A Strong Offense
A Stronger Defense
When the real estate market was booming, it was common to see trustees take advantage of the soaring sales prices by selling real property that was all or part of a trust corpus to developers or investors. Real estate investors, of course, are going to try to quickly flip the property for a tidy profit. It’s no surprise that beneficiaries will look at that type of transaction and think they should have got the benefit of the second sale rather than the original sale.
So what happens when a trustee sells real property held by the trust to an investor who quickly flips the property for more than twice the sale price? In Ortmann v. Bell, a Florida Court of Appeals considered that scenario and essentially determined that – without more – a transaction like that is not automatically a breach of fiduciary duty. Of course, it also helps to have the beneficiaries consent to the sales price and have a probate court order confirming that the beneficiaries agreed to the sales price . . . .When he died, Donald E. Hemphill’s estate assets poured over into the Donald E. Hemphill Trust. Ultimately, Hemphill’s two children, Daniel Hemphill and Heidi Bell, were beneficiaries of the Trust. Marlene L. Sloan was personal representative of Hemphill’s estate and was trustee of the Trust.
Since this case was about trust litigation, you can expect that there was some estate litigation, too. Heidi objected to Sloan’s final accounting and petition for discharge. The estate dispute was resolved by agreeing that property known as Keysville Road Grove would be listed for sale. A listing agreement for Keysville Road Grove where it was listed for sale at $1,225,000 was made a part of the settlement agreement. The probate court entered an order approving the settlement agreement.
Sloan eventually entered into a contract with Keysville Road 57 Land Trust for the sale of Keysville Road Grove. The sales price was $1.5 million, which was more than the amount for which the property had been listed and more than the amount the beneficiaries agreed through the settlement agreement was an appropriate list price. Keysville Road 57 Land Trust assigned the sale contract to Greentree, and Sloan executed a new sales contract with Greentree.
While the sale was pending, Heidi sued Sloan, alleging that Sloan breached her fiduciary duty by (1) failing to provide an accounting for the Trust, (2) failing to provide the beneficiaries with information about the administration of the Trust, (3) wasting Trust assets, and (4) failing to distribute Trust assets in accordance with its terms. Daniel joined the action as a plaintiff.
In the meantime, the sale of Keysville Road Grove proceeded to closing. Sloan executed a warranty deed for the property. However, the grantee named in the recorded deed was Taipan – not Greentree (which was the buyer named in the substituted contract). The documentary stamps paid in connection with the transaction were consistent with a sales price of $4.5 million, not the $1.5 million called for in the contract between the Trust and Greentree.
Heidi and Daniel were able to amend their petition to add, among other allegations, that Sloan sold Keysville Road Grove for $3 million less than it was worth.
A trial court held a hearing on pending claims and entered a final judgment against Sloan for $3.226 million – or the difference between the approximately $4.5 million and the $1.5 million. Sloan appealed and the appellate court reversed the judgment against Sloan after determining that there was no evidence that she breached her fiduciary duty to the Trust in connection with the land sale.
At the hearing, Sloan was unable to explain the discrepancy between the contract price and the consideration purportedly paid by Taipan as reflected in the documentary stamps. Sloan also testified that she never saw the recorded deed or a copy of it after the closing, her real estate attorney never told her that the purchase price was anything other than $1.5 million, and the only indication she had of the market value of the property were appraisals of $455,000 and $625,000. In entering an award against Sloan, the trial court’s rationale was that the “doc stamps are an official record pursuant to statute” and Sloan failed to rebut the presumption that the consideration reflected by the documentary stamps was the price at which the property was sold.
The appellate court first determined that the documentary stamps did not prove sales price. The contract between the Trust and Greentree, the appraisal for $625,000, and Sloan’s testimony all contradicted a finding that the property was sold for anything other than $1.5 million. Heidi and Daniel did not claim that Sloan actually received more than $1.5 million, but suggested that Sloan lied about the sales price. It was clear, however, that there were really two transactions. Sloan sold the property to Greentree for $1.5 million, and then Greentree sold the property to Taipan for $4.5 million.
The appellate court then determined that the documentary stamps did not prove the value of the property. Heidi and Daniel claimed that, while Sloan may have received only $1.5 million, she was liable for the purported $3 million loss because the property was worth much more than the price at which Sloan sold it. Of course, the biggest problem for the beneficiaries here was that they had actually agreed to sell the property for $1,225,000 and a probate court approved a settlement agreement in which the parties agreed to list and sell the property for $1,225,000.
There’s a great lesson in here for trustees considering sales of real property. First, try to get the beneficiaries to consent, in writing, to a sales price. Second, even if the beneficiaries agree, still try to get a court order approving the act. A declaratory judgment petition or a petition for equitable direction are a few good ways to get it in front of a court and get the security that comes from a court blessing the trustee’s action.