IN THE MATTER OF THE FRED PETERSEN LAND TRUST; IN THE MATTER OF THE FRED PETERSEN LIVING TRUST
#29745-aff in pt & rev in pt-MES
IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA
2023 S.D. 44
REHEARING GRANTED AND OPINION WITHDRAWN AUGUST 18, 2023 OPINION FILED 08/18/2023
THE HONORABLE PATRICK T. PARDY, Judge
ARGUED MAY 26, 2022; OPINION FILED NOVEMBER 23, 2022
PAMELA R. REITER
ANTHONY P. SUTTON of Johnson, Janklow, Abdallah & Reiter, LLP Sioux Falls, South Dakota Attorneys for appellants Michael and Sally Johnson.
JOHN A. SHAEFFER Flandreau, South Dakota Attorney for appellee Mindy Smith.
DANNY R. SMEINS Britton, South Dakota Attorney for appellee Jody Wallin.
SALTER, Justice
[¶1.] Prior to his death in 2018, Fred Petersen created two trusts. After Fred‘s passing, one of his daughters, Sally Johnson, filed separate petitions seeking court supervision and reformation of one of the trusts. Another of Fred‘s daughters, Mindy Smith, opposed the reformation of the trust and filed her own petition seeking clarification from the court and requesting other relief.
[¶2.] The circuit court conducted a two-day court trial to determine the merits of the petitions. In its memorandum decision, the court granted Sally‘s request to reform the trust and denied each of Mindy‘s requests for relief. Sally then sought reimbursement from the trust for her attorney fees and expenses incurred during the litigation. The circuit court denied the request, concluding the trust did not receive an economic benefit from the litigation, which, the court determined, was required to justify reimbursement from the trust. Sally has appealed this denial. We affirm in part, reverse in part, and remand.
Facts and Procedural History
[¶3.] Fred Petersen farmed and raised cattle in Moody County for many years. His farm consisted of approximately 1,000 acres of crop and pasture land, including a twenty-acre homestead with outbuildings, a cattle yard, and a farmhouse where Fred and his family lived. At one point, the farm was valued at nearly six million dollars.
[¶4.] Fred and his first wife were divorced in what appears to have been the late 1970s. Prior to the divorce, they had three daughters together: Jody, Mindy, and Sally. As they grew older, Jody and Mindy left the farm and moved out of state.1 Sally, however, remained. She and her husband, Mike Johnson, lived one mile from the homestead and helped Fred on the farm.
[¶5.] In 1997, Sally and Mike rented all the crop ground from Fred and farmed it themselves. When Fred retired from farming altogether, Sally and Mike took over the cattle operation as well. Though Fred continued living on the homestead after his retirement, Sally and Mike began making farm-related improvements to the property with the understanding—expressed to them by Fred—that they would inherit the homestead after his death.
[¶6.] Marital tension between Fred and his second wife, Sharon Petersen, prompted Fred to create the Fred Petersen Living Trust. The Living Trust was a revocable trust prepared by Thompson Law in Sioux Falls and was funded with all of Fred‘s real and personal property. Fred named himself as the initial trustee with Fred and Sharon as the income beneficiaries. Fred selected his sister along with
[¶7.] The Living Trust contained several specific distributions, including Fred‘s directive to have his twenty-acre homestead surveyed, platted, and distributed to Sally immediately upon his death. The Living Trust instrument also provided an option for Sally and Mike to lease the entirety of the agricultural land from the trust after Fred‘s death, with rent for the tillable acres calculated at ninety percent of the county average rental rate.2 The term of the option was the remainder of Sharon‘s life plus three years.
[¶8.] In 2013, Sharon initiated a divorce action. During the pendency of the divorce, Fred returned to Thompson Law and amended the Living Trust to remove Sharon as an income beneficiary. He also created a new irrevocable trust, known as the Fred Petersen Land Trust, which he funded with the farm land owned by the Living Trust. Fred named Sally, Mike, and Fred‘s sister as co-trustees, with Fred as the sole income beneficiary.
