Mendenhall v. Judy

• Decision Date: 13 November 2003
• Docket Number: No. 02-0940.,02-0940.
• Parties: Roger K. MENDENHALL and Edwin L. Mendenhall, Jr., Appellees, v. Marilyn Mendenhall JUDY, Appellant.
• Court: Iowa Supreme Court

671 N.W.2d 452

Roger K. MENDENHALL and Edwin L. Mendenhall, Jr., Appellees, v. Marilyn Mendenhall JUDY, Appellant.

No. 02-0940.

Supreme Court of Iowa.

November 13, 2003.

Thomas M. Walter of Johnson, Hester, Walter, Breckenridge & Duker, L.L.P., Ottumwa, for appellant.

Kenneth L. Keith and Joni L. Keith of Keith Law Firm, P.C., Ottumwa, for appellees.

LAVORATO, Chief Justice.

Two brothers, Edwin L. Mendenhall, Jr. and Roger K. Mendenhall, brought this equity action against their sister, Marilyn Mendenhall Judy. The brothers sought to set aside a transfer of stock in a family corporation that the children's mother, Gladys Mendenhall, made to Marilyn while Gladys was still alive. The district court set aside the transfer of stock on the grounds that the transfer resulted from undue influence that Marilyn had exerted over Gladys. Subject to two modifications, we affirm the judgment of the district court and remand the case for further proceedings consistent with this opinion.

I. Scope of Review.

Because this action is in equity, our review is de novo. Iowa R.App. P. 6.4. In equity cases, especially when considering the credibility of witnesses, we give weight to the fact findings of the district court, but we are not bound by them. Id. R.6.14(6)(g).

II. Applicable Law.

To set aside a transfer on the ground of undue influence, one must show "such persuasion as results in overpowering the will of the [grantor] or prevents him from acting intelligently, understandingly, and voluntarily—such influence as destroys the free agency of the grantor and substitutes the will of another person for his own." Leonard v. Leonard, 234 Iowa 421, 429, 12 N.W.2d 899, 903 (1944). Undue influence must be present at the very time the transfer is made. Arndt v. Lapel, 214 Iowa 594, 603, 243 N.W. 605, 609 (1932). Proof of undue influence must be by evidence that is clear, convincing, and satisfactory. Else v. Fremont Methodist Church, 247 Iowa 127, 139, 73 N.W.2d 50, 57 (1955). Evidence is clear, convincing, and satisfactory when there is no serious or substantial uncertainty about the conclusion to be drawn from it. Raim v. Stancel, 339 N.W.2d 621, 624 (Iowa Ct. App.1983). Direct proof of undue influence is not required. In fact, undue influence may be and usually is proven by circumstantial evidence. Estate of Cory v. Ankeny State Bank, 169 N.W.2d 837, 842 (Iowa 1969).

Four elements are necessary to establish undue influence:

(1) The [grantor] must be susceptible to undue influence, (2) opportunity [on the part of the grantee] to exercise such influence and effect the wrongful purpose must exist, (3) a disposition [on the part of the grantee] to influence unduly for the purpose of procuring an improper favor must be present, and (4) the result must clearly appear to be the effect of undue influence.

Estate of Herm v. Henderson, 284 N.W.2d 191, 200-01 (Iowa 1979). Weakened mental condition of the grantor, relationship of the grantor and the grantee, inequality of distribution, and activity of the grantee are all factors that bear on the question of undue influence. Wilson v. Wilson, 240 Iowa 26, 33, 34 N.W.2d 911, 915 (1948).

A transfer to a grantee standing in a confidential or a fiduciary relationship to the grantor is presumptively fraudulent and therefore presumptively the product of undue influence. Marron v. Bowen, 235 Iowa 108, 112, 16 N.W.2d 14, 16-17 (1944). If such a relationship is found to exist, the burden of proof shifts to the grantee to negate a presumption of undue influence by clear, convincing, and satisfactory evidence. Herm,284 N.W.2d at 200. We have recognized that this "rule is particularly applicable where one of the parties has a dominating influence over the other by reason of the affection, trust, and confidence of the latter in the former." Id.

A fiduciary relationship includes a relationship in which one is under a duty to act for the benefit of the other as to matters within the scope of the relationship. Merritt v. Easterly, 226 Iowa 514, 517-18, 284 N.W. 397, 399 (1939).

We have referred to several principles in determining the existence of a confidential relationship:

Confidential relationship is a very broad term and is not at all confined to any specific association of the parties to it. In law it has been defined or described as any relation existing between parties to a transaction wherein one of the parties is duty bound to act with the utmost good faith for the benefit of the other party. In its broadest connotation the phrase embraces those multiform positions in life wherein one comes to rely on and trust another in his important affairs.

