Opinion
No. 5-744 / 04-1793
Filed November 23, 2005
Appeal from the Iowa District Court for Marshall County, Dale E. Ruigh, Judge.
Co-trustees appeal and cross-appeal the district court's order concerning a trust accounting and trust disbursements. AFFIRMED.
Jennifer Jaskolka-Brown and Louis R. Hockenberg, Des Moines, for appellant.
Sharon Soorholtz Greer of Cartwright, Druker Ryden, Marshalltown, for appellees.
Heard by Sackett, C.J., and Vogel and Eishenhauer, JJ.
Patricia Schade appeals and Jack Gethmann cross-appeals the district court's order concerning the propriety of certain disbursements and payments from a trust established by their late father. Because we find the payments are within the permissible range of the evidence and the intent of the trust has been served, we affirm the district court's order.
Background Facts and Proceedings.
We observe that the appendix is unnecessarily voluminous. See Iowa Rule of Appellate Procedure 6.15( a) which directs that the appendix shall contain only relevant portions of the record and, "any other part of the record to which the parties wish to direct the particular attentionof the court." We do not rely solely on the appendix, but on the entire record which is available for our review.
In April 1992, Kenneth W. Gethmann executed a revocable trust agreement that named himself as trustee, and his two children Patricia and Jack as successor co-trustees, of the Kenneth W. Gethmann Revocable Trust ("Trust"). The Trust also included a provision for a marital trust for Kenneth's wife, Clyda. Kenneth subsequently executed an amendment to the Trust in November 1992, setting up two additional trusts, one for Pat and one for Jack. Clyda died in 2000, with the residual of her marital trust to be divided equally between Jack and Patricia. Kenneth's will, also executed in April 1992, left the residue of his estate to the Trust.
At the time of Kenneth's death, the Trust owned an interest in several businesses, including Gethmann Construction Co., Inc. ("Gethmann Construction"), Inns of Iowa, Ltd. ("Inns of Iowa"), Gethmann Investment Corporation ("GIC"), and Iowa Builders Supply, Inc. The latter two companies merged in 1994, retaining the name of GIC. While Jack was an employee and officer of Gethmann Construction prior to Kenneth's death, Jack was not involved in the operation of Inns of Iowa. Patricia became involved in the operation of Inns of Iowa sometime in the early 1980s, but the record is unclear as to the extent of her involvement.
Under the terms of the Trust, Patricia received all of the "capital stock, securities, interest or claims" owned by Kenneth in the Inns of Iowa, "up to one-half of [Kenneth's] residue estate, whichever is less." Under a similar provision, Jack received Kenneth's entire interest in Gethmann Construction. The district court found that it was Kenneth's intent that both Jack and Patricia be treated equally in terms of distributions from the Trust. The residue of the Trust consisted primarily of shareholder interests in GIC, the interest and management of which the parties eventually brought before the district court. GIC owned several properties, including the Lincoln Towers apartments, Gethmann Country Estates, and the Nicholas Center among other properties
The Trust provided either co-trustee could request an accounting of Trust assets at any time. For several years the trust was primarily managed by Jack. No accountings were made by Jack nor requested by Patricia. At some point around 1998 to 2000, Patricia sought an accounting but was unsuccessful in her efforts. Patricia brought an action for an accounting of the Trust in 2001, later amending the petition to include damages for "mismanagement, misappropriation, and diversion of funds." Trial commenced in late May 2003, and progressed over the course of several days. Having taken the matter under submission, the district court issued its ruling in August 2004. The district court found that Jack "failed to discharge his fiduciary responsibilities in some, but not all, of the instances suggested by Patricia." To that end, it found that Jack's management fees were excessive and ordered him to reimburse the Trust $213,000 in excess compensation. The district court also ordered reimbursement for the following items that the court found unreasonable and not within the Trust's intent:
(1) Payments from GIC to Jack's children, Jill Craft and Jeff Gethmann, for health insurance and payroll taxes although neither was employed by GIC;
(2) Payments from GIC used by Jack to obtain a personal interest in Glenwood Park, L.C.;
(3) Payments from GIC for certain credit card charges for personal use by Jack; and
(4) Payment from GIC for a vehicle used by Joan Gethmann, Jack's wife.
The district court allowed other payments from GIC for Joan's managerial compensation, interest on loans by Jack to GIC, an investment in Marshalltown Development Company, profit and overhead to Gethmann Construction on GIC projects, and credit card charges for items used for GIC business purposes. The total amount the district court ordered Jack to reimburse GIC was $299,229.11. The court was unable to come to a conclusion as to advances by Patricia and Jack for estate taxes, due to continuing confusion as to Patricia and Jack's shareholder interests in GIC. The parties both filed motions to enlarge pursuant to Iowa Rule of Civil Procedure 1.904, after which the court affirmed the majority of its previous ruling, with the exception of some corrective figures and ordered interest on the judgment at 4.12% from the date of the order until payment in full. Patricia appeals and Jack cross-appeals.
