In re The Fred Petersen Land Tr.
| Decision Date | 23 November 2022 |
| Docket Number | 29745-MES |
| Citation | 2022 S.D. 72 |
| Parties | IN THE MATTER OF THE FRED PETERSEN LAND TRUST IN THE MATTER OF THE FRED PETERSEN LIVING TRUST |
| Court | South Dakota Supreme Court |
ARGUED MAY 26, 2022
APPEAL FROM THE CIRCUIT COURT OF THE THIRD JUDICIAL CIRCUIT MOODY COUNTY, SOUTH DAKOTA THE HONORABLE PATRICK T. PARDY Judge
RONALD A. PARSONS, JR. PAMELA R. REITER ANTHONY P. SUTTON of Johnson, Janklow, Abdallah & Reiter, LLP Sioux Falls South Dakota Attorneys for appellants Michael and Sally Johnson.
JOHN A. SHAEFFER Flandreau, South Dakota Attorney for appellee Mindy Smith.
DANNY R. SMEINS Britton, South Dakota Attorney for appellee Jody Wallin
[¶1.] Prior to his death in 2018, Fred Petersen created two trusts. After Fred's passing, one of his daughters, Sally Johnson, filed separate petitions seeking court supervision and reformation of one of the trusts. Another of Fred's daughters, Mindy Smith, opposed the reformation of the trust and filed her own petition seeking clarification from the court and requesting other relief.
[¶2.] The circuit court conducted a two-day court trial to determine the merits of the petitions. In its memorandum decision, the court granted Sally's request to reform the trust and denied each of Mindy's requests for relief. Sally then sought reimbursement from the trust for her attorney fees and expenses incurred during the litigation. The circuit court denied the request, concluding the trust did not receive an economic benefit from the litigation which, the court determined, was required to justify reimbursement from the trust. Sally has appealed this denial. We affirm in part, reverse in part, and remand.
[¶3.] Fred Petersen farmed and raised cattle in Moody County for many years. His farm consisted of approximately 1,000 acres of crop and pasture land, including a twenty-acre homestead with outbuildings, a cattle yard, and a farmhouse where Fred and his family lived. At one point, the farm was valued at nearly six million dollars.
[¶4.] Fred and his first wife were divorced in what appears to have been the late 1970s. Prior to the divorce, they had three daughters together: Jody, Mindy, and Sally. As they grew older, Jody and Mindy left the farm and moved out of state.[1] Sally, however, remained. She and her husband, Mike Johnson, lived one mile from the homestead and helped Fred on the farm.
[¶5.] In 1997, Sally and Mike rented all the crop ground from Fred and farmed it themselves. When Fred retired from farming altogether, Sally and Mike took over the cattle operation as well. Though Fred continued living on the homestead after his retirement, Sally and Mike began making farm-related improvements to the property with the understanding-expressed to them by Fred-that they would inherit the homestead after his death.
[¶6.] Marital tension between Fred and his second wife, Sharon Petersen, prompted Fred to create the Fred Petersen Living Trust. The Living Trust was a revocable trust prepared by Thompson Law in Sioux Falls and was funded with all of Fred's real and personal property. Fred named himself as the initial trustee with Fred and Sharon as the income beneficiaries. Fred selected his sister along with Sally and Mike to serve as successor co-trustees after his death and named his three daughters as successor income beneficiaries.
[¶7.] The Living Trust contained several specific distributions including Fred's directive to have his twenty-acre homestead surveyed, platted, and distributed to Sally immediately upon his death. The Living Trust instrument also provided an option for Sally and Mike to lease the entirety of the agricultural land from the trust after Fred's death, with rent for the tillable acres calculated at ninety percent of the county average rental rate.[2] The term of the option was the remainder of Sharon's life plus three years.
[¶8.] In 2013, Sharon initiated a divorce action. During the pendency of the divorce, Fred returned to Thompson Law and amended the Living Trust to remove Sharon as an income beneficiary. He also created a new irrevocable trust, known as the Fred Petersen Land Trust, which he funded with the farm land owned by the Living Trust. Fred named Sally, Mike, and Fred's sister as co-trustees, with Fred as the sole income beneficiary.
[¶9.] In an effort to resolve the divorce without selling the farm, Fred agreed to make a cash payment to Sharon of $800,000. Fred was able to pay $253,000 with available funds, and he obtained a loan to cover the balance. The loan agreement required annual payments over a twenty-year term with the final payment due on December 1, 2033. The debt was secured by a mortgage on the property now owned by the Land Trust.
