In the lush hills above Pauka’a, near Hilo, an ancient forest grows undisturbed, drenched by more than 200 inches of rain a year. Perched on the eastern slope of Mauna Kea, this submontane rainforest produces commercially valuable timber and sustains a complex array of plants and animals, some of them endangered or threatened. Except for the occasional pig hunter plodding along muddy, jungle trails, this humid forest on the Big Island’s windward side has largely been left alone, until recently.
Bulldozer tracks, abandoned machinery and a slash pile now mar the terrain, a gargantuan legal fight over the property is brewing, and local residents and environmental activists are fuming over what appears to be an illegal incursion into state-regulated Conservation District land.
The silence of this remote spot on the Hamakua Coast was broken in October 2000, when loggers began felling sections of the privately owned rainforest, sandwiched between the federal Hakalau Forest National Wildlife Refuge and the state-owned Hilo Forest Reserve. The loggers’ target species was one of the rarest and most sought-after trees in the world: koa (Acacia koa), a hardwood that grows naturally only in the Hawaiian islands. With its curly grain and attractive blond, red and brown hues, koa is one of the most unique and expensive woods in global markets. It’s coveted by woodworkers in Hawai’i and abroad, all of whom are eager to convert koa into high-priced furniture, musical instruments, artwork, and architectural accents.
“It’s the market leader,” said Andrea Gill, executive director of the Hawai’i Forest Industry Association, based in Hilo
The loggers who felled the trees worked for Koa Timber Inc., a lumber company based on O’ahu that purchased this swath of some 16,000 acres three years ago. The property, about ten miles north of Hilo, includes one of the largest chunks of intact koa forest left in Hawai’i, foresters and scientists say. The company’s owner, Kyle Dong, promised to do what many in Hawai’i from environmentalists to foresters have long sought. Rather than clear-cut the trees and walk away with the profits, Dong has pledged to log sustainably, control invasive species and leave the forest healthier than before.
But within months of the first koa trees crashing to the ground, the project screeched to an abrupt halt. A dispute between Dong and his lender has spiraled into a legal battle filling more than 20 volumes in First Circuit Court in Honolulu. The lender says Dong defaulted on his loan payments and wants to foreclose on the property, while retaining the timber rights, estimated to be worth more than $100 million. Dong has counter-sued, alleging predatory lending and racketeering, among other charges.
As the litigation grinds toward trial in March, the koa project has hit new roadblocks. This summer, in response to critics, Dong withdrew what was supposed to have been the final environmental impact statement for the project, saying the document still needed work. A completed environmental study is key to winning approval from the state Board of Land and Natural Resources to log the koa, most of which lies in the state-regulated Conservation District. Meanwhile, neighbors living near Dong’s property turned him in to forestry officials, complaining that his loggers had encroached into the Conservation District without state permission.
The violation, if confirmed, could mean a fine of $2,000 for every tree illegally cut. Officials inspected the area in July and again in September, said Dawn Hegger, a planner with the state Department of Land and Natural Resources’ Office of Conservation and Coastal Lands. The matter is pending before the Land Board.
Critics of the troubled project are hoping the chainsaws stay quiet for good.
“It’s one of the largest koa stands in the state and it shouldn’t be logged,” said Marjorie Ziegler, executive director of the Conservation Council for Hawai`i.
Others are wondering what went wrong with Dong’s operations and whether large-scale sustainable koa logging can ever be done in Hawai’i. Many saw Dong’s effort as a promising test case for a new industry, one that could create jobs and improve the health of a forest under biological attack by alien species, both plant and animal. These advocates of commercial forestry would like to see the problems fixed and the logging move forward.
“We would love to see a responsible operation,” said Michael Buck, who administers DLNR’s Division of Forestry and Wildlife.
Dong intends to push forward with the koa operation despite the obstacles, according to Danton Wong, one of Dong’s Honolulu-based attorneys. Dong, he added, is refining the environmental impact study and putting together a habitat conservation plan to satisfy the concerns of critics, among them, the U.S. Fish and Wildlife Service, which manages the wildlife refuge just upslope of Dong’s land.