A confidential relationship arises whenever a continuous trust is reposed by one person in the skill and integrity of another, and so it has been said that all the variety of relations in which dominion may be exercised by one person fall within the general term "confidential relation."

Herm, 284 N.W.2d at 199 (citation omitted). Such a relationship is particularly likely to exist where there is a family relationship. McGaffee v. McGaffee, 244 Iowa 879, 888, 56 N.W.2d 36, 39 (1953). Moreover, a confidential relationship may exist although there is no fiduciary relationship. Oehler v. Hoffman, 253 Iowa 631, 635, 113 N.W.2d 254, 256 (1962).

III. Facts.

With the foregoing principles in mind, we turn to the record in this case. On our de novo review, we find the following facts.

Gladys and Edwin Mendenhall, Sr. (Ed, Sr.) had three children: Edwin Mendenhall, Jr. (Ed, Jr.), Roger Mendenhall, and Marilyn Mendenhall Judy. Gladys and Ed, Sr. lived in Ottumwa, Iowa. Ed, Sr. owned and operated Hardsocg Pneumatic Tool Company. Hardsocg was founded in 1904, and its original business included contract machine work, engineering, assembly, and heat-treating. At one time, the company employed approximately forty-five people and made parts for M-47 tanks and jet engines. At the times material to this lawsuit, the company was an owner and lessor of real property, principally for warehouse and office space.

Roger has lived in California most of his adult life. He graduated from the University of Iowa with a B.S. degree in mechanical engineering and received an M.B.A. degree in 1984. Since 1956, Roger has worked for several companies in California.

Ed, Jr. has a B.A. degree in social science. Beginning in 1953, he worked with his father in the Hardsocg Company for about ten years, beginning in 1953. He had a purchasing background and filled such a need in the company at his father's request. Ed, Jr. left the company when it changed from a manufacturing business to a rental property operation. He moved to West Des Moines and regularly saw his parents on holidays.

Marilyn lived in California for several years and returned to Iowa in 1991. She has lived continuously in Ottumwa since 1993. She has worked in clerical and administrative positions. She began helping Ed, Sr. with Hardsocg in 1995.

On June 19, 1995, Gladys executed a will that left all of her property in equal shares to her three children. On the same day, Gladys executed a general power of attorney that named Marilyn as Gladys's attorney-in-fact with Ed, Jr. as successor to Marilyn if Marilyn became unable to act. The power of attorney prohibited Marilyn from making gifts to herself.

In October 1995, Ed, Jr. and Marilyn opened a conservatorship for Ed, Sr. in Wapello County because he was having problems managing his business and other affairs. What led to the conservatorship was the fact that some woman was apparently "scamming" Ed, Sr. of large sums of money.

On August 1, 1997, Ed, Sr. died, leaving to Gladys an estate worth $417,241.22. The estate included 500 shares of Hardsocg stock valued at $296,193.79. The estate had debts totaling $42,000. Hardsocg's assets consisted primarily of three parcels of real estate. Ed, Jr. and Marilyn were appointed co-executors of the estate rather than Gladys because the three children believed Gladys, who was ninety-one years old at the time, did not have the ability to act as executor.

Following Ed, Sr.'s funeral, Gladys made known her desire that her estate be divided equally among her three children. At about the same time, Marilyn suggested to Ed, Jr.—in Gladys's presence—that they should figure out some way to disinherit Roger because he was wealthy and did not need anything. Ed, Jr. refused to go along with this suggestion.

Gladys suffered from many illnesses, some of which were attributed to old age. She had a severe hearing problem, poor eyesight, hypertension, chronic dizziness, gout, breast cancer, glaucoma, degenerative joint disease, skin conditions, and a bowel condition. She also suffered from depression and progressive dementia. A hospital discharge summary dated October 14, 1996 covered a period of hospitalization from October 5 through October 14. The discharge summary included a final diagnosis of malignant hypertension, dementia with delirium, primary and degenerative. An October 8, 1996 consultation prepared by a psychiatrist concluded that Gladys had primary dementia with senile onset. A neurologist who examined Gladys noted in his report dated October 8, 1996 that Gladys had short-term memory deficits and cognitive deficits, but he also noted that her memory deficit "[d]oes not seem that bad for 90 years of age but clearly is impaired." Gladys took numerous daily medications.

After Ed, Sr.'s death, the three children discussed a guardianship for Gladys because of her health problems. Marilyn objected and nixed the idea.

Thereafter, Marilyn grew very close to her mother, calling on her five to six times a day to check on her and running Gladys's household as far as hiring caretakers. Gladys in turn became more and more dependent on Marilyn.

On October 5, 1997, the three children and Gladys had a telephone conference to discuss Gladys's assets, that is, where the money was, how much money there was, and what was to be done with...