William H. Koehn and Sharon K. Koehn v. Koehn Bros. Farms, LLC, William J. Koehn, and Kelly J. Koehn ( 2014 )

IN THE COURT OF APPEALS OF IOWA
No. 13-1036
Filed August 27, 2014
WILLIAM H. KOEHN and
SHARON K. KOEHN,
Plaintiffs-Appellees,
vs.
KOEHN BROS. FARMS, LLC,
WILLIAM J. KOEHN, and
KELLY J. KOEHN,
Defendants-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Clayton County, Richard D. Stochl,
Judge.
Two sons and their company appeal the district court’s order declaring a
land contract between the sons’ company and the sons’ parents null and void.
REVERSED AND REMANDED WITH INSTRUCTIONS.
James Updegraff, West Union, for appellants.
Steven E. Howes of Howes Law Firm, P.C., Cedar Rapids, and Kevin C.
Rigdon of Klatt, Odekirk, Augustine, Sayer, Treinen & Rastede, P.C., Waterloo,
for appellees.
Considered by Danilson, C.J., Mullins, J., and Mahan, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2013).
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MULLINS, J.
William (Jeff) and Kelly Koehn, along with their company Koehn Bros.
Farms, L.L.C., (collectively the Koehn Bros.) appeal the district court’s order that
declared a real estate contract between Koehn Bros. Farms and William and
Sharon Koehn, the parents of Jeff and Kelly, null and void based on undue
influence. The Koehn Bros. claim on appeal the district court incorrectly
determined a confidential relationship existed between them and the parents,
Sharon did not have full knowledge of the facts, and her conveyance was not an
intelligent and voluntary act. The Koehn Bros. claim that even if there was a
confidential relationship, they fully rebutted the presumption that the transaction
was the result of undue influence. They also assert that if the district court’s
decision is to be upheld, fairness requires the parents to repay the amount the
parents received from the Koehn Bros. minus what they would have received had
no contract been executed. Finally, the Koehn Bros. ask that we reform the
contract and the quitclaim deed to reflect the intent of the parties that the parents
would receive a life estate in the house only and the Koehn Bros. would be
responsible to provide a house in town should the parents ever want to leave the
homestead. For the reasons stated herein, we reverse the decision of the district
court and remand with instructions.
I. Background Facts and Proceedings.
The parents in this case filed suit September 20, 2012, alleging the Koehn
Bros. breached the terms of the real estate contract, procured the contract by
undue influence, and failed to include all of the agreed terms into the contract
resulting in a failure of the meeting of the minds. The Koehn Bros. generally
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denied the allegations and filed a counterclaim seeking to reform the quitclaim
deed to state the parents only had a life estate in the house and outbuildings and
not the entirety of the farm property.
The case proceeded to a trial to the court on May 30, 2013. William did
not testify or appear at trial due to his health. Sharon testified he has dementia,
which he had been suffering from for about two years. Sharon testified as to her
recollection of the events surrounding the real estate contract. She stated that
they executed the contract to get the farm in the sons’ names in case her
husband had to go to the care center. Sharon recalled the sons saying that they
would pay $100,000 for the farm and would buy them a house in town to live in if
and when they desired to move into town. However, because the existing
contract did not have this in-town house provision, Sharon asked the whole
contract be thrown out.
She recalled the contract was signed in the basement of her house on a
Sunday morning. The sons were present along with a lawyer who had drawn up
the contract—Thomas David Katsumes. Sharon denied ever having seen the
contract before, ever asking Katsumes to prepare the contract, or ever talking to
Katsumes about selling the property to her sons. While she knew her sons and
the lawyer were coming that day, she did not know there would be a contract to
sign and had not previously spoken to her sons about the purchase price. She
did acknowledge that Katsumes had previously prepared wills for her and
William.
The purchase price of $100,000 was proposed by the Koehn Bros. The
rental income that the parents had previously received from the farm was to
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continue to come to the parents, according to Sharon’s recollection. She
admitted she consulted with a lawyer several years after the contract was signed,
who told her the rental income was supposed to come to her under the contract
terms. Sharon stated that she and William just signed the contract, did not read
it, and were not told to take it to a lawyer. She believed the house and the land
were worth far more than $100,000.
Since the contract was signed, Sharon asserted she has not received the
rental income from the farm. She acknowledged the Koehn Bros. have done
some maintenance on the property. She also acknowledged the Koehn Bros.
have paid the taxes on the property. She asserted she and William would be
willing to pay back the down payment the Koehn Bros. had paid if the contract
was declared null and void.
