SAN FRANCISCO When it comes to Herbalife, nothing seems to come without drama. Expensive, bitter drama.
Even as hedge fund titans wage a high-profile battle over the nutrition company and its finances, five law firms are heading to the First District Court of Appeal this month to wage a $3 million fee fight in what's been called the World War III of probate litigation.
On one side are business litigation firm Mitchell Silberberg & Knupp and solo practitioner Hillel Chodos. They're demanding payment for guarding the interests of Alexander Hughes, 21-year-old heir to a $400 million fortune bequeathed by Herbalife founder Mark Hughes, who died of an overdose in 2000.
Mitchell Silberberg and Chodos accuse the trustees of the estate which include the husband of a California appellate judge of creating "a horrifying morass of catastrophic problems," including a complicated tax-savings scheme that led to a $350 million lawsuit against the estate. Although unsuccessful in their bids to remove the trustees, Mitchell Silberberg says it nevertheless provided "excellent services" at a "significant courtesy discount."
On another side are the trustees, who say Mitchell Silberberg assigned 41 attorneys to the task of unseating them and failed. Even bringing in Chodos, who billed $1,000 an hour without keeping time records, didn't help their cause, say the trustees' lawyers at Akin Gump Strauss Hauer & Feld. What's more, they contend that Mitchell Silberberg and Chodos never cared about young Alex's interests. In reality, Akin Gump says, they were doing the bidding of his mother and guardian, Suzan Hughes, who's trying to wrest control of the trust for her own purposes after obtaining some $14 million in a divorce settlement.
"They were pursuing things that couldn't help [Alex], and they were unsuccessful," says Akin Gump partner Edward Woods.
For her part, Suzan Hughes says the probate litigation had merit but was doomed by poor lawyering from Mitchell Silberberg and Chodos. "The guardian's attorneys were repeatedly sanctioned by the court, were ineffective and were criticized by the court for substandard work," her attorney writes.
And what of Alex, the actual heir to the fortune? After turning 18, he hired Greenberg Traurig and Rosenfeld Meyer & Susman to launch his own effort to oust the trustees. And on his 19th birthday he sued Mitchell Silberberg and Chodos for "exorbitant billing," claiming punitive damages, though he's since dropped the claims.
Los Angeles County Superior Court Judge Paul Gutman sent the fee dispute to referee Richard Neal, a retired Second District Court of Appeal justice. After taking five days of testimony and 150 exhibits, Neal ruled in 2010 that Mitchell Silberberg could keep the $2.47 million it's already been paid but isn't due the additional $1.3 million it's seeking. Chodos, similarly, was allowed the $632,000 paid to him but not the extra $1.75 million he wants.
Neal, now of JAMS, found that their litigation efforts did not sufficiently benefit Alex's estate to merit the full fees. "Were petitioners seeking to recover their fees from Ms. Hughes, who approved and directed the litigation initiatives which generated the fees, the referee would have no hesitancy recommending that she be ordered to pay," Neal wrote in his findings and recommendations.
But Gutman, who had approved interim fee orders in the case, died before he could consider Neal's recommendations. The case was assigned to Judge Mitchell Beckloff, who adopted Neal's report and recommendations in their entirety.
Before the court of appeal on Feb. 27, Mitchell Silberberg and Chodos are expected to describe Beckloff's ruling as essentially a rubber stamp. In fact, Mitchell Silberberg says in its briefs, court records show that 150 exhibits entered into evidence before Neal were never even delivered to Beckloff's court.
Mitchell Silberberg partner Karl de Costa argues that snafu renders Beckloff's review "de facto insufficient."
Says Chodos: "The trustees who have so far spent $26 million of Alex's money on attorneys fees argue that Mitchell Silberberg and I are making exorbitant claims."
A POTPOURRI OF CLAIMS
Mark and Suzan Hughes were married for nearly 10 years before divorcing in 1998. Their parting was not amicable. Suzan's legal team included notorious private investigator Anthony Pellicano, and she acknowledged at Pellicano's 2008 criminal trial that he had played wiretapped phone conversations for her, though she said they were not made at her behest.
The couple negotiated a settlement wherein, according to Akin Gump, Suzan received $6 million for her interest in Grayhall, the family's 22,000-square-foot Beverly Hills mansion; $4 million for a new residence; $500,000 to furnish the new residence; spousal support of $400,000 a year for 10 years; and $120,000 in support for their then 8-year-old son, Alex.
Around the same time Hughes removed Suzan as successor trustee to the $400 million Mark Hughes Family Trust. The trust was set up primarily to benefit Alex in the event of Hughes' death, providing him about $1 million a year in income, then $35 million at age 25, and the remainder at age 35. Hughes substituted in as trustees his father, Jack Reynolds; former Herbalife CEO Christopher Pair; and Hughes' long-time personal counsel, Conrad Lee Klein, who also happens to be the husband of Second District Justice Joan Dempsey Klein.
After marrying a fourth time, Hughes died on May 21, 2000, from an overdose of alcohol and the antidepressant doxepin. He was 44.
Suzan Hughes was appointed Alex's legal guardian and quickly clashed with the trustees. She sought to buy Herbalife, but the trustees instead arranged a sale to private equity companies for $685 million. That was twice her "lowball offer," the trustees say; Hughes in turn accuses the trustees of enriching themselves in the deal with generous contracts and advisory fees.