Dong, who declined repeated interview requests, apparently remains optimistic.
“We all recognize that this is an operation that hopefully will have longstanding good effects on the environment,” Wong said.
A Working Forest
The proposed logging in the South Hilo district caught the attention of government agencies and citizens in part because so much of Hawai’i’s koa has already been harvested. Objections, in the form of written comments and statements made at a public hearing on April 11, 2001, also poured in because Dong proposed cutting a hefty volume – one million board feet a year. Most of that would be from Conservation District land, where development (including logging) requires a period of public comment and eventual Land Board approval.
Although Hawai’i’s timber industry is minuscule by mainland standards, koa is a dwindling commodity. Less than 25 percent of native koa forests remain standing, according to Jack Jeffrey, senior wildlife biologist for the Hakalau National Wildlife Refuge.
Koa reserves on private land fell from 138 million board feet in 1970 to 57 million in 1988, according to Sabry Shehata, a University of Hawai’i-Hilo professor of agriculture economics. Since the late 1980s, the volume of native koa has probably dropped another 20 percent, Shehata said. Much of the koa loss is due to cattle and sheep grazing. Ranch animals, widespread on the Big Island, love to munch on young koa trees. The seedlings taste so good to animals that Jeffrey calls them “ice cream trees.”
Koa has also declined because of logging, as well as natural death and decay.
The pressure on koa is nothing new.
Island forests have produced fuel, shelter, medicine and wood products for centuries. Long before Western contact, Hawaiians cleared their land for agriculture and used trees for firewood, building material, canoes, clothing and other items of daily living.
“When Captain Cook came to the islands, the landscape was already pretty well altered by the Hawaiian people,” said Peter Simmons, a land manager for Kamehameha Schools, which owns some 365,000 acres of land statewide, some of which is logged.
After the arrival of missionaries, the forests became increasingly degraded as land was cleared for ranching, and later, to make way for the sugar and pineapple industries. Logging was done with little regard for how it would affect birds, fish, native plants and other wildlife. Biodiversity wasn’t a concern back then. Chopping down trees to make way for pastures, orchards and sugar lands was the goal.
In more recent times, most logging in Hawai’i has consisted of small-scale salvage operations, Simmons said. When Dong came along with his plan for selective harvest of koa trees on his property near Hilo, the project’s sheer size raised eyebrows. Annual harvest of koa since the early 1980s has averaged about 400,000 board feet a year, according to the Hawai’i Forest Industry Association. Dong’s proposed harvest would more than double that, making it the largest koa operation in the state.
Initially, the plan called for logging on 16,000 acres. Dong has since downsized it to 13,129 acres, about 3,000 of which would be left uncut as buffer strips along streams and along the wildlife refuge boundary. Some areas, designated as critical habitat by the U.S. Fish and Wildlife Service, would also be spared from chainsaws.
Rather than clear-cutting, Dong proposed cutting no more than seven trees per acre every year. The property would be divided into seven “harvest units” of 1,000 to 1,500 acres each. These would be logged on a seven-year rotation schedule.
To many, the project seemed like an economic and ecological boon to East Hawai’i, a region still struggling to replace the hundreds of jobs lost with the demise of the sugar industry in the mid-1990s. At $7.80 per board foot, the operation would produce $7.8 million a year in revenue, Dong predicted. He would create nearly 50 jobs, directly and indirectly, run a $1.6 million payroll, and pay $263,000 in annual state taxes.
Dong pledged to use environmentally friendly methods to harvest the trees, favoring helicopters over bulldozers to reach the forest, for example. Not only would Dong’s workers replant koa, he would hire consultants to monitor the seedlings’ growth and rid the land of invasive species, particularly strawberry guava, that choke out native trees. He promised to control feral pigs through increased hunting, trapping and fencing. Dong said he would leave buffers around trees with nesting birds. And, in response to concerns from biologists, he said logging would be suspended in May and June, when the endangered Hawaiian hoary bat breeds.
The idea appealed to many.