On cross-examination, Sharon testified the agreement called for the
$100,000 would be paid over time by the Koehn Bros. with a $20,000 down
payment and payments of $5000 per year until the balance was paid. Sharon
acknowledged after the contract was signed, the Koehn Bros. executed a
quitclaim deed providing a life estate in the property to her and William. Sharon
contended this was part of the original agreement but was not included in the
contract.
Sharon admitted the Koehn Bros. have made payments under the contract
including interest each year since it was signed in 2009, have received the rental
income since that time, have paid the taxes on the property since that time, and
have done some maintenance on the property as well. She stated she became
unhappy with the contract “a year or two ago” when she went to the lawyer to
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have the wills changed and found out that she should be getting the rental
income on the farm under the life estate. She also testified the contract failed to
state a date when the Koehn Bros. were to take possession of the property, but
she did not object to them receiving the rental income until she spoke to the
attorney a year or two before the trial. William and Sharon offered no further
evidence in support of their claims.
The defense first called Jeff Koehn, the eldest of the two sons. He
testified Koehn Bros. Farms, LLC was created to protect the family farm and take
care of his parents. The company was set up during the time of the execution of
the real estate contract. Jeff explained the contract came about after his father
was approached by a government conservation program to buy the farm and
prevent the land from being worked. Jeff said his father thought the government
buyout was a good deal, but Jeff, along with his brother, explained to his parents
that the price was not a good deal because it would leave them unable to
generate income from the land but still obligate them to pay the taxes. Jeff
stated, “[I]n our lifetime we’ve always looked out for the folks.” Jeff also thought
the deal would decrease the value of the property. However, the price of
$100,000 for the land that was used in the real estate contract matched the
amount of the conservation program buyout offer.
The intent was to keep the family farm to pass it on to the next generation.
Jeff testified his sister was not included in the purchase because Sharon
expressed to Jeff that she did not think the daughter could afford the down
payment and the daughter’s inheritance was taken care of through life insurance.
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Jeff testified William “made note on several occasions that he didn’t want to see
his farm just returned back to the—the nursing home receive his farm.”
Jeff contradicted his mother’s testimony regarding the meetings at the
house involving the sale of the farm. Jeff stated he asked his parents who they
wanted for an attorney and Katsumes’s name came up. Jeff had not previously
done business with Katsumes. Before the day the contract was signed,
Katsumes had been to the house with his parents, Kelly, and himself to discuss
the terms of the sale. The ultimate deal was to provide that the sons would pay
$100,000 for the property and the parents could live on the farm for their lifetime.
If the parents wanted to move to town, the Koehn Bros. would purchase a place
in town for them.
Jeff explained the $20,000 down payment was made pursuant to the
contract, and they have regularly made the annual payments of $5000 to their
parents. He said they have also made interest payments, even though interest
was not a term in the contract, because his mother demanded interest be paid
after talking with her tax consultant. He believed the interest rate that was
agreed to was 2.5%. The Koehn Bros. have paid the real estate taxes for the
property since March 2009, and have paid for maintenance and upkeep including
repairs to the house, and repairs and clean up to the land after spring flooding.
Koehn Bros. also purchased a mower for the property for William to use and
maintained casualty and liability insurance on the property. The court admitted
an exhibit of the expenses paid and the income received from the property since
the purchase in 2009.
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Jeff testified the agreement when the contract was signed was that his
parents would stay and live in the house and have use of the outbuildings but not
the farmland. Jeff explained his mother was concerned, after the contract was
signed, that she have something in writing giving her the right to stay on the
property, so Kelly executed the quitclaim deed with the understanding it would
give his parents the right to the house only. He explained that the parties
discussed that the rental payments from the farmland would be received by the
company and that money would be used to make the annual $5000 payment on
the contract. All other expenses for the purchase and maintenance of the farm
would come out of the brothers’ pockets. Jeff also admitted to paying for
Katsumes’s services for the real estate contract and quitclaim deed in 2009 and
for more recent services in 2010 and 2012.
Katsumes testified at the trial. He stated he had represented Sharon and
William several times over the past ten years by drafting wills and powers of
attorney and counseling them with respect to estate planning. He remembered
being contacted by Sharon in early 2008 to discuss the acreage and what they
could do with it. He remembers that they wanted to give the farm to their sons
and did not want to lose it to a nursing home if they had to go on Title XIX.
Nothing was done at that time as the parents wanted to think about it. However,
in late 2008, early 2009 he must have gotten a call because he went out to the
house on January 10, 2009, and later prepared a contract that was signed
January 24.
