Tag Archives: transition planning

Ohio Ag Law Blog – Case illustrates importance of transition planning for farmers

Unfortunately, the death of a farmland owner can create conflict within a family.  Often, transition planning by the deceased could have prevented the conflict.  Such is the case in a family disagreement that ended up before Ohio’s Third District Court of Appeals.  The case pitted two brothers against one another, fighting over ownership of the family farm.

When their mother passed away in 2006, the five Verhoff siblings decided to sell the family farm.  Two of the brothers wanted to purchase the farm, but one of them was also the executor of the estate.  The estate’s attorney advised the executor brother that he should not buy the land directly from the estate due to his fiduciary duties as executor.  The attorney recommended that the executor wait and purchase one-half of the farm from the other brother after it was transferred from the estate to the other brother.

Following a series of discussions between the two brothers, the executor brother sent half of the farm’s purchase price to the other brother and issued the farm’s deed to the other brother.  Over the next eight years, the two brothers shared a joint checking account used to deposit rental income from the farmland and to pay for property taxes and utilities on the property.  But when the executor brother asked the other brother for a deed showing the executor brother’s half-interest in the farm, the other brother claimed that the executor brother did not have an ownership interest.  The money rendered by the executor brother was a loan and not a purchase, claimed the other brother.  The other brother then began withholding the farm rental payments from the joint checking account. The relationship between the two brothers broke down, and in 2016, the executor brother filed a lawsuit to assert his half-ownership of the farm and his interest in the rental payments.

At trial, a jury found that the brothers had entered into a contract that gave the executor brother half ownership of the farm upon paying half of the purchase price to the other brother.  The trial court ordered the other brother to pay the executor brother half of the current value of the farm and half of the rental income that had been withheld from the executor brother.  The other brother appealed the trial court’s decision. The court of appeals did not agree with any of the other brother’s arguments, and upheld the trial court’s decision that a contract existed and had been violated by the other brother.   Two of the arguments on appeal raised by the other brother are most relevant:  that Ohio’s statute of frauds required that the contract be in writing and that the contract was illegal because an executor cannot purchase land from an estate.

A contract for the sale of land should be in writing, but there are exceptions

Ohio’s “Statute of Frauds” provides that a contract or sale of land or an interest in land is not legally enforceable unless it is in writing and signed by the party to be charged.   The other brother argued that because there was no written agreement about the ownership of the farm, the situation did not comply with the Statute of Frauds and could not be enforced.  However, the court focused on an important exception to the Statute of Frauds:  the doctrine of partial performance.  The doctrine removes a verbal contract from the writing requirement in the Statute of Frauds if there are unequivocal acts of performance by one party in reliance upon a verbal agreement and if failing to enforce the verbal agreement would result in fraud, injustice, or hardship to that party who had partly performed under the agreement.

Based upon evidence produced by the executor brother, the appeals court agreed with the trial court in determining that an oral contract did exist between the two brothers and that the executor brother had performed unequivocal acts in furtherance of the verbal contract.   The court explained that the executor brother had endured “risks and responsibility” by giving the other brother money with the expectation that he would receive rental income from the farm and own a one-half interest in the property.  An injustice would occur if the verbal contract was not enforced because of the Statute of Frauds, as the other brother would receive a windfall at the executor brother’s expense, said the court.  The court concluded that because the doctrine of partial performance had been met, the writing requirement in the Statute of Frauds should be set aside.

Did the executor brother violate his fiduciary duties by purchasing the land?

The other brother also claimed that the verbal contract was illegal because the executor brother made a sale from the estate to himself.  According to the other brother, the sale violated Ohio Revised Code section 2109.44, which prohibits fiduciaries from buying from or selling to themselves or having any individual dealings with an estate unless authorized by the deceased or the heirs.

The court pointed out, however, that the executor brother did not buy the farm from the estate.  Instead, the executor brother purchased the farm through a side agreement with the other brother who purchased the farm from the estate.  The court noted that this type of arrangement could be voidable if other heirs challenged it.  But since no other heirs did so, the court determined that the executor brother had not violated his fiduciary duties to the estate and allowed the side agreement to stand.

