Opinion
NO. 4-13-1103
07-22-2014
JENNIFER ANNE CARTER-BERNAL and JOHN ROBERT CARTER, Plaintiffs-Appellants, v. EDWARD R. CARTER, Individually and as Trustee of the Irrevocable Trust Under an Agreement Dated July 23, 1986, Defendant-Appellee.
NOTICE
This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).
Appeal from
Circuit Court of
Sangamon County
No. 07CH288
Honorable
Leo J. Zappa,
Judge Presiding.
PRESIDING JUSTICE APPLETON delivered the judgment of the court.
Justices Pope and Harris concurred in the judgment.
ORDER
¶ 1 Held: The trial court's decision ordering a 55% discount in the amount defendant is obligated to pay plaintiffs as their share of the fair market value of the trust property and thereafter waive all right, title, and interest in the property in favor of defendant was not supported by the evidence. The appellate court vacated the 55% discount applied by the trial court, recalculated plaintiffs' share without the discount, and otherwise affirmed the court's judgment. ¶ 2 Plaintiffs, Jennifer Anne Carter-Bernal and John Robert Carter, are the children of defendant, Edward R. Carter. In 2007, plaintiffs sued defendant for breach of fiduciary duty, alleging he had abused his duties as trustee of a trust in which plaintiffs were the beneficiaries. Specifically, plaintiffs alleged the quitclaim deeds they each executed in defendant's favor were invalid for lack of consideration. After a bench trial, the trial court entered judgment in favor of defendant, finding the conveyances were valid and supported by sufficient consideration. Plaintiffs appealed, and we reversed and remanded. Carter-Bernal v. Carter, No. 4-10-0681 (Mar. 28, 2011) (unpublished order under Supreme Court Rule 23). On remand, the trial court conducted an evidentiary hearing and, thereafter, entered judgment ordering defendant to pay each plaintiff $25,312 as their respective interests in the value of the trust property conveyed to defendant. We affirm in part and vacate in part.
¶ 3 I. BACKGROUND
¶ 4 A brief recitation of the pertinent facts and historical background of this case is necessary to place this decision in a proper perspective. In 1986, defendant's parents, Luke and Mildred Carter, created a trust, which consisted of an approximately 100-acre tract of land, intended for the benefit of their grandchildren, defendant's four children, including plaintiffs. Defendant was named trustee. The trust property was improved after the trust was created by the construction of a residence, boarding stable/riding arena, and sawmill. The property was also used for seasonal commercial hayrack rides. ¶ 6 In April 2007, plaintiffs filed the underlying lawsuit against defendant, claiming he breached his fiduciary duties as trustee. They claimed the quitclaim deeds they executed were void because defendant acted outside the scope of his duties as trustee and had used the trust property for his own personal gain irrespective of the beneficiaries' best interest. They further claim the conveyance was not supported by consideration. After a May 2010 bench trial, the trial court entered judgment in favor of defendant. Plaintiffs appealed. We reversed, finding the evidence supported plaintiffs' claims that defendant had engaged in self-dealing and that he had breached his fiduciary duty as trustee. Carter-Bernal, No. 4-10-0681 (Mar. 28, 2011) (unpublished order under Supreme Court Rule 23). We remanded the cause with directions for the trial court to conduct an evidentiary hearing to determine damages. We instructed as follows:
"In this case, the trial court must determine at an evidentiary hearing the value of the property placed in trust, the amount of income earned by use of the trust property, the value added to the trust property by reason of the defendant's efforts, and the allocation of the increased value of the property by reason of the fixtures paid for by defendant or due to his efforts. The court should then either fashion an equitable remedy and/or award damages in an amount that would place the beneficiaries in the position in which they would have occupied if no breach of duty had been committed. We are not unmindful that two of the beneficiaries are not parties to this action and are not within the jurisdiction of either the trial court or this court. However, upon remand, the trial court may obtain jurisdiction over them if they so desire, or recognize a settlement between defendant and them." Carter-Bernal, No. 4-10-0681 at p. 21-22 (Mar. 28, 2011) (unpublished order under Supreme Court Rule 23).¶ 7 On January 22, 2013, the trial court conducted an evidentiary hearing. Finding defendant had the burden of going forward on the issue of damages, the trial court considered defendant's evidence first. Defendant presented his own testimony, as well as that of his accountant, Robert Saner, and a real estate appraiser, Gregory Kienzler. Defendant explained that the trust, created in 1986, included property consisting of approximately 100 acres, the majority of which (over 70%) was either wooded or floodplain property. On the useable portion of the trust property, defendant constructed a pole barn, a sawmill, a boarding stable, and his residence. Defendant, his ex-wife (the mother of both plaintiffs), and his children resided in the home until 1997, when the parties divorced. As part of the divorce, defendant was awarded exclusive possession