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Trust Created Under Will of Damon

Supreme Court of Hawaii

June 15, 2017

TRUST CREATED UNDER THE WILL OF SAMUEL M. DAMON, Deceased

         CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-12-0000731; P. NO. 6664; EQUITY NO. 2816-A)

          A. Bernard Bays and Michael C. Carroll for petitioner Christopher Damon Haig

          Rebecca A. Copeland, Peter Van Name Esser, and Thomas R. Sylvester for petitioner Myrna B. Murdoch

          J. Thomas Van Winkle, Duane R. Miyashiro, and Melissa H. Lambert for respondent Trustees under the Will and of the Estate of Samuel M. Damon

          George W.Van Buren for respondents Brendan Damon Ethington and John Philip Damon

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

          OPINION

          McKENNA, J.

         I. Introduction

         This case concerns the objections of two beneficiaries, Christopher Damon Haig ("Christopher") and Myrna B. Murdoch ("Myrna"), of a testamentary trust created under the will of Samuel M. Damon ("Damon Trust" or "Trust"), to the decisions made by the Probate Court of the First Circuit ("Probate Court")[1]that underpinned its August 2, 2012 Judgment, specifically the approval of the Trust's accounts from 1999 to 2003. The Intermediate Court of Appeals ("ICA") affirmed the Probate Court's August 2, 2012 Judgment. See In re Estate of Samuel M. Damon & Trust Created under the Will of Samuel M. Damon (In re Trust of Damon), No. CAAP-12-0000731 (App. June 2, 2016) (mem.).

         Separately, Christopher and Myrna each timely applied for a writ of certiorari from the July 11, 2016 Judgment on Appeal entered by the ICA pursuant to its June 2, 2016 Memorandum Opinion ("Mem. Op."). Among other things, both Christopher and Myrna assert that the Trustees violated their duty to inform beneficiaries pursuant to trust law and Hawai'i Revised Statutes § 560:7-303 (2006), that their due process rights were violated when they were not granted access to documents disclosed to the court-appointed Master by the Trustees of the Damon Trust ("Trustees") thereby preventing them from making informed objections to the Master's Report regarding the Trust's accounts from 1999-2003, and that the Trustees breached their fiduciary duty to keep full, accurate, and orderly records of the status of the Trust's administration when certain documents went inexplicably missing.[2]

         For the reasons discussed, the ICA erred in affirming the Probate Court's approval and adoption of the Master's Report without first granting Christopher's and Myrna's requests to access Trust administration documents, contrary to the requirements of HRS § 560:7-303.

         II. Background

         This probate case was previously heard by this court regarding a separate issue. See In re Estate of Damon, 119 Hawai'i 500, 199 P.3d 89 (2008) (holding that the court-appointed master was disqualified due to a conflict of interest and that objector-beneficiary's challenge to master's appointment was timely). Accordingly, some of the following factual and procedural background is repeated from that opinion.

         A. Factual Background

On November 10, 1914, a testamentary trust was created by the Last Will and Testament of Samuel M. Damon ("Trust"). Samuel M. Damon died on July 1, 1924. During the 1999-2003 accounting period, the Trustees managed the Trust's assets with roughly half of its value in publicly traded securities and the other half in real estate. The securities portion of the Trust's assets consisted mostly of a 13% interest in BancWest Corporation common stock. The real estate portion of the Trust's assets consisted primarily of prime industrial and commercial lands in Honolulu under long-term leases, a sizeable cattle ranch on the island of Hawai'i, two walnut ranches located in California, and an industrial property located in California.
In 2001, the Trust sold its entire 13% interest in BancWest Corporation common stock. In 2003, the Trust sold its prime industrial and commercial land in Honolulu, two walnut ranches, and a significant portion of real estate located on the island of Hawai'i. The net proceeds from these transactions has [sic] been reinvested into a diversified securities portfolio that is being advised and managed by Goldman, Sachs & Company.

In re Estate of Damon, 119 Hawai'i at 501-02, 199 P.3d at 90-91.

         The Trust terminated on November 9, 2004 when the last measuring life, Samuel M. Damon's granddaughter, Joan Damon Haig, passed away. On termination, the Trust's estate was valued at $836 million. There is no dispute that Christopher and Myrna were beneficiaries of the Trust from 1999 to 2003.[3]According to counsel for the Trustees, Christopher's and Myrna's interests in the Trust total "slightly over three percent [3%]." Three percent of $836 million is approximately $25 million.