[¶9.] In an effort to resolve the divorce without selling the farm, Fred agreed to make a cash payment to Sharon of $800,000. Fred was able to pay $253,000 with available funds, and he obtained a loan to cover the balance. The loan agreement required annual payments over a twenty-year term with the final payment due on December 1, 2033. The debt was secured by a mortgage on the property now owned by the Land Trust.
[¶10.] The trust instrument establishing the Land Trust included several provisions relating to the mortgage, leasing, and the eventual distribution of its corpus. Under its provisions, the mortgage payments due after Fred‘s death could be made from the rental income received by the Land Trust. Mike and Sally had the option to lease the land, as they had with the Living Trust, at the ninety- percent-of-the-average rate on the tillable acres for up to three years after Fred‘s death or three years after the loan was paid off, whichever occurred later. The Land Trust instrument designated Jody, Mindy, and Sally as income beneficiaries after Fred‘s death and provided that they would eventually receive all the agricultural land from the Land Trust once the mortgage was paid off and the trust was terminated.
[¶11.] After creating the Land Trust, Fred executed a trustee‘s deed conveying all the real property from the Living Trust to the Land Trust. However, the deed contained a drafting error. Instead of excepting the homestead that Fred intended to gift to Sally and Mike immediately upon his death, the deed unconditionally transferred the homestead to the Land Trust as part of a larger tract without any reference to the intended distribution of the twenty-acre parcel to Sally and Mike. The attorney who drafted both trusts later acknowledged that this was a mistake and that Fred had always planned to transfer the homestead to Sally and Mike in the same manner described in the terms of the Living Trust.
[¶12.] At the time of his death, Fred had reduced the mortgage balance to approximately $150,000 through periodic additional principal payments. However, the terms of the Land Trust required unanimous
[¶13.] Jody, Mindy, and Sally met at Thompson Law several times in the months following Fred‘s death to discuss the implications of his estate plan. During these meetings, the sisters and the trust attorney realized for the first time the error in the Land Trust, which failed to account for the transfer of the homestead to Sally and Mike. After this, the discussions seemed to focus on two main topics—the fate of the twenty-acre homestead and the pace at which the Land Trust retired its mortgage debt.
[¶14.] At an October 2018 meeting, the sisters each acknowledged it was Fred‘s intent to give the homestead to Sally and Mike and that they should take the necessary steps to fulfill their father‘s plan. As for the mortgage, Mindy expressed her desire to use all the Land Trust‘s income to pay down the mortgage as quickly as possible, which would allow the sisters to vote to terminate the Land Trust and distribute the land among themselves. Despite universal consensus on the homestead issue, the sisters were unable to resolve either matter. A memo drafted by a paralegal at Thompson Law in January 2019, described Sally as “fearful” that Mindy “would not sign off on the [homestead transfer]” if Sally did not agree to accelerate the mortgage payments using all of the Land Trust‘s income.
[¶15.] On February 4, 2019, the sisters met a final time at Thompson Law to again discuss the mortgage and the homestead. According to two “family stipulation” agreements drafted by the Thompson Law attorney and sent to the sisters after the meeting, the parties discussed the following terms: (1) the homestead would be surveyed and deeded to Sally and Mike as originally intended; (2) the parties would retain additional income from the Land Trust to accelerate the mortgage payments in an amount to be agreed upon at a later date with the unanimous consent of all the beneficiaries; and (3) Sally and Mike would retain an option to rent the tillable farm ground for three years after the satisfaction of the mortgage at the ninety percent rate and, thereafter, would have an additional seven-year option to rent the ground at one hundred percent of the county average rate.
[¶16.] Jody and Sally each signed the stipulations, but Mindy did not. Further communications among the sisters ceased. Sally and Mindy retained separate counsel, and this litigation followed.