He stated the first meeting on January 10 took place at the parents’ home
with Jeff, Kelly, Sharon, and William present. He testified that during that
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meeting, “I discussed with them the fact that they needed to make a clean break
by having this sold on contract. They—could not—In the contract to avoid Title
[XIX] consequences, they could not retain a life estate interest.” He also
remembered the sons saying that if their parents ever wanted to move to town
“we’ll buy a house in town, . . . we’ll give you a place to live.” Katsumes said
William and Sharon “didn’t want any chance that there would be any kind of a
string-back in case they had to go on Title [XIX]. And I said as long as it’s [a]
separate document, my impression is there is no connection and you don’t have
to worry about it.”
He believed the conversation lasted about two hours and the group either
came up with the conclusion there, or someone called him later to tell him what
the decision was with respect selling the acreage. He said his understanding of
the agreement was the land would be sold to the sons for $100,000 with a
$20,000 down payment and annual payments of $5000 for sixteen years. Based
on this understanding, he prepared the contract and then came back to the home
on January 24 to have the parties review it and sign. At the time the contract
was presented, he explained the contract to all the parties involved, “every
clause, every word,” to make sure everyone knew what it said. He remembered
going through the remedies if the buyers failed to make payments and there was
a laugh about that. While the possession date was left blank, it was Katsumes’s
understanding that the sons would take possession of the property immediately.
He also understood that the sons would get the rent from the farmland and would
pay the taxes and insurance on the property but not the utilities.
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Katsumes testified he received a call later that Sharon was requesting the
life estate be in writing so he prepared the quitclaim deed. It was his intent as
the drafter of the quitclaim deed that the life estate would only apply to the house
in order to provide the parents a place to live as long as they wanted it.
Finally, the defense called Kelly to testify. Kelly remembered talking with
his parents and Jeff at least three times regarding the property. The farm had
flooded several times over the year and the government was offering a buyout
that would tie up the property but still leave his parents obligated to pay taxes on
it. So Kelly and Jeff thought if they bought it and paid his parents a little extra
money, the parents could stay living there as long as they wanted. As Jeff had
testified, Kelly remembered the purchase price was set based on what the
government was offering to purchase the land for. Kelly testified the
understanding was the farm rental income was to be paid to the company and
the annual payment to the parents would come from that rental income. Kelly
also admitted the company agreed to purchase a house in town for the parents
should they no longer wish to remain in the homestead, though this was not
included in the contract. Kelly’s understanding of the life estate was that it would
only extend to the house, not the farm as a whole, and the quitclaim deed was
prepared after the land contract was signed so Sharon would have something in
writing giving her the right to remain in the home.
Kelly acknowledged paying Katsumes for his work in preparing the real
estate contract and quitclaim deed. He said the bill was sent to Sharon who then
gave it to him to pay. He also admitted paying Katsumes to set up the LLC and
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for the time Katsumes spent in 2012 speaking with Sharon’s lawyer who had
questions about the transaction and the rental income.
In rebuttal, Sharon reiterated that Katsumes did not come out to the house
on January 10, 2009, to discuss the sale but only came out on a Sunday morning
with a contract in hand. She stated she was not even aware of the existence of
the quitclaim deed providing her and William a life estate until 2012 when she
went to get a copy of the real estate contract. She maintained the contract was
never explained to her, and she just signed it.
The court filed its ruling on June 20, 2013, finding Jeff and Kelly took
advantage of their parents. The court noted Jeff testified the $100,000
government buyout was not enough to pay for the land and yet purchased the
land for the exact same price. The court found both William and Sharon were
elderly and relied on their sons to act in their best interests, but the sons were
looking out for their selfish interests. The court concluded a confidential
relationship existed between the parents and the sons.
Since there was a confidential relationship, Kelly and Jeff had to rebut the
presumption that the contract was the result of undue influence and had to
affirmatively establish that they did not take advantage of their parents and that
their parents acted voluntarily with freedom, intelligence, and a full knowledge of
all the facts. The court concluded Kelly and Jeff failed to rebut this presumption.
It said the overwhelming evidence was that Sharon did not have a full knowledge
of the facts of the transactions and that her conveyance was not based on an
intelligent, voluntary act. The court therefore declared the real estate contract
null and void, returning ownership of the property to William and Sharon. It also
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held that William and Sharon shall retain all payments made to them by the
Koehn Bros. since the signing of the contract to compensate them for the rent
and other payments taken by the Koehn Bros. The court also provided the
Koehn Bros should not be reimbursed for any expenses they incurred since the
signing of the contract. Because the court nullified the contract, it did not rule on
the Koehn Bros.’s counterclaim to reform the contract or quitclaim deed to reflect
the life estate should extend only to the home and outbuildings.