I. Scope of Review.
"Generally, the remedies of a beneficiary against the trustee are exclusively equitable." Carstens v. Central Nat'l Bank Trust Co., 461 N.W.2d 331, 333 (Iowa 1990). In cases of equity our review is de novo. Iowa R. App. P. 6.4; In re Barkema Trust , 690 N.W.2d 50, 53 (Iowa 2004). In equity cases, especially when considering the credibility of witnesses, we give weight to the fact findings of the district court, but are not bound by them. Iowa R. App. P. 6.14( h).
II. Actions Against a Trustee.
Patricia brought this action against Jack as a trustee, requesting an accounting and alleging mismanagement and misappropriation of Trust funds by Jack. "The polestar of our analysis is the rule that the [settlor's] intent must prevail." In re Trust of Killian, 459 N.W.2d 497, 499 (Iowa 1990). We determine intent from the trust documents themselves, the scheme of distribution, and the circumstances surrounding their creation. Id. A trustee owes a duty of loyalty to the trust and to its beneficiaries and must act in good faith in all actions affecting the trust. Schildberg v. Schildberg, 461 N.W.2d 186, 191-92 (Iowa 1990). However, it is not necessarily improper for a trustee to receive compensation as an officer of a corporation that he holds in trust, if he performs necessary services as an officer and the compensation is reasonable. Restatement of Trusts (Third) § 170 cmt. o (1992).
A. Breach of Fiduciary Duty — Jack Gethmann.
Patricia asserts on appeal that certain actions taken by Jack were a breach of his fiduciary duties as co-trustee and shareholder against the intent of the Trust, requiring him to disgorge funds and return them to the Trust. Jack contends that all of his actions were reasonable and within the intent of the Trust document, as shown by the evidence submitted at trial.
1. Management Fees.
Patricia first claims that Jack's management fees from GIC, although reduced by the district court, remained excessive. Jack cross-appeals this point, contending the district court's reduction of his fees was improper as his fees were not excessive. The parties do not dispute that Jack has performed services in the management of GIC for which he is entitled to compensation. They only dispute the amount of the compensation.
The testimony given at trial regarding the propriety of Jack's compensation was by Lowen Poock, CPA and accountant for the various Gethmann companies since the late 1970s. He testified that in his experience Jack's fees are not excessive for the services he provides, e.g. acquiring, constructing, developing and selling property to provide funds for GIC. Poock also testified that since taking over the management of GIC, the shareholder's net equity has increased $225,000, from $320,680 in 1995 to $546,997 in 2002. He stated that Jack's involvement with GIC has led to the renovation and increased occupancy of GIC's Nicholas Center property, as well as the development and marketing of another GIC property, Gethmann Country Estates. In his opinion, Jack's management fees were reasonable considering the increased equity and efforts Jack has put forth to build and maintain the company.
Patricia's expert Telford Lodden, also a CPA, testified as to the appropriateness of Jack's compensation. He looked to GIC's gross profits and total assets to evaluate whether Jack's management fees were reasonable. According to Lodden's review of the corporate records, GIC's gross profits were virtually unchanged in the period since Jack has been managing the company. In his opinion, it was very significant that Jack has an ownership interest in GIC that presented a possible conflict of interest with his management duties. He testified that compensation in the range of $42,000 per year, rather than the average $63,300, for Jack's managerial services to GIC would be more reasonable and consistent with typical business practice.
The evidence at trial on Jack's management fees was the classic battle of the experts. As noted above, we give weight to the district court's findings concerning credibility of witnesses, but are not bound by them. Iowa R. App. P. 6.14( h); see also Estate of Hagedorn v. Peterson, 690 N.W.2d 84, 88 (Iowa 2004) (in a "battle of the experts," the weight to be assigned the testimony of each witness is within the province of the fact-finder). We agree with the district court that the compensation ordered by the district court was within the permissible range of the evidence, In re Marriage of Decker , 666 N.W.2d 175, 181 (Iowa Ct.App. 2003), considering Jack's responsibilities and increased value of GIC. The district court reduced the amount of compensation Jack received between 1993 and 2002 from $633,000 to $420,000, a difference of $213,000. This was the proposal put forth by Patricia's own expert witness, Telford Lodden. Considering the "hands-on" nature of Jack's management of GIC and his contribution to the increase in GIC's worth, we agree that Jack is entitled to compensation of $42,000 per year for the years 1993 through 2002, or a total of $420,000. We therefore affirm the district court's order as to Jack's management fees, and deny Jack's cross-appeal on this issue.
2. Other issues as to Payments by GIC.
Patricia also raises on appeal several other items she contends were improper expenditures by GIC. She asserts that interest payments on loans Jack made to GIC should be returned. We find from the record that the evidence supports that Jack did make loans to GIC for various purposes. Therefore, interest paid by GIC to Jack on these loans was within the permissible range of the evidence, and we affirm on this issue. Patricia also contends that the monies invested by GIC in Marshalltown Development Company should be returned. The record shows that Kenneth also made various real estate investments, establishing a history of similar ventures. In fact, it appears that the primary purpose of Kenneth's creation of GIC was to invest in, renovate and manage real estate. Although the investment in Marshalltown Development may not have been profitable to GIC, we find the investment within the permissible range of the evidence and consistent with the Trust's intent as to GIC's operations and likewise affirm the district court as to this issue.
