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In re Thomas H. Gentry Revocable Trust

Supreme Court of Hawaii

June 28, 2016

In the Matter of the THOMAS H. GENTRY REVOCABLE TRUST

         CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-13-0000428; TRUST NO. 02-1-0030)

          RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.

          OPINION

          RECKTENWALD, C.J.

         The present appeal arises from a dispute over the administration of two trusts established by the late Thomas H. Gentry (THG): the THG Revocable Trust (Revocable Trust) and the Marital Trust. Petitioner-Appellant Kiana E. Gentry (Kiana), a beneficiary of both trusts and the wife of the late Mr. Gentry, sought appellate review of a judgment entered by the Circuit Court of the First Circuit (probate court).[1] However, the Intermediate Court of Appeals (ICA) dismissed that appeal, and Kiana now seeks review of that dismissal.

         After THG's death in 1998, the parties (the Beneficiaries and the Co-Trustees) disputed how the trust assets should be distributed. The largest remaining trust assets were THG's real estate companies (Gentry Companies). In December 2007, as a result of several disputes in Probate Court regarding the Co-Trustees' accounting and the proper distribution of trust assets, all of the parties entered into a settlement agreement (Settlement Agreement). One of the terms of the Settlement Agreement required the Co-Trustees to sell the remaining trust assets within thirty months of the date of the Settlement Agreement, with a possible eighteen-month extension, and to distribute the proceeds to the Beneficiaries. The Settlement Agreement did not provide for a course of action if the Co-Trustees were unable to sell all of the assets within that timeframe .

         The Co-Trustees sold most of the remaining trust assets, but due to the economic recession of 2008, claimed they were either unable to sell the remaining assets or unwilling because the market conditions would result in a sale of the assets far below their true values. Instead of selling, the Co-Trustees proposed distributing the remaining trust assets to the Beneficiaries and terminating the trusts. Some of the Beneficiaries supported this plan, but some opposed it.

         Kiana, THG's wife at the time of his death and a beneficiary of both the Revocable Trust and the Marital Trust, strongly opposed the Co-Trustees' distribution plan. Kiana filed a Petition to Enforce Settlement Agreement and Appoint Receiver (Petition to Enforce) in probate court, which would have required the Co-Trustees to liquidate the trust assets. The Co-Trustees filed a Petition for Instructions Regarding Distribution of Remaining Assets and Termination of Trust or in the Alternative Resignation of Co-Trustees (Petition for Instructions), proposing a pro rata distribution of the remaining assets and requesting that the probate court order the proposed pro rata distribution, or in the alternative, allow the Co-Trustees to resign. Kiana opposed this petition on the grounds that the Co-Trustees' proposed distribution violated the terms of the Settlement Agreement.

         The probate court entered judgments denying Kiana's Petition to Enforce (Enforcement Judgment) and granting in part and denying in part[2] the Co-Trustees' Petition for Instructions (Distribution Judgment). In the Distribution Judgment, the probate court ordered the pro rata distribution of the trust assets on hand, and included a table showing specifically how many shares of each of the remaining Gentry Companies each Beneficiary was to receive.

         Kiana appealed from the Enforcement Judgment but did not appeal from the Distribution Judgment. Before the ICA, Kiana argued that the probate court erred by refusing to grant her Petition to Enforce, because it meant the probate court must have either ignored the Settlement Agreement or found that it was invalid and unenforceable. However, the ICA found that reversing the probate court's denial of the Enforcement Petition would require overturning the Distribution Judgment. Because Kiana had failed to directly appeal the Distribution Judgment, the ICA determined that her appeal of the Enforcement Judgment constituted a collateral attack on the Distribution Judgment. Because the ICA concluded that it was unable to grant Kiana effective relief, the ICA dismissed Kiana's appeal as moot.

         Kiana filed an Application for Writ of Certiorari. She presents two questions for this court:

(1) Whether the ICA erred when it held that Kiana's appeal was a collateral attack upon the [Distribution Judgment], when Kiana's appeal merely addressed the probate court's improper decision regarding the validity and enforceability of the Settlement Agreement; and
(2) Whether the ICA erred when it dismissed Kiana's appeal as moot based on its erroneous conclusion that Kiana's appeal constituted a collateral attack upon the Distribution Judgment, thereby ignoring the merits of the appeal and ignoring the Settlement Agreement.

         For the reasons set forth below, we hold that the ICA erred in concluding that Kiana's appeal was an impermissible collateral attack. We also hold that the ICA erred in concluding that Kiana's appeal was moot. We thus vacate the ICA's December 5, 2014 judgment on appeal, and remand to the ICA for further proceedings consistent with this opinion.

         I. Background

         A. The Thomas H. Gentry Revocable Trust

         In November 1994, THG, a prominent real estate developer, was left in a coma after a boating accident. He eventually passed away on January 15, 1998.

