A look at the issues
Bronster: Remove three trustees now
Complete text: A.G. Bronster's response to the Master's Report
Complete text: Bishop Estate trustees' response to the Master's Report
Bishop Estate Archive
MasterCourt-monitored strategic planning should be initiated by the estate
Attorney General's response1. The trustees have failed to plan for the expansion of the educational mission consistent with increased revenues as required by the Will and by court orders.
2. This failure to carry out the basic mission of the trust, in contravention of the Will and numerous court orders, is a clear violation of the trustees' duty of care and a clear detriment to the Estate and its beneficiaries. For this reason, the Master has taken the extraordinary step of recommending that the court intervene in the administration of the Estate to initiate, oversee, and complete the strategic plan for the Estate. In essence, the Master is recommending that the Court do the work that the trustees have failed to do. Master's Consolidated Report, pp. 83-99.
3. The failure to provide a strategic plan, that would carry out the educational mission of the trust and provide benefits to the beneficiaries, constitutes a fundamental breach of trust requiring Court action.
Bishop Estate trustees' responseThe incumbent Master's conclusion that there is no satisfactory plan for the expenditure of the accumulated income derives from his dissatisfaction with the Trustees' strategic planning process and the fact that the Ten Year Plans do not refer specifically to accumulated income. Strategic planning is discussed below in Part VIII and the Trustees' agreement to segregate income and corpus and to report accumulated income separately will result in changes to the format of the Ten Year Plans. ...The Trustees previously agreed that they will complete the ongoing strategic planning process initiated by them in 1993. (December 19 Stipulation at 8-9). In so doing, they will implement the foregoing recommendations concerning the strategic planning process, while incorporating as much of their past strategic planning efforts as may be useful and appropriate. The Trustees intend that the details of their schedule and procedures for future strategic planning will be set forth in the stipulated agreements expected to filed herein at or before hearing.
MasterFuture reclassifications of accumulated income should require court approval
Attorney General's response1. The trustees have accumulated approximately $350 million in violation of the Will and numerous court orders to the detriment of the educational mission and the beneficiaries. Collins v. Hodgson, 36 Haw. 334, 339 (1943); Order Approving 99th Annual Report, filed October 8, 1985; Order Approving 103rd Annual Report, filed October 16, 1990; and Order Approving the 107th and 108th Annual Reports, filed February 9, 1996. In addition, the trustees have needlessly reserved for construction millions of dollars of income which the Will and HRS ß 557-13 required be spent on education. Master's Consolidated Report, pp. 27-44.
2. The trustees have concealed from the Court and the beneficiaries the accumulation of income since the 103rd Annual Account (FY 1988). The failure to disclose such important information is a clear violation of the trustees' duty to account as required by the Will, court orders, and HRS ßß 554-4 and 560:7-303.
3. It is no excuse that part of this concealment began before the appointment of several trustees. Upon appointment, every trustee has the affirmative duty to investigate the trust and its accounts to insure that there is no wrongdoing or breach. III Fratcher, Scott on Trusts ßß 223 and 223.1 (4th ed. rev. 1988).
4. The accumulation of income in violation of the Will and court orders, and the failure to account for this breach, constitute fundamental breaches of trust requiring Court action.
Bishop Estate trustees' responsePart VII of the Master's Consolidated Report concerns the issue of accumulated income and contains six of the Master's nineteen recommendations. The degree of the Master's apparent concern with accumulated income is disproportionate to the magnitude of the actual issue. The accumulated income exists unimpaired and is being held solely for the benefit of the Kamehameha Schools. There has been no misappropriation, misapplication or misuse of funds. The question is primarily one of documentation and will be resolved promptly by the preparation of special purpose financial statements for the use of the Court and its masters. This is not to say that a separate record of accumulated income cannot be maintained nor to dispute that there may have been, in 1970, some agreed arrangement concerning the matter. But the incumbent Master's characterization of the Trustees' 1988 action as a 'unilateral alteration' suggests a degree of bad faith or wrongful intention that was simply not present. Eighteen years later, personnel had changed and memories had faded (including, apparently, the Attorney General's). A change in format was recommended to the Trustees and approved by them. The Estate's financial report now was more consistent with the format familiar to its lenders and business partners.
