Walden versus OHA’s LLCs

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Weekly Commentary

For the Week of November 18, 2018

Walden versus OHA’s LLCs
By Tom Yamachika, President
 
About half a year ago, we wrote about some limited liability companies formed by our Office of Hawaiian Affairs (OHA).  These companies received cash and property, including 1,600+ acres of land in Waimea Valley, from OHA.  The question we raised at the time is whether the LLCs can credibly claim that they don’t have to follow laws that apply to the rest of government, such as the open records laws. 

Since then, a gentleman named Andrew Walden, who runs Hawaii Free Press, decided he would strike a blow for public transparency and asked the LLC to fork over some records, like their check registers.  The LLCs, predictably, told him to take a long walk off a short pier.  So, he sued.

The LLCs said that they are all independent companies, and that they all had obtained 501(c)(3) tax-exempt status from the IRS.  Yes, the LLCs are managed by the top people at OHA’s executive team, but they do so as volunteers, they said.  They pointed to a Hawaii Supreme Court case involving ‘Olelo, the public broadcasting corporation that was formed by the Department of Commerce and Consumer Affairs, and argue very strongly that if ‘Olelo is not considered a government unit for purposes of the open records laws, then the LLCs should be considered independent of government as well.

When you look at the governing documents for the LLCs, however, independence from OHA is not what you see.  The managers of each LLC are not individuals whom the LLCs can change as they see fit; they are the holders of specified management positions within OHA. The position, not the individual, is key.  Thus, the managers of the LLC will always be OHA management, and will always be state employees.  If there are any changes to be made in the governing documents, then the sole member of the LLC, which is either OHA or another LLC whose sole member is OHA, needs to sign off on the change.  And then, let’s not forget the ultimate power:  for each LLC, only the sole member possesses the authority to terminate the LLC’s existence.  If an entity is terminated, its net assets (namely, what’s left after the entity’s debts are paid) are not distributed to random charities, but go up the chain to the member that had given the termination order.

Indeed, the aroma of government control is so thick that even the IRS ruled that one of the LLCs, specifically Hi’ilei Aloha LLC, was an arm or instrumentality of a government.  IRS said, in effect, “Most tax-exempt organizations making a certain amount of gross receipts need to file annual tax returns, like the IRS Form 990, but government organizations like you don’t have to file returns.”  If the IRS ruled that one of the LLCs is a government instrumentality, we argued in our friend of the court filing, all three of the LLCs should be regarded as such because they are similarly controlled.

A couple of days after the Foundation filed, the Civil Beat Law Center for the Public Interest, which has done an extensive amount of work relating to Hawaii’s open records laws, jumped into the fray as well.  The Center pointed out that there are huge differences between ‘Olelo and the LLCs.  ‘Olelo, for example, is run by a 15-member independent board of directors while the LLCs are run by 3 managers all of whom are OHA managers and who are necessarily state employees.

Now the matter is with the First Circuit Court in Honolulu.  We will be reporting on case developments in this space.