Neugebauer v. Neugebauer , 2011 S.D. LEXIS 123 ( 2011 )

#25864, #25869-a-SLZ
2011 S.D. 64IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
PEARL NEUGEBAUER, Plaintiff and Appellee,
v.
LINCOLN J. NEUGEBAUER, Defendant and Appellant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
****
THE HONORABLE PATRICIA C. RIEPEL
Judge
****
TIM R. SHATTUCK of
Woods, Fuller, Shultz
& Smith, PC
Sioux Falls, South Dakota Attorneys for plaintiff
and appellee.
MICHAEL F. TOBIN of
Boyce, Greenfield, Pashby,
& Welk, LLP
Sioux Falls, South Dakota
and
THOMAS J. NICHOLSON of
Nicholson & Nicholson
Sioux Falls, South Dakota Attorneys for defendant
and appellant.
****
ARGUED ON AUGUST 23, 2011
OPINION FILED 09/28/11
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ZINTER, Justice
[¶1.] For almost twenty years, Lincoln Neugebauer rented his mother Pearl
Neugebauer’s farm under an oral lease. In 2008, Lincoln purchased the farm by
contract for deed. Pearl later brought this action to rescind the contract on the
ground of undue influence. The circuit court found that Lincoln had exerted undue
influence and the court rescinded the contract. We affirm.
Facts and Procedural History
[¶2.] Harold and Pearl Neugebauer owned a 159-acre farm the parties called
the “Home Place.” The Hutchinson County farm included a house, garage, granary,
machine sheds, barns, silos, and a dairy barn. During their marriage, Harold
handled all of the legal and financial affairs of the farm and family. In 1980, Harold
died, leaving Pearl as the sole owner of the Home Place and another farm property.
Following Harold’s death, Lincoln, the youngest of Harold and Pearl’s seven
children, began farming both properties. Lincoln also resided with his mother on
the Home Place.
[¶3.] In 1984, Lincoln and Dennis, one of Pearl’s other sons, formed L&D
Farms partnership for the purpose of managing the farming operation on Pearl’s
land. L&D Farms entered into a ten-year lease with Pearl that included an option
to purchase the Home Place for $117,000, the appraised value in 1984. In 1985,
Pearl moved from the farm to a home in Parkston. In 1989, Lincoln and Dennis
dissolved L&D Farms without exercising the option to purchase.
[¶4.] After dissolution of the partnership, Lincoln farmed Pearl’s land by
himself. He paid annual rent, but Lincoln and Pearl never reduced their oral farm
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lease to writing. Pearl trusted Lincoln and left it to him to determine how much
rent to pay. Pearl did, however, expect that Lincoln would be “fair.” Pearl never
took any steps to determine if the $6,320 annual rent Lincoln was paying was fair.
[¶5.] On several occasions from 2004 to 2008, Lincoln privately consulted
with attorney Keith Goehring about purchasing the Home Place. On December 3,
2008, Lincoln took Pearl to Goehring’s office to discuss the purchase. Pearl, who
only had an eighth-grade education, was almost eighty-four years old and was hard
of hearing. Although Lincoln and Goehring discussed details of Lincoln’s proposed
purchase, Pearl said virtually nothing. She later testified that she could not keep
up with the conversation and did not understand the terms discussed.
[¶6.] On December 17, 2008, Lincoln again took Pearl to Goehring’s office.
On this occasion, Pearl and Lincoln executed a contract for deed that had been
drafted by Goehring. Goehring had been retained and his fees were paid by
Lincoln. Neither Lincoln nor Goehring advised Pearl that Goehring represented
only Lincoln, and neither suggested that Pearl could or should retain her own legal
counsel.
[¶7.] There is no dispute that the fair market value of the Home Place was
$697,000 in 2008 when the contract for deed was executed. Under the terms of the
contract, Lincoln was to pay Pearl $117,000, the farm’s 1984 appraised value. The
contract price was to be paid over thirty years by making annual payments of
$6,902.98.
