Midkiff v. Kobayashi

• Decision Date: 06 March 1973
• Docket Number: No. 5046,5046
• Citation: 54 Haw. 299,507 P.2d 724
• Parties: Frank E. MIDKIFF et al., Plaintiffs-Appellants, Cross-Appellees, v. Bert T. KOBAYASHI, Attorney General of the State of Hawaii, Defendant-Appellee, Cross-Appellant.
• Court: Hawaii Supreme Court

Page 724

507 P.2d 724

54 Haw. 299

Frank E. MIDKIFF et al., Plaintiffs-Appellants, Cross-Appellees, v. Bert T. KOBAYASHI, Attorney General of the State of Hawaii Defendant-Appellee, Cross-Appellant.

No. 5046.

Supreme Court of Hawai'i.

March 6, 1973.

As Amended March 27, 1973.

As Amended April 5, 1973.

Syllabus by the Court

1. Where an agreement executed pending an appeal renders an issue moot but another substantial issue or question remains in the case, the cause is not moot.

2. Where a court retains jurisdiction in a cause involving a trust having multiple trustees, 'with leave to the parties to apply for other and further relief as may be appropriate and equitable in the premises', a minority trustee is a party.

3. Where the question for decision was whether the majority trustees exceeded their authority under the will and a court judgment, and all of the parties necessary for the decision of the question were present in court, the absence of other parties who might be affected by the decision did not negate the power of the court to adjudicate as between the parties who were joined.

4. A determination that an agreement is better than the previously executed agreement which is not binding on the trust is not a determination that the sale mentioned therein is for the best interest of the trust.

5. In making an outright sale of land belonging to a trust, trustees may not determine the sale price on the basis of an appraisal previously made for a particular purpose and with limiting instructions, without having the appraisal updated and without ascertaining that the purpose for which the appraisal was made and the limiting instructions made no difference in the appraisal.

6. The attorney general has no authority to sanction any trustee action which deviates from trust provisions.

7. The function of the attorney general, as parens patriae of charitable trusts, is to oversee the activities of the trustees to the end that the trust is performed and maintained in accordance with the provisions of the trust document, and to bring any abuse or deviation on the part of the trustees to the attention of the court for correction.

8. If a deviation from any trust provision is necessary in the interest of the trust, the power to authorize the deviation rests solely with the court.

9. Attorney's fees and expenses incurred in a trust litigation are properly payable out of the funds of the trust where the litigation is for the benefit of the trust.

Norman K. Chung (Frank D. Gibson, Jr., and Ken Harimoto, Honolulu, with him on the briefs, Conroy, Hamilton, Gibson, Nickelsen & Rush, Honolulu, of counsel), for plaintiffs-appellants, cross-appellees, majority trustees.

Arthur S. K. Fong, Sp. Deputy Atty. Gen., State of Hawaii (Shirley Smith, Deputy Atty. Gen., Honolulu, with him on the briefs), for defendant-appellee, cross-appellant, State of Hawaii.

Clinton R. Ashford, Honolulu (Ashford & Wriston, Honolulu, of counsel), for trustee-appellee Atherton Richards.

Before RICHARDSON, C. J., MARUMOTO, ABE and LEVINSON, JJ., and LUM, Circuit Judge, in place of KOBAYASHI, J., disqualified.

MARUMOTO, Justice.

We have two appeals here. One appeal is by Frank E. Midkiff, Richard Lyman, Jr., Herbert K. Keppeler, and Hung Wo Ching, four of the five trustees of the Estate of Bernice P. Bishop, Deceased. The other appeal is by the attorney general. The attorney general is parens partiae of all charitable trusts. Bishop Estate is a charitable trust.

The appeals are from an order entered by the first circuit court on June 16, 1970, in Civil No. 17913. The order was entered upon a motion filed in the cause on March 20, 1970, by Atherton Richards, the fifth trustee of Bishop Estate.

In this opinion, the word trustees, without any qualification, will be used to refer to all of the trustees of Bishop Estate; Midkiff, Lyman, Keppeler, and Ching will be referred to as the majority trustees; and Richards will be referred to as the minority trustee.

Bishop Estate owns approximately 200,000 acres of land in Kahaluu and Keauhou, North Kona, Hawaii. For the most part, the land is covered by lava and is unproductive. Of the total acreage, approximately 2,350 acres are below Kuakini Highway. Of the acreage below Kuakini Highway, approximately 1,800 acres are between Kuakini Highway and Alii Highway, and approximately 550 acres are between Alii Highway and the seashore.