The Koehn Bros. appeal.
II. Scope and Standard of Review.
The parties dispute the standard of review that is applicable in this case.
The Koehn Bros. assert the standard of review is de novo because the case was
tried in equity at the district court. See Mendenhall v. Judy, 671 N.W.2d 452, 454
(Iowa 2003). William and Sharon, however, claim the case was tried at law, and
thus, our review is for correction of errors at law. See Iowa R. App. P. 6.907.
We look to the “pleadings, relief sought, and the nature of the case” to determine
whether the case was legal or equitable. Passehl Estate v. Passehl, 712 N.W.2d
408, 414 (Iowa 2006). “We also consider ‘whether the court ruled on evidentiary
objections’ as an important, although not dispositive, test of whether the case
was tried in law or equity.” Id. (citation omitted). Also “a trial court generally
issues a ‘decree’ in an equitable action and a ‘judgment’ in a legal action.” Van
Sloun v. Agans Bros. Inc., 778 N.W.2d 174, 178 (Iowa 2010).
The petition filed in this case by William and Sharon stated it was a
petition at law. They alleged the Koehn Bros. failed to perform the agreement
and terms of the land contract by failing to turn over the rental payments and
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requested the court to declare the contract void. They also asserted the Koehn
Bros. obtained their signatures on the contract by undue influence and asked the
contract again be declared void. Finally, William and Sharon asserted there was
no meeting of the minds making the contract null and void. William and Sharon
also separately filed a jury demand. In response, the Koehn Bros. filed a motion
to strike the jury demand, claiming William and Sharon were not entitled to a jury
because their petition sought relief available only in equity as they were seeking
to set aside the contract and deed and be restored to their position before the
contract was executed, rather than seeking monetary damages. The court set
the motion to strike of a hearing, but before that hearing occurred, William and
Sharon withdrew their jury demand. The court entered an order finding “good
cause” had been shown to grant William and Sharon’s request to withdraw their
jury demand. The hearing previously set was “canceled” by the court, and thus,
there is no ruling from the court regarding whether William and Sharon were
entitled to a jury trial.
The Koehn Bros. filed an answer to the petition and a counterclaim
seeking reformation of the quitclaim deed. The case was tried to the court,
where the court ruled on very few objections. One objection the court sustained
involved hearsay. The witness had already answered the question by the time
the objection was entered, but the court struck the answer. The court also
required a party to lay more foundation when the other party objected to the
admission of an exhibit. The court’s final decision in the case was entitled “order”
rather than “decree” or “judgment.” The court declared the contract null and void
based on undue influence and returned the property to the ownership of William
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and Sharon. The court did order that William and Sharon were to retain all
payments made to them under the contract to compensate them for the rental
payments and government subsidies taken by the Koehn Bros.
An action based on a contract is normally treated as one at law. Van
Sloun, 778 N.W.2d at 178. “Where the basic rights of the parties derive from the
nonperformance of a contract, where the remedy is monetary, and where the
damages are ‘full and certain, remedies are usually provided by actions at law,
and equity has no jurisdiction.’” Id. at 179 (citation omitted). However, “the
action is ordinarily classified according to what appears to be its primary purpose
or controlling issue.” Id. Here, while Williams and Sharon allege the Koehn
Bros. breached the contract by failing to pay them the rental income, the remedy
they sought was for the contract to be declared null and void and to be restored
as the owners of the property, not for the Koehn Bros. to be required to pay them
the rental income. Rescission of a contract is governed by equitable principles.
Brinkholder v. Carpenter, 152 N.W.2d 593, 596 (Iowa 1967). The Koehn Bros.’
counterclaim sought reformation of the contract. The right to reform an
agreement lies within the discretion of a court sitting in equity. See Sun Valley
Iowa Lake Ass’n v. Anderson, 551 N.W.2d 621, 636 (Iowa 1996). Therefore, we
find the case was tried in equity below, making our review de novo. We give
weight to the factual findings of the district court, especially its assessments of
credibility, but we are not bound by them. Iowa R. App. P. 6.904(3)(g).