[¶17.] On August 8, 2019, Sally filed a petition for court supervision of the Land Trust, see
[¶19.] Mindy also filed a motion asking the court to enforce what she alleged to be an earlier oral agreement, in which, Mindy claimed, the sisters had previously agreed to accelerate mortgage payments during their initial discussions at Thompson Law. Sally then alleged that Mindy had violated the Living Trust‘s “no contest clause” and, therefore, forfeited her right to distributions.
[¶20.] The circuit court consolidated the actions and held a two-day court trial. The court heard testimony from several of the beneficiaries, including Mindy, Sally, and Mike, as well as from a Thompson Law attorney. In its memorandum opinion issued after the trial, the court granted Sally‘s petition to reform the Land Trust and denied all of Mindy‘s various petitions and motions. In findings of fact, the court found Mindy was not a credible witness at trial.
[¶21.] Sally subsequently filed a motion for reimbursement of attorney fees and expenses from the Land Trust, citing
[¶22.] At a subsequent hearing, the parties’ arguments focused principally on whether an economic benefit to the trust as a result of the litigation was a prerequisite to recovering attorney fees under
[¶23.] Mindy and Jody argued that the litigation resulted in no economic benefit to the trust and, instead, benefited solely Sally and Mike, who received the homestead. Mindy and Jody also disputed Mike‘s economic benefit theory, asserting that the tillable land could have been leased on the open market for more than the ninety-percent-of-the-average market rate.
[¶24.] The circuit court concluded that to recover attorney fees under
[¶25.] Sally has appealed, asserting the court‘s ruling that a trust must receive an economic benefit to recover attorney fees from the trust was an error of law. She also claims that the court clearly erred when it found that the litigation did not result in an economic benefit to the trust.
Standard of Review
[¶26.] The grant or denial of attorney fees is ordinarily reviewed for an abuse of discretion. Wagner v. Brownlee, 2006 S.D. 38, ¶¶ 17, 713 N.W.2d 592, 598. “An abuse of discretion ‘is a fundamental error of judgment, a choice outside the range of permissible choices, a decision, which, on full consideration, is arbitrary and unreasonable.‘” In re Trust Fund of Baumgart, 2015 S.D. 65, ¶ 27, 868 N.W.2d 568, 575-76 (quoting Gartner v. Temple, 2014 S.D. 74, ¶ 7, 855 N.W.2d 846, 850). “[A] trial court‘s decision based on an error of law can be by definition an abuse of discretion.” In re S.D. Microsoft Antitrust Litig., 2005 S.D. 113, ¶¶ 28, 707 N.W.2d 85, 98 (citation omitted).
[¶27.] “When reviewing a trial court‘s award of attorney fees, questions of fact are reviewed under the clearly erroneous standard.” Id. “A trial court‘s finding is clearly erroneous if, after reviewing the entire evidence, we are left with the definite and firm conviction that a mistake has been made[.]” In re Estate of Dokken, 2000 S.D. 9, ¶ 10, 604 N.W.2d 487, 490–91 (alteration in original) (citation and internal quotation marks omitted).
[¶28.] “When applying the abuse of discretion standard of review, we must be careful not to substitute our reasoning for that of the trial court.” S.D. Microsoft Antitrust Litig., 2005 S.D. 113, ¶ 27, 707 N.W.2d at 98 (citations and internal quotation marks omitted). “In other words, a fee award is within the court‘s discretion so long as it employs correct standards and procedures and makes findings of fact not clearly erroneous.” Id. (cleaned up).
Analysis and Decision
Benefit to a Trust
[¶29.] In South Dakota, parties generally pay their own attorney fees under what is commonly known as the American rule. Id. ¶¶ 29, 707 N.W.2d at 98; see also Credit Collection Services, Inc. v. Pesicka, 2006 S.D. 81, ¶¶ 6, 721 N.W.2d 474, 476 (“An award of attorney‘s fees is not the norm.” (citation omitted)). However, a court may award attorney fees when permitted under the terms of a contract or when such an award is explicitly authorized by statute. See In re Estate of O‘Keefe, 1998 S.D. 92, ¶ 17, 583 N.W.2d 138, 142. A motion requesting attorney fees, therefore, “must specify the judgment and the statute, rule, or other grounds entitling the moving party to the award[.]”