[¶10.] The trust instrument establishing the Land Trust included several provisions relating to the mortgage, leasing, and the eventual distribution of its corpus. Under its provisions, the mortgage payments due after Fred's death could be made from the rental income received by the Land Trust. Mike and Sally had the option to lease the land, as they had with the Living Trust, at the ninety- percent-of-the-average rate on the tillable acres for up to three years after Fred's death or three years after the loan was paid off, whichever occurred later. The Land Trust instrument designated Jody, Mindy, and Sally as income beneficiaries after Fred's death and provided that they would eventually receive all the agricultural land from the Land Trust once the mortgage was paid off and the trust was terminated.
[¶11.] After creating the Land Trust, Fred executed a trustee's deed conveying all the real property from the Living Trust to the Land Trust. However, the deed contained a drafting error. Instead of excepting the homestead that Fred intended to gift to Sally and Mike immediately upon his death, the deed unconditionally transferred the homestead to the Land Trust as part of a larger tract without any reference to the intended distribution of the twenty-acre parcel to Sally and Mike. The attorney who drafted both trusts later acknowledged that this was a mistake and that Fred had always planned to transfer the homestead to Sally and Mike in the same manner described in the terms of the Living Trust.
[¶12.] At the time of his death, Fred had reduced the mortgage balance to approximately $150,000 through periodic additional principal payments. However, the terms of the Land Trust required unanimous agreement among Jody, Mindy, and Sally to continue accelerating the mortgage payments beyond the minimum annual payments.
[¶13.] Jody, Mindy, and Sally met at Thompson Law several times in the months following Fred's death to discuss the implications of his estate plan. During these meetings, the sisters and the trust attorney realized for the first time the error in the Land Trust, which failed to account for the transfer of the homestead to Sally and Mike. After this, the discussions seemed to focus on two main topics-the fate of the twenty-acre homestead and the pace at which the Land Trust retired its mortgage debt.
[¶14.] At an October 2018 meeting, the sisters each acknowledged it was Fred's intent to give the homestead to Sally and Mike and that they should take the necessary steps to fulfill their father's plan. As for the mortgage, Mindy expressed her desire to use all the Land Trust's income to pay down the mortgage as quickly as possible, which would allow the sisters to vote to terminate the Land Trust and distribute the land among themselves. Despite universal consensus on the homestead issue, the sisters were unable to resolve either matter. A memo drafted by a paralegal at Thompson Law in January 2019, described Sally as "fearful" that Mindy "would not sign off on the [homestead transfer]" if Sally did not agree to accelerate the mortgage payments using all of the Land Trust's income.
[¶15.] On February 4, 2019, the sisters met a final time at Thompson Law to again discuss the mortgage and the homestead. According to two "family stipulation" agreements drafted by the Thompson Law attorney and sent to the sisters after the meeting, the parties discussed the following terms: (1) the homestead would be surveyed and deeded to Sally and Mike as originally intended; (2) the parties would retain additional income from the Land Trust to accelerate the mortgage payments in an amount to be agreed upon at a later date with the unanimous consent of all the beneficiaries; and (3) Sally and Mike would retain an option to rent the tillable farm ground for three years after the satisfaction of the mortgage at the ninety percent rate and, thereafter, would have an additional seven-year option to rent the ground at one hundred percent of the county average rate.
[¶16.] Jody and Sally each signed the stipulations, but Mindy did not. Further communications among the sisters ceased. Sally and Mindy retained separate counsel, and this litigation followed.
[¶17.] On August 8, 2019, Sally filed a petition for court supervision of the Land Trust, see SDCL 21-22-9, and a petition for reformation of the Land Trust to correct the scrivener's error in the trustee's deed, see SDCL 55-3-28.[3] Mindy then filed her own petition seeking trustee direction and "other relief[.]" She specifically asked the court to order that the parties cease making mortgage payments from the income of the Land Trust because, Mindy alleged, the mortgage was the obligation of Fred's estate or the Living Trust. Alternatively, Mindy asked the court to reform the Land Trust and remove the requirement of unanimous approval of the beneficiaries to accelerate mortgage payments and order that all Land Trust income be used for that purpose until the mortgage was satisfied.
[¶18.] Sally and Mindy each opposed...
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