III. Undue Influence.
In order to set aside an inter vivos transfer based on undue influence, a
party has to show “such persuasion as results in overpowering the will of the
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[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.” Mendenhall, 671 N.W.2d at
454. The undue influence must be present at the time of the transfer, and the
party making the claim has to prove the undue influence “by evidence that is
clear, convincing, and satisfactory.” Id.However, where the grantor and grantee are in a confidential or fiduciary
relationship, the transfer is presumptively fraudulent and a product of undue
influence. Id. If such a confidential or fiduciary relationship is found to exist, the
burden of proof shifts to the grantee to negate the presumption by clear,
convincing, and satisfactory evidence that the grantee acted in good faith
throughout the transaction and the grantor acted freely, intelligently, and
voluntarily. Jackson v. Schrader, 676 N.W.2d 599, 605 (Iowa 2003).
A. Confidential Relationship. In order to determine the standard of
proof and who held the burden of persuasion in this case, we have to answer the
question of whether Jeff and Kelly had a confidential or fiduciary relationship with
their parents. A fiduciary relationship is one where a person is under a duty to
act for the benefit of the other as to matters within the scope of the relationship.
Mendenhall, 671 N.W.2d at 455. No one asserts, and the district court did not
find, a fiduciary relationship existed in this case.
A confidential relationship has been broadly defined as “any relation
existing between two 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.” Id.“The gist of the doctrine of confidential relationship is the presence of a dominant
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influence under which the act is presumed to have been done.” In re Estate of
Clark v. Swope, 357 N.W.2d 34, 37 (Iowa Ct. App. 1984). While a confidential
relationship does not arise solely from a blood relationship such as between a
parent and child, id., a confidential relationship is particularly likely to exist where
there is a family relationship. Mendenhall, 671 N.W.2d at 455. The concept
embraces “those multiform positions in life wherein one comes to rely on and
trust another in his important affairs.” Id. It “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 relationship.’” Id.The district court concluded a confidential relationship existed between the
parties. While it did not point to any specific facts that supported its conclusion,
the court did state that William and Sharon were elderly and both trusted in their
sons to act in their best interests. The record showed at the time of trial in
January of 2013, William was eighty-seven and Sharon was seventy-five. This
would make them eighty-three and seventy-one, respectively, at the time of the
transaction in January of 2009. Sharon testified William had been suffering from
dementia for two years by the time of trial, which would make the onset of the
dementia approximately two years after the transaction occurred.
There was no testimony or evidence offered to indicate Sharon suffered
from any mental or physical impairment at the time of the transaction. There was
no indication in the evidence that either Sharon or William relied on either Jeff or
Kelly in the management of their daily or business affairs. Jeff and Kelly clearly
offered their advice to their parents that the government buyout offer was not in
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their best interests, and Jeff testified the sons “always tried to look out for the
folks.” The advice offered by Jeff and Kelly was presumably taken to heart by
Sharon and William as they did not enter into the government buyout transaction,
instead selling the farm to their sons. However, it appears it was Sharon and
William’s intent to keep the farm in the family before the government buyout was
even proposed, as they had discussed with Katsumes in early 2008 how to give
the farm to their sons and avoid losing the farm if they had to go on Title XIX.
Our case law demonstrates that a confidential relationship will be found
where a son was the grantor’s agent and had for nearly twenty years managed
the lands comprising the grantor’s entire worldly estate, lived in the same house
as the grantor, and spoke of the land to others as his own. See Curtis v.
Armogast, 138 N.W. 873, 880 (Iowa 1912). Likewise, a confidential relationship
was found where a nonrelative of the grantor handled more and more of the
grantor’s business affairs and eventually handled them completely, and the
grantor was over ninety years old, nearly blind, and confined to her home. See
First Nat’l Bank v. Curran, 206 N.W.2d 317, 319–20, 322 (Iowa 1973); see also
Mendenhall, 671 N.W.2d at 460 (finding a confidential relationship between a
mother and daughter where daughter managed the business to one degree or
another for eight years, took care of the mother’s daily physical needs, had a
very close, loving and confidential relationship with the mother, and held a power
of attorney for the mother). But see Clark, 357 N.W.2d at 38 (finding no
confidential relationship where a father put a son’s name on two savings
accounts, the son never paid father’s bills, and there was no evidence the son
exerted influence over the father or assisted the father in any way with business
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decisions); Hatt v. Hatt, 265 N.W.2d 640, 642 (Iowa 1936) (finding no fiduciary
relationship between a father, a son, and a family friend when evidence showed
the father had always looked after his own property and managed his own affairs
and that none of his children nor the family friend ever controlled or managed his
property up to the time of the execution of the trust agreement). While the
evidence showed Sharon and William listen to, loved, and trusted their sons, we
find the evidence does not show the kind of relationship where either Kelly or Jeff
had a dominating influence over their parents such as would lead to the
conclusion there was a confidential relationship here.
