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In re Trust Agreement

Supreme Court of Hawaii

October 24, 2019

IN THE MATTER OF THE TRUST AGREEMENT, AS AMENDED

          CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-15-0000409, CAAP-15-0000414, CAAP-15-0000576, CAAP-15-0000598, CAAP-15-0000632; TRUST NOS. 14-1-0019 and 14-1-0097).

          Gary Victor Dubin and Frederick J. Arensmeyer for petitioners.

          Vincent A. Piekarski, Raymond K. Okada, Judy Y. Lee, Johnathan C. Bolton and Deirdre Marie-Iha for respondent Bank of Hawaii.

          Robert Bruce Graham, Jr., James K. Mee and H. Shan Wirt for respondent Susan Sheetz and Patricia Sheetz.

          Blake W. Bushnell for respondents Julie G. Henderson, Trustee of the Julie G. Henderson Irrevocable Trust, the Jean K. Gowans Irrevocable Trust and the Louis L. Gowans, Jr. Irrevocable Trust; and Richard L. Gowans, Trustee of the Richard L. Gowans Irrevocable Trust.

          Douglas C. Smith and Christopher J.I. Leong for respondent Kevin I. Yokoyama, as Trustee of the Kevin I. Yokoyama Trust and the Irvine K. Yokoyama, Jr. Trust.

          NAKAYAMA, ACTING C.J., POLLACK, AND WILSON, JJ., CIRCUIT JUDGE ASHFORD IN PLACE OF RECKTENWALD, C.J., RECUSED, AND CIRCUIT JUDGE TO'OTO'O, IN PLACE OF McKENNA, J., RECUSED

          OPINION

          NAKAYAMA, J.

         This appeal arises from a 2014 petition by Respondent/Petitioner-Appellee Bank of Hawai'i (BOH) to resign as trustee for a trust comprised of several parcels of land underlying the Discovery Bay condominium complex in Waikiki (Trust). Petitioners/Respondents-Appellants Michael David Bruser and Lynn Bruser (collectively, "the Brusers"), who hold the leasehold commercial unit in the condominium, and several Trust beneficiaries objected to BOH's petition to resign as trustee.

         In the subsequent litigation in the Probate Court of the First Circuit (probate court), the probate court entered several orders that determined that a monthly trustee's fee of $9, 850 was reasonable, permitted BOH to reform the trust agreement, and awarded attorneys' fees and costs to BOH. The probate court, however, specifically declined to determine whether the Brusers were liable to pay the trustee's fees. Thereafter, the Brusers filed two appeals in the Intermediate Court of Appeals (ICA) challenging these orders.

         After their appeals were consolidated with the appeals of other beneficiaries, the Brusers filed an opening brief alleging that the probate court erred when it determined that the $9, 850 trustee's fee was reasonable and when it awarded an unreasonable amount of attorneys' fees and costs to BOH. The Brusers also stated that the probate court erred in exercising jurisdiction over the Brusers, who are not parties to the Trust Agreement, and holding them responsible for the increased trustee's fee.

         The ICA determined that under the language of the Trust Agreement and the condominium conveyance document for the commercial unit, the Brusers were responsible for paying the trustee's fees. The ICA also concluded that the $9, 850 monthly trustee's fee was reasonable. Accordingly, it affirmed the probate court's orders denying the Brusers' motion for reconsideration and granting in part the petition for resignation. Additionally, the ICA rejected the Brusers' specific objections to the probate court's attorneys' fees and costs order, but vacated and remanded the order on other grounds.

         On certiorari, the Brusers contend that the ICA erred when it concluded that they are liable for the trustee's fees even when the probate court made no such determination, and when the probate court did not allow the Brusers discovery to determine the reasonableness of the trustee's fee. They also challenge the ICA's failure to address their specific objections to the probate court's attorneys' fees and costs order, even if the ICA vacated and remanded the order on other grounds.

         On review of the record and the orders entered by the probate court in this case, we first agree with the Brusers to the extent that the probate court did not make any determination regarding their liability for the trustee's fees. Therefore, the ICA erred in concluding, in the first instance, that the Brusers are liable for the trustee's fees when the probate court did not address the issue. We vacate the ICA's judgment on appeal to the extent that it holds the Brusers liable for the trustee's fees.

         However, for the reasons set forth herein, we affirm the ICA's judgment on appeal that affirmed the probate court's conclusion that a $9, 850 monthly trustee's fee is reasonable. We also affirm the ICA's judgment on appeal vacating and remanding the probate court's attorneys' fees and costs order.