         As a result of Mr. Gentry's incapacity, Mark L. Vorsatz (Vorsatz) and Hawaiian Trust Company (HTC) were named as successor co-trustees of the Revocable Trust. The assets of the Revocable Trust included various personal assets of THG, real estate, and the Gentry Companies, including Gentry Pacific and Gentry Properties. The beneficiaries of the Revocable Trust are Norman H. Gentry, Tania V. Gentry, Mark T. Gentry, Corin S.N. Gentry-Balding, and Candes S.N. Gentry (THG's children from previous marriages), Arielle N.H. Gentry and Race N.K. Gentry (THG's adult grandchildren), Kiana, Angel D. Vardas (Kiana's daughter from a previous marriage), and all minor and unborn issue of THG (collectively, Beneficiaries).

         When Vorsatz and HTC began administering the Revocable Trust, the financial condition of the Gentry Companies was apparently extremely precarious, with high levels of debt, ongoing litigation, and a lack of liquidity. However, between 1995 and 2005, Vorsatz and HTC worked with the management of the Gentry Companies to stabilize the companies' financial positions. Over that period, the Co-Trustees claimed that over $300, 000, 000 of assets were sold, external debt was reduced from $275, 000, 000 to $46, 000, 000, internal loans were reduced from $102, 000, 000 to $16, 000, 000, operating costs were greatly reduced, thirty-nine separate companies were liquidated, and Gentry Homes was returned to profitability.

         Some time between 1995 and 1997, it became apparent that HTC was conflicted, and as a result, HTC resigned as cotrustee. Initially, the Beneficiaries agreed that there would be no successor corporate trustee. However, Kiana later filed a petition to appoint a corporate co-trustee. Subsequently, and over Kiana's objection, First Hawaiian Bank was appointed as cotrustee in July 1997.

         One of the terms of the Revocable Trust was that if Kiana outlived THG, one-third of the Revocable Trust was to be distributed to a separate trust, designated as the Marital Trust. The Marital Trust was created and approved by the probate court on January 27, 1995. At the time of his death, THG was married to Kiana, who is the sole income beneficiary of the Marital Trust. Between April 2000 and December 2004, the improved financial condition of the Gentry Companies allowed the Marital Trust to make cash distributions of approximately $4, 600, 000 to Kiana, in anticipation of dissolving the Revocable Trust.

         B. Probate Court Proceedings and Settlement Agreement

         In 2006, the Co-Trustees began planning how to distribute the remaining assets of the Revocable Trust to various subtrusts.[3] On June 15, 2006, the Co-Trustees filed a Petition for Instructions Regarding Initial Funding of Subtrusts, which proposed to distribute $25 million in cash and allocate $35 million worth of assets to the subtrusts. According to the Co-Trustees, Kiana opposed the proposed $25 million cash disbursement to the subtrusts because she believed that the Marital Trust should be funded with cash, while the interests in the Gentry Companies should be left to the other beneficiaries. From 1998 through 2006, the Co-Trustees also filed several petitions for approval of trust accounting, many of which were objected to by Kiana and other beneficiaries.

         Due to the Beneficiaries' objections, the Co-Trustees' Petitions for Approval of Income and Principal Accounts for the Periods January 16, 1998 through December 31, 1999; January 2000 through December 31, 2003; January 1, 2004 through August 29, 2006; January 2006 through March 30, 2007; and the Co-Trustees' Petition for Instructions Regarding Initial Funding of Subtrusts were consolidated and set for trial in November 2007. Subsequent to the setting of trial, in September 2007, the Co-Trustees also filed a petition to approve their 2006 accounting and a Petition for Instructions Regarding Final Funding of Subtrusts, seeking to fully fund the subtrusts and terminate the administration of the Trusts. This Petition was added to the issues to be resolved at trial.

         In August 2007, three months before the trial, Kiana settled her claims against the Co-Trustees and withdrew her objections to the Co-Trustees' petitions. However, the trial proceeded to resolve the issues of distributing the trust assets to the Beneficiaries and subtrusts.

         Two weeks into trial, the parties (all Beneficiaries and Co-Trustees) entered mediation and agreed to the Settlement Agreement. At a hearing before the probate court on December 7, 2007, the parties put the terms of the Settlement Agreement on the record. The probate court informed the parties that the Settlement Agreement was enforceable and that the court would retain jurisdiction to enforce it. The probate court also went over the terms of the Settlement Agreement and ensured that each party understood the terms.

