October 5, 2000 | Read Time: 9 minutes
By STEPHEN G. GREENE
An insurance company for Hawaii’s wealthiest charity would pay $25-million to settle a long-running legal battle between the attorney general and the charity’s former trustees,
FROM THE ARCHIVES:
1/15/1998: Trustees of Hawaii’s Wealthiest Charity Make Changes to Quell Criticism
10/8/1998: In Unusual Move, Hawaii Seeks to Remove Trustees of Embattled Bishop Estate
4/22/1999: Top Trustee Indicted at Big Hawaii Charity
12/16/1999: Bishop Estate to Pay IRS $9-Million but Retain Its Tax-Exempt Status
1/13/2000: Kamehameha Schools Faces $165-Million Tax Bill
under a proposal filed in probate court.
The insurer, which has already paid nearly $5-million of that sum in lawyers’ fees, would pay an additional $1.3-million to reimburse the state for its costs in bringing the legal action, plus several million more for other legal bills. The balance of some $14-million would go to the charity in question, the Kamehameha Schools.
State and school officials have hailed the agreement as a major milestone for the school, which educates children of native Hawaiian ancestry. Previously called the Bernice Pauahi Bishop Estate after the Hawaiian princess whose bequest created the institution in 1884, the trust now has more than $6-billion in assets. It is the state’s largest private landowner and one of its most powerful institutions.
“The settlement brings an end to a painful chapter in the history of the trust and will permit the trustees, the staff, the faculty, and the students of Kamehameha Schools to turn their complete and undivided attention to the primary purpose of the trust, which is the education of the beneficiaries,” said Earl I. Anzai, the attorney general.
Many other Hawaiians say they’ll be glad to see an end to the acrimonious and costly dispute, which had thrown the school into increasing turmoil from the spring of 1997 until a probate judge removed the five former trustees from their posts last year. The Internal Revenue Service had threatened to revoke the school’s tax exemption unless the institution ousted those trustees and made other structural and management changes (The Chronicle, May 20, 1999).
The former trustees have also expressed relief. “I’m glad the attorney general’s office agreed it was time to bring closure to it,” said Oswald K. Stender, who resigned as trustee last year. “The mission was to remove the trustees and start over — and now that’s been accomplished.”
But not everyone is pleased. Some critics say the settlement lets the former trustees off too lightly — and sends the wrong message about trustee accountability.
The state had contended that those trustees violated their fiduciary duties by awarding themselves excessive compensation — more than $1-million apiece in 1998 — and otherwise enriching themselves at the trust’s expense, as well as by mismanaging the trust’s investments and neglecting its educational affairs. The previous attorney general, Margery S. Bronster, had sought to surcharge the trustees for as much as $200-million for those alleged abuses.
Under the proposed global agreement, however, the state would settle for a small fraction of that amount — the $25-million limit of the charity’s liability policy with the Federal Insurance Company. The former trustees would admit no liability or misconduct. And although the agreement does state that an unspecified portion of the $14-million represents reimbursement of excessive compensation, the former trustees themselves would pay nothing.
“Clearly these trustees should have been held accountable for what they did, but they haven’t been,” declared Randall W. Roth, a professor at the University of Hawaii who has been a persistent critic of the former trustees. “It makes a mockery of our trust law and concept of fiduciary duties.”
Political Considerations
Political considerations continue to affect the charity’s affairs — including the settlement, Mr. Roth said. For decades, trustees of the Bishop Estate were selected by justices of Hawaii’s Supreme Court, who in turn were appointed by the governor. Over time, the lucrative trustee positions became political plums passed out by the state’s Democratic Party.
“Most of these trustees who are walking away without paying a penny in surcharges or taxes or fines or attorneys’ fees are people who are politically connected,” said Mr. Roth. “That’s probably the best explanation as to how they emerge unscathed after years of almost unbelievable abuses of their trust.”
Among the ousted trustees, for example, are a former president of the state Senate, a former speaker of its House of Representatives, a former state schools official, and a confidant of former governor John Waihee.
“The political pressure out here is to put all this behind us, to look to the future and to let bygones be bygones,” said Mr. Roth. “A whole lot of people in positions of power would rather sweep this under the rug and go on with their lives.”
But there is a cost in doing so, Mr. Roth said. “If this doesn’t cause people to be cynical about the attorney general’s and the probate court’s ability to monitor and to hold accountable the trustees of a charitable trust, I don’t know what would,” he said. The lesson many people are drawing, he added, is that “you can set a world record for abuses of trust and end up going scot-free.”
