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Richards Trust Petition

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Richards Trust Petition

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Richards Trust Petition

  1. 1. Of Counsel: ALSTON HUNT FLOYD & ING Attorneys at Law A Law Corporation PAUL ALSTON NICKOLAS A. KACPROWSKI 1001 Bishop Street, Suite 1800 Honolulu, Hawai'i 96813 Telephone: (808) 524-1800 Facsimile: (808) 524-4591 E-mail: palston@ahfi .com nkacprowski@ahfi.com 1,Y),,^ SO P.=o (lerk T. No. trß 1- t t71 (rnusr) PETrrroN TO (l) voID ACTS OF TRUSTEE IN VIOLATION OF TRUST AGREEMENT AND TRUSTEE'S FIDUCIARY DUTIES, (2) PREVENT ANY FURTHER ENCUMBRANCES ON TRUST ASSETS; (3) REMOVE HERBERT M. RICHARDS JR. AS TRUSTEE, AND (4) APPOINT SUCCESSOR TRUSTEE; DECLARATION OF PATRICIA KUUALOHA RICHARDS ; EXHIBITS I _ 14 FIR:rl tl Ìr_iitT ( 0Uiif STÅTE 0i: ii;ìlr,,il FtL iaL) I126 8627 R Attorneys for Petitioners PATRICIA KUUALOHA RICHARDS and HERBERT M. RICHARDS, III In the Matter of THE ATHERTON RICHARDS TRUST DATED SEPTEMBER T9, 1972 IN THE CIRCUIT COURT OF THE FIRST CIRCUIT STATE OF HAWAI'I ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 1013958v3 I 1335-l
  2. 2. 1013958v3 11335-1 i TABLE OF CONTENTS I.  STATUTORY BASIS FOR PETITION/JURISDICTION AND VENUE.................... 1  II.  FACTUAL BACKGROUND ...................................................................................... 2  A.  Summary of Dispute......................................................................................... 2  B.  The Atherton Richards Trust ............................................................................ 6  C.  Petitioners’ and Their Interests......................................................................... 8  D.  The Trustee .................................................................................................... 10  E.  The Parties’ Succession Planning................................................................... 10  F.  The Trustee’s Scheme to Require Operation of the Ranch into Perpetuity to the Financial Detriment of the Trust’s Beneficiaries................. 13  G.  The Trustee’s Discrimination Against Beneficiaries and Self-Dealing .......... 19  H.  The Trustee Has Completely Ignored Other Beneficiaries of the Trust.......... 21  I.  The Trustee’s Mental and Physical Incapacities............................................. 22  J.  The Petitioners Attempt to Convince the Trustee to Retire ............................ 22  III.  PROBATE RULE 126(C) STATEMENTS................................................................ 23  IV.  THE SHAREHOLDER AGREEMENT SHOULD BE VOIDED BECAUSE IT VIOLATES THE TRUST AGREEMENT AND IS ILLEGAL UNDER CORPORATIONS LAW ........................................................................................... 24  A.  Legal Standard: The Court Has the Power to Void Transactions that Violate the Trust Agreement .......................................................................... 24  B.  The Shareholder Agreement Should Be Voided as a Breach of Trust Because It Is Intended to Benefit Third Parties Other than the Beneficiaries and It Harms the Beneficiaries by Encumbering Their Stock ... 25  C.  The Shareholder Agreement Should be Voided as a Breach of Trust Because It Violates Section I.4(d) of the Trust Agreement ............................ 32  D.  The Shareholder Agreement Should be Voided as a Breach of Trust Because It Discriminates Among Beneficiaries.............................................. 33  E.  The Shareholder Agreement Should Be Voided Because It Violates Contract Law and Corporations Law.............................................................. 35 
  3. 3. 1013958v3 11335-1 ii V.  THE TRUSTEE SHOULD BE REMOVED FROM OFFICE DUE TO BREACH OF TRUST ................................................................................................................ 37  VI.  THE TRUSTEE SHOULD BE REMOVED FROM OFFICE DUE TO HIS PATTERN OF HOSTILITY TO THE BENEFICIARIES OF THE TRUST.............. 40  VII.  THE TRUSTEE SHOULD BE REMOVED FROM OFFICE DUE TO PHYICAL AND MENTAL INCAPACITY................................................................................. 43  VIII.  THE TRUSTEE SHOULD BE BARRED FROM ENCUMBERING THE TRUST ASSETS AND FROM PARTICIPATING IN THE SELECTION OF A NEW TRUSTEE.................................................................................................................. 44 
  4. 4. 1013958v3 11335-1 iii TABLE OF AUTHORITIES FEDERAL CASES Chao v. Malkani, 452 F.3d 290 (4th Cir. 2006) ...................................................................................................38 Neil v. Foster-Bey 228 F. Supp. 3d 707, 711 (E.D. Va. 2017) ..............................................................................31 Neil v. Zell, 677 F. Supp. 2d 1010 (N.D. Ill. 2009).....................................................................................31 O’Neill v. Davis, 721 F. Supp. 1013 (N.D. Ill. 1989)..........................................................................................31 STATE CASES Betty G. Weldon Revocable Trust v. Weldon, 231 S.W.3d 158 (Mo. App. 2007) ...............................................................................30, 31, 38 In re Conservatorship of Abbott, 295 Neb. 510 (2017) ................................................................................................................41 DFS Group L.P. v. Paiea Prop., 110 Hawai`i 217, 131 P.3d 500 (2006)....................................................................................14 In re Estate of Rutter, 633 N.W.2d 740 (Iowa 2001) ............................................................................................34, 39 In re Estate of Stuchlik, 289 Neb. 673 (Neb. 2014)..................................................................................................34, 39 Hartmann v. Bertelmann, 39 Haw. 619 (Haw. Terr. 1952)...............................................................................................42 McNeil v. Bennett, 792 A.2d 190 (Del. Ch. 2001), affirmed in part, reversed in part on other grounds 798 A.2d 503 (Del. 2002)....................................................................................34, 39 Richards v. Midkiff, 48 Haw. 32, 396 P.2d 49 (1964)........................................................................................25, 26 Riegler v. Riegler, 262 Ark. 70 (1977)...................................................................................................................40 Shear v. Gabovitch, 43 Mass. App. Ct. 650 (1997)............................................................................................42, 43
  5. 5. 1013958v3 11335-1 iv In re Trust of Bresel, No. A-14-922, 2016 WL 1359097 (Neb. App. April 5, 2016) ..........................................43, 44 In the Matter of the Trust Estate of George H. Holt, 33 Haw. 352 (Haw. Terr. 1935)...............................................................................................37 In re Will of Crabtree, 449 Mass. 128 (2007) ..............................................................................................................39 Woods v. Stull, 182 Va. 888, 892-93 (Va. 1944) ..............................................................................................29 STATE STATUTES Hawai`i Revised Statutes § 414-163(b)(2)........................................................................................................................36 § 414-193 .................................................................................................................................27 § 414-194 .................................................................................................................................27 § 414D-134 ..............................................................................................................................27 § 560:1-403(2)(c).....................................................................................................................24 § 560:7-202................................................................................................................................1 § 568:7-201................................................................................................................................1 RULES Hawai`i Probate Rules Rule 3.........................................................................................................................................2 Rule 26.....................................................................................................................................39 Rule 126.....................................................................................................................................2 Rule 126(C)..............................................................................................................................23 OTHER AUTHORITIES Dana Brakman Reiser, Dismembering Civil Society: The Social Costs of Internally Undemocratic Nonprofits, 82 Or. L. Rev. 829 (2003)............................................27 Restatement (Second) of Trusts § 193.........................................................................................................................................31 § 193 cmt. a........................................................................................................................25, 30 Restatement (Second) of Contracts § 283.........................................................................................................................................36 Restatement (Third) of Trusts § 37(b)......................................................................................................................................37 § 37 cmt. d................................................................................................................................37 § 37 cmt. e................................................................................................................................40 § 37 cmt. (f)(1).........................................................................................................................34 § 72...........................................................................................................................................35
  6. 6. 1013958v3 11335-1 v § 79...........................................................................................................................................33 § 79 cmt a.................................................................................................................................33 § 79 cmt(b)(1) ..........................................................................................................................34 § 79(1)(a) .................................................................................................................................33 § 87 cmt. b................................................................................................................................24 § 87 cmt. c................................................................................................................................26 § 95 cmt. c................................................................................................................................44
  7. 7. 1013958v3 11335-1 1 PETITION TO (1) VOID ACTS OF TRUSTEE IN VIOLATION OF TRUST AGREEMENT AND TRUSTEE’S FIDUCIARY DUTIES, (2) PREVENT ANY FURTHER ENCUMBRANCES ON TRUST ASSETS; (3) REMOVE HERBERT M. RICHARDS JR. AS TRUSTEE, AND (4) APPOINT SUCCESSOR TRUSTEE Petitioners Patricia Kuualoha Richards and Herbert M. Richards, III (collectively “Petitioners”), Petition the Court for the following: (1) An order requiring the Trustee to revoke the shareholder agreement dated January 13, 2018 for the Trust’s principal asset, Kahua Ranch Limited, a Hawai`i corporation. The shareholder agreement constitutes a breach of trust which harms the beneficiaries. The Trustee should not have entered into it, and it should be revoked. (2) An order prohibiting the Trustee from placing encumbrances on the stock of Kahua Ranch Limited, a Hawai`i corporation, or on land owned by the company that would devalue the land, such as long-term leases or conservation easements. (3) An order removing Herbert M. Richards Jr (the “Trustee”) as the trustee based on his repeated breaches of trust, fiduciary duty, and his mental and physical incapacity. (4) An order appointing a successor trustee. I. STATUTORY BASIS FOR PETITION/JURISDICTION AND VENUE 1. The statutory basis for this Petition is Hawai`i Revised Statutes (“HRS”) § 568:7-201, which provides that the Court has jurisdiction of proceedings initiated by trustees and interested persons concerning the internal affairs of trusts, including, inter alia, those concerning the administration and distribution of trusts, the declaration of rights and the determination of other matters involving trustees and beneficiaries of trusts. 2. Venue for this proceeding is in this Court pursuant to HRS § 560:7-202. As far as the Petitioners and the Trustee himself are aware, the Trust is either registered in this
  8. 8. 1013958v3 11335-1 2 circuit or unregistered, and this circuit is a place where the Trust could have been registered. 3. This Petition is filed pursuant to Hawai`i Probate Rules 3 and 126. II. FACTUAL BACKGROUND A. Summary of Dispute 4. At its core this dispute is about a father, the Trustee, who at the age of 88 is no longer fully in control of his mental and physical faculties, and to the detriment of his own children, is using his power as Trustee to completely undermine the purpose of the Trust Agreement that he is supposed to faithfully administer. In short, the Trustee is using the Trust assets as if he owns them free and clear and can do with them as he pleases, and not as if he is bound by a Trust Agreement to manage them for the benefit of the beneficiaries.1 5. The Trust is a “generation skipping trust” established by Petitioners’ great- uncle for their benefit. (See e.g. Ex. 5) Generation skipping trusts were commonly used for large estates because they enjoyed significant tax benefits. The settlor would leave assets in trust, with estate taxes paid upon the settlor’s death. The second generation may enjoy trust income, but would never have ownership of the trust assets. The trust assets would eventual- ly be distributed free of additional inheritance tax to the third generation beneficiaries. This structure allowed the second generation to obtain income benefits without having the assets subject to double estate taxes by having the ownership passed to the second generation and then ownership passed again to the third generation. Rather ownership passes directly to the third generation and “skips” the second. The tax benefits for this type of trust are no longer available, but the Trust at issue has been grandfathered in under federal law. 1 The Trust Agreement is attached as Exhibit 1.