         B. Procedural Background

         On April 30, 2004, the Trustees filed a "Petition for Approval of 1999, 2000, 2001, 2002 and 2003 Income and Principal Accounts" ("Petition") in Equity No. 2816-A and Probate No. 6664. The Petition represented that the Trustees

sent annually to all adult beneficiaries who are entitled to income by the terms of the Will copies of their annual accounts for the calendar years 1999, 2000, 2001, 2002 and 2003, showing detailed expenditures of [sic] receipts and income and principal for these years, together with inventories as of the end of each year, and copies of Consolidated Financial Statements and Schedules of the Estate of S.M. Damon, and the Independent Auditor's Reports prepared by KPMG LLP, for each year.

(footnote omitted).

         After the Probate Court's initially appointed master for the Petition was disqualified upon Christopher's objections, see In re Estate of Damon, 119 Hawai'i 500, 199 P.3d 89, the Trustees petitioned for another court-appointed master to examine the Estate's accounts. Christopher objected to the Trustee's petition for the appointment of another master, and instead filed a "Petition for Assignment to Civil Trials Calendar of the First Circuit Court" ("First Assignment Petition") on February 11, 2010, asserting the following issues regarding the Trust's 1999-2003 accounts:

1. Whether the trustees adequately managed the estates' [sic] securities portfolio[.]
2. Whether the trustees obtained a satisfactory premium for the First Hawaiian Bank stock.
3. Whether the trustees obtained fair market value for the real estate portfolio of the trust.
4. Whether the trustees had conflicts of interest in the foregoing matters.

         Myrna, pro se, appeared to join in Christopher's concern regarding the appointment of a new master and his request for the assignment of the case to the civil trials calendar. The hearing for the First Assignment Petition was set for April 1, 2010, which fell after the date set for the court's hearing on the appointment of a new master.

         At a hearing on February 18, 2010, the Probate Court granted the Trustee's petition for the appointment of a new master ("Master"), who was appointed by Order of Reference filed March 22, 2011. In accord with Hawai'i Probate Rules ("HPR") Rule 29, [4] that Order stated that "[t]he [Trustees] shall . . . make all books and records of the Damon Estate available to the Master."

         The court held a hearing on the First Assignment Petition on April 1, 2010. After hearing argument from the parties, the court decided to continue the matter until the court had an opportunity to review the Master's Report.[5]

         On October 7, 2011, the Probate Court received Christopher's "Petition to Renew Request for Assignment of Case to Circuit Court Pursuant to Probate Rule 20 or in the Alternative, for Appointment of a Discovery Master"

         ("Christopher's Renewed Assignment Petition"). On October 10, 2011, through counsel, Myrna similarly filed a "Petition for Assignment of Case to Circuit Court Pursuant to Probate Rule 20(a) through 20(c) or in the Alternative, for an Order Pursuant to Probate Rule 20(d) Compelling Discovery and Appointing a Discovery Master" ("Myrna's Assignment Petition"). Both Christopher's Renewed Assignment Petition and Myrna's Assignment Petition asserted that each had requested information from the Trustees regarding Trust administration, those requests were denied or ignored, and that when assistance was sought from the Master, the Master stated that she did not have the power to compel the Trustees to provide discovery and advised Myrna and Christopher to take up the issue with the Probate Court.

         A hearing on Christopher's Renewed Assignment Petition and Myrna's Assignment Petition was held on December 1, 2011. At the hearing, the Master indicated that the Report would not be completed until sometime in mid-February 2012 because deadlines for submissions were suspended pending the outcome of Christopher's and Myrna's petitions. The Probate Court judge reminded the parties that the First Assignment Petition had been continued so that the Master's Report could be completed. The court also indicated the parties would be better able to focus on discrete issues of concern after the Master's Report issued, which would limit the scope of any potential discovery.