Hereafter, the area between Kuakini Highway and Alii Highway will be referred to as the mauka area, and the area between Alii Highway and the seashore will be referred to as the makai area. ¹

Sometime before November 1965, the trustees initiated a study for the development of the estate lands in Kahaluu and Keauhou, and retained Community Planning Consultants, Ltd., of Vancouver, British Columbia, to prepare a development plan. Community Planning Consultants came up with a plan, which it called 'Community for Leisure-Hawaii', containing a proposal for the development of the entire makai area and about 550 acres of the mauka area, or approximately 1,100 acres, for resort and related purposes.

Hereafter, the lands embraced in the plan will be referred to as the project lands, and the development proposed therein will be referred to as the Keauhou project, or simply as the project.

At that time, the project lands were appraised at approximately $7,000,000, but the income generated therefrom was only about $16,700 per year. So, the trustees were desirous of proceeding with the project. However, in doing so, they were limited by tax considerations. They were advised by Dean William C. Warren, their special tax counsel, that for the estate to engage in land development and incidental activities might endanger the tax exempt status of Kamehameha Schools. ² Previously, they had been advised by J. Garner Anthony, their regular counsel, against the use of joint venture between the estate and developers because of adverse tax consequences in the light of the Internal Revenue Service ruling in the estate's transaction with Kaiser Hawaii-Kai Development Company.

In the circumstance, upon consultation with their special tax counsel, the trustees formulated a plan which involved the formation of a development corporation, conveyance of the project lands to the corporation in exchange for its capital stock and other securities of a value equal to the fair market value of the conveyed lands, and sale of 20 percent or more of the capital stock of the corporation to other persons in order to obtain the cash required for the development.

The trustees were in doubt regarding their authority to proceed with their plan. So, on November 10, 1965, they commenced Civil No. 17913 by filing a complaint in the nature of a bill for instructions in which they sought the instruction of the court on the matter.

The circuit court entered its judgment on November 19, 1965, pursuant to findings of fact and conclusions of law filed on the same day.

The judgment declared that the plan for development proposed by the trustees was in conformity with the intent of the testatrix, and that, insofar as it might be in deviation of the will, the court approved the deviation. It authorized the trustees:

(1) to form a corporation for the purpose of developing, subdividing, selling, and leasing the project lands; ³

(2) to subscribe for the shares of the capital stock of the corporation, and pay for the same in cash and other property;

(3) to convey the project lands to the corporation for the shares of the capital stock, and other securities thereof, of an amount equal to the fair market value of the lands;

(4) to lend funds to the corporation at prevailing rates of interest 'as they in the exercise of prudent business judgment may determine,' but not to mortgage or pledge any estate assets to secure the debts of the corporation; and

(5) to form other corporations for the purpose of developing other lands, subject to review by the attorney general and approval by the court before their formation.

The authorization for the formation of a corporation for the development of the project lands was contained in paragraph 1 of the judgment. The authorization for the formation of corporations to develop other lands was contained in paragraph 8.

A careful reading of the judgment shows that the provisions thereof, other than paragraphs 5 and 8, applied only to the corporation authorized in paragraph 1.

Paragraph 5 required the approval of the attorney general to the formation of, and the conveyance of lands and other property ot any corporation. The requirement for the approval of the formation of a corporation included the approval of the articles of association, by-laws, and capital structure of such corporation.

The provisions applicable to the corporation authorized in paragraph 1 did the following:

(1) required the trustees to control the corporation and not to relinquish their control without the approval of the attorney general;

(2) conditioned the operation of the corporation on the trustees obtaining a ruling from the Internal Revenue Service that their receipts of dividends and other income therefrom were exempt from taxation under the Internal Revenue Code;

(3) gave authority to the attorney general to review the operations of the corporation, the development of the project lands, and related matters;

(4) required the approval of the attorney general to the lending of funds by the trustees to the corporation; and

(5) provided for retention by the court of jurisdiction over the cause, with leave to the parties to apply for such further relief as might be appropriate.

On February 18, 1966, two trustees and a third person formed a Hawaii corporation under the name of Kamehameha Development Corporation, with an authorized capital of 1,000 shares of no par value stock, of which 750 shares were subscribed by the trustees at a total subscription price of $7,500. ⁴ The trustees initially paid...