Wednesday, August 9, 2017
C.A. Orders New Trustees of Herbalife Founder’s Fortune
Says Provision Relating to Replacement of Trustees ‘Unable’ to Serve by Specified Persons Extends to Substituting Those Persons Where Trustees Are Judicially Ousted
By a MetNews Staff Writer
The Court of Appeal for this district has reversed an order that an investment company oversee a trust that had $300 million in assets when the trustor and initial sole trustee, Herbalife founder Mark Hughes, died in 2000.
Div. Six on Monday declared that Los Angeles Superior Court Judge Lesley C. Green erred in deviating from Hughes’s explicit instructions as to which individuals would fill in for any of the three original successor trustees should they become “unable” to serve.
There have been numerous lawsuits, through the years, in connection with the Mark Hughes Family Trust, spawning several appeals. Another opinion relating to the trust was also filed Monday, that one dealing with Green’s recusal of a law firm.
In the case involving the selection of a new trustee or trustees, Green had appointed Fiduciary Trust International after all three successor trustees upon Hughes’s death—Hughes’s longtime attorney Conrad Lee Klein, Herbalife executive Christopher Pair, and the trustor’s father, Jack Reynolds—were ousted by Los Angeles Superior Court Judge Mitchell L. Beckloff for mismanagement.
Green chose Fidelity at the request of Alexander Hughes, son of the trustor and the sole beneficiary. The judge held that the word “unable” does not include an inability to serve based on a judicial ouster.
Tangeman Rejects Interpretation
Justice Martin J. Tangeman of Div. Six differed with her interpretation. He wrote, in an unpublished opinion:
“If the meaning of a word is unmistakable, the intention which is expressed thereby must govern….Klein, Pair, and Reynolds are unable to serve as trustees because a court has ordered them not to do so.”
He said that ¶3.2.1 of the trust instrument comes into play. It says that successor trustees, next in line to Klein, Pair and Reynolds, are to be “(1) Michael Rosen; (2) Samantha Faulkner; or (3) Dale Sefarian.”
The instrument adds:
“It is Trustor’s preference for there to be three Co-Trustees, but if only two of the individuals named above shall be able and willing to serve, they shall serve as Co-Trustees.”
Tangeman noted that in light of Rosen declining to serve as a trustee, “[o]nly two of the individuals named by Hughes are able or willing to serve.” He declared:
“Paragraph 3.2.1 unambiguously provides that they shall serve as co-trustees.”
They are to receive fees, under the trust instrument, of “no greater than one-half (1/2) of the fee then chargeable by corporate trustees” in Los Angeles.
In the trial court, Mark Hughes’s confidante Faulkner and financial advisor Sefarian opposed the petition to name Fidelity trustee, and were the appellants. Their attorneys on appeal were Roshan Wick and Benazeer Roshan of Augustine, Seymour & Roshan for Faulkner and Karin D. Vogel, Aaron J. Malo, Sean P. O’Connor and Randolph Godshall of Sheppard Mullin for Sefarian.
Eric V. Rowen, Scott D. Bertzyk, Lisa C. McCurdy and Matthew R. Gershman of Greenberg Traurig represented respondent Alexander Hughes.
The case is Faulkner v. Hughes, B268680.
Alexander Hughes was 9 when his father died, at age 44, from the combined effects of alcohol and an anti-depressant. Under the trust, he was to start receiving, annually, one-third of the trust’s yearly income, amounting to about $1 million, (plus $35 million from a separate account) when he turned 25; is to get about $2 million a year when he reaches 30; and will have the remainder at 35.
On March 18, 2013, Beckloff removed Klein, Pair and Reynolds as trustees. Among his findings was that that their no-cash sale of Tower Grove, a 157-acre parcel in the Santa Monica Mountains, to one Charles Dickens, an uneducated man of little means who went into bankruptcy constituted “a gross breach of trust” that “borders on recklessness” and “resulted in significant damage to the Trust.”
An appeal was filed in this district but was shifted by the Supreme Court on June 19, 2013, to the San Francisco-based First District Court of Appeal. Conrad Klein’s wife is Joan Dempsey Klein, then-presiding justice of this district’s Div. Three (now retired).
