The Hawai'i Supreme Court has found that local attorney James Kawachika — a past president of the Hawai'i Bar Association — was in a conflict of interest when he acted as court-appointed "master" reviewing liquidation of the Damon Estate's $1 billion in assets.

The high court, in a ruling late last month, also faulted state Probate Court Judge Colleen Hirai for allowing Kawachika to continue serving as master in 2004 despite objections from Damon heir Christopher Damon Haig.

Kawachika's law firm, Reinwald O'Connor & Playdon, was representing the estate in two civil lawsuits when Hirai appointed Kawachika in May 2004 to review the estate's business activities during the years 1999 through 2003. That was a critical period for the Damon Estate, when trustees sold some $500 million in local bank stock and another $400 million in real estate holdings and prepared to distribute the cash to heirs of the family fortune.

The law firm's representation of the estate at the same time Kawachika worked as master created a situation in which his "impartiality might reasonably be questioned," the high court said.

The master is to "serve as the eyes and ears" of the judge in providing an "objective review" of activities of the Damon Estate trustees, the opinion said.

"Although we do not question Kawachika's capability to effectively perform his responsibilities as master," the court ruled, "the facts of this case reasonably give rise to a perception that Kawachika's impartiality might reasonably be questioned."

Kawachika said this week, "I respectfully disagree with the decision and continue to believe the Probate Court's decision was correct."

UNCERTAIN OUTCOMES

The new opinion reversed Hirai's January 2005 ruling that Kawachika was not in a conflict and sent the case back to her for further action.

"The Probate Court abused its discretion by denying Haig's request to disqualify the master because a conflict of interest existed," the opinion said.

What happens next is unclear. Most of the assets of the estate have long since been sold and distributed among beneficiaries, although some $30 million in reserve funds are still being held while affairs of the once-mighty local financial powerhouse are wound down, according to recently filed Probate Court records.

The estate's offices — in the headquarters of First Hawaiian Bank, which Damon family patriarch Samuel Mills Damon helped establish — have been closed and its employees are gone.

Thomas Van Winkle, lead attorney for the estate, said, "I really can't comment on a case that's ongoing."

Frederick Riecker, personal attorney for Christopher Haig, said, "We're not exactly certain what happens now."

One question is whether Kawachika might have to surrender some or all of the $57,922 in fees he was paid as master.

"I don't know," Kawachika said when asked about the fees.

Riecker said: "That's a good question. I don't know the answer."

He said his client, in addition to protesting Kawachika's service as master, has filed detailed objections to management of Damon assets by estate trustees.

Haig and his lawyers hired outside experts who said the estate lost tens of millions of dollars selling Hawai'i and Mainland real estate. They also questioned the trustees' decision to keep much of the investment portfolio in First Hawaiian Bank stock, claiming greater returns could have been achieved with more diversified investments.

JUDGE'S OPTIONS

"One of the things we wanted was an evidentiary hearing to determine the validity of these claims," Riecker said.

Hirai has several options, said Riecker and other lawyers familiar with probate procedures and trust law.

She could name another master to conduct a new review of the estate's 1999-2004 financial activities or she could review the matters herself.

Or she could refer the matter to the civil court, which normally handles evidentiary proceedings that involve sworn testimony and documentary evidence, the lawyers said.

Meanwhile, Haig continues to protest the trustees' actions.

Last year, he was due to receive $3,156,250 from the estate, but he refused to sign a standard liability waiver so the money is being held in an account until his claims are resolved, court files show.

Haig's conflict of interest claims did prompt Hirai to require stronger conflict of interest disclosures by estate trustees.

And the judge adopted a recommendation from Kawachika that cautioned trustees "to be more circumspect in the waiver of disclosed conflicts of interest."

The newest master appointed by Hirai to review Damon financial reports and activities last year, attorney Jeffrey Niebling, disclosed that his sister-in-law worked at First Hawaiian Bank, which provides trust services to the estate.

That relationship was not deemed a conflict of interest by any parties in the case, including Christopher Haig.