[¶8.] After executing the contract, Lincoln told Pearl not to tell the rest of
her children about the agreement. Pearl later became suspicious that something
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may have been wrong with the contract. In January 2009, Pearl’s children returned
to Parkston for a funeral. For the first time, Pearl revealed the contract to the rest
of her children, and they explained the contract to her. She began to cry and
wanted the contract torn up. Pearl personally and through her children asked
Lincoln to tear up the contract. Lincoln refused.
[¶9.] Pearl then brought this action for rescission of the contract for deed
and damages for breach of the pre-contract oral lease. Pearl challenged the contract
on the ground of undue influence. Her breach of lease claim was based on the
assertion that Lincoln failed to pay her the full amount of rent that was owed. The
parties tried the rescission claim to the court and the breach of lease claim to a jury.
The jury found for Lincoln on the breach of lease claim, and the court found for
Pearl on the rescission claim.
[¶10.] With respect to rescission, the circuit court found that a confidential
relationship existed between Pearl and Lincoln. The court further found that
Lincoln actively participated in the contract’s preparation and unduly profited from
it. Based on these findings, the court determined that a presumption of undue
influence arose shifting the burden of production to Lincoln to show that he took no
unfair advantage of Pearl. The court found that Lincoln was unable to make that
showing. Alternatively, the court found that even in the absence of a confidential
relationship and the resulting presumption of undue influence, Pearl established
the four elements of undue influence under SDCL 53-4-7, namely: Pearl’s
susceptibility to undue influence; Lincoln’s opportunity to exert such influence and
effect a wrongful purpose; Lincoln’s disposition to do so for an improper purpose;
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and a result clearly showing the effects of undue influence. Ultimately, the court
rescinded the contract and ordered that the parties be restored to the status quo
existing before the contract was executed. The court further ordered that Lincoln
pay $6,320 annual rent in accordance with the terms of the prior oral lease for the
time (2009 and 2010) he used and occupied the property under the rescinded
contract for deed. 1
[¶11.] Lincoln raises one issue on appeal: whether the circuit court erred in
finding that the contract for deed was a product of undue influence. Pearl raises
one issue by notice of review: whether the court erred in ruling that following
rescission, Lincoln was only obligated to pay $6,320 in annual rent for the time he
occupied the property under the contract for deed.
Decision
[¶12.] Our review in undue influence cases involves a mixed question of law
and fact. Stockwell v. Stockwell, 2010 S.D. 79, ¶ 15, 790 N.W.2d 52, 58. Because
undue influence is a non-technical, fact-based inquiry that requires the circuit court
to examine the parties’ states of mind and motives, this Court reviews a circuit
court’s application of law to the facts under the clearly erroneous standard. Id. ¶
16. The circuit court’s findings of fact are also reviewed for clear error. Id.
[¶13.] Lincoln argues that he had no confidential relationship with his
mother. He contends that the court erred in failing to consider the factors we have
utilized to determine whether a confidential relationship exists. See, e.g., In re
1. Because the contract for deed payments slightly exceeded the oral lease
payments, the court did not order Lincoln to pay any additional rent for 2009
and 2010.
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Estate of Dokken, 2000 S.D. 9, ¶ 30, 604 N.W.2d 487, 496 (examining the amount of
time the parties spent with each other, whether the beneficiary handled many of
the personal or business affairs of the party alleged to have been unduly influenced,
and whether that party ever sought the advice of the beneficiary). Because Lincoln
argues that no confidential relationship existed, he contends that the court erred in
applying the presumption of undue influence. 2
[¶14.] We decline to address these contentions because the court
alternatively found that Pearl established the four elements of undue influence
independent of a confidential relationship. These alternative findings are
dispositive 3 because undue influence may be established in three ways, but only one
requires proof of a confidential relationship. See SDCL 53-4-7. 4
2. The presumption of undue influence is a mechanism that alters the burden of
production. When the presumption arises, the burden of production shifts to
the beneficiary to show he took no unfair advantage of the person who was
allegedly unduly influenced. However, the ultimate burden of persuasion
remains on the contestant to prove the elements of undue influence by a
preponderance of the evidence. Stockwell, 2010 S.D. 79, ¶ 31, 790 N.W.2d at
63.