  9. 9. 1013958v3 11335-1 3 6. The settlor of the Trust very explicitly intended to ultimately leave his fortune to his four grandnephews/grandnieces, but with their father, his nephew, the Trustee, enjoy- ing a portion of the income from it for life. That is clear both from the Trust Agreement itself and its structure as a generation-skipping trust, which are used specifically for this purpose. The Trust provides that upon the death of the Trustee, the Trust will terminate with the assets distributed to the Trustee’s four children (the “Remaindermen”), which includes the two Petitioners. 7. In the last five years, however, the Trustee has been taking actions to prevent the ultimate beneficiaries, his own children, from obtaining the Trust assets upon his death. The principal asset of the Trust is the Kahua Ranch of over 4,000 acres on the island of Hawai`i. Up until 2013, Petitioners and the Trustee’s other children were on the Board of Directors of the Ranch, and one of the Petitioners was the general manager. The family was actively discussing succession planning. Succession planning is a very complicated issue for tax reasons, and because of the difficulty of figuring out how to divide one ranch among four individuals who may have different ideas about what they want to do with the asset. Discussing succession planning was also quite timely, given that the Trustee was already in his 80’s. 8. In 2013 and 2014, the Trustee shut down all talks about succession planning, and completely iced his children out of the Ranch. He expelled them all from the Board of Directors, and he had Petitioner Dr. Tim Richards fired as the general manager. Since then, he has operated the Ranch in secrecy, with little or no transparency for the Petitioners. The only limited financial information that has been provided came after Petitioner Dr. Richards sued in probate court for a trust accounting.
  10. 10. 1013958v3 11335-1 4 9. The Trustee’s actions appear to be motivated in part by his desire to prevent the break up of Kahua Ranch after his death, and in part by his personal animosity toward the two Petitioners. Regarding Kahua Ranch, the fundamental economic issue is that the land the Ranch owns is incredibly valuable—perhaps over $120 million. The profits available from ranching it, however, are relatively small. Indeed the Trustee has run it at a perpetual loss. There is therefore an economic incentive for at least some of the four Remaindermen to want to sell the land. Petitioners, for their part, grew up on the Ranch and would like to see the Ranch continue to operate if it is economically feasible to do so. They do not want a situation, however, where the Ranch operates at a loss indefinitely, incurring debt or selling off assets to float operating deficits, ultimately reducing or eliminating the value of the land assets. 10. The Trustee has been taking actions to effectively eliminate the ability of the Remaindermen to control or sell the Ranch after his death. Upon his death, 100% of the stock of the Ranch will go to the Remaindermen. The Trustee has imposed a shareholder agreement on the Ranch. Under the terms of the Shareholder Agreement, the agreement cannot be amended or removed even if 100% of all future shareholders want it to be. Rather, the consent of the Trustee’s hand-picked directors of the Ranch is necessary to change the Shareholder Agreement. 11. The Shareholder Agreement violates the Trust Agreement in a number of ways. It discriminates against the very beneficiaries of the Trust by not allowing any of the Remaindermen to ever be officers, directors, or employees of the Ranch. It devalues the Trust’s principal asset, the Ranch, by placing a number of onerous restrictions on the stock, rendering it effectively unmarketable. It gives the directors the power to operate the Ranch in perpetuity without ever giving a dime to the Trust beneficiaries. It therefore violates the
  11. 11. 1013958v3 11335-1 5 very purpose of the Trust, which was ultimately to pass the Settlor’s assets to the four Remainderman upon the death of the Trustee. 12. The Trustee’s obvious goal in executing the Shareholder Agreement was to prevent the Remaindermen from being able to control the Ranch upon his death, because he does not want them to sell it or divide up the lands. But whether or not they actually would do so, the Trust entitles them to do whatever they want with the assets upon dissolution of the Trust, and the Trustee is prohibited from doing anything that devalues those assets. The Shareholder Agreement the Trustee has imposed has effectively taken a trust that was to benefit the beneficiaries and converted it into something akin to a charitable trust that exists to keep the Ranch together in perpetuity without being broken up or sold. In other words, the Trustee is treating the Ranch as if it is his own property and as if he is free to do what he wants with it when he dies, as opposed to it being an asset of the Trust to be managed for the beneficiaries’ economic benefit. The Shareholder Agreement is also illegal under corporation law, as it places restrictions on the stock that are simply not authorized by law. 13. The Trustee has also been committing other breaches of trust. The Trust provides that 51% of the income goes to the Trustee, and 49% to his children. But he has used his power as Trustee to give himself disproportionate benefits. For example, he granted himself a life estate in the main house on the ranch, which is to be enjoyed by his current wife even after he dies. He has also discriminated among beneficiaries by providing benefits from the Trust to his preferred children, and not to Petitioners to the same extent, with whom he has poor relations. 14. The Trustee also no longer has the mental or physical capacity to execute the considerable responsibilities of his position. He has difficulty paying attention to conversations. His eyesight is poor. He recently underwent heart surgery. He has had
  12. 12. 1013958v3 11335-1 6 multiple transient ischemic attacks (“TIA”) (aka “mini-strokes”), some of which have rendered him unable to speak clearly. He has difficulty walking. He admits to being forgetful. B. The Atherton Richards Trust 15. The Atherton Richards Trust, was established through a trust agreement executed September 19, 1972. The settlor was Atherton Richards (aka “AR”). AR’s brother, Herbert M. Richards Sr. is the Trustee’s father and Petitioners’ grandfather. AR had no children of his own. 16. Atherton Richards was the son of Theodore Richards and Mary Atherton, and was descended from a number of old missionary families. He had a prominent career in his own right. In addition to being a colonel and a top official of the Office of Strategic Services (precursor to the CIA) serving under General Donovan, he was a successful Hawai`i businessman. He served as president of the Hawaiian Pineapple Company, which later became Dole. He was also a trustee of the Bishop Estate. 17. In 1928, Atherton Richards acquired approximately 25,000 acres on the island of Hawai`i as well as cattle along with business partner Ronald Von Holt, and he incorporated Kahua Ranch Limited as a Hawai`i Corporation (“Kahua Ranch”).2 18. On September 19, 1972, Atherton Richards established the trust at issue. Although the Trust Agreement barely mentions Kahua Ranch, the main asset of the Trust is, and has always been, the stock of Kahua Ranch Limited. The corporation currently operates a business under the name “Kahua Ranch” on approximately 8500 acres for the home ranch, of which 4,400 are leased and 4,000+ are Fee Simple, on the Big Island. The fee simple 2 The land was later divided between the Von Holt Family and Kahua Ranch, with the Von Holt’s portion becoming the Ponoholo Ranch.
