OCTOBER 2, 2000 VOLUME 8, NUMBER 14
If an individual becomes incapacitated someone must take responsibility for his or her business affairs. That may mean the appointment of a conservator (in some states, “guardian of the estate”) by the court. Sometimes the individual will have had the foresight to establish a trust, or at least name an agent in a durable power of attorney, before becoming incapacitated. Whatever the title, the person who handles financial matters for an incapacitated individual does so in a “fiduciary” capacity, and is held to very strict standards.
One of the central principles governing fiduciaries is that they are not permitted to “self-deal.” In other words, a fiduciary may not personally profit from the position of trust, except by charging a reasonable fee for services.
Bessie Jordan, a retired school teacher, lived in Ida County, Iowa. Ms. Jordan’s principal asset was a 79% interest in the farm she inherited from her family, consisting of 423 acres. When she became incapacitated it seemed logical to appoint her nephew George Remer as her guardian and conservator. After all, he was already managing the family farm for Ms. Jordan, and he was a licensed attorney.
For several years Mr. Remer continued to rent the family farm. His annual rent payment to Ms. Jordan amounted to a little over $20,000. By late 1988, however, Ms. Jordan had moved to a nursing home and the cost of her care was escalating; Mr. Remer decided it was time to sell her interest in the farm. He proposed to sell it to a corporation owned by his wife.
While such a sale would normally be forbidden, the court can approve a transaction between the fiduciary and his ward if stringent guidelines are met. The fiduciary must demonstrate that the sale is necessary, that the price is fair, and that the fiduciary is not taking any advantage of the position of trust. To help protect against abuses, notice of the proposed transaction must be given to all interested persons.
Mr. Remer obtained two appraisals of the farm property, and he proposed to sell it to his wife’s corporation at the higher of those two figures. He disclosed to the court that his wife was the buyer, and he argued that Ms. Jordan’s nursing home bills would require the liquidation of the property. The court approved the sale.
Four years later Bessie Jordan died, and four years after that her estate filed an action to set aside the transaction. The probate court, noting that it had been approved at the time, declined to cancel the sale, and the estate appealed to the Iowa Supreme Court. The state’s highest court pointed out that no notice of the sale had been given to Ms. Jordan herself, and that the sale could therefore be invalidated. Furthermore, said the Justices, the terms of the sale were not in Ms. Jordan’s best interests; because of the structure of payments, her total annual income was actually lowered from the lease payments she had been receiving from Mr. Remer. The Supreme Court directed that the transaction be set aside, and Mr. Remer ordered to pay the difference between the annual payments and what would have been collected under the lease agreement.
The Supreme Court also approved most of the probate judge’s determination that Mr. Remer owed another $87,731 to Ms. Jordan’s estate (although the figures were adjusted in various small ways). It also left standing an additional $20,000 punitive damage award against Mr. Remer, agreeing with the probate judge that “Mr. Remer’s course of self-dealing was persistent, extreme and pervasive. It continued over a long period of time and affected almost every aspect of Ms. Jordan’s financial affairs.” In the Matter of Jordan, September 7, 2000.