B. Four Elements of Undue Influence. Because the facts of this case
do not support the conclusion a confidential relationship existed between the
parents and their sons, the burden to prove undue influence by clear, convincing,
and satisfactory evidence remained on the parents. They must have proved the
following four elements:
“(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.”
Mendenhall, 671 N.W.2d at 454 (quoting 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.” Id.
1. Susceptible to undue influence. The evidence shows both William and
Sharon were elderly at the time of the transaction, eighty-three and seventy-one,
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respectively. We know William later went on to develop dementia, but there is no
indication he was suffering from those effects at the time of the transfer in
January 2009. We have no evidence that Sharon’s mental or physical health
was impaired at any time. Sharon worked during the marriage at local
restaurants and cooked for thirty years for senior citizens at the Northland
Agency on Aging. William painted water towers early in their marriage and then
worked for the department of transportation for twenty years before retiring.
2. Opportunity to exercise undue influence. The couple had four children,
of which three are still living. The two sons, Jeff and Kelly, live locally, and the
daughter lives in the Iowa City. There is no information about the extent of the
contact between Jeff and Kelly and their parents leading up to the execution of
the contract nor is there any indication whether the daughter was made aware of
this transaction before it occurred. However, there was testimony the parties
considered including the daughter in the purchase but Sharon did not think the
daughter had the resources for the down payment. There is no indication the
sons handled their parents’ daily or business affairs. Kelly asserts he met with
his parents at least three times to discuss the deal. Both Jeff and Katsumes
recall at least two meetings with everyone present. Sharon only recalls one
meeting where she was presented with and signed the contract. Both Jeff and
Kelly clearly expressed their opinion to their parents about the value of the
government buyout offer, but it is unclear whether the parties’ relationship led the
parents to particularly rely on Jeff or Kelly for advice regarding their business
dealings.
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3. Disposition to influence. Katsumes testified to a meeting with William
and Sharon in early 2008, approximately a year before the transaction, where he
recalled the parents were concerned with the implication long-term care and Title
XIX could have on their property. They expressed to him at that time a desire to
give the farm to their sons, though nothing was executed at that time. Jeff and
Kelly said their father initially thought the government buyout was a good idea,
but the sons did not because it would cut off the stream of income to the parents
and still saddle them with the cost of the taxes, insurance, and upkeep of the
property. The deal proposed by Jeff and Kelly, and accepted by their parents as
evidenced by the contract, kept the sale price the same but relieved the parents
of the obligation to pay for property taxes, insurance, and upkeep.
While Katsumes had previously provided legal advice to William and
Sharon, it does not appear that he offered them independent legal advice with
respect to this transaction.
Proper independent advice in these circumstances means “showing
that the donor had the benefit of conferring fully and privately upon
the subject of his intended gift with a person who was not only
competent to inform him correctly as to its legal effect, but who was
furthermore so disassociated from the interests of the donee as to
be in a position to advise with the donor impartially and confidently
as to the consequences to himself of his proposed benefaction.”
Id. at 462 (quoting Merritt v. Easterly, 284 N.W. 397, 399 (Iowa 1939)). All of
Katsumes’s meetings regarding this transaction occurred in the presence of Jeff
and Kelly, and he also represented Jeff and Kelly in the establishment of their
limited liability company, which was set up to be the grantee of the transaction.
4. Result appears to be effect of undue influence. There was no evidence
offered as to the value of the farm in January 2009. The parents had received
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another similar, but less attractive, offer to purchase the farm from the
government to ensure conservation efforts in the area of the river. Sharon
thought the farm and house were worth far more than the $100,000 purchase
price, but no party had the property appraised or had any idea as to its value at
the time the contract was signed. The assessed value of the property at the time
of trial, over four years after the contract was executed, was $150,000.
The parents were granted a life estate in the property, and Jeff and Kelly
admitted to agreeing to purchase a house in town for their parents should the
parents ever decide to leave the homestead. Both of those agreements have
economic value. The daughter of William and Sharon was left out of the
transaction, but Jeff recalled his mother saying that her inheritance was taken
care of through life insurance.
Based on the evidence, Sharon and William did not prove by clear,
convincing, and satisfactory evidence that the real estate contract was procured
by undue influence. While independent legal advice for both parties would have
been advisable in this case to ensure both parties were fully apprised of their
rights and responsibilities, see id., the evidence submitted by Sharon and William
falls short to prove the Koehn Bros. induced them to sign the contract by undue
influence. We therefore reverse the decision of the district court on this issue
and hold the real estate contract executed in January 2009 should not be
rescinded.