Duty of care
MasterThe estate should strengthen its due diligence and investment monitoring policies, practices and procedure
Attorney General's response1. The trustees have failed to carry out their investment responsibilities as a prudent investor would. This failure is widespread and occurs at all levels of governance, oversight, regulation, management and implementation. The Master has concluded that there are many deficiencies in investment return analysis and measures, diversification, liquidity, planning, due diligence, documentation of investments, monitoring, accounting for costs and expenses of investment and other areas. The Arthur Andersen report analyzes the deficiencies of many specific transactions and forms the basis for the Master's conclusions. Master's Consolidated Report, passim.
2. The Hamakua land purchase (described on pages 81-82 of the Master's Consolidated Report) is just one of many examples that illustrates how the trustees have breached their duty of care by failing to conduct adequate due diligence, failing to follow recommendations of staff and expert consultants, and failing to analyze and assess risk and diversification requirements. In 1994, the trustees paid $21 million for 30,000 acres of Hamakua Sugar Company land with borrowed money. The trustees bought land that does not benefit the Estate or its beneficiaries. They did so despite contrary recommendations of expert consultants who advised diversification from land to liquid investments. In buying the land, the trustees paid more than the staff recommended. This investment loses more than $1 million a year.
Bishop Estate trustees' responseThe Master's comments concerning the Estate's acquisition of approximately 30,000 acres of land on the Hamakua Coast of Hawaii do not present a complete picture of that transaction. C.R. at 81-82. While the Trustees have conceded that documentation practices can be improved upon, the Trustees submit that the purchase of the Hamakua properties is an example of their prudent and responsive administration of the Estate. ... The Trustees concede that the Estate's records with respect to due diligence are uneven. In his First Report, the Master recommended that asset lists with summary descriptions and other relevant facts should be assembled. (First Report at 62) The Trustees accepted and acted upon the recommendation. Thirteen- point investment summaries were completed and financial status reports were compiled. Arthur Andersen reviewed these and other records and has made specific recommendations to strengthen the Estate's due diligence and investment monitoring processes. The Trustees accept the consultant's recommendations concerning these matters and will implement them.
MasterLead trustee system should be abolished and a new CEO-based system should be instituted
Attorney General's response1. The trustees have failed to carry out their governance and regulatory duties as required by the Will and by law to the detriment of the Estate, the Kamehameha Schools, and the beneficiaries. For this reason, the Master has taken the extraordinary step of recommending that the Court intervene in the administration of the Estate, abolish the "lead trustee" system, and implement a CEO-based system of management. In essence, the Master is requesting that the Court carry out the duties that the trustees have failed to perform because of the harm to the Estate, the Kamehameha Schools and the beneficiaries. Master's Consolidated Report, pp. 83-111.
Bishop Estate trustees' responseThe so-called "Lead Trustee" system has already been terminated. The Trustees have stated that Trustee Lokelani Lindsey relinquished her role as the so-called "Lead Trustee" for the Education Group in August, 1997. Trustees' Response to Final report Of Fact Finder Filed Under Seal On December 4,1997, filed herein on December 10, 1997, at 7. "Trustee Lindsey has formally withdrawn as Lead Trustee far the Education Group." Id. at 8. On August 3, 1998, Randall 0. Chang became the new General Manager of the Estate's Asset Management Group and Trustee Henry Peters withdrew as the Interim General Manager of that Group. Other Trustees also have already given up any direct supervision of specific groups or departments of the Estate. The Trustees have undertaken to complete the strategic planning process.
Duty of loyalty
MasterStricter conflict-of-interest policies and procedures should be adopted.
Attorney General's response1. The most fundamental duty of a trustee is the duty of loyalty to the trust and its beneficiaries. 11A Fratcher, Scott on Trusts ß 170 (4th ed. rev. 1988). This duty is so important that a trustee cannot exercise a trust power without court authorization where there is a conflict between a trustee's fiduciary duty and his individual interest. HRS ß 554A-5(b) (1993). The Master has found that the trustees have adopted inadequate conflict of interest policies and procedures, and have ignored their duty to address conflicts and bring them to the attention of the Court.
