Appeal from the Circuit Court of Knox County; the Hon. Harry
C. Bulkeley, Judge, presiding.
PRESIDING JUSTICE HEIPLE DELIVERED THE OPINION OF THE COURT:
Rehearing denied February 18, 1986.
Hazel A. Allison (Hazel) died in December 1982. She is survived by five children: W. John Allison (John), Wesley Allison (Wesley), Wayne Allison (Wayne), Phylinda Lampe (Phylinda) and Rachel Allison (Rachel).
At the time of her death, Hazel owned two farms in Knox County. One was a 70-acre tract commonly referred to as the Almgreen Farm. The other was a 164-acre tract known as the Fox Farm. The Almgreen Farm was specifically bequeathed to Wesley Allison, while the Fox Farm passed under the residuary clause of her will to Wayne, Rachel and Phylinda.
The will of Hazel nominated John as executor of the estate. Prior to her death, Hazel had executed a crop share lease agreement with Allison Farming Company. The lease covered both farms and provided for a 50/50 crop share. The tenancy was from year to year, terminable upon notice by either party prior to September 15 of the current lease year. If this notice was not given, the tenancy would automatically extend into the February following the next crop year. At all times relevant to this appeal, Allison Farming Company was solely owned by John, who also acted as president and secretary of the corporation.
Upon Hazel's death John petitioned for letters of office and was appointed executor. This placed him in the awkward position of both landlord and tenant. Hazel's will specifically provided, however, that if farming operations were included in the estate, "the Executor shall have full power to engage in farm operations * * * to lease on shares * * * and to perform any other acts necessary or desirable in the discretion of the Executor to operate such farm properties * * *."
While John was acting as executor, Allison Farming Company continued as tenant on both farms for the 1983 crop year pursuant to the lease between Allison Farming Company and Hazel. In the spring of 1983, the Federal government, through the Department of Agriculture, instituted the Payment In Kind program, better known as PIK. The PIK program allowed farmers to draw a certain amount of surplus commodities in exchange for their not planting such commodities. Small cash diversion payments were also part of the program. In his capacity as executor, John enrolled the estate farms in the PIK program. Pursuant to the crop share agreement and PIK regulations, John divided the grain received between the estate and Allison Farming Company. Each received 12,668 bushels of grain and $2,711.50 in diversion payments. On the first current account and report, not directly at issue here, a $1,356 diversion payment in favor of the estate was reported. On the second current account and report, the sale of PIK grain and the rest of the diversion payments were reported. However, in neither account and report was it mentioned that Allison Farming Company had received anything from the PIK program. The objection to this omission by Wesley, Wayne and Rachel, the residuary legatees, forms the basis for the principal issue in the case at bar.
The residuary legatees contend that John profited from a breach of fiduciary duty by acting as both landlord and tenant of the estate farmland. At the heart of their argument is the money John realized as tenant under the PIK program, a program in which John as executor caused the estate to participate. They would have John account to the estate for all proceeds from the sale of PIK grain and for diversion payments received.
John offers several responses to these objections. Because his mother passed away after September 15, the tenancy continued by operation of the agreement without any affirmative action on his part. Hence, there were no dealings, therefore no self-dealing. The provisions of the PIK program also required the corporation to continue on as tenant, since only the 1982 tenant could participate in the 1983 program. Most significantly, the will purportedly created and sanctioned this conflict of interest by allowing the executor to carry on farming operations. Finally, there is no allegation that John's decision to enroll the farms in PIK was either in bad faith or contrary to the best interests of the estate. The trial court overruled the legatees' objections on this point. It construed the lease and will together and concluded that it was Hazel's intention to allow such a conflict to exist.
The legatees direct our attention to In re Will of Gleeson (1955), 5 Ill. App.2d 61, 124 N.E.2d 624, and Johnson v. Sarver (1953), 350 Ill. App. 565, 113 N.E.2d 578. In Gleeson, the testatrix appointed Con Colbrook as her executor. Prior to her death the testatrix had leased some of her farmland to Colbrook and a partner. The testatrix died 15 days before the beginning of the farm year. Colbrook farmed the land under the terms of the lease that year. In response to the objector's arguments, Colbrook noted that he had not time to find a suitable tenant, that it was in the estate's best interest that he hold over, that he was honest with the trust and that no loss was suffered. The court ruled as follows in reliance on Johnson:
"We think the [Johnson] decision suggests that the petitioner herein, instead of conferring with her beneficiaries concerning continuance of his tenancy of the trust property, should have then decided whether he chose to act as a tenant or as a trustee. His election was to act as trustee and as such could not deal with himself * * *." In re Will of Gleeson (1955), 5 Ill. App.2d 61, 67, 124 N.E.2d 624.
In Johnson, the testator bequeathed all of his property in trust to three of his nine children. The three children were all living on and farming a portion of the seven farms owned by their father. It was argued that the will of the testator disclosed an intention to confer upon the trustees the right to lease the real estate to themselves. The relevant clause gave the executor the power to "carry on the farming and other business of the estate as nearly as possible and as circumstances will permit as I am now and have for many last years past * * *." The court acknowledged the language, but rejected the notion that there was an intention to treat the trust differently than any other trust. If the testator had desired the result argued for by the trustees he could have explicitly provided a power to lease to themselves.
• 1 The net effect of the Gleeson and Johnson holdings is to call John's actions as executor and de facto tenant into serious question. The first questionable act was the acceptance of the office of executor. He knew that the lease would automatically extend into the 1983 farming year when he became executor. At that point, he should have either refused the position or assigned the lease. The lease contains no restrictions against assignment. The assignment might have disqualified the farms from the PIK program, but the election to participate at the 100% level was made months after John became executor. Turning to the decision to opt into the PIK program, it is undisputed that the decision was sound and that the estate was not harmed thereby. It is also the case that the profit realized by John from the set-aside would have occurred even if someone else had made the decision to participate. However, these circumstances are not entirely relevant. The profits earned by a fiduciary as the result of a self-interested transaction belong to the beneficiaries (Bingham v. Ditzler (1941), 309 Ill. App. 581, 33 N.E.2d 939). Had John either petitioned the court for permission to enroll the farms in PIK or resigned and allowed a substitute executor to serve, then he could have received the tenant's share of the PIK bounty without adverse consequences. However, because he allowed himself to remain in a position to profit from a self-interested transaction, the profit must be accounted for and returned to the estate.
The argument that John raised before the trial court concerning the intent of the testatrix to create such a conflict is misplaced. While there is an exception to the general principles of fiduciary responsibility where the instruments creating the relationship sanction a conflict of interest (Childs v. First National Bank (N.D. Ill. 1980), 494 F. Supp. 1096), the ...