  13. 13. 1013958v3 11335-1 7 lands have all been registered in land court and carry a clear title. The Ranch derives income from ranching and also as a venue for events and activities for paying visitors. The Trustee, on behalf of the Trust, is the sole shareholder of all the stock in Kahua Ranch. 19. The Trust provided for two trustees during the lifetime of Atherton Richards: Atherton Richards and Herbert M. Richards, Jr. Following the death of AR, Herbert M. Richards Jr. was to be the sole trustee. (§ I.6.) Mr. Richards continues to be the sole trustee today. 20. The Trust provided that during Atherton Richard’s lifetime he would receive support from Trust income. (§ I.2.) Following his death, the Trust Agreement states that the Trust estate shall be used for discretionary payments by the Trustee for the benefit of various relatives of Atherton Richards. (§ I.4(a).) After that, all Trust income was to split 51% to Herbert M. Richards, Jr., 27% to Phyllis Richards, and the balance to their children in equal shares. (§ I.4(b).) Following the death of Phyllis Richards, the split was to be 51% to Herbert M. Richards, Jr. and 49% in equal shares to his children. As Mrs. Richards has died, that is the current income spilt from the Trust. 21. The Trust provides that it will terminate following the deaths of AR, the Trustee, and Phyllis Richards, provided that the youngest of Herbert Richard’s living children has attained the age of 25. AR and Mrs. Richards have died, and all children have reached the age of 25. (§I.4(d).) The Trust will therefore terminate upon the death of Herbert M. Richards Jr. Upon termination, the Trust estate is to be transferred free and clear from any trust to the living children of Phyllis and the Trustee in equal shares, with the shares of any deceased children with their own children distributed to those descendants. 22. Atherton Richards had no heirs, and he very much considered his nephew and the children of his nephew his heirs. The Trust was set up specifically for their benefit, and
  14. 14. 1013958v3 11335-1 8 this is spelled out explicitly in the Trust Agreement: The primary purpose and intent in creating this trust is to benefit those who shall from time to time be income beneficiaries. (§II.(p)) (emphasis added). The only income beneficiaries are Trustee and his four children, which include the Petitioners. 23. The principal asset of the Trust is 100% of the stock of Kahua Ranch Ltd.. Petitioners estimate that the assets of Kahua Ranch Ltd. are worth conservatively in excess of $120 million. C. Petitioners’ and Their Interests 24. The Petitioners are Patricia Kuualoha Richards Giles and Dr. Herbert M. (“Tim”) Richards, III. They are two of the four children of the Trustee and Phyllis Richards. The other two children are Pam Richards Ketchum and John Richards. Both petitioners grew up on Kahua Ranch. 25. Both Ms. Giles and Dr. Richards are accomplished and successful people in their own right. They are not, for example, wealthy heirs living off the Trust. To the contrary, in the 45 years the Trust has been in existence, Ms. Giles and Dr. Richards have received less than $300,000 combined in income from the Trust. 26. Ms. Giles is 56 years old. She has a Bachelor’s degree in Computer Science/ Fine Art from the University of Colorado. She also has a Master’s of Business degree from Indiana Wesleyan University. She was the founder and co-owner of a business in Honolulu, the Computer Training Company. Computer Training was named one of Hawaii’s fastest growing companies 4 years out of the 10 years that Ms. Giles was a managing owner in the company. She built the company and eventually sold it. Ms. Giles has been recognized for her business acumen through a number of awards, including: 1) March 2010 - First recipient of the Microsoft Innovation Award; 2) June 2009 - Finalist position for John L. Scott Real
  15. 15. 1013958v3 11335-1 9 Estate in the 2009 Inman Innovator Awards for Most Innovative Brokerage or Franchise; 3) Recognized as 1997 Ernst & Young Female Entrepreneur Of The Year®. Ms. Giles also serves as a trustee of the Atherton Family Foundation and the Lucy K. Henriques Trust. 27. Dr. Richards is 59 years old. Dr. Richards holds a doctorate in veterinary medicine from Washington State University. He practices as a veterinarian at Veterinary Associates, Inc. in Waimea. He has been a veterinarian for over 30 years. He is also an elected member of the nine-member Hawai`i County Council, representing District 9. 28. Dr. Richards has had a passion for agriculture and ranching his entire life. He has held various roles at Kahua Ranch over the years, including mainland cattle management beginning in 1995, livestock manager from 1999 to 2013, and the president and general manager from 2004 to 2013. He has been a veterinarian for many of the larger ranches in the area and statewide including Parker Ranch and Kaupo Ranch. He sits on the Board of Directors for two major ranches, the Ponoholo Ranch and the Palani Ranch. He has been a member of various ranching organizations and counsels, including the Hawai`i Cattle Producers Cooperative (Board Member), the National Cattlemen’s Beef Association (Member), the Hawai`i Cattlemen’s Council (former President), and the Hawai`i Cattlemen’s Association (former President). Dr. Richards very much considers himself to be a rancher. Currently he has leased lands to continue to pursue his passion of ranching and is currently running a couple hundred head of cattle. He is so dedicated to ranching that he wants to raise his children up around ranching as well. 29. Dr. Richards not only grew up on Kahua Ranch, he enjoyed a close relation- ship with the Settlor, Atherton Richards. AR was Dr. Richards’s godfather. AR gave Dr. Richards his nickname “Tim.” As a youth Dr. Richards’s responsibility was to accompany AR on walks and while hiking around the ranch, especially when AR was in his
  16. 16. 1013958v3 11335-1 10 elder years. Through and because of this time spent with AR on the lands of Kahua, Dr. Richards developed a deep appreciation and love for those lands and the Kohala Mountains. Dr. Richards was about as close to AR as anyone else at the time of AR’s death. 30. Dr. Richards was the president and general manager of Kahua Ranch from 2004 to 2013, running the day to day operations of the Ranch. He was both placed in that position and removed at the orders of the Trustee. As president of the Ranch, Dr. Richards significantly increased Kahua Ranch’s financial health, started turning some profits, and weathered the global financial crisis that started in 2007. 31. Ms. Giles’s and Dr. Richards’s current interest in the Trust is that of income beneficiaries and Remaindermen. As income beneficiaries they are currently each entitled to 12.25% of all Trust income. If the Trust was to terminate today, they would both be entitled to a distribution of 25% of the Trust assets. D. The Trustee 32. The Trustee was born in 1929 and is currently 88 years old. He has worked in various capacities at Kahua Ranch since approximately 1955. All four of his children were raised on the ranch. Although he used to be involved in the day to day management of the Ranch, he has stepped back due to his age and currently only serves as a director. E. The Parties’ Succession Planning 33. There was a time when everybody, including the Trustee, recognized that it was vital that a succession plan be put in place for the Trustee’s death, and also to choose a successor trustee in case the Trustee became incapacitated and to oversee the winding down of the Trust upon the death of the Trustee. Indeed, in a memorandum dated March 11, 2013 from the Trustee to the beneficiaries, he recognized the importance of the succession issues. (Ex. 2.) The Trustee wrote:
  17. 17. 1013958v3 11335-1 11 As previously discussed, we have been looking into the orderly transition of the Atherton Richards Trust after I pass away or become incapacitated…The successor trustee would be responsible for winding down the trust, which terminates upon my death. It has been my feeling, and some of yours, that it would make sense to have an organized plan that we all agree on before my death. The Trustee even proposed a process for him and the four children/beneficiaries to nominate potential candidates for successor trustee, interview them, and to try to reach a consensus. 34. The issues regarding what to do with the Trust assets following the death of the Trustee and the termination of the Trust are complicated. The Trust’s principal asset is the Kahua Ranch, which has a very high value in land, but operates on low margins. Petitioners estimate the land value to be in excess of $120 million. The profits from ranching, however, are relatively small, and most years the ranch operates at a loss. Even the Trustee admitted in a 2000 interview, after running the Ranch for decades, that “Haven’t been able to hit the profitability bell yet, but I’m still trying.” (Ex. 3 at 22.) Over the years, the Ranch has had to sell lands to cover operational deficits. Although the Petitioners have a longtime affection for the Ranch and would like to keep it in operation if it is economically feasible, in 2013 there were a number of options being discussed for the Ranch after the termination of the Trust. These options included: (1) sell the Ranch and divide the proceeds among the Remaindermen; (2) sell the Ranch and reinvest the proceeds with professional managers; (3) physically divide the Ranch lands among the Remaindermen; (4) keep ownership of the Ranch but lease it to other ranchers; (5) keep ownership and have the Remaindermen operate the Ranch; and (6) keep ownership and have outside professionals operate the Ranch. (Ex. 4, 5.) To make matters further complicated, each of the various options being considered had different capital gains tax consequences. 35. In 2012 and 2013, the Trustee and the Remaindermen participated in a number of meetings, including with various different facilitators, to attempt to agree on a succession
  18. 18. 1013958v3 11335-1 12 plan. All of these attempts failed, because the Trustee would not seriously commit to any plan. Many of these facilitators communicated to Petitioners that the Trustee was the problem. 36. Later in 2013, the Trustee completely changed course. He used his power to remove Dr. Richards as the manager of the Ranch, and he threw all four Remaindermen off the Board of Directors for the Ranch.3 Since then, the Trustee and the Ranch have shared virtually no information about the operations of business of the Ranch with the Remaindermen. The Trustee has not engaged at all in discussions about succession planning with the Remaindermen. 37. Matters became worse in 2014. On September 17, 2014, after being totally shut off from any information, Dr. Richards filed a suit in probate court seeking a trust accounting. Ms. Giles filed a declaration in support of the petition. The legal proceedings substantially deteriorated the personal relationship between the Trustee and Petitioners, so much so that when Ms. Giles and the Trustee spoke this year, the Trustee told her he was still angry at her. 38. The only information that Petitioners have available to them about the Ranch is a very basic income statement for the Trust that shows the book value of Kahua Ranch and the net income of the Ranch. The most recent statement they received was in 2017 for the 3 The purported reason for this was because of infighting between the Remaindermen, which the other nonfamily directors claimed was an issue. Three of these directors resigned and refused to rejoin the Board unless all family members (including the Trustee) resigned from Board and until the family worked cooperatively to find a successor Trustee. (Ex. 6.) The letter was addressed to the Trustee and the children, and noted that “it is not any one of you that has led us to this decision, but all of you.” They did not follow through on their conditions: although the Trustee kept himself on as a director, and eventually ignored succession planning, two of the three resigning directors came back anyway. Moreover, the Trustee and his hand-picked directors have always overstated the issue, and in spite of disagreements, by 2013 the Ranch had enjoyed several of its best years financially.
  19. 19. 1013958v3 11335-1 13 year 2015. The financial information is also misleading, because the net income figure may include Ranch properties that have been sold. In other words, Petitioners believe that the Ranch may very well be operating at a deficit (perhaps a huge deficit), and is covering it through proceeds of the sale of other investments. The Accountant’s own summary of the limited, pre-2016 financials provided states that they were not audited and no other procedure was performed to verify accuracy or completeness. (Ex. 10.) In other words, the Trustee’s mismanagement of the Trust assets described in this petition, as severe as it is, could just be the tip of the iceberg, given that he is operating with no transparency. 39. The abandonment of all plans for succession is harmful to the Trust assets, harmful to the beneficiaries, and is therefore inconsistent with the Trust’s purpose. Significant decisions need to be made about the operation of the Ranch after the Trustee’s death. If they are not made in advance, but need to be made in a hurried nature when the Trustee dies, it will certainly have a negative effect on operations and thus the value of the Trust assets. F. The Trustee’s Scheme to Require Operation of the Ranch into Perpetuity to the Financial Detriment of the Trust’s Beneficiaries 40. The Trustee’s design is to secure the operation of the Ranch into perpetuity, no matter if that means that no beneficiary will ever receive a penny from the Trust. Indeed, in January of 2018 he admitted to Ms. Giles that securing the operation of the Ranch in perpetuity was the motivation behind his recent actions. He told her specifically “If you don’t like it, sue me.” He has refused to discuss succession planning or provide Petitioners with any information about the operation of the Ranch precisely because he wants the freedom to execute his scheme before Petitioners are able to stop him. 41. Petitioners believe that the Trustee believes that the Ranch is his legacy and is motivated by a personal desire to see it operate into perpetuity. Indeed, the Trustee has even
  20. 20. 1013958v3 11335-1 14 written a book about the Ranch, titled “Ranching Under the Rainbow,” where he lamented the prospect of selling or dividing up the Ranch, even if that was the only feasible economic option: “If you were to judge Kahua Ranch strictly on a business model, we are an abject failure…If you really want the ranch to generate a lot of money in terms of interests, dividends, and all, then sell the damn thing and split the money up. But you’re going to lose one of the most beautiful spots in the entire state. I don’t think you want to do that, so suck it up and keep going.” (Ex. 7 at 161.) 42. The Shareholder Agreement that the Trustee executed on January 13, 2018 is a key instrument of his scheme to keep the Ranch together in perpetuity. He specifically told Ms. Giles in a telephone conversation that the Agreement was a “loophole” that his lawyer found to keep the Ranch together in perpetuity. As discussed below, his lawyer is incorrect about the “loophole,” because the Shareholder Agreement is voidable because it both violates the Trust Agreement and corporate law governing shareholder agreements. As an aside, the lawyer involved in advising on the “loophole,” James Stubenberg, has the rare distinction of having been referred to the Office of Disciplinary Counsel in a published opinion of the Supreme Court of Hawai`i. See DFS Group L.P. v. Paiea Prop., 110 Hawai`i 217, 225, 131 P.3d 500, 508 (2006).4 43. At the time he executed the Shareholder Agreement, the Trustee also signed a statement about his reasons for doing so. He gave five reasons, and not a single one of them was that the Agreement would benefit the beneficiaries or increase the value of Trust assets. Rather, he stated that he entered into the Shareholder Agreement for the benefit of others who are not Trust beneficiaries. Specifically he wrote: 4 The concurring opinion of Chief Justice Moon goes on for many pages describing the conduct that led to the Court’s referral. 110 Hawai`i at 226-233, 131 P.3d at 509-516.
