Klukwan, Inc. board member Rosemarie Hotch has sued the village Native corporation, seven of its directors and the Chilkat Indian Village for “looting” corporation trusts through a $2 million loan to the village to buy the corporation’s tour boat and dock, and through “exorbitant” fees for managing the trusts.
Hotch is seeking the return of the village loan funds as well as money spent on “service agreements” to maintain the trusts. She also wants the court to rewrite trust documents to create independent trustees. Corporation board members currently serve as trustees, an arrangement Hotch calls an inherent conflict of interest.
“The defendants, who as both trustees and also directors of Klukwan, Inc., were on both sides of the transactions; the defendants looted the three trusts to provide Klukwan, Inc. with operating funds and, in turn, to furnish perquisites and ongoing employment for themselves,” the suit says.
Hotch declined comment on the case this week except to say she brought the suit with her own money.
Klukwan, Inc. manager and president Ralph Strong said the corporation would be responding to the suit. “We have an audit of the trust every year and all the shareholders get the audit reports. That’s as much as I can say about what’s going on. I’m not going to try to influence the court through your newspaper,” Strong said.
Strong recently replaced CEO Bob Hamilton as the corporation’s chief. He also is a member of the board of directors and a defendant in the suit.
In the wake of Hotch’s action, the corporation’s board has delayed a distribution to shareholders in the amount of $90 per share, or $2.28 million. The board voted for the distribution Nov. 13, about three weeks after Hotch filed suit in state Superior Court.
The suit says the loan to the village ran counter to the advice from the corporation’s own attorney and is specifically prohibited by language in the general income trust, the largest of the three trusts.
“The continuing existence of Klukwan, Inc. is dependent on the payments from these three trusts. Additionally, trustee Ralph Strong is employed by Klukwan, Inc. as are the children of two other trustees. These trustees have a double conflict of interest,” the suit says.
Hotch attorney Fred Triem wrote that in 2005, Klukwan, Inc. and its subsidiaries had run out of funds and were “deeply in debt.” Since then, the corporation has had only two sources of income, the “services contract” for maintaining the trusts and money shared among Native corporations. The latter wasn’t enough to fund day-to-day operations of Klukwan, Inc., the suit says.
Under the “service agreements,” the corporation was to provide support services for the three trusts including monthly financial statements, payroll, and accounts payable and receivable.
“In return for these limited services, the three trusts have paid and continue to pay Klukwan, Inc. enormous sums of money” including $4 million since 2006, the suit states. “During 2007 and 2008… the corpus of the general income trust dropped from approximately $28.8 million to $17.5 million, in part due to the transfer of millions of dollars under the service agreements,” the suit says.
The trusts paid millions of dollars in advances on the service contracts, but Klukwan, Inc. continues to bill for services every month, amounting to more than $200,000 per year, the suit says.
The suit also alleges that the last two years of operation of Chilkat Cruises and Tours, 2007-2008, were “improperly and illegally subsidized by the three trusts via advances on the services agreement.”
Hotch’s suit asks for an injunction prohibiting further disbursements of general income trust money to the corporation, or any disbursement of trust money to beneficiaries unless the trust is terminated.
Trust documents provide that the corpus of the trust be maintained at $28.6 million, according to the suit.
Klukwan, Inc. manager Ralph Strong defended the planned distribution, which Hotch’s lawsuit doesn’t specifically address. “These are trust funds and the trust was created to make distributions to shareholders. The trustees are doing what the trust was meant to do.”
Combined over the past three years, the corporation has made distributions equivalent to $160 per share, Strong said. He declined to say what amount remained in the general income trust. A 2008 company financial report cited $17.5 million in the account.
Hotch won a seat on the Klukwan, Inc. board in July. She said in an interview then that shareholder distributions in recent years are in violation of trust wording. She also provided company paperwork showing transfers from the trusts to Klukwan, Inc. and its subsidiaries were “specifically prohibited” under the trust agreement, according to certified public accountants Mikunda, Cottrell & Co.
According to the suit, an April advisory vote of general income trust beneficiaries found majority support for liquidating the trust.
Klukwan, Inc. board members named in the suit include Ralph Strong, David Berry, Jr., Edward Hotch, Janice Hotch, John Katzeek, Les Katzeek, and Chad Strong.