“There is a statewide need for sustainably harvested koa,” wrote the HFIA’s Gill. “A well thought-out, sustainable commercial koa forestry operation in the South Hilo forest could help meet this demand if it was carefully and properly implemented.”
Hilo woodworker Greg Blomgren agreed. He often has to wait months to buy koa from sawmill owners. “The market could use a little flooding. The prices are so inflated now because demand is so high,” he said. “It’s trendy and it’s very rare.”
But the project carried risks. One of the biggest hurdles was convincing government officials, the public and the environmental watchdogs that logging old-growth koa was a sound idea. Then there was the complicated task of getting the permit needed to harvest trees in the Conservation District, a politically touchy issue in a state with the highest number of endangered species in the nation. “There is great potential for major environmental damage if this operation is allowed to go forward under the present forest management plan prescriptions,” wrote Buck, the state’s top forestry official, in a July 17 letter to his colleagues at the Office of Conservation and Coastal Lands. The U.S. Fish and Wildlife Service, which manages the Hakalau refuge, noted that Dong’s property serves as a buffer between the refuge and degraded former sugar plantation land along the coast. The 38,030-acre Hakalau refuge provides habitat to 14 native birds, eight of which are endangered. The refuge is also home to the Hawaiian hoary bat and at least one and potentially up to 15 endangered Hawaiian plants, wrote Paul Henson, then-field supervisor of the federal agency in Honolulu.
The historic lack of human activity on Dong’s land, prior to the recent logging, has slowed the spread of invasive species on the refuge, Henson said in his comments on the draft environmental impact statement. Opening the forest to public hunting and commercial forestry would invite weeds in via access trail and seeds transported by dogs, hunters and work crews, according to Henson. In later comments on Dong’s final environment impact statement, Henson repeated the same concerns.
Even promoters of the logging industry say Dong’s attempts to win support for his project have fallen short.
“The project as currently proposed does not provide the degree of assurance needed to be considered a truly sustainable supply of koa timber,” wrote the forest industry association’s Gill. She listed a host of shortcomings, including not enough detail on how Dong would control invasive species or whether the helicopter logging and replanting would do an adequate job of regenerating koa.
Gill noted in an interview that she commented on Dong’s draft environmental impact statement and had not reviewed the final version, released in June but subsequently withdrawn.
Wong, attorney for Dong, said the company needs to correct some errors and add information to make the final environmental impact statement complete. This, he says, should allay some of the concerns the project has provoked.
“The comments we received on the FEIS indicated to us that we weren’t explaining what we were doing sufficiently,” he said. “There’s so much information we have. A lot of it is in there. But it’s not in a fashion that people can easily understand.”
A Lack of Specifics
Dong’s first attempt to win state approval for the project was accompanied by a draft environmental assessment issued in January 2001. The report gave a general overview of the project, discussed the physical attributes of the land, and talked about the plants, animals and other resources intrinsic to the area.
The document relied heavily on the Hawai’i Forest Bird Survey of the late 1970s and two days of field work. It acknowledged that “surprisingly little botanical field work has taken place on the site.”
The draft was widely criticized by agencies, individuals and the logging industry’s trade association as inconsistent and lacking enough scientific and economic detail to be meaningful.
Dong hired new consultants and in December 2002 published an expanded study a draft environmental impact statement. Again, critics ranging from the Sierra Club to the Fish and Wildlife Service to the state Division of Forestry and Wildlife found the analysis deficient.
“We find it difficult to support the approval of a harvesting permit over such a large, relatively undisturbed native forest area without adequate information,” wrote Buck, head of the forestry division.
Most agencies and individuals who commented on the document found that Dong failed to provide, among other things, basic information on how much timber the property held, to what extent endangered species used the area, what he would do to avoid harming them further, how he would adequately control invasive species, and how he would monitor and pay for reforestation.
“The draft EIS lacks the detailed explanation needed to mitigate the control of invasive weeds, pig activity and preventing damage to bird, bat and insect habitat following harvesting,” Buck wrote.