  21. 21. 1013958v3 11335-1 15 1. That it will help the Ranch continue as employer and provider in the community. 2. That the Ranch owned by Atherton Richards since March 1928 has maintained tradition of ranching in North Kohala. 3. That the Ranch has provided a place of residence for the shareholders.5 4. To continue the Ranch style of life which is healthy and worthwhile. 5. Kahua Ranch has some of the most beautiful parts of Hawaii, the rolling green hills of the Kohala Mountain. Atherton Richards agreed. It was his intention that the Ranch should continue.6 (Ex. 8.) 44. The problem is that the Trustee’s goals are completely inconsistent with the Trust Agreement, which does not mention perpetuating the Ranch at all. In fact, it only mentions the Ranch once in passing when noting an agreement about it that was terminated decades ago between Settlor and the Von Holt family. (§I.8.) Atherton Richards very well could have established a trust with the goal of perpetuating the Ranch if he wanted to. This is precisely what the owner of the Parker Ranch, Richard Smart, did with it when he died. Alternatively, if AR wanted the Trustee to have the unbridled power to do with the Ranch what he likes, AR could have dispensed with a Trust altogether and left the Ranch outright to the Trustee. Instead AR set up a trust in a format commonly used to pass assets on to third generation heirs with favorable tax treatment, and he noted in the Trust Agreement that “the 5 It is unclear what the Trustee meant by a place of residence for the “shareholders.” There is only one shareholder, and that is the Trustee on behalf of the Trust. However, the four Remaindermen have been allowed to have houses at the Ranch. 6 The Trustee often presents the impression that AR was a kind of cowboy, riding the lands and enjoying the “Ranch style of life.” Although AR no doubt had affinity for the Ranch and was a steward of the lands, the impression of him as a rancher is not accurate. For example the Trustee’s book recounts a story of how AR was living in New York City in the 1940’s, and the Trustee went to visit him at his apartment building, where the doorman would not let him in because he was not wearing a coat and tie. The Trustee eventually snuck in and made it up to AR’s apartment, where “the butler let me in and boy he chewed me out” for not being property attired. (Ex. 7 at 38) (emphasis added).
  22. 22. 1013958v3 11335-1 16 primary purpose and intent in creating this trust is to benefit those who shall from time to time be income beneficiaries.” (§II.(p)). Effectively the Trustee is trying to take assets put in Trust for Petitioners and just give them all to charity. 45. The Shareholder Agreement has a number of provisions that are wholly inconsistent with the Trust’s purpose as well as basic tenets of corporate law. 46. Section 1, titled “Self-Perpetuating Board of Directors,” provides that directors will select their own successors. The Shareholders, even acting unanimously, will have no power to remove or appoint directors. Section 8 provides that the Shareholder Agreement cannot be amended without the consent of the directors. In other words, the Trustee’s hand- picked directors are given the broad power to operate the Ranch in perpetuity after the Trustee dies, and never pay the Trust beneficiaries a penny. If they do that, the Shareholders can neither remove them, nor terminate the Shareholder Agreement. They are at the mercy of the directors forever. The Shareholder Agreement effectively extends the life of the Trust forever, in furtherance of the Trustee’s goal of perpetuating the Ranch, but contrary to AR’s specific goal of having the Trust terminate upon the Trustee’s death and passing the assets to the Remaindermen. This is the “loophole” that the Trustee thinks allows him to ignore the Trust Agreement’s directives. As discussed below, these provisions are unenforceable because they not only breach the Trust Agreement, they are also illegal under corporate law. 47. Section 2 prohibits any Shareholder or Immediate Family of a Shareholder from serving as an officer, director, employee, independent contractor or agent of the Corporation, except for the Trustee. In other words, the Trustee is violating basic trust law by discriminating against certain beneficiaries in favor of another beneficiary, who happens to be himself. The perpetual prohibition on the beneficiaries from ever serving as officers or directors of the Ranch also violates the Trust. It means that even when the beneficiaries own
  23. 23. 1013958v3 11335-1 17 100% of the Ranch, they cannot even control their own asset. It also unfairly excludes the beneficiaries from a business that is their family’s legacy. It deprives the Ranch of the expertise in the ranching business that some of the beneficiaries have, particularly Dr. Richards. 48. Section 4 gives the Board the power to amend the Articles of Incorporation and Bylaws, merge, sell corporate assets, and do a wide variety of things, even if all Shareholders disagree. 49. Section 7 puts restrictions on the transfer of stock, including a requirement that any stock be offered for sale to third parties only pursuant to an all-cash offer, and that the Corporation be provided a right of first refusal. 50. The net effect of all these actions is to substantially devalue the stock in the Ranch, which is the Trust’s principal asset. The Remaindermen will neither see any dividends from their stock, nor will they be able to sell it. No third party is going to want to buy stock from the Remaindermen in the Ranch when: (A) they can never select the directors; (B) the directors can never be removed even with unanimous consent of the shareholders; (C) the directors will control the corporation forever, never need to pay dividends; (D) the directors have been charged with a charitable directive to perpetuate the Ranch rather than to maximize value for the shareholders; and (E) the right of first refusal and requirement of cash sales of stock create onerous restrictions on future transfer. 51. Although some of the provisions of the Shareholder Agreement are illegal under corporation law, others might be permissible if the Trustee personally owned the shares, and not as a trustee on behalf of all the Trust beneficiaries. If the Ranch was his own company, he could do whatever he wanted with it. He could give the whole thing to charity,
  24. 24. 1013958v3 11335-1 18 just like Parker Ranch. But he holds shares as a Trustee, and he is bound to exercise his control over the Ranch consistent with the Trust Agreement. 52. Petitioners are particularly concerned about future erratic behavior of the Trustee that could devalue the Trust assets in furtherance of the Trustee’s goal of perpetuating the Ranch. For example, the Trustee could place certain encumbrances on the Ranch land, such as long-term leases or conservation easements. The Petitioners have been told by Ranch employees that they have been told by Ranch management that there are plans to put Ranch land in conservation. That could be ruinous for the value of the Trust assets. 53. It appears that the Trustee may already be taking actions in furtherance of his scheme to limit future use of Ranch lands, even if it significantly devalues the Ranch, and thus the value of the Trust assets. In April 2017, the Hawaiian Legacy Reforestation Initiative (“HLRI”) announced that it was creating a “legacy forest” in partnership with Kahua Ranch to preserve 700 acres of land on Kahua Ranch. (Ex. 11.) The executive director of HLRI stated that “It’s not meant to be something to build vast amounts of wealth…This is not a build-to-sell model, it’s a build-to-give model. Working with Kahua Ranch, they are a perfect example of this.” (emphasis added). 54. The HLRI transaction is precisely the type of action that concerns Petitioners. First, they are completely in the dark as to what the arrangement is between the Ranch and HLRI. For example, how long are these lands committed? Is there a restriction on sale? Is there a restriction on higher value use? Is there any economic value to be achieved, and how does it compare to other uses? The Trustee has provided Petitioners absolutely no informa- tion: they learned about this transaction through the news. Second, it strikes right at the heart of their fear that the Trustee would rather trust assets go to charitable or community causes than the beneficiaries. In other words, at the age of 88, having lived very comfortably
  25. 25. 1013958v3 11335-1 19 off the Ranch for his entire adult life,7 the Trustee would now rather give it away than fulfill his duty of giving it to his children. G. The Trustee’s Discrimination Against Beneficiaries and Self-Dealing 55. The Trustee’s actions are also motivated in part by personal animosity toward Petitioners Ms. Giles and Dr. Richards. His relationship has been strained with Petitioners since approximately 2007. Since 2013, the Trustee and Dr. Richards are effectively completely estranged. Ms. Giles has made efforts to stay in contact, but in January 2018 the Trustee told her that he was still angry at her for supporting Dr. Richards in his 2014 lawsuit to obtain a Trust accounting. Accordingly, the Trustee discriminates against Petitioners in favor of himself and his other two children in the administration of the Trust. The Trustee does this both to punish Petitioners, and to intimidate their siblings into not opposing him. One of the examples of this punishment occurred when the Trustee cancelled the health insurance for Dr. Richards and his wife when his wife was pregnant and in her third trimester. Mrs. Richards had a triple high risk pregnancy in that she was in her 40’s, expecting twins, and living in a rural area. The Ranch cancelled their health insurance, which they had been paying for through COBRA, without notice to them. Mrs. Richards contacted the Trustee, who was the acting president of the Ranch and the Chairman of the Board, and he refused to respond. It was only after she called her lawyer and threatened to sue that her health insurance was restated. Dr. and Mrs. Richards have not had health insurance through the Ranch since 2014, following the birth of their children. 7 The Trustee has long treated the Ranch as a sort of baronial estate, with himself as lord of the manor. On the cover of his book, he styles himself “Monty Richards of Kahua Ranch.” (Ex. 7)
  26. 26. 1013958v3 11335-1 20 56. One example of disproportionate benefits for the Trustee occurred in 2014. The Trustee took for himself a life estate in the main Ranch house and provided for a six month estate following his death for his current wife, Eleanore Chong. (Ex. 9.) The provisions of the life estate provide that the Ranch will pay all maintenance and repair expenses, all utilities, and all taxes. No value appears to have accrued to the Ranch or the Trust from these grants. When Dr. Richards was the president of the ranch, he paid for his own vehicle, food, and living expenses. The Ranch later paid for half his vehicle expenses. The Trustee received all those benefits when he was president, and even after he was president even though he no longer held that position. He has even had travel to and from Honolulu paid for when he was not president. 57. Although the Trust provides that 51% of the Trust income will go to the Trustee and the other 49% to the Remaindermen, the Trustee takes benefits directly from the Ranch, and divvies up benefits among his children, without any attempt to adhere to the income split the Trust dictates. For example, although all four Remaindermen have informally been allowed use of houses on the Ranch, there is no attempt to equalize benefits. The Trustee has made no attempt to account for the benefits he doles out to himself and to his preferred beneficiaries to ensure that benefits are either paid for actual work performed for the Ranch, and if not, if the benefit split adheres to the trust income division of 51% for the Trustee and 12.5% for each beneficiary. For example, Petitioners believe that Remainderman Pam Richards Ketchum is still employed by the Ranch, despite the illegal Shareholder Agreement that would prohibit that. Ironically, not only has the Trustee imposed an illegal Shareholder Agreement on the Ranch, he apparently disregards its dictates