Estate and transition planning can help prevent family disputes

Imagine the toll that this case took on the family.  It’s quite possible that parents can prevent these types of conflicts over what happens to the farm when they pass on.  An initial step for parents is to determine which heirs want to transition into owning and managing the farm, and what their future roles with the farm might be.  This often raises other tough questions parents must face:  how to provide an inheritance to children who don’t want the farm when other children do want the farm? Must or can the division of assets be equal among the heirs?  What about other considerations, such as children with special issues or not having heirs who do want to continue the farm?  These are difficult but important questions parents can answer in order to prevent conflict and irreparable harm to the family in the future.

The good news is that there are legal tools and solutions for these and the many other situations parents encounter when deciding what to do with the farm and their assets.   An attorney who works in transition planning for farmers will know those solutions and can tailor them to a family’s unique circumstances.  One agricultural attorney I know promises that there’s a legal solution for every farm family’s transition planning issues.  Working through the issues is difficult, but identifying tools and a detailed plan for the future can be satisfying.  And it will almost certainly prevent years of litigation.

The text of the opinion in Verhoff v. Verhoff, 2019-Ohio-3836 (3rd Dist.) is HERE.  For more information about farm estate and transition planning, be on the lookout for our soon-to-be released Farm Transition Matters law bulletin series or catch us at one of our Farm Transition Planning workshops this winter.

 

Leave a comment

Filed under Contracts, Estate Planning

What We’ve Been Up To: Analyzing the Use of the Limited Liability Company for Farming Businesses

Written by Evin Bachelor, Law Fellow, OSU Extension Agricultural & Resource Law Program

Sometimes you happen upon a question that you want an answer to, and the answer you find raises more questions.  That’s exactly what happened when we started examining Limited Liability Company (LLC) statutes from across the Midwest.

Originally, we wanted to determine whether there are any significant legal differences between the LLC statutes of different states.  While we may be based in Ohio, we find projects that examine how different states compare to one another on the same legal topic fascinating.  The comparisons allow us to see trends and different ideas, and we had the chance to do this in our recently completed projects on CAUV and agritourism.

Ultimately we found the Midwestern states to have functionally similar LLC statutes, with about half of the Midwest having adopted a uniform statute.  When a state adopts a uniform statute, it intends for its law on a given topic to match those of other states with the same uniform statute.  There are other examples of these like the Uniform Commercial Code, Uniform Probate Code, and more.  Uniform codes are designed to make it easier for people to do business and live their lives across state lines.  For Midwestern LLC statutes, even in states that have not adopted a uniform statute, the key elements are still very similar.  The statutes have filing procedures for creating the entity, default rules for operating agreements, and rules that govern LLCs in general.

When we answered our questions about the state statutes, we became curious about some of the benefits offered by using an LLC instead of some other business form.  We found that LLCs offer great liability protection, with some specific limitations such as the application of piercing the veil from corporate law.  Further, pass through taxation can provide great tax benefits and avoid double taxation.  Since states allow operating agreements to be highly customizable, LLCs also provide a flexible entity structure that may be adapted to suit the needs of a business or family.

That last word led us to another question: what benefits does the LLC structure offer a family farm in its estate and business transition plan?  The previous three benefits are well known and thoroughly discussed; however, this last one, while done a lot in practice, is not commonly mentioned in academic writing.  Ultimately, the benefits in estate and transition planning come from the flexible nature of the operating agreement.

How can LLCs be helpful in an estate and business transition plan for a farm?  Here’s a few ways:

  • Restrict the transfer of an ownership interest through rights of first refusal and buy-out provisions
  • Restrict membership and voting power of non-family members
  • Transition equity ownership more easily than in a corporation
  • Transition the business in relative privacy

Once we learned about these benefits, the question arose of how common farming LLCs now are.  Using data from the USDA’s Census of Agriculture, we found that by 2012, there were almost as many farms organized as LLCs as there were farms organized as corporations, while the vast majority of farms remained owned outright by individuals with no formal legal entity.  We are waiting for the next Census of Agriculture to spot any trends, because 2012 was the first year that farms were asked to identify whether they were organized as LLCs.

Throughout the paper, we made some observations and predictions for what we expect to see in the future.  We are also history buffs, so of course there had to be a section on the origins of the LLC, and why Wyoming was the first state to adopt an LLC statute.  It is an interesting and dramatic history that we had not heard about before.

Our project examining farm LLCs is available on our OSU Extension Farm Office website HERE, as well as the National Agricultural Law Center’s website HERE.  This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.

Leave a comment

Filed under Business and Financial, Estate Planning