At the same time, state officials and others interested in Hawai’i’s forests say something needs to be done to control the spread of weed trees and grasses that are strangling native species, such as koa and ‘ohi’a. And if Dong or another landowner were committed to a sound, long-term control program, the benefits to the land and the economy would be significant.
“The same people who are upset about his plan, and they have a right to their opinions and I respect that, but we need to find a way to deal with the problems of our forests,” said Simmons, land manager for Kamehameha Schools.
Lloyd Jones, who co-owns Martin & MacArthur, a furniture store in Honolulu that sells handcrafted koa furniture, agreed: “The worst forest management practice is to do nothing. It means the pigs come in, the weeds come in. You have to manage it.”
Waiawi and Pigs
The lower-elevation forest on Dong’s land is thick tangle of strawberry guava, or waiawi ‘ula’ula (Psidium cattleianum Sabine). Native to South America, strawberry guava was introduced in Hawai’i in the early 19th century because of the luscious, sweet-tasting fruit it prolifically bears.
Strawberry guava is considered one of Hawai’i’s most serious pests. The ubiquitous tree grows on all the major Hawaiian islands but it especially flourishes on the Big Island’s windward side, where the warm climate and heavy rainfall offer ideal growing conditions. The species is considered a noxious pest because it grows voraciously and kills native plants, like koa and ‘ohi’a. Because it out-competes almost everything in its path, strawberry guava establishes monocultures, or biologically barren zones dominated by a single species.
The wild pigs that run rampant in Hawai’i gorge themselves on the mouth-watering guavas that carpet the forest floor in many places. When they defecate, the pigs drop the seeds into new areas, encouraging guava’s spread. Besides carrying seeds into native forests, pigs pose other threats to Hawai’i’s koa stands. Feral pigs, along with cattle, uproot and eat seedlings. They also create trails and wallows, destroying native sedges and grasses and replacing them with introduced species. Surveys of Dong’s land showed heavy pig infestation throughout the property, according to the environmental assessment. A walk through lower sections of the forest reveals pig droppings and wallows virtually everywhere.
State officials, private landowners, conservationists and others recognize alien species as a major threat to native forests and many would like to see the problem controlled. Dong’s offer to construct pig exclosures, starting with 100-acre units and eventually fencing off several thousand acres, was welcome.
There was also support for his proposal to mechanically grub out and kill the strawberry guava with herbicides. But the plan, as proposed, always seemed to lack enough specifics to satisfy regulators.
Buck says he has read various iterations of Dong’s forestry plan but his basic concerns have gone unmet. The Division of Forestry and Wildlife has “repeatedly stressed the need for a budget that details all components of the harvest, tree regeneration, monitoring, and weed control methods Koa Timber Inc. has proposed,” Buck wrote last July. “Such a budget is needed to evaluate whether the proposed methodology is economically viable, but none has been submitted to date.”
No Cookbook
As a timber company owner, Dong wanted to break new ground for his industry and he fashioned himself a proponent of sustainable forestry in Hawai’i.
“For many years, the proprietors of Koa Timber Inc. have been disenchanted with local timber suppliers because they have stripped the forest of the islands. By stripping the forest, timber suppliers have not only ruined the forest and wildlife it supports, but they also jeopardized their businesses. Without timber to sell, many of the suppliers have gone out of business. Rather than continue to depend on these suppliers, the proprietors decided to secure their own timber resources,” Dong wrote in his draft environmental assessment.
“Koa Timber Inc. will demonstrate to others that managing natural forests in a sustainable manner can be economically valuable and environmentally responsible,” he continued.
As he was putting his plans together, Dong consulted with The Nature Conservancy of Hawai’i and other environmentally oriented groups in an effort to build support and head off potential conflicts, said Rob Shallenberger, the organization’s conservation director for the Big Island. “They wanted us to comment or provide our input on their mitigation strategies. They were working very hard to incorporate measures that would minimize adverse impacts and address the concerns that people had raised,” Shallenberger said.