  27. 27. 1013958v3 11335-1 21 himself when it pleases him.8 Ms. Ketchum also received a car loan from the Trust. Remainderman John Richards works from time to time as an independent contractor. Petitioners, however, do not receive these benefits.9 The most recent trust accounting provided for 2015 shows accounts receivable, apparently loans, of $13,722 to Pam Ketchum and $36,519 to the Trustee.10 Without an accounting of all these benefits and justification for their payment as either for work or compliant with the Trust’s income split, the Trustee is able to distribute them without accountability as he pleases either to benefit himself directly or to secure support from favored beneficiaries. H. The Trustee Has Completely Ignored Other Beneficiaries of the Trust 58. The Trust Agreement also provides that various other relatives of Atherton Richards would be beneficiaries, though not income beneficiaries or remaindermen. Section I.4(a) lists a number of specific relatives, and provides that during the life of the Trust, those relatives and their issue shall be provided support at the discretion of the Trustee. The Trustee appears to have completely ignored this section. Indeed, his own brother, who is a beneficiary under this section, did not know he was until 2014, over 40 years after the Trust was created. The Trustee appears to have made no effort to determine if any of these beneficiaries were in need of support. This is just another example of the Trustee simply ignoring his duties under the Trust Agreement. 8 The Trustee’s brother is still apparently on the Board of Directors, although the Shareholder Agreement prohibits his siblings from being on the Board. (Ex. 8, § 2.) 9 Ms. Giles has no economic relationship with the Ranch. Dr. Richards’s colleagues in his veterinary practice perform veterinary services for the Ranch, but not Dr. Richards, and fees from those services are allocated to his colleagues and not to him. All Remaindermen do get a check for $500 per quarter. 10 On April 12, 2018, the date this petition was filed, the Trustee’s attorneys provided an accounting for 2016. It lists these exact same amounts due to the Trust. In a year, they had not been paid down at all.
  28. 28. 1013958v3 11335-1 22 I. The Trustee’s Mental and Physical Incapacities 59. As his errant behavior in violation of the Trust suggests, the Trustee is not fully in control of either his mental or physical faculties. The Trustee has had a number of TIA attacks over the years. His eyesight is poor because of extreme cataracts. He has been unable to have the cataracts removed because he first needed to have heart surgery, which he recently underwent. He has difficulty paying attention to conversations, and he admits to trouble remembering things. The Trustee also has difficulty walking. The Trustee appears to have developed paranoia about the Petitioners, as is reflected in his actions with respect to the Trust. His attorney also told Ms. Giles’s attorney that the Trustee sleeps with a gun because he fears his children. This is unsubstantiated, as neither Petitioner has ever done anything to physically threaten the Trustee. The Trustee’s job is a demanding one, and given his age and infirmities, he is simply no longer able to do it. J. The Petitioners Attempt to Convince the Trustee to Retire 60. The filing of this petition was the last straw after a number of years of trust mismanagement, estrangement, and hostility on the part of the Trustee. Despite all of that, the Petitioners tried to avoid litigation. On April 4, 2018, they sent the Trustee a letter through counsel telling him that he should revoke the Shareholder Agreement and retire, and notifying him that they were prepared to file this petition. (Ex. 12.) Although the letter was candid, Petitioners communicated that they wanted to repair their relationship with him, and that it is now clear that is impossible while he remains the Trustee. The Trustee’s response was to commence litigation two days later. He filed his own petition, seeking to have the court “approve Trustee’s actions regarding the Shareholder Agreement, and declare that the Trustee acted within his authority regarding such.” (Ex. 13 at 10.)
  29. 29. 1013958v3 11335-1 23 III. PROBATE RULE 126(C) STATEMENTS 61. The information required by Rule 126(c) of the Hawai`i Probate Rules to be set forth in this Petition is as follows: (a) The Trust Agreement, dated September 19, 1972, between Atherton Richards as “Settlor”, and Atherton Richards and Herbert M. Richards, Jr. jointly and severally as “Trustee”. (b) Name of Settlor: Atherton Richards (c) Date of creation: September 19, 1972 (d) Nature and value of known Trust assets: See Exhibit 10, attached hereto. (e) Name and address of the current Trustee: Herbert M. Richards, Jr. P.O. Box 837 Kanuela, Hawai`i, 96743 (f) Names and addresses of present permissible beneficiaries and Remainder/ Contingent beneficiaries: Herbert M. Richards, Jr. P.O. Box 837 Kamuela, HI 96734-0837 (income beneficiary) Pamela Richards Ketchum P.O. Box 837 Kamuela, HI 96743 (income beneficiary and remainder) Herbert M. Richards, III P.O. Box 6741 Kamuela, HI 96743 (income beneficiary and remainder) Patricia Kuualoha Richards (Giles) 13323 NE 152nd Street Woodinville, WA 98072 (income beneficiary and remainder)
  30. 30. 1013958v3 11335-1 24 John Atherton Richards P.O. Box 837 Kamuela, HI 96743 (income beneficiary and remainder) Mary Richards Shattuck 4275 Owens Road Cottage 707 Evans, GA 30809 (permissible beneficiary) James Atherton Richards 583 Kamoku St., Apt. 3101 Honolulu, HI 96826-5233 (permissible beneficiary) George Manning Richards 2255 Nuna St. Honolulu, HI 96821 (permissible beneficiary) 62. It is submitted that the interests of any unborn or unascertained beneficiaries are substantially identical to the interests of the current beneficiaries now in being and, pursuant to HRS § 560:1-403(2)(c), are adequately represented by one or more of the current beneficiaries now in being. Thus, there is no need to appoint a guardian ad litem for any unborn or unascertained contingent remainder beneficiaries. IV. THE SHAREHOLDER AGREEMENT SHOULD BE VOIDED BECAUSE IT VIOLATES THE TRUST AGREEMENT AND IS ILLEGAL UNDER CORPORATIONS LAW A. Legal Standard: The Court Has the Power to Void Transactions that Violate the Trust Agreement 63. There can be no question that the Court has the equitable power to void transactions that are inconsistent with Trust Agreement and/or constitute breaches of trust. The Court’s equitable powers to remedy a breach of trust are broad. They include “directing the trustee to act or refrain from acting or by setting aside a transaction in which the trustee has already acted.” Restatement (Third) of Trusts § 87 cmt. b. The Hawai`i Supreme Court
  31. 31. 1013958v3 11335-1 25 has also ruled that “Restitution of the property conveyed in breach of trust or restoration of the status quo through cancellation is a proper remedy.” Richards v. Midkiff, 48 Haw. 32, 43, 396 P.2d 49, 56 (1964) (noting that cancellation is proper remedy even in a transaction with a third party if the third party had notice of the breach of trust). 64. The Trustee, as owner of shares on behalf of the Trust, also has a duty to vote them in furtherance of the interests of the beneficiaries and the Trust: a. Duty of trustee in voting shares. It is the duty of the trustee in voting shares of stock to use proper care to promote the interest of the beneficiary. The trustee has discretion whether and how to vote, and if he does not abuse his discretion the court will not control him in voting; but he may be restrained by injunction or otherwise from casting a vote which would violate his duty to the beneficiary. Restatement (Second) of Trusts § 193 cmt. a. 65. The Court can thus use its equitable powers to void the Shareholder Agreement if entering into it constituted a breach of trust, which it did. Alternatively, the Court has the equitable power to order the Trustee, as sole shareholder of the Ranch, to revoke the Shareholder Agreement. Given that the Shareholder Agreement is only among one shareholder, the Trustee, neither of these acts has any effect on a third party. B. The Shareholder Agreement Should Be Voided as a Breach of Trust Because It Is Intended to Benefit Third Parties Other than the Beneficiaries and It Harms the Beneficiaries by Encumbering Their Stock 66. It is clear from the facts discussed above that the Trustee’s motives in entering into the Shareholder Agreement were charitable. He wants the Ranch to go on as long as possible for the benefit of the community and employees, even though it has virtually never turned a profit, and has paid minimal dividends to the beneficiaries in the last 45 years. (See Supra ¶ 25.) This would be altruistic, if part of his motivation was not naked hostility toward his own children. In any event, it is clear under Hawai`i law that a trustee is not free to simply take trust assets and give them away. Richards, 48 Haw. at 57, 396 P.2d at 63
  32. 32. 1013958v3 11335-1 26 (“It is improper for a trustee to make a gift of trust property unless it is advantageous to the trust estate”)11 That is what the Trustee has done by creating restrictions on the stock that effectively render it unmarketable, unprofitable, but serve the goal of perpetuating the Ranch as long as possible. He has given the Ranch over to his hand-picked directors to operate for a charitable purpose, with no ability for the beneficiaries to control or stop it. Similarly, an action motivated by good faith can constitute a breach of trust: “an abuse of discretion occurs when a trustee acts from an improper even though not dishonest motive, such is when the act is undertaken in good faith but for a purpose other than to further the purposes of the trust.” Restatement (Third) of Trusts § 87 cmt. c. 67. The Shareholder Agreement constitutes a breach of trust because it was entered into to benefit others rather than the beneficiaries. This is clear from the Trustee’s statement of January 13, 2018. (Ex. 8.) The Trustee’s motives breach the Trust, which explicitly provides that “The primary purpose and intent in creating this trust is to benefit those who shall from time to time be income beneficiaries.” (Ex. 1, §II.(p)) Nowhere in his January 13 statement does the Trustee state that he is entering into the agreement for the 11 The Richards in that case was none other than the Settler of this Trust, Atherton Richards. In Richards he sued his fellow trustees of the Bishop Estate. The case shows two things relevant to this dispute. First, AR was sophisticated when it came to trusts, and he had counsel and knew how to assert his will when he wanted to. Second, that AR had no illusions that undeveloped Big Island lands would be used for ranching forever. The dispute was about an undeveloped 15-acre parcel that Bishop Estate owned as part of an 18,228 acre tract of land known as the land of Kaupulehu, which were used for ranching. 48 Haw. at 35, 396 P.2d at 52-53. Bishop Estate leased the 15-acre parcel (along with other Kaupulehu lands) to a third party, but AR thought he was entitled to lease the 15-acre parcel from Bishop Estate. He wanted the lease because the ranching conducted on the parcel was unprofitable, and he “came to the conclusion that these lands could be more profitably utilized if leased for a long term not only for the conduct of a cattle operation but also for the development of a resort area consisting of a number of mountain and beach sites for use by vacationers.” Richards, 48 Haw. at 35, 396 P.2d at 53. This was in 1959. Id. AR was also in talks at the time with a developer about developing the land. Id.
