Opinion ID: 1824389
Heading Depth: 1
Heading Rank: 2

Heading: Ademption of Purchase Option

Text: The first issue presented on appeal may be summarized as follows: whether an option to buy stock granted in a testator's will adeems when the stock is exchanged for the stock of another corporation pursuant to a merger, where the exchange occurs: (1) after the testator has become incompetent; and (2) under the scrutiny of a conservator pursuant to court order. The factors which make this a novel and complex issue are that this is: (1) a bequest of an option to purchase stock rather than a bequest of stock; (2) an exchange rather than a sale of the subject matter of the bequest; and (3) the actions of a conservator rather than the testator. The Densmores raise two general arguments against the continued existence of the options. First, they argue that the doctrine of ademption does not apply in this instance because ademption only applies to specific bequests and testamentary options cannot be specific bequests because they do not constitute property but merely a nonbinding right. Therefore, they argue, because the property was disposed of before the death of the testator, the option created no enforceable rights in the optionees, and the option was effectively revoked. Second, the Densmores assert that if the doctrine of ademption does apply, the fact that a conservator exchanged the subject matter of the option while the testator was incompetent does not save the bequest because the proceeds of the disposal of the subject matter are not traceable. The Densmores contend that the proceeds are not traceable because the stock and cash exchanged for the bank stock are materially different from the bank stock. The optionees respond by arguing that the principles of ademption do apply and the options did not adeem as a result of the transfer because: (1) the transfer occurred while the testator was incompetent, and therefore she could not have formed the intent to dispose of the subject matter of the options; and (2) the proceeds of the disposal of the subject matter of the options are traceable since the INB stock and proceeds from the exchange were kept segregated following the merger, and the INB stock does not represent a material change in interest from the bank stock. Well-settled precepts govern our interpretation of wills. First, the intent of the testator is the central principle guiding our interpretation and must prevail. Rogers, 473 N.W.2d at 39; Anderson, 359 N.W.2d at 480. Second, we must derive the testator's intent from a consideration of: (1) all of the language contained within the will; (2) the testator's scheme of distribution; (3) the circumstances which surrounded the will's execution; and (4) the existing facts. Rogers, 473 N.W.2d at 39. Third, we will use technical rules or canons of construction only when the will is ambiguous or conflicting or if the testator's intent is uncertain. Id. In determining intent, the question we seek to answer is not what the testator meant to say, but rather what the meaning is of what the testator did say. Id. In attempting to determine a testator's intent we consider the instrument as a whole and give each part meaning and effect, if possible. Id. Ademption generally occurs when a testator, following the execution of a will but before the testator's death, disposes of property which the testator has specifically given under the will. In re Estate of Wolfe, 208 N.W.2d 923 (Iowa 1973). The Densmores argue that the doctrine of ademption does not apply to the controversy at hand because an option granted within a will does not confer a property right upon the optionees. The mere execution of a will does not confer any property rights to anyone named in the will. In re Lundgren's Estate, 250 Iowa 1233, 1237, 98 N.W.2d 839, 841 (1959). A will is merely ambulatory. Id. By its execution, the maker does not part with any rights or divest herself of any part of her estate, nor do any rights accrue to, or vest in, any other person. Id. For purposes of the doctrine of ademption, the real question is not whether a bequest creates a property interest in the beneficiary, but rather whether the subject of the bequest constitutes a specific property interest of the testator. A specific bequest or legacy is: a designated article or specific part of the testator's estate which is identified and distinguishable from other things of the same kind, which may be satisfied by delivery of the specific thing or portion. It may be looked upon as one which the testator has separated from the general mass of his property for the benefit of a particular legatee; and in ascertaining whether a legacy is specific, recourse should be had to the intention of the testator. Zion Lutheran Church v. Executors of Estate of Lamp, 260 Iowa 363, 366, 149 N.W.2d 137, 139 (1967); see also In re Estate of Hoagland, 203 N.W.2d 577, 581 (Iowa 1973); In re Estate of Deutsch, 644 P.2d 768, 770 (Wyo.1982). Because the option Lou Carpenter granted in her will for the purchase of the bank stock arose as an incident of her property right to own and dispose of the stock, her grant of the options amounted to a specific bequest of a property interest. The Densmores assert that In re Estate of Lemke, 216 N.W.2d 186 (Iowa 1974), stands for the proposition that options are different from specific bequests, and this difference suggests ademption analysis cannot be applied to options granted in wills. Lemke held that a testator's intent controls will interpretation and the language of the will indicated that the testator did not intend a purchase option in real estate to be inheritable. Lemke, 216 N.W.2d at 190-92. Lemke