The Conservancy staff shared with Dong concerns they had about protecting six perennial streams that cross the property, representing some of the most pristine watersheds in the Hawaiian islands, Shallenberger recalled. Staff agreed with the Fish and Wildlife Service that logging could compromise the nearby Hakalau refuge and, Shallenberger added, the group also expressed “concerns about some of the predictions about sustainable timber harvest based on some pretty limited information.”
The final environmental impact statement acknowledges that very little data exist on koa growth rates and actual volume of timber on the property. “This dearth of growth and yield information presents the greatest problem in determining a sustainable harvest,” the document acknowledged.
Dong has resisted doing a comprehensive timber cruise of the property, citing the high cost. Instead, he has offered to conduct a timber inventory on a rolling basis, as the logging proceeds and revenue rolls in. The state has balked at that approach because not knowing how much timber is on the property makes if difficult to know if the project is economically feasible.
“I’m still not sure the economic model will work,” said Buck.
Regulators also wondered whether helicopter logging, while more environmentally benign than conventional methods, would spark the regrowth of koa in the way Dong envisions. Koa is a light-dependent tree that likes to grow in disturbed soils. Landslides, severe storms, wind, bulldozers, or anything that mixes up, or scarifies, the soil benefits koa production. The seeds naturally get scattered in the ground by Hawai’i’s tropical breezes. In commercial forestry, it just takes a little activity to get them interested in sprouting, foresters say.
“Since helicopter logging creates minimal soil disturbances, the natural regeneration of koa in harvested sites could be disappointing,” said Gill of the HFIA.
J.B. Friday, a forester with the University of Hawai’i’s cooperative extension service, has a similar view. While helicopter logging sounds great on paper, in reality, it may not be the proper way to harvest koa. “There is a strong possibility that the logging methods described will not open large enough gaps for koa to regenerate and grow to maturity,” Friday said.
Both Buck and Friday recommend that Koa Timber start out on a scale much smaller than 13,000 acres. Buck suggested that the company bite off about 2,000 acres and do a demonstration project to show that it could control invasive species, protect endangered birds and plants, and do a good job of spurring new koa growth.
“It would be better to start on a much smaller area, or harvest an initial increment and then monitor the results for several years before proceeding,” Friday said.
Little is known about commercially managing koa for sustainability, which makes the Dong project so interesting and yet risky, several professional foresters said.
“There’s no cookbook to koa silviculture,” Friday said.
A Weed Corridor
Despite all the unknowns and the risks involved with winning state approval to log, Dong purchased the property for $10.3 million from the estate of Ling Kai Kung of Hong Kong, a nephew of the late Chinese nationalist leader Chiang Kai-shek. He secured the financing through Metropolitan Mortgage & Securities Inc., based in Spokane, Washington the firm he’s now battling in court.
From October 2000 to June 2001, Dong’s loggers cut trees in the portion of the property that lies within the state Agriculture District, where logging is allowed without special permit. About 357,000 board feet of koa was removed, using both bulldozers and helicopters, according to the final environmental impact statement.
Micah Miller and his wife, Gwen, are among Dong’s closest neighbors. They live on about 20 acres high in the hills overlooking Hilo Bay, less than a mile from the logging operation. The Millers started hearing helicopter noise from their home in December 2000 and saw choppers flying overhead. The aircraft were ferrying koa logs to a staging site, where they were transferred to trucks that hauled them to a sawmill in Pepe’ekeo.
Miller, a real estate agent and board member of the Kaiwiki Community Association, said Koa Timber never notified him or any other neighbors about their operation. He became curious and decided to see for himself what was happening in the nearby forest, said Miller, who has a certificate in tropical forestry from the University of Hawai’i-Hilo.
With a machete, he hacked a trail through the guava jungle behind his house. The narrow, primitive trail, marked by thick brush and pig droppings, connects to an established route used by hunters that winds through the hills onto Dong’s land. The waiawi is so dense at this elevation that little sunshine filters through the canopy. It’s a dark and humid place, where moisture coats everything. A hand placed on a waiawi trunk comes away wet and mud covers hiking boots within minutes. The higher in elevation, the drier the forest gets and the waiawi thins out somewhat. Eventually, the hunter trail gives way to a pasture where Dong’s loggers had a staging area. Abandoned machinery and slash now litter the site.