  33. 33. 1013958v3 11335-1 27 benefit of the beneficiaries. Indeed, the cover letter from counsel transmitting the agreement to the beneficiaries is even more explicit that their interests are second class. Counsel wrote “the reason for the Agreement is to prevent potential future disputes among shareholders that could cause harm to the Ranch, its employees and their families, and the community in general.” (Ex. 8.) In other words, he wants to protect the Ranch from being broken up, even if that is not in the best economic interests of the beneficiaries. There is nothing in the statements of the Trustee and counsel provided with the Shareholder Agreement that a purpose of it was to increase (or even maintain) the value of Trust stock. 68. The very structure of the Shareholder Agreement shows that it is meant to mimic a charitable trust. The first provision is titled “self-perpetuating board of directors.” This is a board of directors that elects its own successors into perpetuity. Though common with charitable trusts and non-profit corporations,12 these are virtually unheard of in a for-profit corporation like the Ranch. Establishing a self-perpetuating board structure is alone evidence of the Trustee’s intent that the Ranch operate primarily to serve a charitable function going forward. 69. The Shareholder Agreement also violates the Trust Agreement because it places encumbrances on the Ranch stock that reduce its value. The beneficiaries are ultimately going to get valueless stock that they can never sell and that will never pay any 12 The Hawai`i Nonprofit Corporations Act, for example, provides that directors may be elected by the board itself. HRS § 414D-134. The Hawai`i Business Corporations Act covering for-profit corporations, has no such authorization. Rather it provides that directors are elected by the shareholders. See HRS §§ 414-193, 414-194. For discussion, see, Dana Brakman Reiser, Dismembering Civil Society: The Social Costs of Internally Undemocratic Nonprofits, 82 Or. L. Rev. 829 (2003) (discussing how nonprofits with self-perpetuating boards are less well run than nonprofits with directors elected by members or for-profit corporations with directors elected by shareholders, because of the lack of accountability of self-perpetuating boards.)
  34. 34. 1013958v3 11335-1 28 appreciable dividends. Even if all four beneficiaries decided to sell 100% of their stock, either nobody would want to buy it, or it would go at a huge discount. This is because under the encumbrances of the Shareholder Agreement, even if 100% of the shareholders agree, they could not remove the Agreement. They could not select directors. They could not affect corporate operations whatsoever. They could not liquidate the company. They would effectively have what the Trust has now: stock in a company that operates perpetually at a loss, paying almost no dividends, while the land assets of the Company are incredibly valuable, but cannot be touched. 70. The beneficiaries have a valid fear that the Trustee’s hand-picked directors will keep the Ranch going on forever at a loss, selling off assets here and there to keep operations going, with no income for the beneficiaries. This is exactly what the Trustee has been doing for 45 years, and he wants it go on as long as possible after he dies. He even wrote a book where he admits to it: “If you were to judge Kahua Ranch strictly on a business model, we are an abject failure…If you really want the ranch to generate a lot of money in terms of interests, dividends, and all, then sell the damn thing and split the money up…I don’t think you want to do that, so suck it up and keep going.” (Ex. 7 at 161.) Indeed, the first sentence of the preface to the Trustee’s book about the Ranch reflects these exact sentiments: Kohala has been discovered. The ranches can be sold, they can make a lot of money and the rancher can live the life of Riley, but after that, it’s gone. Because when you start cutting up these places, you are not going to see the expanses; you are not going to have the herds of cattle and horses… (Ex. 7 at iv.) 71. It breaches trust for a trustee to place an encumbrance on stock the trusts owns that is inconsistent with the trust purpose. In a case that presented similar, though not
  35. 35. 1013958v3 11335-1 29 nearly as severe encumbrances, the Supreme Court of Virginia found such an encumbrance inconsistent with the trust. In Woods v. Stull, the settlor of the trust at issue left his shares in a corporation in trust for the benefit of his mother and sister. 182 Va. 888, 892-93 (Va. 1944). He also noted that as long as the trust owned the stock, “said stock shall be so voted as to secure continued employment” of three specific individuals “as long as their services are reasonably satisfactory.” Id. at 893. One of the employees was discharged, and sued alleging that the trustees breached their duty to vote shares to secure his continued employment. Id. 895. The Court ruled against the employee. It held that the purpose of the trust was obviously to benefit the mother and sister of the settlor, and that the provision of continued employment was narrowly defined as only to the time the trustees held the stock, and even then only if it was in the best interests of the beneficiaries. Id. at 903. It specifically held that an encum- brance on stock requiring certain employees was an impairment of value inconsistent with the objective of the trust to benefit the beneficiaries: “It was not the intention of the testator to encumber or impair the value of the trust estate by attaching a perpetual condition or restriction which was inconsistent with the main object of the trust.” Id. 72. Here the Trustee has breached the trust with the Shareholder Agreement in a manner that is leaps and bounds above the situation addressed in Woods. Unlike in Woods, where the settlor actually did place some encumbrance on the stock in the trust estate, Atherton Richards did no such thing. If he wanted the shareholder/beneficiaries to never have any say in the selection of the directors of the Ranch or its operation, he certainly could have structured the Trust in that manner. He did not. The encumbrances at issue here are also far more severe. The only encumbrance alleged in Woods was the corporation’s employment of three individuals. The Shareholder Agreement, by contrast, takes Trust stock that allows the shareholders all control permitted to it under corporate law, and then
  36. 36. 1013958v3 11335-1 30 abdicates every single bit of that control to a perpetual board. It is about a severe an encumbrance imaginable on a stock asset. 73. The Trustee’s folly appears to be in thinking that as the “owner” of the shares of the Ranch, he is free to do anything with them an owner of shares can do. The problem, however, is that there is a distinction in the law between what a shareholder can do with shares he owns personally versus shares he owns in trust. A shareholder has wide latitude with what he can do with shares he owns on his own account. For example, if the Trustee owned the shares of the Ranch, he could use his voting power to liquidate the company and give all its assets to charity. As a Trustee, however, he is duty bound to exercise his power as a shareholder only for the economic benefit of the beneficiaries. This duty is recognized in the Restatement. See Restatement (Second) of Trusts § 193 cmt. a. It is also embedded in the case law. As one case has noted, when a corporation’s entire stock is held in trust, “the corporation becomes the alter ego of the trustees and as such, the propriety of the trustee’s acts must be determined in light of the trust and must be controlled by the provisions of the trust.” Betty G. Weldon Revocable Trust v. Weldon, 231 S.W.3d 158, 171 (Mo. App. 2007).13 13 The Weldon case discusses exactly the type of trust that AR could have set up if it was his goal to keep the Ranch running in perpetuity. In Weldon, the settlor was the owner of a corporation that had a number of businesses as subsidiaries. 231 S.W.3d at 165. The subsidiaries included a number of newspapers, and a “renowned” horse-breeding and training farm that had raised world championship horses. Id. The settlor had founded the horse- breeding farm in the 1940’s. Id. She established the trust in 1998 with herself and her three children as beneficiaries. Id. at 164. One of the explicit terms of the trust was that the horse- breeding farm not be sold during the settlor’s lifetime. Id. 177-78. By 2004, the farm had operated at a cumulative loss of $26 million during the prior 27 years, “despite its reputation.” Id. at 165. The settlor became incapacitated in 2001. Id. In 2005, the board of the parent company voted to sell the horse-breeding farm, because it was a drain on the resources of the parent. Id. at 165-66. Two of the directors voting were trustees of the trust, who had been appointed due to the trust’s ownership of the stock of the parent company. Id. at 166. The daughter, and a co-trustee, sued the two trustees that voted in favor of selling the horse-breeding farm for breach of trust. Id. The two trustees argued that they were protected (continued…)
  37. 37. 1013958v3 11335-1 31 74. A number of cases have held that a trustee must exercise shareholder power to benefit the trust beneficiaries, and not to benefit his own interests or entrench himself. For example, in Neil v. Foster-Bey, the trustee used his voting power over stock the trust owned in a corporation to elect directors that would not fire him as the CEO of the company. 228 F. Supp. 3d 707, 711 (E.D. Va. 2017). Applying the common law of trusts, the Court held that “all courts to have considered the matter appear to agree, however, that a trustee’s self- interested use of his or her voting power to determine the outcome of a corporate power struggle can violate the trustee’s fiduciary duty…” Here the Trustee has done precisely that with the Shareholder Agreement: he seeks to have the Ranch controlled by his chosen directors beyond the grave so as to further his own interest in perpetuating the Ranch. See also Neil v. Zell, 677 F. Supp. 2d 1010, 1028-29 (N.D. Ill. 2009) (applying common law of trust and Restatement (Second) § 193 to hold that plaintiffs stated a claim that the trustee violated fiduciary duties by entering into voting agreement that required them to vote trust stock in favor of specific directors); O’Neill v. Davis, 721 F. Supp. 1013, 1014-15 (N.D. Ill. 1989) (finding complaint stated a claim for breach of trustees’ fiduciary duties where they (…continued) in their actions as directors by the business judgment rule under corporations law. Id. at 170. The Court disagreed, and held that as directors serving in that capacity as trustees of the trust, they were obligated to act consistently with the terms of the trust. Id. at 170-72. The court held that trust law overrode any protection under corporations law, including the business judgment rule. Id. at 171. The court held that the trust unambiguously provided that the horse-breeding farm should continue in operation during the settlor’s lifetime, and that though it was projected to operate at a loss, the profits from the other businesses of the parent company could sustain the loss. Id. at 177. The court also noted that the settlor had a history of underwriting losses on the farm with profits from other businesses. Id. The Weldon case is significant for two reasons. First, it shows that if a settlor like AR wants to establish a trust to keep an agricultural operation going, there are certainly ways to do so in the trust agreement. Second, it affirms that trustees acting as directors or shareholders on behalf of a trust have duty to act first in accordance with the trust, notwithstanding corporations law.
