close Floyd's estate after resolving the pending matters. Neither Patsy nor Cherry filed a response or an objection to the United States' proposed final account.

In late August 2001, the trial court adopted the United States' final account and directed the United States to prepare an order approving that account. The court also advised the parties that it would enter the proposed order if Patsy or Cherry did not file objections within 10 days of receiving the proposed order. In early September 2001, the United States filed the proposed order. The United States also sent copies of the proposed order to both Patsy and Cherry; however, neither Patsy nor Cherry filed an objection.

Later in September 2001, the trial court entered a written order approving the final account and adopting the report and its attached exhibits as the court's factual findings. The order provided, in pertinent part, as follows:

"8. [Patsy] and [Cherry] have had more than four months to review the United States' proposed final report, and in open court on August 31, 2001, neither [Patsy] nor [Cherry] objected to the factual allegations set forth in that proposed [account]. Also, a copy of this proposed order prepared by the United States was sent to [Patsy] and [Cherry] by the United States on September 4, 2001, and no objections to the entry of this order have been submitted to the [c]ourt.

9. Consequently, the United States' proposed final [account] and attached exhibits are adopted by this [c]ourt and incorporated herein as the substantive factual findings of this [c]ourt. Based upon those factual findings, [Patsy's] distributions of $89,666.49 of the United States' secured collateral and accrued interest thereon detail[ed] in that proposed [account] are not allowed.

* * *

1. [Patsy's] distributions of $89,666.49 of the United States' secured collateral and accrued interest thereon * * * were made by [Patsy] (1) in violation of her fiduciary duties owed as execut[rix] to the United States as a secured creditor of the estate; (2) contrary to law; (3) without prior court approval; and (4) without the consent of the United States.

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