3. Lincoln argues that the circuit court’s alternative ruling is not independent of
the court’s confidential relationship determination because confidential
relationship language appears in various conclusions of law discussing the
alternative ruling. However, the court’s findings of fact (that do not refer to a
confidential relationship) clearly establish undue influence under the four
alternative factors. We conclude that the court’s alternative ruling was
independent of the ruling that a confidential relationship existed.
4. Undue influence occurs:
(1) In the use, by one in whom a confidence is reposed by
another, or who holds a real or apparent authority over him, of
such confidence or authority for the purpose of obtaining an
unfair advantage over him; or
(continued . . .)
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[¶15.] Undue influence is defined by SDCL 53-4-7. This Court has identified
the general elements on several occasions. Nizielski v. Tvinnereim, 453 N.W.2d
831, 833 (S.D. 1990). The elements are: (1) a person susceptible to undue influence;
(2) another’s opportunity to exert undue influence on that person to effect a
wrongful purpose; (3) another’s disposition to do so for an improper purpose; and (4)
a result clearly showing the effects of undue influence. Stockwell, 2010 S.D. 79, ¶
35, 790 N.W.2d at 64. The party alleging undue influence must prove these
elements by a preponderance of the evidence. Id.
Susceptibility to Undue Influence
[¶16.] Lincoln argues that no evidence supported the court’s finding that
Pearl was susceptible to undue influence. He focuses on the absence of medical
evidence regarding Pearl’s mental functioning. Lincoln contends that in the
absence of medical evidence of mental deficits, the court erred in finding that Pearl
was susceptible to undue influence.
[¶17.] Concededly, “‘physical and mental weakness is always material upon
the question of undue influence.’ Obviously, an aged and infirm person with
impaired mental faculties would be more susceptible to influence than a mentally
alert younger person in good health.” In re Estate of Metz, 78 S.D. 212, 221, 100
N.W.2d 393, 398 (S.D. 1960) (quoting Johnson v. Shaver, 41 S.D. 585, 172 N.W. 676,
________________________
(. . . continued)
(2) In taking an unfair advantage of another’s weakness of mind;
or
(3) In taking a grossly oppressive and unfair advantage of
another’s necessities or distress.
SDCL 53-4-7.
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678 (1919)). But this Court has not required medical evidence to prove
susceptibility to undue influence. See, e.g., id. (finding susceptibility to undue
influence solely through inconsistent testamentary statements and admissions that
the party allegedly influenced was senile, childish, and incompetent to attend to his
business affairs).
[¶18.] In this case, there was substantial non-medical evidence
demonstrating Pearl’s susceptibility to undue influence. Pearl had an eighth-grade
education, and she lacked experience in business and legal transactions. When she
signed the contract for deed, Pearl was almost eighty-four and hard of hearing.
Pearl and Dennis testified that she had relied on her deceased husband to take care
of all their business and legal matters during their marriage. This dependency
continued after Harold’s death. Pearl testified that, with the exception of her
checking account and monthly expenses, she often asked her children for help with
business and financial affairs, which she did not understand. Pearl’s daughter
Cheryl confirmed that Pearl’s children had to explain such things as hospital bills,
“documents,” and Social Security because Pearl lacked experience with business
matters. Further, Pearl, Dennis, and Cheryl testified that Pearl did not understand
the contract for deed until they explained it to her after it had been executed.
Susceptibility to undue influence may be established through such evidence of a
party’s limited education and business experience. See Delany v. Delany, 402
N.W.2d 701, 705-06 (S.D. 1987). We also note that Lincoln admitted Pearl had
some mental impairment. He told Cheryl that Pearl was “slipping,” meaning that
Pearl would say something and a few minutes later repeat herself because she had
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forgotten what she had said. The circuit court’s finding that Pearl was susceptible
to undue influence is not clearly erroneous.