  38. 38. 1013958v3 11335-1 32 voted the shares of the trust stock “to reconstitute the Board of Directors and to consolidate their control of the Company…”). 75. The Trustee has similarly breached his duty by exercising his power as share- holder to institute a perpetual board, that also entrenches himself and his brother, so as to further his personal goal of keeping the Ranch in operation as long as possible. This breaches trust because it was not done with the motive of benefiting the beneficiaries, and indeed it devalues their stock and discriminates against them. C. The Shareholder Agreement Should be Voided as a Breach of Trust Because It Violates Section I.4(d) of the Trust Agreement 76. Atherton Richards decided explicitly when he wanted the Trust to terminate and when he wanted the Trust assets to be wholly at the disposal of the beneficiaries. His wishes are expressed in Section I.4(d) of the Trust Agreement. According to that provision, the trust terminates after the deaths of the Trustee and Phyllis Richards, provided that all their surviving children attain the age of 25. At that time the trust estate is to be delivered to them “absolutely and in fee simple, free and clear from any trust.” 77. The specificity of this provision is important. It shows that once their parents were deceased, AR wanted Ms. Giles and Dr. Richards to be able to do whatever they wanted with the trust assets “free and clear” “absolutely and in fee simple.” The fact that AR selected the age of 25 is also significant. Not only did he want the Remaindermen to have the assets to do with as they pleased, he considered it closely enough to pick a specific age when he thought they would be responsible to do so. 78. The Shareholder Agreement is completely inconsistent with AR’s carefully laid plans, as expressed specifically in the Trust Agreement. First, it creates substantial encumbrances on the Remaindermen’s ability to dispose of or even manage trust assets. Second, it effectively extends the time that the Ranch is in trust, despite AR’s intent that the
  39. 39. 1013958v3 11335-1 33 Remaindermen receive assets free and clear of any Trust. Once again, if AR did not think that the Remaindermen would ever be mature enough to handle the Ranch, he could have set up this provision differently. He could have made it so that it was held in trust during their entire lives. Through the Shareholder Agreement, the Trustee has implemented a structure where the Ranch will effectively be held in trust for the Remaindermen’s lives, with the directors like trustees that the Remaindermen cannot control and cannot remove. 79. The Court can and should void the Shareholder Agreement for the additional and independent basis that it is inconsistent with the Trust Agreement’s termination provisions. D. The Shareholder Agreement Should be Voided as a Breach of Trust Because It Discriminates Among Beneficiaries 80. The Shareholder Agreement is simply a naked breach of the Trustee’s duty of impartiality. This is yet another separate and independent basis for voiding the Shareholder Agreement. “A trustee has a duty to administer the trust in a manner that is impartial with respect to the various beneficiaries of the trust.” Restatement (Third) § 79. The current directors are his hand-picked cohort. The Shareholder Agreement discriminates in favor of one beneficiary with respect to corporation officerships, directorships, and employment: the Trustee himself. Only he is allowed to serve as a director, officer, or employee. The Shareholder Agreement permanently discriminates against the rest, including Ms. Giles and Dr. Richards, even long after the Trustee dies or is no longer Trustee for any other reason. 81. The duty of impartiality is broadly defined as essentially the need for a trustee to be impartial in all his acts as trustee. “The duty of impartiality is applicable to all duties of the trustee.” Id. cmt a. It includes impartiality “in investing, protecting, and distributing the trust estate, and in other administrative functions…” Id. §79(1)(a). Moreover, “it is the trustee’s duty, reasonably and without personal bias, to seek to ascertain and to give effect
  40. 40. 1013958v3 11335-1 34 to the rights and priorities of the various beneficiaries or purposes as expressed or implied by the terms of the trust.” Id. cmt. b (emphasis added). When the trustee is also a beneficiary, there is a particularly heightened temptation to abuse the power for his own benefit, and therefore “a trustee-beneficiary’s conduct is to be closely scrutinized for abuse, including abuse by less than appropriate regard for the duty of impartiality.” Id. cmt(b)(1). See also § 37, cmt. (f)(1) (“when a beneficiary serves as a trustee…the conduct of the trustee in the administration of the trust will be subject to especially careful scrutiny.”) The duty of impartiality thus applies to his decisions regarding Ranch officers, directors, and employees, and his decisions in that regard must be “scrutinized for abuse.” 82. Other than stealing trust assets, it is hard to imagine a less impartial act than a trustee decreeing that a benefit of the trust can forever go only to himself, and never to other beneficiaries. There can be no dispute that the right to serve on the Board and being employed by the Ranch are benefits. There is also no doubt that the Trustee has wielded his power as the sole stockholder to completely control who the officers, directors, and employees of the Ranch are. The Trustee has used that power to permanently exclude all beneficiaries but himself from enjoying these rewards. A trustee violates the duty of impartiality when he administers the trust so as to route benefits to himself and away from other beneficiaries. In re Estate of Rutter, 633 N.W.2d 740, 750-51 (Iowa 2001); In re Estate of Stuchlik, 289 Neb. 673, 679-80, 690-91 (Neb. 2014) (co-trustees who controlled partnership owned in part by trust potentially breached impartiality by discriminating against one beneficiary, including by leasing or selling partnership assets to another beneficiary, who was also a co-trustee). Indeed, a trustee violates the duty of impartiality merely by treating some beneficiaries more favorably than others, even where the trustee is non-interested and received no benefit from the impartiality. See e.g. McNeil v. Bennett, 792 A.2d 190, 192,
  41. 41. 1013958v3 11335-1 35 211-213 (Del. Ch. 2001) (non-interested trustees breached duty to beneficiary “by being (perhaps unwittingly) partial to his siblings.”), affirmed in part, reversed in part on other grounds 798 A.2d 503 (Del. 2002). 83. Finally, the breach of the duty of impartiality is particularly serious because of the permanence of the exclusion of the other beneficiaries from the benefits of directorship and employment at the Ranch. These are benefits that the Trustee has enjoyed for virtually his entire adult life. They are also benefits that were previously available to and enjoyed by the beneficiaries. Now the Trustee has declared he can keep them for life, but the beneficiaries can never have them. 84. The Court should exercise its equitable power to void the Shareholder Agreement and/or direct the Trustee to revoke it. E. The Shareholder Agreement Should Be Voided Because It Violates Contract Law and Corporations Law 85. The Shareholder Agreement should also be voided because it violates the statute on shareholder agreements, as well as basic contract law principles. A Trustee cannot act in a matter that is unlawful or contrary to public policy, even if the trust agreement purports to require it. Restatement (Third) of Trusts § 72. 86. Here the Shareholder Agreement goes beyond the bounds of what the statute authorizes, and indeed specifically contradicts it. The statute provides that “An agreement authorized by this section shall be…subject to amendment only by all persons who are shareholders at the time of the amendment, unless the agreement provides otherwise.” § 414-163(b)(2) (emphasis added). In other words, shareholders can always unanimously take back control of their own company. Moreover, the idea that a shareholder agreement can permanently delegate all selection of directors of the company to non-shareholders is so fundamentally contrary to corporate practice, that if the statute allowed that it would have
  42. 42. 1013958v3 11335-1 36 said so specifically. The Trustee may argue that the language “unless the agreement provides otherwise” means that he can eliminate the statute’s requirement that the agreement can be amended with unanimous shareholder consent. But that language is not meant to provide an exception to the requirement that shareholders can amend the agreement, it means only that the shareholder agreement can dictate that amendments do not have to be unanimous. To read it otherwise would not make any sense, since the statute is obviously meant to impose a requirement that shareholders can amend the agreement. Indeed, the very first phrase, and its language that agreements under the section “shall be” shows that the section is intended to impose requirements on shareholder agreements, including amendment by the shareholders. The Agreement should be voided as it violates the statute’s requirement that shareholder agreements be amendable by consent of the shareholders. 87. Prohibiting the Shareholder Agreement from being amended by the shareholders also violates fundamental tenants of contract law. Agreements can always be rescinded with the consent of the parties. Restatement (Second) of Contracts § 283. The Agreement at issue is between the shareholders of the corporation. That is clear both from its title, and from the statute that purportedly authorizes the agreement, which states in its first sentence that it governs “an agreement among the shareholders of a corporation.” Put more simply, the agreement is a contract among shareholders. It would be simply ludicrous under contract law to provide that all the parties to the contract cannot revoke or amend it. But that is precisely what the agreement purports to do, by giving non-party directors the power to veto any amendment. Thus the Agreement should be voided because it is inconsistent with fundamental contract law.