Bishop Estate trustees' responseThe Trustees accept the Master's recommendation that stricter conflicts policies should be adopted and they will do so. They note, however, that the three examples narrated by the Master (McKenzie Methane, Mid-Ocean Limited, and RTJ Golf Course) all arose in prior years and that they have adopted a conflicts policy and a fiduciary handbook since then. Specifically, the McKenzie Methane investments were made in FY 1989; the Mid-Ocean investment in FY 1993; and RTJ in FY 1995. The Trustees' Conflicts of Interest Policy was adopted on August 22,1996 and is incorporated in a Trust Administration And Fiduciary Guidelines Handbook containing numerous fiduciary policies, which was approved on August 12, 1997.
MasterTrustees should show why they should not be charged for expenses incurred in opposing the intermediate sanctions legislation
Attorney General's responseWith respect to lobbying, the trustees have breached their duty of loyalty by:
a. Lobbying against the intermediate sanctions law (which penalizes individual trustees for receiving excess compensation, rather than revoking the entity's tax exempt status);
b. Lobbying against legislative history which states that State legislation authorizing compensation "would not be determinative of the reasonableness of compensation paid." Committee Report on Public Law 104-168 (Taxpayer Bill of Rights 2 (1996)); and
c. Lobbying for legislative history which would have created a presumption of reasonableness for compensation approved by the Probate Court. Master's Consolidated Report, p. 137.
The trustees used Estate funds to lobby against a law that punishes trustees for taking excessive compensation at the expense of the trust and its beneficiaries. The trustees' actions conflicted with the best interests of the trust and the beneficiaries and was unauthorized under HRS 554A-5 (b). This constitutes a fundamental breach of trust requiring Court action.
Bishop Estate trustees' responseThe Trustees believe that when the Master has had an opportunity to review the relevant materials and the actual efforts of the Estate in connection with Intermediate Sanctions, he will conclude that his recommendation of surcharge is mistaken and should be withdrawn. Accordingly, they ask the Court to defer action as to Recommendation No.17, pending the Master's completion of his review. If the Master then remains dissatisfied, the Trustees will promptly submit a petition placing the matter before the Court for its determination. In the meantime, the Trustees make the following points: Tax exempt entities, including the Estate, are entitled by law to conduct a limited amount of lobbying activity. The Estate's lobbying activity was within allowable limits.
MasterA plan for determining reasaonable trustee compensation should be prepared
Attorney General's responseThe trustees have taken approximately $500,000 in commissions on final distributions of capital ("FDOC") in violation of their agreement with the Attorney General and the beneficiaries. The trustees stated in their methodology for computation of commissions that they took commissions on FDOC from 8/93 to 7/94. See Exhibit "L" to the Master's Consolidated Report. In 1966, the trustees formalized their long standing practice of waiving commissions on Final Distributions Of Capital by agreeing with the Attorney General to waive all future commissions on FDOC. "[T]he Trustees have agreed that there will not be commissions paid on money borrowed or paid for construction of Kamehameha Schools facilities." Report of the Attorney General on the 79th Annual Account filed herein on July 15, 1966. Expenditures for capital improvements or equipment of a permanent or long lasting nature are FDOC. Even the trustees believed that taking commissions on money spent on the construction of school facilities was unreasonable. For 27 years, from 1966 to 7/93, the trustees kept their agreement. From 8/93 to 7/94, the trustees breached their agreement with the Attorney General and the beneficiaries and took commissions on FDOC. It appears that the trustees retroactively took commissions on FDOC for the sole purpose of maintaining the compensation levels they had become accustomed to. During this period, the Estate suffered major financial losses which substantially decreased trustees' commissions on income. By taking excessive compensation, by using Estate assets for private benefit, and by continuing to ignore their conflicts with the trust, the trustees have jeopardized the Estate's tax-exempt status and its ability to fulfill its educational mission. This constitute a fundamental brach of trust requiring Court action.