The trustees also embarked on a complicated tax-saving strategy, known in estate planning as a Graegin transaction, which involved creating two investment partnerships and loaning estate assets back and forth between them. The Graegin transaction reduced the estate's tax liability substantially estimates range from $30 million to $160 million but led to a dispute between the two partnerships, resulting in a $350 million claim against the estate.
Suzan Hughes retained Mitchell Silberberg and Chodos for a variety of actions against the trustees and the estate, with the clear overarching purpose of removing Reynolds, Pair and Klein as trustees. The litigation became personal Hughes asserted before referee Neal that she believes Klein was complicit in her ex-husband's death, though she could not provide any evidence, and she has sued Pair for sexual harassment.
The trustees' attorneys, meanwhile, have ridiculed Hughes for what they characterize as blatant attempts to enrich herself at her son's expense. They mock her claim that Alex wanted to recover bronze potpourri holders, a French chandelier and other antiques from the Grayhall mansion, and asked for a $100,000 summer rental in Malibu. Neal agreed it was "implausible" Alex wanted those items, and "instead likely that Ms. Hughes wanted them for herself."
(Mitchell Silberberg say the judges overseeing the litigation saw it otherwise, ordering a $50,000 payment for a summer vacation. They "all supported and ordered disbursements of custodianship funds precisely for the purpose of funding extravagant and opulent vacations for wealthy young Alex," de Costa writes.)
The trustees say they couldn't determine exactly what Alex wanted because Hughes, aided by Mitchell Silberberg and Chodos, prevented the trustees from visiting him to find out. "By definition," Akin Gump's Woods says in his brief, "they sought to have a portion of Alex's inheritance transferred to Suzan personally."
They further argue that Chodos and Mitchell Silberberg attorneys duplicated work, appearing together at more than 80 percent of court hearings, and that Chodos charged excessive fees.
Referee Neal found that Chodos' $1,000 rate was "at the very top end" of rates charged in 2009 "and would have been off the charts a few years ago." He found trustee Klein to be "an honest and straightforward if occasionally testy and impertinent witness."
Chodos, who's represented everyone from billionaire businessmen to the Los Angeles Police Commission, said in an interview he's been billing $1,000 an hour for 25 years. Judge Gutman had no problem with his rate, he said, and "Neal himself charged $800 an hour."
In court, Mitchell Silberberg and Chodos notched a few minor victories. Pair resigned under court pressure from Alex Hughes' conservancy but not the trust, and Suzan Hughes blocked the trustees' allowance of a creditor's $236,000 claim against the estate (out of a total of $350 million in creditor claims). Otherwise, the litigation has not yet produced results.
But winning or losing is the wrong standard to judge the value of its legal services, Mitchell Silberberg argues in its brief to the court of appeal. "There can be many 'benefits' to vigorous advocacy of a guardian's colorable positions," de Costa writes. If paid only for success, "every attorney for a fiduciary would serve as de facto contingency counsel."
Besides, it can take time to build a case of trustee unfitness. "Brick by brick," de Costa writes, Mitchell Silberberg and Chodos "laid the groundwork of support for an eventual effort to remove the co-trustees."
In any event, Suzan Hughes approved every legal initiative, and their legal duties appropriately ran to her as Alex's legal guardian, they argue.
De Costa and Mitchell Silberberg push back hard on the reasonableness of the Graegin transaction. "When the Graegin chickens do come home to roost, the co-trustees will argue that they are insulated from liability as a result of the approval order they obtained long ago, over the guardian's strenuous objections," de Costa writes.
The Graegin chickens did appear to be circling last year, as one of the investment partnerships went to trial against the Hughes estate in L.A. Superior Court, seeking $350 million over alleged breach of contract. But the trustees, represented by Akin Gump's Woods and Susan Leader, persuaded the jury there was no breach. "I'm glad we had a smart jury and I'm glad they saw things the way we did," Woods told the Los Angeles Daily Journal.
Akin Gump appellate specialist Rex Heinke is expected to argue for the trustees before the First District. Normally the appeal would have been heard by the Los Angeles-based Second District, but it was transferred to the First District because of trustee Klein's relationship to Second District Justice Klein.
PASSING THE TORCH
Suzan Hughes hired Bingham McCutchen to take over the trustee litigation after parting ways with Chodos and Mitchell Silberberg in 2008. She's walking a fine line in the fee appeal. Her attorney in the fee appeal, Martin Jacobs, writes that she, Chodos and Mitchell Silberberg did have probable cause to bring all of their actions, but that the lawyers did poor work, resulting in occasional court criticism and sanctions. "The rulings here reflect badly on the work which was done," writes Jacobs.
Suzan Hughes seemed somewhat conciliatory toward Chodos when she testified before Neal, saying she believed it would be fair to pay him $1.2 million of the $1.75 million he's requesting.
Meanwhile, Alex Hughes turned 18 in December 2009, bringing the guardianship to a close. Exactly one year later, he sued Chodos and Mitchell Silberberg over "purported services that were beyond excessive," in the words of the complaint filed by Steven Zelig of Brentwood Legal Services. He dropped the complaint against Chodos last year, on the ground that trial would interfere with his school obligations.
But Alex has retained Greenberg Traurig and Rosenfeld Meyer to continue his mother's efforts to oust the three trustees of his estate. And that, say Chodos and Mitchell Silberberg, proves they were acting in Alex's interests all along. "Greenberg Traurig, Bingham and Rosenfeld Meyer have all pursued the same actions on Alex's behalf, with his approval since reaching the age of majority, that we were pursuing," Chodos says.
"Even if the 'benefit to the ward' standard did govern the question," writes de Costa, "that standard is clearly satisfied."