of the home but was ordered to pay his ex-wife $110,000 as her share of the equity in the home. ¶ 8 The trust property generated income from the following sources: (1) boarding stables, wherein each stall is rented for $200 per month with 13 of the 20 available stalls occupied at the time of the hearing; (2) sawmill; (3) four mobile homes, rented at the rates of $400, $400, $550, and $600 respectively per month; and (4) haunted hayrides, which traverse over the trust property for approximately only two-tenths of a mile. On defendant's tax returns, the business income generated from these sources was grouped together and not individually allocated. Further, the "business income" included income received from defendant's other income sources not associated with the trust property. ¶ 9 Plaintiffs' appraiser, Barry Taft, had testified at the bench trial in May 2010 that the home and the immediate 4.48 acres had a value of $205,000. The remaining acreage in the trust property had a market value of $300,000, with $60,000 contributory value for the improvements. However, in his appraisal, he noted the mobile homes and an older structure on the property "detracted and had a negative influence of the property." On the other hand, defendant's appraiser, Gregory Kienzler, testified at the damages hearing that the home with 5 acres (he used 5 instead of the 4.48 used by Taft) had a value of $270,000, with the remaining acreage valued at $211,000. He did not place a contributing value upon any of the improvements, and he testified he was not aware of any income generated from the mobile homes, boarding stables, or sawmill. ¶ 10 Testimony revealed that defendant earned an estimated gross income of $9,000 to $14,000 per night from the haunted hayrides, which were conducted approximately six times (Friday and Saturday nights for the three weekends preceding Halloween) during the month of October each year. However, according to defendant and Saner, from a review of the bank deposit tickets and annual secretary's register, operation of the haunted hayride experienced a loss of over $61,000 between 2005 and 2012. Saner testified that, because all business income was lumped together on defendant's tax returns, the only feasible way to calculate income attributable from the various businesses using the trust property was to review the secretary's registers (admitted as defendant's exhibits) and bank deposit tickets. Saner also testified that the income from the sawmill, boarding stable, and mobile home rentals between 2005 and 2012 resulted in a loss of $33,057.64. ¶ 11 Plaintiffs presented the testimony of plaintiff John Carter, Avram Peters (a private investigator), and Katie Carter, defendant's daughter-in-law, presumably John's wife. John testified he often worked with his father at his various businesses throughout his youth. He said all of defendant's businesses were conducted on a cash basis. He recalled his father placing some cash earned into a bag for a bank deposit, some in his office, and the rest in his pocket. Peters testified he attended two nights of the haunted hayride and reported the specifics on how the ride was operated. He stated on the first night he attended, approximately 900 tickets were sold at $10 each, whereas on the second night he attended approximately 1,400 tickets were sold. He traced a path on a map of the route of the hayride, confirming that only a small portion of the ride traversed over the trust property. Katie testified only that she worked in the ticket booth, corroborating Peters' testimony as to the number of tickets sold. ¶ 12 After considering the testimony and documentary evidence, and later each parties' trial brief, the trial court entered an order, finding as follows. First, the court made several credibility findings, noting plaintiffs' testimony from the "original hearing in 2010" was not credible, nor was John's testimony from the damages hearing. However, the court found defendant's testimony, though he "exhibit[ed] that he is not sophisticated in the ways of business," was nonetheless credible. Next, the court placed the value of the home and residential tract at $220,000 and the value of the remaining property with improvements at $300,000. The court allocated a contributory value of approximately $205,000 to defendant on the value of the home due to defendant's labor expended on the construction of the home. The court also allowed defendant the contributory value of $60,000 on the remaining property due to the labor expended toward the improvements thereon. Based upon the extended family's "great animosity toward [] plaintiffs" and the "unique geographics of the real estate" at issue (ingress and egress requires a private easement from defendant's brother), the court assigned a 55% valuation discount. The court further found the testimony of defendant and Saner established that between 2002 and 2012, the sawmill, boarding stable, mobile homes, and haunted hayrides did not generate net income from the trust property and therefore, plaintiffs were not entitled to any proceeds therefrom. Based on these calculations, the court ordered defendant to pay each plaintiff the sum of $25,312 and, upon payment, plaintiffs' "right, title, and interest in and to the trust or the underlying real estate which is held by the plaintiffs in the trust shall terminate." ¶ 13 This appeal followed.