Bishop Estate trustees' responseTrustees were added to the list of persons entitled to statutory commissions in 1928. 1927 Haw. Sess. L. ch. 183. There were at least six subsequent amendments to the law applicable to charitable trustees. During the period of the three accounts under review, the Trustees' compensation was based upon a commission schedule established by H.R.S. ßß607-1 8 and 20. The Master correctly notes that "the statutory formula has consistently yielded a maximum commission substantially in excess of what the Trustees actually receive." In other words, the Trustees have not taken the full commission allowed them by the statute. During the accounting period, the Trustees have accepted less than 55% of the commission due them under the schedule. C.R. at 116. No commissions were taken on land sales and commissions were waived as to other capital receipts and disbursements as well. Act 310 of the 1998 State Legislature amended the law applicable to compensation of charitable trustees. It abandoned the practice of 140 years whereby trustees receive a commission based upon their performance, in favor of a general statement that "the compensation of the trustees shall be limited to an amount that is reasonable under the circumstances." This provision becomes effective January 1, 1999. This law still recognizes that the Trustees are entitled to compensation. The Master acknowledges that the Estate's Trustees "should be highly compensated individuals" in order to ensure that capable and qualified persons are fully committed to the responsibilities of the trusteeship.
MasterTrusteesshould be ordered to adopt the financial statements and supplemental schedules proposed by Arthur Andersen L.L.P.
Attorney General's responseImplicit in the Master's numerous recommendations regarding financial and accounting reforms is the problem that Coopers and Lybrand has been the Estate's accountant for over 30 years. During this time, they have lapsed into accounting practices that are not up to their usual high standard. For example, their financial reports failed to call any attention to the accumulation of $350 million and the reclassification of this income to corpus. In his report on the 99th Annual Account filed on August 2, 1985, Master George Hong observed that this exceedingly long tenure called into question the independence of Coopers and Lybrand. The Arthur Andersen report on the financial and accounting deficiencies dramatically demonstrates the value of the normal business practice of changing accountants every three years. For these reasons, the Court should order the trustees to select an independent auditor every three years subject to approval by the Court and the Attorney General, as parens patriae.
Bishop Estate trustees' responseThe Master commends the Trustees for enabling the financial and management audit conducted by Arthur Andersen and acknowledges that the Trustees provided him with information required by the Minimum Guidelines, as amended, and by the December 19 Stipulation. C.R. at 6 & 7. These acknowledgements should lay to rest any question concerning the Trustees' willingness to cooperate with the Master and open the Estate's records to his review and inspection. Another amendment of the Guidelines is contemplated by the December 19 Stipulation. (December 19 Stipulation at 29) The Guidelines have proved unsatisfactory to everyone involved. Almost every master since their promulgation has requested amendments to them. As a result, the Guidelines have failed to provide either the Estate's staff or the masters with any certainty as to what constitutes appropriate initial production and acceptable formatting. As more fully shown in Part XIV of this Response, it is time to redesign the Guidelines rather than merely restate them.
Bronster: Remove three trustees now
Complete text: A.G. Bronster's response to the Master's Report
Complete text: Bishop Estate trustees' response to the Master's Report
Bishop Estate Archive
Key Developments in the
Bishop Estate Controversy
Highlights of the Bishop Estate controversy:
Aug. 9, 1997: Five prominent community leaders -- U.S. District Judge Samuel King; former Kamehameha Schools for Girls Principal Gladys Brandt; Msgr. Charles Kekumano, former chairman of the Queen Liliuokalani Trust; retired state Intermediate Court of Appeals Judge Walter Heen; and University of Hawaii law professor Randall Roth -- publish "Broken Trust" in the Honolulu Star-Bulletin. The article alleges mismanagement of trust assets and conflicts of interest by individual trustees and criticizes the trustee selection process by the state Supreme Court.
Aug. 12, 1997: Gov. Ben Cayetano orders Attorney General Margery Bronster to investigate Bishop Estate trustees.
