The estate's lawyer slamsBy Rick Daysog
Judge Chang's ruling barring them
from IRS dealings for
conflicts of interest
A wake-up call. Bizarre. Irresponsible.
Those were some of the words used to describe probate Judge Kevin Chang's decision to disqualify all five trustees from matters involving the Internal Revenue Service's audit of the multibillion-dollar trust.
In a written ruling yesterday, Chang said he will appoint a panel of five special administrators to address issues raised by the exhaustive, four-year IRS audit. The ruling does not remove board members from other duties that they perform at the trust and the estate-run Kamehameha Schools.
"We hope that this would be a wake-up call for the trustees to do the right thing for the children," Attorney General Margery Bronster said through a spokeswoman. "But it is clear now that they have no intention of changing their conduct."
According to Chang, all five trustees of the Bishop Estate have actual, adverse and material conflicts of interest in matters involving the IRS audit.
He said the IRS's initial findings, known as notices of proposed adjustments, involve the issue of unreasonable or excessive compensation for trustees.
Chang also cited court papers by trustee Oswald Stender stating that the IRS expects to issue preliminary findings later this month to one or more trustees relating to the new federal intermediate sanctions law.
That law bars trustees of a charitable organization from receiving inappropriate benefits at the expense of the trust.
If a trustee is found to have received improper benefits, he or she could face substantial fines by the IRS.
Stender and fellow trustee Gerard Jervis -- who have petitioned the probate court to disqualify trustees from the pending IRS audit -- said the ruling supports their conclusion that trustees are in conflict.
"There is a conflict of interest because the trustees actually find themselves in situations that are potentially adverse to the estate," Jervis said.
The ruling represents a major setback for the estate's majority board members -- Richard "Dickie" Wong, Henry Peters and Lokelani Lindsey -- who argued that they have no conflict and should not delegate any of their authority to an outside panel.
William McCorriston, attorney for the estate, called Chang's decision "bizarre," saying it goes against 150 years of established trust law and represents another step in the process of dismantling the Bishop Estate.
McCorriston cited a recent court declaration by Jerry Cohen, an Atlanta tax attorney and former IRS chief counsel, who said trustees would not have a conflict of interest at this stage of the audit. According to Cohen, the preliminary findings of an IRS audit routinely will target compensation as a negotiating ploy.
McCorriston said the trustees are studying their legal options, which include the filing of appeals and writs of mandamus with the state Supreme Court and the federal courts.
He noted it would be difficult to appoint a panel of five administrators to meet IRS deadlines.
"I think somebody looking at this critically could very well conclude that it was highly irresponsible for trustees or a court to allow this to happen," said McCorriston, who noted that the trust's tax-exempt status could be a target of the IRS at the early stage.
"This whole thing confirms my view that in Hawaii, there are two systems of justice: one for everyone else and one for the trustees of the Bishop Estate."
The effect of Chang's ruling on various removal actions involving the Bishop Estate trustees is unclear. The attorney general's office is seeking the permanent removal of Peters, Wong and Lindsey, alleging that they engaged in a widespread pattern of self-dealing and mismanagement.
Bronster also is seeking the temporary removal of all but Stender on the five-member board.
Local trust law expert Randall Roth said the decision suggests a need for new blood in the Bishop Estate's board room.
If trustees cannot deal with what could be the most important question affecting the estate's future, they probably should not serve as trustees, said Roth, co-author of the 1997 "Broken Trust" article that criticized trustees' management of the estate.
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