Opportunity to Exert Undue Influence
[¶19.] Lincoln contends that the court’s finding of opportunity to exert undue
influence was erroneous because Lincoln and Pearl had no confidential relationship
and Pearl had the ability to seek independent advice between the two meetings
with Goehring, but chose not to do so. Lincoln relies on In re Smid, 2008 S.D. 82, ¶
38, 756 N.W.2d 1, 13-14, for the proposition that the passage of fourteen days is
ample time to seek independent legal advice concerning a transaction that is
subsequently claimed to be voidable on the ground of undue influence. However,
the Smid language upon which Lincoln relies related to the rules for rescission on
the basis of mistake when one signs but does not read a contract. Id. ¶¶ 36-38.
Those rules do not limit the ways in which the opportunity to exert undue influence
may be established.
[¶20.] In this case, Pearl testified that Lincoln was her son and someone with
whom she had previously lived for many years: someone she trusted to “do right.”
Lincoln conceded that on the date Pearl signed the contract, he knew Pearl trusted
him and had confidence that he would treat her fairly in his business dealings with
her. This type of trust and confidence by a mother in her son was sufficient to prove
opportunity.
[¶21.] Additionally, there is no dispute that Lincoln had been seeking
independent legal advice to acquire the farm for approximately four years. And
when Lincoln finally decided to go through with the purchase, Pearl voluntarily
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accompanied him to his lawyer’s office. At that point in her life, Pearl was elderly,
hard of hearing, and had difficulty understanding the conversation. The circuit
court was free to adopt Pearl’s testimony regarding her inability to understand the
transaction over Goehring’s perception of what he believed Pearl may have
understood. There is no clear error in the court’s finding that Lincoln had the
opportunity to exert undue influence over Pearl.
Disposition to Exert Undue Influence
[¶22.] The court’s finding that Lincoln had a disposition to exert undue
influence for an improper purpose was also supported. Lincoln had substantial
experience in farmland transactions and real estate appreciation. He collaborated
with an attorney a number of times over four years to purchase the farm and draft
the necessary documents. Yet Lincoln did not have the farm appraised as he had
previously done when farming the property with his brother. Instead, Lincoln set
the price at a value for which it had appraised twenty-four years earlier, a price
that was one-sixth of its then current value. He also took no steps to ensure that
his elderly mother understood the contract terms, including the fact that
considering her age and the thirty-year amortization, she would likely never receive
a substantial portion of the payments. Finally, neither Lincoln nor his attorney
advised Pearl to seek legal representation. “[T]he presence of independent legal
advice [is] an important factor to be considered in determining whether undue
influence exists.” Kase v. French, 325 N.W.2d 678, 681 (S.D. 1982).
[¶23.] Lincoln’s conduct after execution of the contract was also relevant to
show disposition to exercise undue influence at the time the contract was executed.
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See In re Estate of Jones, 320 N.W.2d 167, 170 (S.D. 1982). After this contract for
deed was executed, Lincoln instructed Pearl not to tell her other children about the
contract. Lincoln also declined to tell his siblings about the transaction before or
after executing the contract even though the other children had raised the topic of
selling the land to Lincoln. Lincoln did not disclose the sale until he was confronted
about the matter. And, when asked by his mother and siblings to tear up the
contract and work out a “fair deal,” Lincoln refused.
[¶24.] The court finally observed that Lincoln historically took advantage of
Pearl by paying her less than fair market rent under the oral lease. Lincoln,
however, contends that this finding is at odds with the jury’s verdict finding no
breach of the oral contract to lease the land in prior years. Lincoln also points out
that the court made a conflicting statement that Lincoln had paid Pearl a “fair
amount of rent.” 5
[¶25.] With respect to the jury’s verdict on Pearl’s breach of contract claim,
the jury was not asked to find whether Lincoln used undue influence to negotiate
the terms of the oral lease. The jury was asked to determine whether the lease was
breached, and its general verdict does not disclose the factual basis for its decision;
e.g., whether its decision was based on Pearl’s claims or on Lincoln’s defenses.