         I. BACKGROUND

         A. The Formation of the Trust

         On June 6, 1974, various parties who owned thirteen adjacent parcels of land under what is now the Discovery Bay condominium complex (Discovery Bay) at 1778 Ala Moana Boulevard in Waikiki entered into a trust agreement with Mainline-MEPC Properties (Hawai'i), Inc. (MEPC Properties), a construction company that wished to build a condominium at the site, and Hawaiian Trust Company, Limited (Hawaiian Trust Company), as trustee, to construct a condominium on the property.

         The purposes of the Trust, as described in the Trust Agreement, were to (1) construct a condominium on the property; (2) provide efficient and uniform administration of the Settlors' interests; (3) determine the value of the leases created by condominium conveyance documents (CCD); (4) distribute rental income under the CCDs to the Settlors; and (5) administer the property on the termination of the leases created under the CCDs.

         As defined by paragraph 2 of the Trust Agreement, the trustee's powers were limited to the powers expressly granted by the Trust Agreement.[1] The Trust Agreement provided other provisions with respect to trustee's fees and the resignation of the trustee:

11. Trustee's Fees. The Trustee shall be entitled to such reasonable fees as from time to time may be mutually agreed upon. In addition to said reasonable fees, the Trustee shall have the right to incur such expenses and to be reimbursed by the Lessee as provided for by the leases; and to incur such expenses and be reimbursed for extraordinary services. The Lessee or its assigns will pay the Trustee's fee and expenses until December 31, 2039 or the earlier termination of this trust.[2]
17. Resignation, Removal and Substitution of Trustee.
(a) Resignation of Trustee. The Trustee may resign its duties hereunder by filing with each person designated as a representative its written resignation. No such resignation shall take effect until sixty (60) days from the date thereof unless prior thereto a successor Trustee shall have been appointed.
(c) Appointment of Successor Trustee. A successor Trustee hereunder may be appointed hereunder upon the majority vote of representatives of Settlors having an interest in the majority in square footage in the jointly developed parcel and shall take effect upon the delivery to the resigning or removed Trustee, as the case may be, of (i) an instrument in writing appointing such successor Trustee, and (ii) an acceptance in writing of the successor Trustee hereunder executed by the successor so appointed.
Any successor Trustee hereunder shall be a corporation authorized and empowered to exercise trust powers within the State of Hawaii. . . .

         Pursuant to an agreement with MEPC Properties in 1974, Hawaiian Trust Company, the original trustee, received an annual trustee's fee of $800.00.

         B. The Brusers and the Commercial Unit

         Discovery Bay consists of 665 leasehold residential units and one leasehold commercial unit (Commercial Unit). Title to the leasehold interests is held by an "Apartment Owner" under the terms and conditions of a CCD for that unit.

         On December 1, 197 6, the Commercial Unit CCD was executed between Hawaiian Trust Company, as trustee and lessor, and MEPC Properties, as the "Apartment Owner." Therein, Hawaiian Trust Company conveyed the Commercial Unit to MEPC Properties for a term "commencing on the 1st day of December 197 6, and terminating at midnight on the 31st day of December, 2039." The Commercial Unit CCD contains a provision stating that "[t]he Apartment Owner shall also pay to the Lessor all fees and expenses charged or incurred by the Lessor as Trustee under the terms of the said Trust Agreement[.]"

         On or about December 14, 1984, the Brusers acquired the Commercial Unit from MEPC Properties by a deed (Apartment Deed). Pursuant to the Apartment Deed, the Brusers stated that for ten years, they "paid all monthly rents, costs, expenses, assessments, and charges required and demanded of them in a timely manner, and continue to do so."

         In February 1994, BOH, which had previously acquired Hawaiian Trust Company (and thus had become the trustee of the Trust), requested a monthly trustee's fee of $500 for its efforts on behalf of the trust beneficiaries. While the Brusers questioned the validity and reasonableness of the trustee's fee, they nevertheless agreed to pay the $500 monthly fee.

         In 2001, after being notified that BOH intended to increase the monthly trustee's fee from $500 to $2, 586, the Brusers filed a complaint for declaratory judgment in the United States District Court for the District of Hawai'i (U.S. District Court) requesting that the U.S. District Court find that they were not liable for any alleged trustee's fees. The Brusers later settled with BOH and agreed to pay a monthly trustee's fee of $1, 100 until December 31, 2002.

         The Brusers appear to have continued to pay the monthly trustee's fee of $1, 100 until BOH filed its petition to resign as trustee in January 2014.

         C. Probate Court Proceedings

         On January 28, 2014, BOH filed a "Petition for Resignation of Trustee, Appointment of Successor Trustee, Reformation of Trust and Approval of Trustee's Accounts Covering the Period from January 1, 2008 through December 31, 2013" (Petition for Resignation) in the probate court.[3] While BOH did not explain why it wished to resign, it informed the probate court that the beneficiaries had not yet selected a successor trustee, that Central Pacific Bank and First Hawaiian Bank were the only corporations authorized to exercise trust powers in the state, and that pursuant to paragraph 17 (c) of the Trust Agreement, they were the only entities that could become a "successor trustee." BOH also stated that Central Pacific Bank and First Hawaiian Bank had declined to serve as the successor trustee, and therefore BOH requested that the probate court approve a reformation of paragraph 17(c) that struck language requiring a corporation to be a successor trustee.