¶ 14 II. ANALYSIS
¶ 15 In our previous order, we remanded the cause to the trial court for the purpose of conducting an evidentiary hearing to determine the value of the trust property so that plaintiffs could be placed in the position they would have been in had defendant not breached his fiduciary duties as trustee, or in a position they would have been in had defendant paid consideration for plaintiffs' respective interests in the trust property upon their execution of the quitclaim deeds. See Carter-Bernal, No. 4-10-0681 (Mar. 28, 2011) (unpublished order under Supreme Court Rule 23). ¶ 16 When construing a trust, the first task is to determine the settlor's intent at the time the trust is created. To do this, courts will look at the trust as a whole and effectuate that intent if it is not contrary to public policy. Harris Trust & Savings Bank v. Donovan, 145 Ill. 2d 166, 172 (1991). We acknowledge the record reveals that defendant purchased the trust property from his father in 1978, but the property remained in a land trust for defendant's benefit. Between 1978 and 1986, defendant lived on the property in a mobile home and constructed improvements with the intent of producing income. In 1986, defendant, his parents, and his sister created the trust with the intent to preserve the trust property for his children and to insulate it from potential liability stemming from his trucking business. He placed the property in a trust, naming his four children as beneficiaries and he as trustee. However, he continued to treat the property as exclusively his own. We find he did so, not with malicious or fraudulent intent, but because he did not fully understand the legalities of a trust. With that said, it is clear the beneficiaries, including plaintiffs, cannot be stripped of their rights in the trust property without voluntarily and intelligently waiving or relinquishing their rights or, in the alternative, being compensated the fair market value of their respective shares. ¶ 17 The trial court, after considering all of the evidence relating to the full accounting of the trust property, ordered defendant to pay plaintiffs $25,312 each as their respective shares of the fair market value in exchange for their voluntary relinquishment of their rights to the trust property. It is this ruling the plaintiffs challenge. When a party challenges a trial court's bench-trial ruling, we defer to the trial court's factual findings unless they are contrary to the manifest weight of the evidence. Nokomis Quarry Co. v. Dietl, 333 Ill. App. 3d 480, 484 (2002). We give great deference to the trial court's credibility determinations and will not substitute our judgment for that of the trial court because as the fact finder, it is in the best position to evaluate the witnesses' conduct and demeanor. Samour, Inc. v. Board of Election Commissioners of the City of Chicago, 224 Ill. 2d 530, 548 (2007). A finding is against the manifest weight of the evidence only if the opposite conclusion is clearly evident or the decision is unreasonable, arbitrary, and not based on any competent evidence. Quinlan v. Stouffe, 355 Ill. App. 3d 830, 836 (2005). "Under such a standard, a trial court's determination will be reversed only if, after review of the entire record, the reviewing court is left with the definite and firm conviction that a mistake has been committed." Quinlan, 355 Ill. App. 3d at 836. We find the trial court's application of the 55% discount was arbitrary in that it was not supported by any evidence in the record or by legal precedent. ¶ 18 According to the trial court's order, the court found the "computation of value for the acreage as calculated under the trial brief of the defendant is reasonable and credible." In his trial brief, defendant calculated the value of the trust property using marketability discounts based upon (1) the lack of usability of the majority of the property (with only eight acres outside of the floodplain), and (2) the unique characteristics of the property given it is bounded to the south by a river, to the east by a railroad, to the north by commercial property, and to the west by another person's residence and highway. Further, the only feasible ingress and egress is over the commercial property claimed as a private easement from defendant's brother. However, defendant does not indicate how he arrived at the value of 55% as the appropriate discount. ¶ 19 To determine the value of the residential tract, defendant relied upon plaintiffs' appraisal prepared by Taft. According to Taft's appraisal prepared in 2010, the 4.48 acre plat under and surrounding the home was valued at $14,112 (assigning a valuation of $3,150 per acre), with the residential structure valued at $190,888. To determine the value of the approximately 95 acres remaining, defendant relied upon his own appraisal prepared by Kienzler. According to Kienzler's appraisal prepared in 2011, the 95 acre plat was valued at $211,000. ¶ 20 As stated, the trial court