III. Reformation of Real Estate Contract and Quitclaim Deed.
We next address the Koehn Bros. counterclaim to reform the contract or
quitclaim deed. This issue was not addressed by the district court because it had
21
declared the real estate contract void, making any claim to reform that contract
moot. While we find the contract was not procured by undue influence, we also
note the contract as written does not reflect the parties understanding of the
agreement. In fact, Katsumes testified candidly that in order to satisfy the
objectives of Title XIX planning, the contract was not intended to contain all the
agreed terms; in particular, the life estate in the house and outbuildings on the
property was omitted. The testimony of all witnesses confirms that another key
term of the agreement—the purchase of a house in town should William and
Sharon decide to leave the homestead—was not included in the contract.1 We
find it significant that even though Sharon sought to rescind the contract, she
testified consistent with Jeff and Katsumes that the agreement was that she and
William would have a life estate2 and that the sons would provide a house in
town when she and William decided to leave the farm.
On our de novo review of the evidence, we seek to reconcile any conflicts
in the evidence and try to determine what evidence is more believable. See,
e.g., Iowa Civ. Jury Instruction 100.9. The undisputed evidence is that at the
time the contract was executed, William and Sharon wanted to avoid losing the
farm to Title XIX or a nursing home, they wanted to remain living in the home on
the farm, and if they chose to no longer live on the farm, they wanted to be able
to move to a home in town that the sons would provide. Less clear, but implicit,
is that they wanted to maintain a cash flow from the farmland in an amount
1
No one testified as to whether there was any discussion to include or omit this term
from the contract. The evidence was simply that all agreed to the term.
2
Though we acknowledge she maintains a different understanding of the extent of that
life estate.
22
comparable to the rents they had been receiving. The evidence suggests that
William wanted the sons to end up with the farm, but there is little evidence as to
Sharon’s personal wishes at that time in this regard. Selling the farm to Jeff and
Kelly, even at what may have been a discounted price,3 seemed like a plan
which would accomplish all those objectives. The only problem was that in order
to try to most efficiently accomplish the first objective—keep the farm from being
consumed for nursing home care—they felt the need to have a secret, oral, side
agreement.4 This case is an example of the old saying that “an oral agreement is
worth the paper it is written on.” The reason for this litigation is the slight-
handedness that was one of the objectives.
The problem with this arrangement started as a result of Sharon either (1)
not understanding the importance of avoiding the paper trail, or (2) having such a
strong mistrust of her sons that she insisted on written documentation of the life
estate notwithstanding that such documentation may derail some of the planning.
Based on our findings above, we believe the real estate description in the
quitclaim deed that granted her and William a life estate in the whole farm
resulted from a scrivener’s error. Again, as we seek to reconcile the evidence, it
is clear that all the parties were happily sailing along under the contract—sons
were receiving rent, paying on the contract, paying taxes, and paying for
improvements and upkeep—until a lawyer found the quitclaim deed and based
on that deed advised Sharon that she should be getting the rent from the farm.
Combine that with another scrivener’s error in the contract that omitted the
3
We render no opinion as to value; we only acknowledge a dispute regarding same.
4
As demonstrated below, it seems that Sharon did not share this view.
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possession date and you have the making of a dispute. By then, William was
suffering from dementia so that he was unable to contribute to an understanding
of the intent, and Sharon had decided that she and William had not made a good
decision back in 2009.
“When the understanding of the parties was not correctly expressed in the
written contract, equity exists to reform the contract to properly express the intent
of the parties.” State ex rel. Palmer v. Unisys Corp., 637 N.W.2d 142, 151 (Iowa
2001). “[R]eformation is needed to give effect to the intention of the parties and
to prevent unjust enrichment.” Id. “[T]he requirement of mutuality of mistake
does not apply to a mistake of a scrivener in reducing an agreement to writing.”
Gouge v. McNamara, 586 N.W.2d 710, 713 (Iowa Ct. App. 1998).
Jeff and Kelly have the burden to prove the contract should be reformed
by clear, satisfactory, and convincing proof. Akkerman v. Gersema, 149 N.W.2d
856, 859 (Iowa 1967). This high burden is to prevent the courts from making
contracts for the parties rather than making the written instrument speak the true
contract. Id. William and Sharon contend the Koehn Bros. have not satisfied this
burden because they are precluded from offering extrinsic evidence of the
parties’ intent by the parol evidence rule and the statute of frauds.