Therefore, it is impossible to ascertain whether the jury’s verdict was inconsistent
5. Lincoln further points out that the court did not allow the breach of contract
claim to go to the jury on the question of punitive damages. The court ruled
that Lincoln had not acted “willfully or maliciously” in his dealings with his
mother regarding the oral lease. This ruling is irrelevant. Malicious conduct
suggests a more culpable state of mind than the disposition to exert undue
influence.
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with the court’s finding that Lincoln had historically paid less than fair market
rent, an act suggesting a disposition to take advantage of Pearl’s trust. See
generally Williams v. First Gov’t Mort. Corp., 225 F.3d 738, 748 (D.C. Cir. 2000)
(concluding jury verdict did not support issue preclusion when jury did not specify
which of two alternative theories to adopt and no one could say what the jury found
the facts to be). In any event, the circuit court was the ultimate trier of fact with
respect to the equitable claim of rescission. And any jury findings on the action for
breach of contract, even if applicable to rescission, were only advisory. Nizielski,
453 N.W.2d at 834 (observing that generally “on equitable issues a jury’s verdict is
advisory only”).
[¶26.] We also see no inconsistency with respect to the court’s statement that
Lincoln had paid a fair amount of rent. That statement was made when the court
was discussing the amount of rent Lincoln would be obligated to pay for 2009 and
2010 to restore the parties to the status quo existing before the court ordered
rescission. The court rejected Pearl’s request for fair market value rent during that
period. Instead, the court concluded that $6,320, the amount of the oral lease, was
necessary to restore the parties to the status quo before the contract for deed was
executed. The court further noted that allowing Pearl fair market rent would have
placed her in a better position than she was at the time she executed the contract
for deed. In this context, the court’s statement regarding a fair amount of rent paid
under the oral lease cannot be construed to suggest Lincoln had not historically
taken advantage of Pearl by paying less than fair market rent. The court was
merely distinguishing between the amount of rent that would fairly restore the
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parties to the status quo and the fair market rent that would put Pearl in a better
position than if she had not executed the contract. The court did not clearly err in
finding that Lincoln was disposed to exert undue influence.
Result Showing Effects of Undue Influence
[¶27.] Finally, we see no clear error in the court finding a result clearly
showing the effects of undue influence. By executing the contract for deed, Pearl
sold her property for $580,000 less than its value. Not only was the contract price
of $117,000 substantially below the market value of $697,000, the thirty-year
payment term would have required Pearl to live to 114 years-of-age to receive the
payments.
[¶28.] Lincoln, however, argues that land transactions between family
members do not always contemplate fair market value. He also argues that from a
cash flow perspective, Pearl was not harmed. These arguments fail to acknowledge
that Pearl was entitled to fairly choose whether to sell her farm for one sixth of its
value thereby depriving her other children of a probable, substantial inheritance.
[¶29.] In the final analysis, Lincoln’s arguments are based on a version of the
facts that was rejected by the circuit court. Further, this case is unusual in that the
party alleged to have been unduly influenced was able to capably testify that she
had been unduly influenced. The circuit court listened to the witnesses and made
findings, including credibility determinations in which the court chose to believe
Pearl instead of Lincoln. We find no clear error in the circuit court’s findings of fact.
We affirm its conclusion that rescission was warranted. We also find no merit in
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Pearl’s argument raised by notice of review. The judgment of the circuit court is
affirmed.
[¶30.] GILBERTSON, Chief Justice, and KONENKAMP and SEVERSON,
Justices, and MILLER, Retired Justice, concur.
[¶31.] MILLER, Retired Justice, sitting for WILBUR, Justice,
disqualified.
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