         Christopher explained that he filed the Renewed Assignment Petition because "[al]though the trustees provided information in the past, they have now refused." Christopher and Myrna argued that they had a right as beneficiaries to the requested information, or, at the very least, information that was disclosed to the Master, and that they had already narrowed their objections. In their memoranda, Christopher and Myrna each cited to HRS § 560:7-303, Bogert's on Trusts § 962 ("Duty to Respond to Beneficiaries' Requests for Information"), [6] and the Restatement (Second) of Trusts § 173 ("Duty to Furnish

         Information"), [7] to show that the Trustees had a duty to provide them with the requested Trust documents and information. Moreover, because the Master's document review was in part based on the general objections already noted by Christopher and Myrna, they explained they would be unable to "submit . . . more meaningful objection[s]" to the Master if they did not get access to those very documents provided to the Master by the Trustees. As an example, Christopher's memorandum cited his securities and real estate experts, who indicated "they cannot [issue] a report unless they have more information." The Trustees countered that "[t]he Order of Reference by definition is an ex parte process. We are required to meet with the Master, again, as the eyes and ears of the Court and provide her with access to the books and records. We're doing that."

         The Probate Court concluded that Christopher and Myrna failed to show that discovery was necessary prior to the completion of the Master's Report. The court emphasized that Christopher's and Myrna's issues were preserved, and that they would be given an opportunity to respond to the Master's Report. Accordingly, the court denied their petitions.[8]

         The Master's Report, concluding the Trust's 1999-2003 income and principal accounts should be approved, was filed on March 9, 2012. In it, among other things, the Master noted the following:

Your Master verified the accuracy and reliability of the Trust's financial accounts by examining the statements of assets and liabilities, income and expenses, and random examination of the 2003 receipts and invoices. The 1999-2002 receipts and invoices were unlocatable and, according to Controller Mizuno, were probably destroyed as part of the Trust's regular document culling process. Controller Mizuno assured the Master that he has seen and audited most of the 1999-2002 receipts and invoices when he was part of the KPMG LLP (hereinafter KPMG) audit team and approved some of the 2002 receipts and invoices when he was hired as the Estate's Controller in October 2002. The 1999-2003 annual statements, which were mailed annually to all Beneficiaries, were created from the receipts and invoices. He also confirmed that the Trust's internal controls requiring at least three levels of approval, including those of the Trustees, were uniformly followed in all of the years in the 1999-2003 Accounts Period.
The Damon Trust accounts are annually audited by KPMG who issued annual "Independent Auditors' Report" of its findings. The audits process included, inter alia, random reviews of the receipts and invoices to confirm that internal controls, such as the approval process for all invoices, were in place and properly followed. KPMG's audits are attached to the 1999-2003 Accounts Petition.
Based on the examination of the financial statements, receipts, and KPMG's annual audits, your Master is satisfied that the Trust's 1999 - 2003 financial accounts as presented to the Probate Court are fair and accurate.

         At a status conference on March 20, 2012, the court set the following deadlines: April 25, 2012 for responses or objections to the Master's Report; May 25, 2012 for any reply; June 21, 2012 for the hearing on the Trustee's Petition.

         On April 17, 2012, Christopher submitted to the Probate Court a "Petition to Compel Production of Documents and Continue Deadline to Respond to Master's Report" ("Petition to Compel"), which was joined by Myrna. The Trustees objected to the Petition to Compel on numerous grounds, including that Myrna's requested documents were irrelevant to the Trustee's Petition, or were ones she already received from the Trustees or could have received from other sources. The Petition to Compel was set for a May 31, 2012 hearing.

         Concurrent to submitting briefing on the Petition to Compel, both Myrna and Christopher timely submitted their objections to the Master's Report on April 25, 2012. Christopher maintained that although he submitted general objections to the Master's Report, he was unable to adequately and completely respond to the Master's Report because he was not provided with the documents he requested of the Trustees. On May 25, 2012, the Master and Trustees filed their responses to these objections.[9]

         At the May 31, 2012 hearing on the Petition to Compel, the Probate Court listened to the parties' arguments but made no additional inquiries or comments. The Probate Court ruled on the Petition to Compel by way of a minute order issued on June 19, 2012:

After review of the record and pleadings herein, review of the Master's Report filed on March 9, 2012 and objections and responses thereto, and having considered the representations, arguments and objections made, the court hereby denies the Petition [to Compel].
The court finds that there is no basis to compel the trustees to produce all the documents reviewed by the Master. The court also denies the Petitioner's request to transfer ...

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