  43. 43. 1013958v3 11335-1 37 V. THE TRUSTEE SHOULD BE REMOVED FROM OFFICE DUE TO BREACH OF TRUST 88. The Trustee’s breaches of trust associated with the Shareholder Agreement and his own admissions that he puts the Ranch’s perpetual, non-profitable operation above the interest of the beneficiaries are sufficiently serious, that the Court should remove him as Trustee. In addition to his breach of impartiality with the Shareholder Agreement, he has also breached the duty by providing himself and favored beneficiaries special benefits not enjoyed by Ms. Giles and Dr. Richards. These breaches also justify removal. 89. A trustee can be removed “for cause by a proper court.” Restatement (Third) of Trusts § 37(b). This includes where “a trustee whose continuation in that role would be detrimental to the interests of the beneficiaries.” Id. cmt. d. Grounds for removal include “unwarranted preference to the interests of one or more beneficiaries.” Id. Moreover, although “not every breach of trust warrants removal,” “serious or repeated misconduct, even unconnected with the trust itself, may justify removal.” Id. See also In the Matter of the Trust Estate of George H. Holt, 33 Haw. 352, 357 (Haw. Terr. 1935) (“A court of equity may and will remove a trustee who has been guilty of some breach of trust or violation of duty.”) 90. There are both serious and repeated acts of misconduct that justify removing the Trustee. These include: 1) failure to make any succession plan for the Trust, despite being 88-years old, such that trust administration and Ranch operations are likely to be a mess ripe for further discord upon his death; 2) admitting repeatedly that his primary goal in administering the Trust is the perpetuation of the Ranch in its present state, despite his inability to operate it profitably; 3) putting his plan of perpetuating the Ranch, profitable or not, into action by encumbering the Ranch’s stock and substantially devaluing it through a Shareholder Agreement that purports to prohibit any future shareholders from ever changing it themselves, or from ever being able to remove his hand-picked directors, or even select
  44. 44. 1013958v3 11335-1 38 any other directors; 4) discriminating against all beneficiaries other than himself in the Shareholder Agreement by prohibiting anyone else from being officers, directors, or employees; 5) further breaching the duty of impartiality by unevenly distributing benefits of the Trust among the beneficiaries (including himself), and failing to account at all for his doling out of benefits arising from the Trust, such as an estate in the historic main Ranch house for his new wife after his death; 6) failing to provide an accounting for any years following 2015 despite being ordered by this Court to provide an accounting three years ago.14 (Ex. 14.) 91. Any one of these breaches is independently sufficient ground to remove the trustee. Cumulatively, they are overwhelming. The Trustee must be removed. 92. The breach of trust, and cavalier ignoring of key Trust provisions and the settlor’s intent, certainly justifies removal. For example, in Weldon discussed supra at Note 13, the court removed trustees that refused to implement precise provisions in the trust agreement. Weldon, 231 S.W.3d at 180. See also Chao v. Malkani, 452 F.3d 290, 295 (4th Cir. 2006) (trustee removal justified when the trustee misinterpreted the trust document in a way that deprived beneficiaries of benefits). Here, as described above, the Shareholder 14 Although the Order technically covered only the accounting provided in 2015, the implication is clear that, at the very least, the Trustee has a duty to provide such an annual accounting. Also, as noted above, on April 12, 2018 the Trustee finally provided an accounting for the year 2016. The timing was by no means coincidental. On April 4, 2018, the Petitioner’s counsel sent the Trustee’s counsel a letter specifically noting that Petitioners would be filing suit on April 12, 2018. (See Ex. 12.) Realizing the utter indefensibility of being two years behind in accounting, the Trustee’s counsel apparently scrambled to provide the 2016 accounting by the filing day. Once again, they are laden with caveats from the accountant, noting that the information was unverified, unaudited, and he relied entirely on the Trustee. An accounting for 2017 is still outstanding. Even more concerning, however, is that between 2015 and 2016 the assets of the Trust as stated in the accounting dropped from $41.5 million to $27.1 million, or by over a third! This shows that either the accountings provided are wildly inaccurate, or that the gross mismanagement of the Trustee is even worse than Petitioners ever imagined.
  45. 45. 1013958v3 11335-1 39 Agreement breached multiple explicit and implicit provisions of the Trust. The problem justifying removal, moreover, goes beyond just the Shareholder Agreement. The Trustee has admitted that it is his mission to preserve the Ranch in operation, notwithstanding the effect on the beneficiaries’ economic interests or AR’s intent that they take trust assets free and clear upon the Trustee’s death. In re Will of Crabtree, 449 Mass. 128, 136 (2007) (“where trustees are shown to act in disregard of the settlor’s intent, they breach their fiduciary duties in a manner that may justify their removal.”) 93. The partiality towards certain beneficiaries (mostly himself) and complete failure to account for the doling out of benefits to be consistent with the Trust income distri- bution also justifies removal. In the McNeil case, the Delaware Chancery court removed a trustee, and the Supreme Court affirmed, where the trustee favored some beneficiaries over others with respect to access to information and other benefits, even where the favoritism was conducted “perhaps unwittingly.” McNeil, 792 A.2d at 192, 211-213, 221, affirmed in part, reversed in part on other grounds 798 A.2d at 513 (affirming removal of trustee). Trustees can also certainly be removed for self-dealing, where like here one of the bene- ficiaries is the trustee and he is favoring is himself. In re Estate of Rutter, 633 N.W.2d 740, 750-51 (Iowa 2001) (“the trial court abused its discretion in failing to remove the executor. The executor, in breach of his duty of impartiality, clearly handled the estate in a manner that favored some beneficiaries over others” including to his “personal advantage”); In re Estate of Stuchlik, 289 Neb. 673, 679-80, 690-91 (Neb. 2014). 94. The failure to provide a regular accounting, particularly after the Court ordered it, also justifies removal. On April 14, 2015, after Dr. Richards had to sue to get one, this Court finally granted his request for an accounting and held that a Rule 26 accounting the Trust had provided during the litigation was sufficient. This order set an
  46. 46. 1013958v3 11335-1 40 extraordinarily low bar, and gives the beneficiaries such miniscule information that they have little to no insight into the operation of the main Trust asset, the Ranch. Despite the minimal amount of information ordered provided, the Trustee has virtually thumbed his nose at the accounting requirement anyway. The last accounting sent was fourteen months ago. (See Ex. 10.). It was uncertified and unaudited, and the accountant signing it noted that he relied solely on information provided by the Trustee. The accounting was for the year ended 2015. The Trustee fully admits in the petition he filed on April 6, 2018 that he is two years past due on even this most basic accounting. (Ex. 13 ¶ 14.) The accounting also seems designed to hide operational losses of Trusts assets. (See supra ¶ 38.) 95. As the Restatement and case law recognize, this refusal to account, particularly after prior litigation and a court order, is grounds for removal. Restatement (Third) of Trusts § 37, cmt. e. Riegler v. Riegler, 262 Ark. 70, 78 (1977) (removing trustee who “refused to account to the beneficiaries for a long time after ordered to do so by the court”). Moreover, given that there has been prior litigation over the accounting issue, and the Trustee has access to legal and accounting advisors, it is hard to explain the failure to account except hostility toward the Petitioners and the Trustee’s desire to keep them in the dark as much as possible so he can further his own scheme for the Ranch. VI. THE TRUSTEE SHOULD BE REMOVED FROM OFFICE DUE TO HIS PATTERN OF HOSTILITY TO THE BENEFICIARIES OF THE TRUST 96. The Trustee’s animosity toward beneficiaries Ms. Giles and Dr. Richards is an independent grounds for removal of the Trustee. Indeed, although this hostility is caused by the unreasonable acts of the Trustee, the law does not even require it to be the Trustee’s fault to justify removal. 97. The Restatement provides that “a serious breakdown of communications between beneficiaries and a trustee may justify removal, particularly if the trustee is respon-
  47. 47. 1013958v3 11335-1 41 sible for the breakdown or it appears to be incurable.” Restatement (Third) of Trusts § 37 cmt. (e)(1) (emphasis added). 98. Here it would be an understatement that there is “a serious breakdown of communications” between Ms. Giles, Dr. Richards, and the Trustee. Dr. Richards and the Trustee have been almost completely estranged for five years. Ms. Giles has only a marginally better relationship. The only communication about the Trust is the very high level, unverified and unaudited financial information that the Trustee only provided after Dr. Richards sued for it, and which is two years past due. There is no question that the Trustee holds the prior lawsuit against Dr. Richards and Ms. Giles: he admitted so much to Ms. Giles recently on one of the few occasions they have spoken in the last several years. The breakdown in communication also, regrettably, appears incurable, at the very least while the Trustee continues to hold that office. 99. A large number of courts have sanctioned removal of trustees where there is a hostile relationship between them and beneficiaries. As the Supreme Court of Nebraska has noted, “A cause for removal of a trustee is appropriate for the best interests of the trust estate where hostile relations exist between a trustee and beneficiaries of such a nature as to interfere with proper execution of the trust, particularly where it appears that the trustee's personal interests conflict with, or are antagonistic to, his or her duties as trustee under the terms of the trust.” In re Conservatorship of Abbott, 295 Neb. 510, 527 (2017). That statement of the law describes the present situation perfectly. Not only is the Trustee personally hostile to Ms. Giles and Dr. Richards, his personal interest in keeping the Ranch going at all costs is in conflict the with beneficiaries and antagonistic to the terms of the trust. See also Restatement (Third) of Trusts § 79 cmt. b (“Impartiality does mean that a trustee’s treatment of beneficiaries or conduct in administering a trust is not to be influenced
  48. 48. 1013958v3 11335-1 42 by the trustee’s personal favoritism or animosity toward individual beneficiaries, even if the latter results from antagonism that sometimes arises in the course of administration.”) 100. Other courts, including Hawai`i courts, have removed trustees where there were irreparable hostile relations between them and beneficiaries. Hartmann v. Bertelmann, 39 Haw. 619, 624 (Haw. Terr. 1952) (affirming removal of trustee where “the evidence showed there was serious dissention between the trustee and some of the beneficiaries” even though there was nothing in the record to reflect a breach of trust or lack of integrity on the part of the trustee); Shear v. Gabovitch, 43 Mass. App. Ct. 650, 688 (1997) (removing trustee due to hostility and noting “hostility can be a ground for removal, even where the trustee is without fault.”). 101. There are now three separate litigations filed in probate court in the last four years regarding the Trust. Two filed by Petitioners, one filed by the Trustee. The hostility between the Trustee and the Petitioners is undeniable. If the Court does not remove the Trustee, these problems are going to go on for a long time, probably with even more lawsuits, and interfere with the operation of the Trust. Indeed, the Massachusetts Court of Appeal described a similar situation (though with far less trustee misconduct) in a case affirming the removal of a trustee. Where the duty of a trustee is so delicate, where the hostility has arisen since the trust was created, and is attributable in part to the fault of the trustee, where the existence of the hostility would naturally pervert his feelings and judgment, it is competent for a justice to remove a trustee without further proof of misconduct, upon the ground that the removal appears essential to the interests of the beneficiary. That is the situation here. A trustee with almost plenary discretion over all distributions to a beneficiary cannot reasonably be expected to exercise his power with desirable perspective and detachment when his motives and integrity are constantly impugned by the beneficiary and the parties have been mired for years in a draining legal equivalent of total war. Prudence called for a change of trustees.

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