[¶30.] The provisions of
[¶31.] At one time, our decisions held that attorney fee awards under
[¶32.] However, we later concluded that the second prong of the test—requiring the attorney services to be necessary because of a fiduciary‘s negligence, fraud, or inactivity—was improvidently gleaned from the Engebretson case. See Wagner, 2006 S.D. 38, ¶ 12, 713 N.W.2d at 596. In Wagner, we held that the principal rule of Engebretson was simply that “an allowance may be made out of the estate of a deceased person for the services of attorneys for beneficiaries where those services were beneficial to the estate.” Id. (quoting Engebretson, 68 S.D. at 260, 1 N.W.2d at 353).
[¶33.] Hastening the demise of the two-prong test after “a lengthy and conflicting history regarding [its] applicability[,]” Wagner, 2006 S.D. 38, ¶ 13, 713 N.W.2d at 597, was the Legislature‘s 1995 adoption of the Uniform Probate Code and the enactment of
[¶34.] Under
[¶35.] But here it is not necessary to determine whether we should extend the substantial benefit rule of
[¶36.] Although the formulation of the standard for attorney fees under
[¶37.] Nor do we believe that a party‘s status as a beneficiary places her at a disadvantage under
[¶38.] Here, we conclude the circuit court abused its discretion by denying Sally‘s motion for attorney fees based on its erroneous view that an attorney fees award under
Economic Benefit to the Fred Peterson Land Trust
[¶39.] As indicated above, an economic benefit to the trust obtained from litigation can, generally speaking, support an award of attorney fees. Sally alternatively contends under this theory that the Land Trust received additional, purely economic benefit from the litigation and that the court‘s finding to the contrary was clearly
[¶40.] As to the former contention about rent payments to the Land Trust, we believe that Sally did not establish any benefit, economic or otherwise, to the trust as it relates to litigating the mortgage payments issue. It does not appear from the record that the rental payments from Mike and Sally were any more beneficial to the Land Trust than would have been the case if the land had been leased to different farmers in the absence of the option. In other words, it does not appear the successful litigation provided the estate with income it could not have otherwise obtained from a different renter. For this reason, the circuit court did not abuse its discretion when it determined that the litigation on this issue did not provide the trust with an economic benefit.
Appellate Attorney Fees
[¶41.] Sally and Mike have also requested appellate attorney fees. An award of appellate attorney fees is authorized “only where such fees are permissible at the trial level.” Farmer v. Farmer, 2020 S.D. 46, ¶ 58, 948 N.W.2d 29, 45 (quoting Charlson v. Charlson, 2017 S.D. 11, ¶ 36, 892 N.W.2d 903, 913); see also
Conclusion
[¶42.] Attorney fees are authorized in trust supervision proceedings under
[¶43.] Here, then, attorney fees are authorized for Sally‘s efforts to vindicate her father‘s intent. Short of litigation, there was no other means for her to do so. We reverse the circuit court‘s denial of attorney fees for Sally‘s litigation efforts to obtain the homestead. However, the circuit court correctly determined that attorney fees were not authorized for Mike and Sally‘s efforts to resist Mindy‘s attempt to reform the Land Trust and retire the mortgage debt sooner, and we affirm this determination.
[¶44.] Finally, the plain fact that fees are authorized does not make a fee award a fait accompli. See Ctr. of Life Church v. Nelson, 2018 S.D. 42, ¶ 34, 913 N.W.2d 105, 114 (holding the fact that a court was authorized to exercise its discretion and award attorney fees did not obligate it to do so). Whether to exercise its discretion to award attorney fees and, if so, in what amount are beyond the issues presented here, and we remand the case for the court to consider these questions.
[¶45.] JENSEN, Chief Justice, and KERN, DEVANEY, and MYREN, Justices, concur.