On one visit to the area, Miller said, he saw puddles of oily fluid left behind by the logging equipment. On another, he and a neighbor came upon something that disturbed them even more. It appeared that a bulldozer had plowed a road uphill beyond 1,600 feet in elevation, marking an incursion into Conservation District land. From the main road, bulldozer tracks veered off in various direction, like branches from a trees.
Miller and his neighbor, John Flaherty, are longtime residents of the area and know the lay of the land. They got together and took their topographical maps and global positioning system devices on an unofficial reconnaissance hike. From maps and visual observations, they determined that the Conservation District began just before a fork in the Honoli’i Stream. Locating the fork, the pair then backtracked to find the bulldozed road made by Dong’s loggers, and followed it for about a mile.
The two knew that Dong had not received a Conservation District Use Permit to log. In February 2001, Miller notified state authorities of the apparent violation.
A few months later, Peter Kerr got in a helicopter and flew over the property to investigate. Kerr is a conservation officer with the Department of Land and Natural Resources’ Division of Conservation and Resource Enforcement.
Kerr located the bulldozer tracks and, using the instruments inside the helicopter, calculated that Dong’s loggers had indeed plowed a road deep into Conservation land.
“It was obvious,” Kerr said.
The dozer tracks went “far beyond” the limits of the Agriculture District, he said. Kerr reported his findings to Hegger with the DLNR Office of Conservation and Coastal Lands. Hegger said her office has conducted two site inspections but she would not discuss specifics.
Wong, the attorney for Koa Timber, also inspected the site. He wouldn’t say whether the loggers had in fact breached state law by logging in the Conservation District without the required permit because violations can only be determined by the Land Board. But if the Land Board determines that violations did occur, Koa Timber Inc. is prepared to acknowledge wrongdoing, he said.
“Obviously we cut trees and if we cut them in the Conservation [District], we’re bad and we’ll take our lumps,” Wong said.
Two years after he discovered the apparent violation, Flaherty is still outraged. Recently, he pointed out a flowering purple weed, alien to that terrain, that now sprouts along the corridor plowed by the bulldozers. The work crews and the machinery brought it to the Conservation land, he said, adding: “They’re criminals. They bulldozed a mile into the conservation zone and brought all the weeds up.”
Flaherty emphasized that he’s not a radical, anti-logging environmentalist. He supports the idea of eradicating guava, controlling pigs and making a rainforest healthier. But logging has to be done right, Flaherty said, and so far he isn’t impressed by Dong’s track record.
Miller and Flaherty also wonder why, two years after the fact, state regulators have yet to prosecute Dong. They acknowledge that the DLNR’s enforcement division is understaffed. But, they said, the kind of response they’ve seen to their complaints in this case doesn’t inspire confidence that the DLNR will be able to police future operations on the 13,129 acre project, they said.
Unlike other states with active forest products industries, Hawai’i has no comprehensive state logging law that spells out what loggers can and cannot do. The state does have a manual outlining “best management practices” but they are optional on agricultural land. On land in the Conservation District, it’s up to the Land Board to decide whether or not to attach them to a permit.
“We’re kind of like Costa Rica. We have things on paper but nobody enforces them,” said Miller.
Past Practices
The South Hilo project isn’t Dong’s first foray into koa logging or controversy on the Big Island. In the mid-1990s, a Dong-owned company, KoaAina Ventures, logged private land in South Kona, on the leeward side of the island. The heavily forested land, at Honomalino, lies in the state Agriculture District.
For loggers to reach the site, Dong needed to obtain an easement from the Land Board to cross state-owned Conservation land. Environmental groups at the time reported that Dong began traversing the Conservation land before he had permission.
Activists also complained that Dong was using a road that diverged from the legal access, that he was over-harvesting, and that he was running a sloppy operation. State forestry officials looked into it.