         On December 21, 2007, which was also the "effective date of the Settlement Agreement, " the parties signed the written Settlement Agreement. Under the terms of the Settlement Agreement, the parties agreed to request that the probate court approve all of the Co-Trustees' prior accountings, up until 2007. The Settlement Agreement also established a plan for the orderly disposition of the trust assets. Pertinent to the present appeal, the Settlement Agreement provided:

6. ORDERLY DISPOSITION OF ASSETS.
A. The parties agree to the orderly disposition of certain assets of the Trusts. These assets are the Trusts' interests in TG California Company, Gentry-Pacific, Ltd., Gentry Properties and Gentry Homes, Ltd. The Co-Trustees will sell these entities or their assets within a 30-month period from the Effective Date, with one 18-month extension permitted if supported by good cause as approved the Court. One or more of Gentry's Children and/or their issue are not prohibited from purchasing any entity or asset from the Trusts or from the entities for full fair market value.
B. With respect to the Trusts' ownership of Gentry-Pacific, Ltd., this interest will not be sold until Gentry Investment Properties or its assets have been sold. When Gentry Properties' assets are sold and that entity is liquidated, and all expenses associated with Gentry Properties are paid, Gentry Pacific will make a dividend distribution of all of its cash to the shareholders of Gentry Pacific. Thereafter, Gentry Investment Properties will make a guaranteed payment to Gentry-Pacific, Ltd., sufficient to cover Gentry-Pacific, Ltd.'s reasonable operating expenses for no longer than the aforesaid 30-month period.
7. GENTRY INVESTMENT PROPERTIES. Gentry Investment Properties ("GIP") will not be subject to the disposition parameters of paragraph 6 above. As soon as practicable, the Trust's interests in GIP will be distributed to the marital subtrust, Gentry's Children (free of trust), and to the GST subtrust, Pro Rata. Gentry-Pacific, Ltd., will remain as the general partner of GIP for the aforesaid 30-month period. The parties will use their best efforts to assure that Gentry-Pacific, Ltd., and/or GIP will not use GIP's accumulated income or sales proceeds to start or acquire any new businesses, or to acquire additional real property, or to construct intract improvements. The intent of the parties is that GIP will dispose of its assets over time (unspecified) in a commercially reasonable manner. In doing so, GIP is not precluded from constructing infrastructure in order to facilitate sales, provided, however, that such improvements may be made only to obtain a final subdivision map and/or to satisfy the requirements of specific buyers under written contracts or as required by law. Infrastructure includes, but is not limited to, roads, walkways, drainage systems, utilities and other construction consistent with the land use entitlements of the particular property being improved. Obtaining a final subdivision map includes the ability to post or, if necessary, perform under a bond for the required public improvements.
9. FURTHER DISTRIBUTIONS. The proceeds from the sale of entities or assets under paragraph 6 and/or 7 along with other income of the entities will be distributed to the Trusts promptly (in the ordinary course of business and subject to a reasonable reserve) and will not need to be held for the entire 30-month disposition period. The Trusts shall distribute income and principal in accordance with the Trust instruments and applicable law.

         Subsequent to the Settlement Agreement, the Co-Trustees began to execute a plan of liquidation of the trust assets pursuant to paragraph 6 of the Settlement Agreement. Specifically, the Co-Trustees claimed that they:

(i) distributed $60 million to the beneficiaries and subtrusts; (ii) distributed Gentry Investment Properties to the beneficiaries and subtrust; (iii) sold 5 separate lots within Gentry Properties for a gain of $11 million over book/tax basis; (iv) sold the Trust's interest in Lake Tahoe Blueridge land for a gain of $662, 000 over book/tax basis; (v) sold the industrial court and 4 separate lots within GPP, LLC (owned by Gentry Properties) for a gain of almost $22 million over book/tax basis.

         The Co-Trustees also stated in December 2010 that the only remaining Gentry Companies held in the trust were Gentry Pacific and Gentry Properties. The Co-Trustees claimed that the above transactions were accomplished under "incredibly difficult circumstances" due to the 2008 recession.

         The Co-Trustees filed in the probate court--in June 2008, February 2009, February 2010, and April 2010--petitions for approval of accounts for various periods from January 1, 2007 through December 31, 2009, and for the approval of attorney's fees accrued by the trusts. Several Beneficiaries, including Kiana, objected to these petitions.

         C. Prior Proceedings in the Present Appeal

         On August 25, 2010, Kiana filed the Petition to Enforce in probate court. In the Petition to Enforce, Kiana argued that under the terms of the Settlement Agreement, specifically paragraphs 6 and 7, the Co-trustees were required to take "a series of actions ... to complete the administration of the Revocable and Marital Trusts within 30 months time of the execution of the Settlement Agreement." Kiana argued that the Co-Trustees had failed to take these actions and requested that the probate court "order that the necessary steps be taken to effectuate a complete administration of the Revocable and Marital Trusts pursuant to the terms of the Settlement Agreement."

         On November 9, 2010, the Co-Trustees filed an objection to Kiana's Petition to Enforce. The Co-Trustees denied that they had failed to implement the Settlement Agreement "to the extent to which it is capable of being prudently implemented, " and stated that they would file an additional petition seeking instructions for distribution of the remaining trust assets prorata .

         On December 1, 2010, the Co-Trustees filed their Petition for Instructions. The Co-Trustees argued that although they had sold most of the trust assets at a profit pursuant to paragraph 6 of the Settlement Agreement, they did not believe it was in the best interests of the Beneficiaries to sell the remaining assets given market conditions.[4] The Co-Trustees further argued that although their proposed distribution of the remaining assets would "require the beneficiaries to maintain mutual ownership of certain Gentry Companies for the foreseeable ...


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