Oct. 10, 1997: Trustees Oswald Stender and Gerard Jervis file a court petition alleging that the majority trustees -- Richard Wong, Henry Peters and Lokelani Lindsey -- kept them out of the information loop on key decisions. The majority trustees deny the charge.
Nov. 17, 1997: The estate's court-appointed master, Colbert Matsumoto, files a harsh 120-page critique of the estate's investment policies, saying the estate faces losses and loss reserves of up to $264.1 million. Matsumoto offers 21 recommendations to improve management and calls for the estate to discontinue its "lead trustee" management system, which gives a trustee responsibility for certain estate subject areas. The estate responds that it is in its best-ever financial shape.
Nov. 27, 1997: Five community leaders -- Gladys Brandt; former Punahou Schools headmaster Roderick McPhee; Winona Rubin, former director of the state Department of Human Services; educator Winona Beamer; and Isabella Abbott, University of Hawaii botany professor -- publish "Broken Trust II" in the Honolulu Star-Bulletin, alleging gross mismanagement of the schools by trustees and Lokelani Lindsey, the lead trustee for the estate's educational programs.
Dec. 5, 1997: In an about-face, Bishop Estate agrees to follow nearly all of master Matsumoto's recommendations and agrees to review its lead trustee system. It also agrees to conduct a financial and management audit of estate operations. It later hires the national accounting firm of Arthur Anderson to conduct the audit.
Dec. 5, 1997: Trustee Lindsey goes public with her report criticizing the test scores of Kamehameha Schools students. She also alleges unauthorized use of funds by schools President Michael Chun's wife, Bina Chun. Trustees Jervis and Stender criticize Lindsey, saying her report was inaccurate and caused harm to students.
Dec. 9, 1997: Lindsey steps down as lead trustee for the estate's educational programs.
Dec. 12, 1997: A state judge unseals court-appointed fact-finder Patrick Yim's report on the management of Kamehameha Schools. It alleges that Lindsey managed by "intimidation" and fostered "an environment of favoritism" at the campus. The report also alleges that trustees manipulated the admission process at the elementary school level, and calls for an audit of the operations of Kamehameha Schools. Lindsey denies the charges against her.
Dec. 20, 1997: The state Supreme Court removes itself from selecting Bishop Estate trustees, ending a century-old tradition.
Dec. 29, 1997: Jervis and Stender file court papers seeking Lindsey's removal from Bishop Estate's board, saying she breached her fiduciary duties and was unfit to serve. Lindsey denies the allegations and refuses to resign.
Feb. 18, 1998: The Kamehameha Schools Alumni Association votes 81-10 to support the petition by Jervis and Stender seeking Lindsey's removal.
March 12, 1998: In response to a petition by Bronster, the state Supreme Court recuses itself from holding hearings on Bishop Estate-related cases. Justices appoint five substitute judges to handle estate cases.
March 13, 1998: Kamehameha Schools faculty members vote 186-36 to form a union.
March 19, 1998: Summaries of an accreditation report on the Kamehameha Schools by the Western Association of Schools and Colleges appear in the local media. The WASC report generally praises teachers' efforts but faults trustees for a "perverse application of top-down decision-making." The WASC team gives Kamehameha Schools a three-year accreditation instead of the six sought. The school appeals the decision.
May 8, 1998: The state Legislature passes a bill to set com
pensation of Bishop Estate trustees at reasonable amounts to be set by a state judge. The bill is originally killed by the House, but then is revived due to public pressure. Cayetano signs the bill into law in July.
July 28, 1998: An audit of Kamehameha Schools management faults President Chun's leadership. The report also criticizes trustees for not seeking input from parents, alumni and teachers.
Aug. 7, 1998: Court-appointed master Matsumoto files a critical report on Bishop Estate's fiscal 1994-1996 operations. Among faults cited: subpar return on investments and the need to replace lead trustee system with a chief executive officer.
Aug. 8, 1998: Trustee Peters petitions Circuit Court to remove Bronster as legal guardian of KSBE, charging that her investigation into the trust is politically motivated.
Bishop Estate Archive