did not hold that an option may not constitute the subject matter of a specific bequest and does not render ademption analysis inapplicable. Of greatest significance, in Lemke, this court did state that the purchase option at issue constituted a valuable property right but that this factor was not per se determinative and the real controlling factor is the testator's intent. Id. Applying ademption analysis, under Iowa law, where the conservator of an incompetent testator sells specifically devised property with court approval, the devise is only adeemed to the extent the conservator uses proceeds of the sale for care and maintenance of the ward and expenses of the conservatorship. Stake v. Cole, 257 Iowa 594, 599, 133 N.W.2d 714, 717 (1965). Proceeds which are traceable from the sale into the hands of the executor do not adeem. Id. This is the majority rule among American jurisdictions and is based on the rationale that the testator's intent controls disposition of the testator's property and an incompetent testator cannot form the intent to adeem the property or avoid the effect of an unwanted ademption with a new will. Id.; In re Estate of Swoyer, 439 N.W.2d 823, 825-26 (S.D. 1989). Applying this exception to ademption, the exchange of bank stock for INB stock and cash did not cause the options to adeem. Next is the question whether the proceeds of the exchange are traceable. Generally, where there has been a specific bequest of securities or a specific bequest of options to purchase securities, a change in the form or description of the securities which does not materially change the true interest of the testator in the corporation will not cause an ademption and the beneficiary or optionee is entitled to the new securities or options to purchase the new securities. Matthews v. Matthews, 477 So.2d 391, 394 (Ala.1985) (stock bequest); In re Vail's Estate, 67 So.2d 665, 667 (Fla.1953) (stock bequest); Goode v. Reynolds, 208 Ky. 441, 271 S.W. 600, 602-03 (1925) (stock bequest); Opperman v. Anderson, 782 S.W.2d 8, 11 (Tex.App.1989) (stock bequest); In re Armour's Estate, 11 N.J. 257, 94 A.2d 286, 292 (1952) (option bequest); In re Will of Strauss, 137 Misc.2d 686, 521 N.Y.S.2d 642, 644-45 (Sur.Ct.1987) (stock bequest); In re Kent's Will, 20 Misc.2d 923, 189 N.Y.S.2d 676, 685-86 (Sur. Ct.1959) (option bequest); 80 Am.Jur.2d Wills § 1716, at 772 (1975). Where stock is the subject of a specific bequest or a specifically bequested option is exchanged in a merger, consolidation, or divestiture for other securities, one factor for consideration is whether the new securities represent a change in form or substance. Goode, 271 S.W. at 602-03; Armour, 94 A.2d at 292; 80 Am.Jur.2d Wills § 1716, at 772. However, the controlling factor is the intent of the testator. duPont v. duPont, 42 Del. Ch. 246, 208 A.2d 509, 511 (1965); Opperman, 782 S.W.2d at 10; 80 Am.Jur.2d Wills § 1716, at 773. Some courts hold that where a bequest of bank stock clearly indicates that the intent of the testator was to grant all rights and benefits flowing from the stock in the beneficiary, no change in the shares, whether of form or substance, will cause the bequest to adeem, so long as the proceeds are traceable. See, e.g., In re Estate of Watkins, 284 So.2d 679, 681 (Fla.1973). In the case at hand, the change in securities which resulted from the merger, when considered in coordination with the evident intent of the testator, was not so substantial as to cause an ademption of the options. Although the Monticello State Bank stock was exchanged for the stock of INB, a bank holding company with ownership interests in five banks, the bank itself retained its former name, location, customer base, assets and liabilities, and many of the same employees. When considering these differences and the many remaining similarities, we must also consider Lou Carpenter's intent. In order to determine intent, we may not look to extrinsic evidence to vary, contradict, or add to the terms of the will, but we may use extrinsic evidence as an aid in resolving doubts where the instrument is ambiguous. Rogers, 473 N.W.2d at 39. Ambiguity may be patent or latent. Id. A will is patently ambiguous if its meaning is uncertain, doubtful, or obscure on its face. Id. A will is latently ambiguous if it is clear on its face, but some outside matter renders the meaning obscure or uncertain. Id. at 40. The exchange of bank shares for INB shares is an outside matter which has rendered the options ambiguous. We therefore consider all available evidence in attempting to determine Lou Carpenter's intention as manifested in her grant of options. The record contains considerable evidence which shows that Lou Carpenter was proud of the bank and its employees. In addition, the will and circumstances surrounding the will support a finding that it was Carpenter's intent to reward bank employees for their service to the bank and for their friendship. In the years before her health failed, Carpenter visited the bank often and took part in social gatherings with bank employees and their families. The record shows that it was Lou Carpenter's intention to provide the bank employees with an option to benefit from the rights and benefits flowing from ownership of the bank stock. The rights and benefits flowing from ownership of the bank stock included the right to securities and cash acquired as a result of exchange of the bank's stock. Therefore, the options did not adeem, and the bank employees have the option to purchase the INB shares and proceeds traceable to the bank stock. Those shares and proceeds are easily traceable since the district court ordered the conservator to keep them segregated.