The International Journal
of Not-for-Profit Law

Volume 1, Issue 4, June 1999

A quarterly publication of the International Center for Not-for-Profit Law

Country Reports: North America

the United States

Bishop Estate Should Not Pay for Trustees' Lawyers

Professor Randall W. Roth

An aspect of the Bishop Estate controversy that hasn't been discussed publicly is the trustees' hiring and payment of lawyers. To fully appreciate the issues and degree of abuse in this area, several common misconceptions need to be corrected.

Many people mistakenly think a trust is an entity that, among other things, can own property and hire lawyers. But in the eyes of the law, a trust is nothing more or less than a legal relationship between trustees and beneficiaries. Unlike a corporation or a partnership, for example, a trust does not have a separate legal existence.

To illustrate: $10 billion of trust corpus, including 10% of Goldman Sachs and approximately 450,000 acres of land in Hawaii, isn't owned by the Bishop Estate ... it is the Bishop Estate. What we call trust corpus, or the trust estate, in fact is owned by Dickie Wong, Henry Peters, Lokelani Lindsey, Gerald Jervis and Oswald Stender. If you doubt this, take a look at the deeds, stock certificates and other documents of ownership.

As owners of record, these five trustees have the power (though not the right) to do anything they want to do with the trust estate. The potential for abuse is obvious and is the reason why trust law imposes strict fiduciary duties on trustees, including a duty of undivided loyalty to the interests of the beneficiaries. Trustees' use of trust funds to serve their own personal interests is kapu (strictly forbidden and harshly punished).

Trustees regularly hire lawyers to "represent the trust," meaning that they're to do legal work that is intended to serve the best interests of the beneficiaries. When no conflict of interests exists between trustees and beneficiaries, this terminology works fine, and it is proper to pay such lawyers with trust funds.

But the interests of the Bishop Estate trustees in the on-going investigations and related court actions are not the same as the interests of the beneficiaries. The probate judge, in fact, has identified conflicts that are "actual, apparent, adverse, and material."

In conflict of interest cases involving a charitable trust, the Attorney General has the responsibility and authority to serve as the beneficiaries' lawyer. The cost of her services (including staff time and outside consultants) currently is coming out of her budget, but the state eventually may seek reimbursement from trust funds. Since her efforts are on behalf of the beneficiaries, such reimbursement would not be inappropriate.

Each Bishop Estate trustee has retained one or more lawyers to represent his or her respective individual interests, and in a rather unusual move, the three-trustee majority -- Henry Peters, Dickie Wong and Lokelani Lindsey -- also hired lawyers to represent the combined interests of just those three trustees, as trustees. Lawyers for individual trustees ethically must put the interests of their respective client ahead of those of both the beneficiaries and the other trustees. Lawyers for the three-trustee majority owe duties to those three trustees, but because they were hired to represent them "as trustees," they also owe duties to the beneficiaries. This is true regardless of who's paying the bills.

Trustees sometimes are allowed to use trust funds to defend their individual interests when under fire from beneficiaries. However, courts generally allow this only when the trustees are not highly compensated or the case against them appears to lack merit. Even then, trustees who eventually lose in court must reimburse the trust estate. And in any event, trust funds should never be used to serve the personal interests of the trustees without the court's prior authorization. No such permission has been sought or obtained by Bishop Estate trustees.

Reportedly, some of the trustees' lawyers initially were paid with trustees' personal funds, but for some time now have been receiving payments from insurance companies on policies purchased several years ago with trust funds. These third-party payments eventually will impact the trust estate through higher premiums and diminished insurance coverage (i.e., payment of attorney fees reduces amounts available to protect the trust estate).

If these trustees were serving without compensation, or if trustees generally were allowed to use trust assets to protect their personal pockets, then this type of insurance arrangement would be perfectly appropriate. In this case, however, the trustees should have reported these policies as part of their compensation, or at least disclosed the personal benefits they provided. In past years, trustees actually cited the lack of such protection as a major reason for their high compensation.

One lawyer involved in these proceedings estimates that the aggregate cost of just the lawyers mentioned above, already has exceeded $4 million. From the beneficiaries' standpoint, this seems excessive, to say the least.

Yet another lawyer, who has recently resigned, reportedly billed to the estate an additional $1.5 million. Unlike any of the lawyers already described, this one claimed to be representing "the trust" and wanted his fee paid directly with trust funds. His description of his client as "the trust” begs the real question of whose interests he was trying to protect.

Since the purpose of any trust is to benefit beneficiaries rather than trustees, the natural assumption is that any lawyer claiming to represent "the trust" will be watching out for the interests of the beneficiaries rather than the trustees. But that doesn't seem to be
happening in this case. For example, the media instinctively would go to this particular lawyer for a response anytime someone has been critical of the trustees and he always seemed to respond as if he were their advocate.

Rather than cooperate with the Attorney General's investigation into alleged abuses of the trust, this lawyer fought her at every opportunity. He also was relentlessly critical of the court-appointed fact finder, court-appointed master, court-appointed auditor, campaign spending commission, school accreditation team, Na Pua parent and alumni group, Na Kumu teachers group and everyone else who has accused the trustees of misfeasance or malfeasance, or called their rule "dysfunctional."

Bishop Estate trustees have made a mockery of their fiduciary duty to put the interests of beneficiaries ahead of their own. If rule of law means anything in Hawaii, four trustees soon will be permanently replaced. Also, lawyers who put the interests of trustees ahead of those of beneficiaries should be told to collect their fees from the soon-to-be ex-trustees, and not from the trust estate or its insurance carrier.

Other articles relating to the the United States appear elsewhere in this issue, including:

New Tax Regulations for Certain Tax-Exempt Organizations

Property Tax Exemption and Municipal Revenue: Philadelphia’s Efforts to Solicit Payments-in- Lieu-of-Taxes from Charitable Nonprofit Organizations

 

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