accepted defendant's valuation and determined the value of plaintiffs' interest as follows: (1) $14,000 for acreage under the home (defendant to receive 100% of the value of the home because of his labor and costs expended), and (2) $211,000 for remaining acreage, for a total of $225,000, or $112,500 to plaintiffs as 50% owners of both tracts. Defendant applied a "significant fractional interest discount" in the amount of 55% due to the unique circumstances of the property as described above. Applying the 55% discount to plaintiffs' combined share of the $112,500 value, defendant calculated the total discounted value for 50% ownership of the trust property at $50,625, entitling each plaintiff to $25,312. The court found defendant's calculation "reasonable and credible" and so ordered. ¶ 21 This court cannot find support, either in the record or in relevant case law, for the court's application of the 55% "significant fractional interest discount." Defendant cited NAB Bank v. LaSalle Bank, N.A., 2013 IL App (1st) 121147, in support of his position that the trial court should apply a discount from the appraised value, which would presumably reflect the true fair market value of an undivided interest in the property. However, the First District's decision in NAB Bank does not support the application of the discount in this case. In NAB Bank, the appellate court affirmed the circuit court's approval of a sale price generated in a forced judicial sale of real estate. The sale price ($20,000) was significantly below the appraised value ($280,000), but the circuit court approved the sale nonetheless because of " 'unusual circumstances' " which arguably supported the low price. NAB Bank, 2013 IL App (1st) 121147, ¶ 23. Those circumstances included the fact that the auction was for an undivided half-interest in the property and the appraisal "might have been overly generous" based on the current real estate market. NAB Bank, 2013 IL App (1st) 121147, ¶ 23. ¶ 22 The appellate court acknowledged "the fair sale price of a one-half interest in a single-family home must be significantly discounted from the amount calculated by merely dividing the price of the entire property by two. Established principles of real estate appraisal, as set forth in case law from other jurisdictions, particularly tax and bankruptcy cases, support this rule." NAB Bank, 2013 IL App (1st) 121147, ¶ 24 (citing First National Bank of Chicago v. Steinbrink, 812 F.Supp. 849, 853 (N.D. Ill. 1993) (noting that "the nature, worth, and marketability of fractional interests in property is fundamentally different from investment property owned in whole"); Jarvis v. Boatmen's National Bank of St. Louis, 478 S.W.2d 266, 275 (Mo. 1972) (" 'It is conceded that it is proper to make a deduction in valuing an undivided fractional interest in real property because of the diminution of value which results from the fact that it is an undivided fractional interest only.' " (quoting In the Matter of the Estate of Gilbert, 176 A.D. 850, 851-52 (N.Y.A.D. 1 Dept. 1917)))). The court held: "Taking these principles into account, the sale was just, and the sale price was not unconscionable. Accordingly, we find that the circuit court correctly confirmed the sale." NAB Bank, 2013 IL App (1st) 121147, ¶ 25. ¶ 23 The First District's opinion does not support defendant's assertion the trial court should assign a specific discount based upon the unique circumstances of the property in the absence of expert testimony on the issue. Defendant bore the burden of demonstrating what, if any, discount should apply to plaintiffs' interest in the trust property, in light of the appraised value. However, no evidence on this subject was presented and nothing in the record supports the court's allocation of a discount of 55%. Because we find this number is not supported by any evidence in the record, we vacate the assigned discount. ¶ 24 Otherwise, we find the trial court's calculation is reasonable and equitable and not against the manifest weight of the evidence. Defendant, as trustee, used the property as his own without regard to the beneficiaries' interests. Defendant then had the beneficiaries deed their respective interests in the trust property to him personally without consideration of the fair market value of their interests. After the full evidentiary hearing, the court calculated the fair market value of plaintiffs' respective interests and the amount defendant must pay plaintiffs as consideration for their interest in the property. With the exception of the applied discount of 55%, we affirm the court's calculation as supported by the evidence. Thus, we hold plaintiffs together are entitled to $112,500, or $56,250 each.
¶ 25 III. CONCLUSION
¶ 26 For the reasons stated, we vacate a portion of the trial court's judgment by vacating the 55% discount applied to plaintiffs' share of the fair market value of the trust property. We otherwise affirm the court's judgment. ¶ 27 Affirmed in part and vacated in part.