         Respondent/Respondent-Appellant Association of Apartment Owners of Discovery Bay (AOAO), the majority owner of the beneficial interests in the Trust, objected to BOH's Petition for Resignation. It claimed that BOH's resignation would be "highly detrimental to the Trust assets and the Beneficiaries' interest in the Trust." Several of the non-AOAO beneficiaries also filed objections to BOH's Petition for Resignation and requested that the probate court deny its petition.[4]

         As an interested party, the Brusers also filed a position statement wherein they stated that they paid a monthly trustee's fee of $1, 100 to BOH, and requested that any approval of the Petition for Resignation should be accompanied by an order that the successor trustee be bound to a $1, 100 monthly trustee's fee pursuant to the provisions of the Commercial Unit CCD.

         1. Interim Order

         In preparation for a hearing in the probate court, BOH filed a Supplement to Petition for Resignation of Trustee. Therein, BOH informed the probate court that it had met with the beneficiaries and had proposed several reformations to the Trust Agreement. BOH further stated that because the beneficiaries had rejected its proposed trust reformations, it had informed the beneficiaries that it would seek compensation as provided by HRS § 607-18.[5] BOH argued that under the statute, a corporate trustee is entitled to fees as set forth in its fee schedule. BOH's standard fee schedule for "[i]ncome producing properties [m]anaged with [a] third-party property manager" called for an annual fee of 6% of the gross rental income collected. Applying BOH's standard 6% fee to the annual rent of $3, 378, 840.00, BOH concluded that it was entitled to an annual trustee's fee of $202, 730.40, or $16, 894.20 per month.

         The AOAO opposed the request for a trustee's fee of $16, 800 as unreasonable. The Brusers joined the AOAO's position regarding BOH's request to resign as trustee. Additionally, regarding BOH's request to reform the trust, the Brusers explained that they

support[ed] any reformation of the Trust that is in accordance with the amendments that are agreed to by [BOH] and the beneficiaries, except for any attempt to have it as the Commercial Owner of the Commercial Unit (or as the "CU Lessee") continue to pay the amount [previously agreed to in the Settlement] if the Bruser Trust is also going to have to pay for some portion (its percentage of common interest) of the Trustee's fees as a member of the AOAO. It is not equitable for the Bruser Trust to pay for both amounts if that is what the Petitioner and the beneficiaries are attempting to structure.

(emphasis in original).

         Before the probate court entered an order on BOH's Petition for Resignation, on August 28, 2014, the Brusers initiated proceedings for declaratory relief in the U.S. District Court requesting that the U.S. District Court order the Brusers not liable to pay trustee's fees. See infra Section I.D.

         On September 8, 2014, BOH reported that it had arranged a compromise agreement with the non-AOAO beneficiaries regarding the amount of the trustee's fee. This Outline Agreement proposed a trustee's fee of 3.5% of the rental income, or $9, 850 per month.

         At a September 11, 2014 hearing before the probate court, BOH argued that the Outline Agreement as reached by BOH and the non-AOAO beneficiaries should be adopted. In response, the AOAO argued that the trustee's fee was "high" and unreasonable. It also contended that the Brusers were required to pay the trustee's fees under the provisions of the Trust. The Brusers stated that they could not be liable for paying the trustee's fees, but did not take any position with respect to the reasonableness of the amount of the trustee's fee:

We're not taking a position today as to what the fees should be because that's between - that's under the trust. And this court has jurisdiction under the trust. And we can't take a position because we're not one of the beneficiaries. We're just simply here to protect the Brusers' rights and to ask this court to not overstep its jurisdiction as we've laid out.

         At the conclusion of the hearing, the circuit court stated it would preliminarily approve a monthly sum of $9, 850 as a reasonable trustee's fee, and approve the withholding of the monthly fee from the distributions to the beneficiaries for the five-year period as stated in the Outline Agreement.

         On November 6, 2014, the Brusers filed an Ex Parte Motion for Leave to Take Depositions in the probate court. In their ex parte motion, the Brusers appeared to take a contrary position from the position they held at the September 11, 2014 hearing, and argued that the $9, 850 monthly fee was "excessive and cannot be justified[.]" In support of their motion, the Brusers noted that they had already conducted an investigation into the work performed by BOH, "and their findings confirm that, contrary to BoH's title as Trustee on behalf of Discovery Bay, BoH has few, if ...


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