In a terse March 1996 letter, Buck told Dong to stop logging until he cleaned up a leaky 50-gallon drum of hydraulic fluid and fixed several pieces of equipment that were dripping fuel. Buck also chastised Dong for excessive harvesting and damaging non-target trees in the project area. Less than a month later, Dong responded with a letter of his own saying the broken equipment had been repaired and the spills were cleaned up.
Dong was never fined and the state continued to granted him permission to cross state land.
“There were some who felt it wasn’t the best operation but it was within the legal parameters,” said Roger Imoto, administrator of the Division of Forestry and Wildlife on the Big Island.
In 1999, the Nature Conservancy bought the property that Dong logged. Because logging and grazing had severely degraded the 4,000-acre tract over the last century, the Conservancy decided to acquire the property to try to restore its ecological values. Ironically, the organization is also attempting to do what Dong said he would do in South Hilo. By testing koa growth rates and trying out various management techniques, it’s attempting to develop a model for sustainable koa forestry that it can pass on to other landowners, said Heather Cole, the Conservancy’s Big Island field representative.
Koa in the area logged by Dong seems to be coming back nicely, Cole added. There’s a great seed bank, lots of light and great growing conditions. It makes sense to figure out a way to turn degraded land into a working forest, she said.
“Koa just wants to grow. And then, when it grows up, it’s a very valuable wood. It’s a no-brainer. Why wouldn’t you do something with this product?”
Battling It Out
Besides the regulatory hurdles holding up Dong’s South Hilo project, the timber company owner also needs to resolve a contentious legal fight with his lender, Metropolitan Mortgage & Securities, that could jeopardize his plans for the koa forest. Metropolitan, which financed Dong’s purchase of the property, paints the situation as a simple foreclosure case. But Dong is alleging a series of white-collar crimes on the part of his lender, ranging from loan-sharking to fraud.
According to attorneys for Metropolitan, Dong fell behind on loan and timber harvest payments. Executives at the Spokane company are seeking to take ownership of the property after they and Dong failed to agree on a workout plan to repay the debt.
“The basic dispute is that they haven’t paid us,” said Lea Hong, a Honolulu attorney for Metropolitan. “We want to get paid or we want to foreclose.”
Dong has testified that while he ran into initial difficulties making his monthly payments because of unanticipated challenges and costs with the logging, the financing was structured in a way that made default inevitable. Metropolitan wanted to steal the property to pump up its faltering bottom line, he contends. Dong also said he was pressured into signing loan documents at the last minute. His counter-suit alleges fraud, racketeering, usury, illegal lending, deceptive business practices, breach of contract and other claims of wrongdoing.
A judge has thrown out all but four of Dong’s claims, says Steve Jones, a Seattle attorney representing Metropolitan.
Dong’s lawyer, Gary Dubin, says Metropolitan is in a perilous financial condition and that it structured the deal in a reckless and illegal way to benefit itself. In court documents, Dubin described the Dong financing as a “criminal scheme.”
In addition to the loan, the firm also took an $18 million equity stake in the koa and put it on their books to cover up losses, Dubin said. “They cooked their books,” Enron-style, he said.
Metropolitan staunchly denies that. If it wanted to have acquired the Hilo property, Metropolitan could have simply bought it, says Jones.
“The last thing I want to do, or the company wants to do, is predatory lending,” said Bill Smith, Metropolitan’s chief financial officer. “We don’t have a philosophy of loan-to-own.”
High-Risk Lending
The Spokane company is a high-risk lender that often backs projects, such as Dong’s, that wouldn’t qualify for conventional financing, Jones said. It often takes an equity stake in such projects to protect its interests.
To build its case for Dong, Dubin’s law firm hired experts to look into Metropolitan’s finances and lending practices. What they uncovered point to a company on the ropes, according to Dubin.
“Financial reports for Metropolitan Mortgage & Securities Co. Inc. show a financially distressed company desperate for unreasonable profits, resulting in unfair loan dealings with defendant borrowers causing virtually certain probability of default,” wrote William Sarsfield, a career banker and litigation consultant hired by Dubin to research the Dong transaction.
