Herbalife Heir Can't Object to Settlement Agreement

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By Stephanie Cumings

Sept. 30 — Alexander Hughes, who stood to inherit over $300 million when his father, Herbalife-founder Mark Hughes, died unexpectedly in 2000, doesn't have standing to object to a bankruptcy settlement agreement which he claims could negatively impact the trust of which he is the sole beneficiary (Hughes v. Tower Park Props., LLC (In re Tower Park Props., LLC), 2015 BL 313372, 9th Cir., No. 13-56045, 9/28/15).

In a case of first impression, the Ninth Circuit held Sept. 28 that Hughes, as a trust beneficiary, didn't have the required “party in interest” standing under the Bankruptcy Code to object to the settlement, even though the trust was a party tothe settlement.

Trust Battle

Alexander has been battling with the now-former trustees of the trust his father left him for years. Mark Hughes was the founder of Herbalife, a nutrition company that makes “nutrition, weight-management, energy and fitness and personal care products,” according to its website. He died in 2000, from what was widely reported as a lethal combination of alcohol and antidepressants, when his only child Alexander was eight years old.

According to the trust, Alexander can't access the trust principal until he turns 35, but he claims the men entrusted with protecting his assets have engaged in various forms of misconduct.

In court documents, Hughes claimed that the value of the trust “fell precipitously” between 2000 and 2010 while the trustees “paid themselves millions of dollars in trustee fees, manager fees, and consulting fees out of the [t]rust and [t]rust-owned entities.” He also alleged that the trustees used trust assets to fund litigation against him and against his mother, “including litigation to vigorously resist honoring an express [t]rust obligation to support Alexander in his accustomed standard of living.”

Trustees Ousted

One point of contention was the trust asset Tower Grove, a 157-acre undeveloped residential property overlooking Beverly Hills, Calif. In 2004, the former trustees sold Tower Grove to Tower Park Properties LLC and loaned Tower Park the money to make the purchase. But Tower Park quickly defaulted and filed for bankruptcy.

Hughes managed to have the former trustees, one of whom was his paternal grandfather, ousted after years of contentious litigation. The probate court found that the trustees had breached their duties in selling the Tower Grove property because the Tower Park principal “had no formal education in real estate, property management, real estate financing, and no professional licenses or certifications.”

Adequate Settlement?

The former trustees and Tower Park eventually reached a settlement agreement, in which the trustees agreed to accept less than what they were owed. The day after the trustees were suspended, Alexander filed an objection to thesettlement agreement. The replacement trustee partially joined the objection, asking for time to review the settlement todetermine its adequacy.

But the bankruptcy court approved the settlement. On appeal, the district court found that Alexander didn't have standing as a beneficiary of the trust to object to the settlement. Alexander appealed to the circuit court.

Guidance From Second Circuit

The circuit court found that Alexander wasn't a “party in interest” under Section 1109 of the Bankruptcy Code. In reaching its holding, the court looked to the Second Circuit's decision in In re Refco Inc., 505 F.3d 109 (2d Cir. 2007). InRefco, the Second Circuit found that a group of investors were not parties in interest when the investment company reached a settlement in a bankruptcy case. The court said that by investing with the company, the investors had given the investment company full control of the funds. Even if the investors had legitimate grievances with the company, the court said that the bankruptcy court was not the proper forum to deal with them.

The Ninth Circuit also distinguished this case from its own prior decision in In re Thorpe Insulation Co., 2012 BL 79804, 677 F.3d 869 (9th Cir. 2012), in which it found a group of insurers could object to a Chapter 11 plan because the plan directly affected their legal interests. The Seventh Circuit has similarly relied on Refco and distinguished Thorpe to find a party's interest “too remote to entitle the entity to intervene in a bankruptcy case,” according to research conducted by Bloomberg BNA.

Real Party in Interest

“Once Mark Hughes placed assets in the Trust for his son's benefit, he placed control of those assets entirely within the hands of the trustees,” the court said, comparing a trust beneficiary to the investors in Refco. “The legally protected interest in the properties at issue here rests with the trustees, not the beneficiary.”

The court said that the allegations of misconduct on behalf of the former trustees did not change this because, as the Second Circuit found in Refco, the bankruptcy court was not the forum to address that misconduct. The court noted that Alexander had already ousted the trustees in the proper forum for their breaches of duty, and that the replacement trustee was “willing and able to advocate for the [t]rust's assets.”

The Ninth Circuit said that the replacement trustee is the real party-in-interest with standing to protect the trust. The court qualified its holding by finding that Hughes lacked standing “at least where his interests are adequately represented by a party-in-interest trustee,” as the court found they were in this case.

Attorneys for the parties in this case did not immediately respond to requests for comment.

Judge Jay S. Bybee wrote the opinion and was joined on the three judge panel by Judges Raymond C. Fisher and Elizabeth E. Foote.

Eric Victor Rowen, Howard J. Steinberg, Scott D. Bertzyk, and Matthew Ryan Gershman of Greenberg Traurig LLP, Los Angeles, and Karin Bohmholdt of Greenberg Traurig LLP, Santa Monica, Calif., represented Alexander Hughes.

Dean A. Ziehl and Jeremy V. Richards of Pachulski Stang Ziehl & Jones LLP, Los Angeles, represented the debtor.