Ms. Bronster, who started the state’s investigation in 1997 when she was attorney general, also expressed concern about the proposed settlement.
“The effort was in part intended to make sure there was full and complete disclosure of everything the trustees had been doing,” she said — but the former trustees made every effort to conceal information and to hinder her investigation. “That made it so difficult to litigate.” Many details may remain hidden, she said, if the case never goes to trial.
The proposed settlement is contingent on approval by the probate judge, a court-appointed master, and the Internal Revenue Service. The I.R.S. signed its own closing agreement with the trust last year in which it received some $13-million in lieu of taxes and assumed an extraordinary degree of oversight over the trust’s affairs.
That agreement required the permanent removal from office of the former trustees, a reorganization of the institution’s management structure, and the installation of checks and balances intended to limit the trustees’ power and ensure their accountability to the I.R.S., the probate court, and the school’s beneficiaries.
Many observers have also expected the I.R.S. to seek additional relief from the former trustees for what it considered to be their excessive compensation, which had averaged more than $800,000 apiece over the past decade. So-called intermediate-sanctions legislation passed by Congress in 1996 permits the service to penalize trustees individually for enriching themselves at a charity’s expense, while allowing the charity itself to remain tax-exempt.
While still in office, the since-ousted trustees retained Washington lobbyists to fight passage of that legislation, just as they also fought attempts by Hawaii’s legislature to limit the fees paid to trust officials to what is “reasonable.”
“The law does allow — and actually requires — the I.R.S. to hold those individuals accountable for the damage they’ve caused to the organization,” said Ms. Bronster, who was Mr. Anzai’s predecessor as attorney general until Hawaii’s Senate refused to confirm her appointment to a new term. “You’re talking about people who worked very hard against the law because they thought it would come back and haunt them some day.”
The service has in fact sought such relief from at least one former trustee. During 1995 through 1999, Henry H. Peters received about $4-million in commissions. In a letter filed in Tax Court, the I.R.S. contends that Mr. Peters should have received no more than $158,000 a year — making his excess benefit $2.7-million for the period.
Federal law permits the I.R.S. to penalize people involved in excess-benefit transactions for 25 percent of the excessive amount initially, 200 percent if the person does not reimburse the charity in a timely fashion, and 10 percent in the case of an organization manager who approves such excess benefits. The service claims that Mr. Peters is subject to all those excise taxes and therefore owes the government $6.4-million.
For his part, Mr. Peters contends in his U.S.Tax Court petition that his compensation was appropriate in view of his full-time responsibilities, was sanctioned by state law and longstanding custom, and did not fall within the scope of the intermediate-sanctions law because the Treasury Secretary has not issued regulations detailing how the law should be implemented.
If the I.R.S. accepts the proposed settlement, it would be required to reach a mutually agreeable resolution of any alleged liability by the former trustees under the provisions of that law — presumably quashing any hope it may have of collecting money from the former trustees. If it rejects the settlement, the entire deal falls apart.
“Whether this person or that person is fully brought to justice or not is not the issue,” said Jan Dill, vice president of Na Pua a Ke Ali’i Pauahi, a group of Kamehameha alumni, students, parents, and other supporters who have been critical of the former trustees. “The issue is what is best for the children.” The financial and psychological costs of pursuing the legal case are not worth the benefits, he said.
A Major Change
On the central issue — removal of the former trustees — the service has already prevailed, say many observers. “The I.R.S. got its win on this one,” said Bruce R. Hopkins, a Kansas City lawyer who is an authority on nonprofit law. “It would have been cleaner to have had a trial and a court opinion, from a legal-development point of view. But I think the ends of justice were served.”
And Kamehameha Schools is on the threshold of another big change: Probate Judge Kevin Chang will shortly select five new permanent trustees who will succeed the interim trustees he appointed in May 1999. Change at the top will not automatically solve the trust’s problems, observers believe, since many school employees appointed by the former trustees and still loyal to them remain in their jobs.
“What we need to do is to change the culture of self-aggrandizement that has permeated the estate for the past 10 or 12 years,” said Mr. Dill, of Na Pua.
Added Ms. Bronster: “The problems of the Bishop Estate did not occur overnight, and I don’t think they’ll be solved overnight either.”