The First District’s Div. Three affirmed, in a March 30, 2015 opinion by Justice Martin J. Jenkins, who said:
“Having reviewed the relevant record, we conclude there is indeed substantial evidence to support the findings relied upon by the trial court to suspend and remove appellants based on their conduct in connection with the Tower Grove sale. In short, the trial court appropriately identified evidence of a multitude of acts or failures to act committed by appellants in connection with the Tower Grove sale that, viewed collectively, met the legal standard for removal.”
The ousted trustees argued that Alexander Hughes was estopped from complaining of the decision to make the sale because his mother, Suzan Hughes, (former wife of the trustor), had been his guardian at the time of the sale and consented to it. Jenkins responded:
“[E]ven if Suzan had consented to the Tower Grove sale, the fact remains that much of the conduct underlying the challenged order arose after the property sale was finalized when, for example, appellants took no action in response to Klein’s imprudent decisions to forgive Dickens’ multiple violations of the sale terms and to continue to extend him credit despite his obvious inability to repay.”
That decision, in Hughes v. Klein, A138983, was also not certified for publication.
Also handed down Monday was an opinion, not certified for publication, in Faulkner v. Klein, B265893. There, this district’s Div. Six reversed Green’s order disqualifying the law firm of Miller Barondess, LLP from representing Faulkner in her role as a trustee.
Green acted on the motion of Klein and Reynolds. Three of the members of Miller Barondess, while attorneys for other firms, had represented them, they pointed out, alleging a conflict.
The attorneys are Louis R. “Skip” Miller, formerly of Christensen Miller LLP; Gene Williams, an erstwhile member of Browne Woods George LLP; and Scott Street, who worked at Akin Gump Strauss Hauer & Feld LLP.
Recusal was unnecessary, Tangeman said, because the lawyers had represented the trust, not Klein and Reynolds, individually. He wrote:
“A person seeking disqualification must demonstrate they [sic] had an attorney-client relationship with the targeted attorney…or some other relationship imposing a duty of confidentiality….Klein and Reynolds rely on attorney-client privilege for standing. When a trustee seeks advice on trust administration, the client is the office of the trustee, not the individual trustee….And when there is a change in trustees, the power to assert the attorney-client privilege passes with the office from the predecessor to the successor trustee….The current trustee is thus the present holder of the privilege with respect to any confidential communications between the former trustees and Miller, Williams, or Street that arose from their representation of the office of the trust.”
No Personal Representation
The jurist went on to say:
“…Klein and Reynolds show counsel performed some work that related to removal, accounting objections, and matters for which they may be subject to surcharges, but they offer no evidence they retained Miller, Williams, or Street in their personal capacities for the purpose of protecting against personal liability. No lawyer declares they represented Klein or Reynolds in their personal capacities, and there are no retainer agreements or billing records to support such an inference. Williams and Street each declare they worked for the office of the trust and did not represent Klein or Reynolds in their personal capacities. Miller declares he never worked for the trustees directly in any capacity. His collection letter proves he had contact with the former trustees because he refers to a “conversation” with Klein. But it does not support an inference that the firm represented Klein and Reynolds in their personal capacities. It is adversarial, and he wrote it five months after the firm’s representation ended.”
Tangeman said reversal is required because Klein and Reynolds failed to show that they had standing to contest the representation of Faulkner by the law firm.
In that case, Miller, along with Mira Hashmall and Christopher D. Beatty, also of Miller Barondess, represented Faulkner. Rex S. Heinke, Edward A. Woods and Oleg Stolyar of Akin Gump Strauss Hauer & Feld argued for Klein and Reynolds.
Alexander Hughes was also a respondent, and Eric V. Rowen, Scott D. Bertzyk, Lisa A. McCurdy and Matthew R. Gershman of Greenberg Traurig were his lawyers on appeal.
Tangeman signaled that further opinions relating to the trust are likely. He said that while Klein, Pair, and Reynolds were removed as trustees in 2013, “[l]itigation about their accountings and possible surcharge liability continues.”
Copyright 2017, Metropolitan News Company