(CN) - Though the trustees who signed the settlement have since been suspended, the Ninth Circuit blocked a challenge Monday from the 24-year-old sole beneficiary of a multimillion-dollar trust created by the man who founded Herbalife, his father.
Alexander Hughes is the only son of Mark Hughes, founder of nutrition company Herbalife, and the sole beneficiary of the Mark Hughes Family Trust.
At the time of Mark Hughes' death in 2000, the 44-year-old nutrition executive was worth over $300 million. He had arranged for trustees to manage the trust, having stipulated that Alexander cannot touch the trust principal until turns 35 in 2026.
In 2004, the trustees arranged for Tower Hill Properties to purchase certain trust property, a 157-acre property overlooking Beverly Hills, Calif.
Notably, the sale was seller-financed - in other words, the trust loaned Tower Hill $23.75 million to purchase the property, plus additional money to develop it.
Since Tower Hill filed for Chapter 11 bankruptcy in 2008, however, it owes the trust more than $80 million today.
The proposed plan of reorganization, approved by the bankruptcy court in 2012, restructured Tower Hill's loans, modified its interest rates, and also provided that the trust would provide it with $7 million more in exit financing.
This deal prompted Herbalife's heir to petition for the removal of the three trustees, alleging that each had committed breaches of fiduciary duty with respect to the sale of the Beverly Hills property.
A California probate court agreed, finding that the trustees had indeed breached his duty to act with prudence by entrusting the development of the property to people with no formal education in real estate or property management, and no professional licenses.
After the probate court suspended the trustees, Hughes challenged the bankruptcy court's approval of the settlement, which allowed Tower Hill a payoff amount discounted by 30 percent.
A federal judge ruled that Hughes lacked standing, however, because he was not a "party in interest" to the bankruptcy suit.
The Ninth Circuit affirmed Monday.
"In general, a trust beneficiary is not the entity positioned to take legal recourse to protect the trust assets, unless the beneficiary is seeking only to enforce the terms of the trust," Judge Jay Bybee said, writing for the three-judge panel. "Here, Hughes' objection to the settlement agreement is not an action to enforce the terms of the Trust. Nor has Hughes suggested that his interest in the trust assets is somehow different from that of an ordinary trust beneficiary."
Hughes has no direct ownership interest in the trust assets at this time, and no legal entitlement to manage them.
Therefore, he does not have a "legally protected interest" in the bankruptcy settlement, the Pasadena-based court ruled.
"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," Bybee wrote. "The legally protected interest in the properties at issue here rests with the trustees, not the beneficiary. The proper party is FTIC [Fiduciary Trust International of California], the trustee ad litem."
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