“[O]rdinarily parol evidence is admissible in actions for the reformation of
legal instruments so long as the evidence is relevant and material.” Montgomery
Props. Corp. v. Econ. Forms Corp., 305 N.W.2d 470, 474 (Iowa 1981). But a
contract will be reformed “only if the party seeking reformation clearly and
convincingly establishes” that the contract does not express the true intent of the
parties because of “fraud or duress, mutual mistake of fact, mistake of law, or
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mistake of one party and fraud or inequitable conduct on the part of the other.”
Id. To reform the contract,
a definite intention or agreement on which the minds of the parties
had met must have preexisted the instrument in question. There
can be no reformation unless there is a preliminary or prior
agreement, either written or verbal, between the parties, furnishing
the basis for rectification or to which the instrument can be
conformed.
Peak v. Adams, 799 N.W.2d 535, 545 (Iowa 2011) (internal quotation marks and
citations omitted).
All the evidence admitted at trial indicated the parents intended to remain
living in the house as long as they wished, and the sons agreed to purchase,
through the company, a house for their parents in town should the parents desire
to move from the homestead. These terms were not included in the contract,
and we hold the contract should be reformed to provide these terms. We next
address whether the life estate for the farm house also extended to the farmland.
Sharon recalled that the rental income from the farm, along with the
purchase price payments, were supposed to come to her and William. This
would be consistent with the granting of a life estate to the entire property. See
Whitehall v. Whitehall, 233 N.W. 748, 748 (Iowa 1930) (providing that ordinarily a
life estate tenant is entitled to receive and retain the income from the land in the
absence of an express intent to the contrary). However, the evidence indicated
this opinion of Sharon was only developed after she consulted with a lawyer in
2012. Up to that point, the sons had received the rental income without objection
from Sharon or William for 2009, 2010, and 2011. In fact, Sharon admitted she
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had never even seen the quitclaim deed, which was the basis for the life estate,
until she went to see the lawyer about the land contract in 2012.
Jeff, Kelly, and Katsumes all testified their understanding of the life estate,
both at the time the real estate contract was signed and later when the quitclaim
deed was signed, was that it extended to only the house and the outbuildings.
As explained above, no life estate was put into the real estate contract initially
due to Katsumes’s concern that such a provision would make the family farm
subject to a collection action if William and Sharon needed to apply for Title XIX
in the future. In fact, during the signing of the contract Katsumes’s believed the
life estate was not really an issue between the parties—the parents knew the
sons would not turn them out of the property. The sons wanted to provide a
place for their parents to live for so long as the parents wanted to remain on the
farm, but they were counting on the farm rental income to fund the annual
payments on the real estate contract.
We conclude the Koehn Bros. have established by clear and convincing
evidence that the life estate at issue here was intended by the parties to extend
only to the house and the outbuildings. The farmland and the rental income that
land generates was intended by the parties to go to the Koehn Bros. to help fund
the annual payments to purchase the property from William and Sharon. While
Sharon contends her understanding was to the contrary, we note she was not
even aware of the existence of the quitclaim deed setting out the extent of the life
estate until more than three years after the execution of the contract and after
she consulted with an attorney who reviewed the language of the documents in
question. Also, during those three years the Koehn Bros. had received the rental
26
income, and made the required annual payments, with no objection from William
or Sharon.
We hold the real estate contract is hereby reformed as follows: (1) William
and Sharon have a life estate in the house and outbuildings on the property at
issue; (2) if William and Sharon choose to move off the farm to town, the Koehn
Bros. shall purchase a suitable home in town for them, and upon their move to
the home in town the life estate in the house and outbuildings on the farm
property shall transfer to the town property thus extinguishing said life estate on
the farm property; (3) the possession date left blank in the contract is the same
date as the contract was signed; and (4) the interest rate left blank in the contract
is the rate to which the parties had agreed and the Koehn Bros. had been
paying—2.5% per annum. The farmland, and the applicable farm rental income
generated by that land, is not subject to this life estate. Accordingly, and in light
of the reformation contained above, the quitclaim deed is hereby declared null
and void.
IV. Conclusion.
Because we find the evidence admitted does not prove the Koehn Bros.
exerted undue influence over Sharon and William with regarding to the execution
of the real estate contract, we reverse the decision of the district court and hold
the contract is not rescinded. In addition, we find the Koehn Bros. established
the real estate contract and quitclaim deed did not accurately reflect the intent of
the parties, and we grant relief as outlined in the foregoing paragraph. We
remand for the court to determine a legal description—by agreement of the
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parties, by survey ordered by the court, or as otherwise determined by the
court—for the property subject to the life estate as set forth above and to enter
such orders as are necessary to accomplish the holding of this opinion.
REVERSED AND REMANDED WITH INSTRUCTIONS.