Finally, Patricia argues that Gethmann Construction overcharged GIC on overhead and profit for construction projects that should have also been open to outside bidding. Telford Lodden testified that the charges by Gethmann Construction were high with a twenty-five percent overhead charge and additional profit margin of five percent, when most competitively-bid projects charged costs plus ten percent to fifteen percent. Lodden expressed concerns that these charges were "double-dipping" for Jack, considering the management fees he was already collecting from GIC. However, the evidence also shows that it was customary for Kenneth to use Gethmann Construction exclusively on GIC projects, with similar cost allocations and billing practices. Although, as Patricia argues, Kenneth was the only one to benefit from this arrangement, the evidence nonetheless supports the propriety of overhead and profit fees charged to GIC by Gethmann Construction, and we affirm the district court as to this issue.
3. Shareholder Interest in GIC.
Patricia asserts that Jack obtained a majority shareholder interest in GIC in the years following Kenneth's death, in violation of the terms and intent of the Trust. Jack contends that he acquired his interest in GIC through a court order or other proper means, consistent with the intent of the Trust to equalize their respective interests. The parties presented this issue at trial and in the rule 1.904 motion to enlarge, but the district court determined that it could not rule on the issue of proportionate shareholder interest in this cause of action, due to an incomplete record and the pending resolution of both Kenneth and Clyda's estates. As these issues were not ruled upon by the district court in this action, we may not consider them on appeal. See Meier v. Senecaut, 641 N.W.2d 532, 537 (Iowa 2002).
At oral argument, neither side could enlighten this court as to the number of shares Jack and Patricia owned.
B. Management Fees Paid to Joan Gethmann.
Patricia's second issue on appeal is that the management fees paid to Jack's wife, Joan Gethmann, from GIC were excessive. Jack counters this argument, claiming that fees paid to Joan were reasonable for her management of Lincoln Towers apartments. At trial, Telford Lodden, CPA, testified that Joan was paid a salary of $3450 per month as of May 2003. In addition, GIC paid "payroll taxes and insurance" for Joan of $862 per month, for a grand total of $51,744 per year. He testified the gross income generated by Lincoln Towers was approximately $15,654 per month. Joan's management compensation therefore equals 30.2% of the gross rents garnered from Lincoln Towers. This figure did not take into consideration a vehicle and gas or cell phone provided to Joan, as Lodden did not have figures for those items. He further testified that in his experience reviewing the books and records of real estate management companies in central Iowa, the customary management fee is typically between five and ten percent of the gross rents, with the percentage inversely correlating to the number of units in the complex. He surmised the average fee rate in central Iowa is ten percent, but may vary depending on the number of vacancies versus long-term tenants and degree of difficulty of management in those situations. Lodden also testified that it is unusual for a manager to be provided a vehicle, cell phone, and health insurance. Typically, there is also documentation by managers with respect to time involved, services performed, and/or management agreements, none of which were present in this case. He did admit that he did not know what duties Joan assumed as manager of Lincoln Towers.
The smaller the number of units in the apartment complex, the higher the percentage fee would be, and vice versa.
Lowen Poock also testified as to the propriety of Joan's compensation for her management position. He stated that it was proper for corporations to reimburse an employee for gasoline when they are driving for business purposes, or to provide meals to discuss business matters. He also testified that Joan has many responsibilities: showing and renting units and performing routine maintenance, such as painting, carpeting and installing tile. Her fees, considering the duality of her position as manager and maintenance person as well as the high-end quality of the Lincoln Towers complex, were reasonable in Poock's opinion. He testified that other apartment complexes use outside maintenance contractors, therefore using their ratio of management fees to gross rents would not be comparable. Joan also testified that she is on-call twenty four hours a day and available to assist the elderly residents with various personal tasks difficult for them to do themselves.
As with the issue of Jack's management fees, the district court was faced with conflicting testimony from each party's expert witness on the propriety of Joan's compensation. The district court found no justification for Joan's vehicle. Otherwise, the evidence showed that while Joan was receiving a proportionately high compensation in the field of real estate management, she also performed other duties that are typically farmed out to third parties in the maintenance and minor repair/renovation of an apartment complex. In light of her extensive duties, we agree with the district court's finding that an annual salary of $41,000 is within the permissible range of the evidence and consistent with GIC's business operations. Payment for Joan's payroll taxes, medical insurance and a cellular phone is also compensation supported by the evidence for her breadth of duties and on-call status. We therefore affirm the district court's order as to Joan's compensation.
C. Conclusion.
Upon our de novo review, we find the district court made appropriate findings of fact, affirm its ruling and order as to all issues and deny the cross-appeal.