Metropolitan’s net losses in 2000 and 2001 were $7.6 million and $8.9 million respectively. Last year, Metropolitan posted a profit of $3.9 million, according to the company’s annual report. Yet a financial report for the nine month period ending June 30 showed Metropolitan suffered a loss of $25.5 million. Smith said the company expects to lose money in 2004 as well.
The same report showed the company’s commercial loan delinquency rate at 19.5 percent. That’s so high that it “either reflects reckless lending or an intent to use commercial real estate loans as a vehicle to seize properties from borrowers,” wrote Sarsfield.
In a quarterly filing with the Securities and Exchange Commission, Metropolitan noted that the high delinquency rate shouldn’t surprise anyone.
“We expect higher delinquency rates because receivables we purchase or originate are typically not of the same quality as mortgages that we originate for sale to such agencies as the Federal National Mortgage Association (‘Fannie Mae). We believe that the economic effects of these higher delinquency rates will generally be offset by the higher yields expected to be received on these receivables than those typically received on the conventional ‘A’ credit lending markets and the value of the underlying collateral,” the company’s report said.
Meanwhile, the company is facing other problems. The Internal Revenue Service determined that Metropolitan improperly recorded a $28 million tax benefit on a 1999 investment loss, according to a company filing with the Securities and Exchange commission.
And in late October, a closely affiliated company, Metropolitan Investment Securities, settled a months-long investigation into its activities by the National Association of Securities Dealers. Among other things, the settlement involved a formal censure from NASD, payment of a $500,000 fine, a ban on sales of securities of its affiliated companies, and restitution to certain investors. MIS is the sole agent for sales of securities in Metropolitan Mortgage & Securities. According to the Spokesman-Review, the Spokane daily paper, the restitution may require payment of several million dollars to investors misled by company representatives. The paper quoted Deb Bortner, director of Washington state’s Securities Division, as saying, “This is a case about a bunch of people being told Metropolitan was a safe investment when it wasn’t It may not be unsafe, but it’s certainly risky.”
Depleted Collateral?
All this smells bad to Dubin, Dong’s attorney.
Metropolitan’s “lending practices have violated the law, overstepping the role of an ordinary lender, tricking borrowers into making loans that are impossible to repay for the purpose of stealing the underlying property from borrowers and taking control of the borrowers’ enterprises, using falsely created assets derived artificially from those loan to cook their books,” the Honolulu lawyer has argued.
A great legal theory, but it falls flat, according to Metropolitan.
Dong wanted 100 percent financing to buy the Hilo property and start his wood venture, said Jones, attorney for the mortgage company. Dong portrayed himself as the most knowledgeable and experienced koa operator in Hawai’i, Jones added.
“Metropolitan relied on Dong’s representations regarding the value of the land, as well as his representations regarding his superior abilities related to harvesting, milling and marketing of koa timber. The payment schedule ultimately reflected in the timber harvesting agreement between Metropolitan and Dong is based on Dong’s representations regarding his ability to harvest and market koa,” Jones wrote in a summary he prepared of the case.
Dong was offered a financing package in July 2000 that consisted of $9.2 million in two loans, one for $5.85 million from Old Standard Life Insurance, a Metropolitan subsidiary, and another for $3.5 million from Summit Securities Inc., a closely allied company. A third element in the package involved Dong signing a timber harvesting agreement; under its terms, Dong would be advanced $2.5 million in return for agreeing to pay back $18 million over five years, presumably with funds from sales of harvested koa. The terms and conditions of the timber harvesting agreement were set by Dong, Jones said.
Dong’s attorneys describe the logging payment schedule as a rip-off of unbelievable proportions orchestrated by Metropolitan.
“Hawai’i Forest Preservation [a company owned by Dong and a partner] was required to make payments to Metro totaling $18 million, an incredible 600 percent-plus return on its $2.5 million advance. These payments were required whether or not any timber was harvested,” wrote Amara Harrell, an attorney who initially represented Dong.
In other words, Metropolitan put up a total of $11.85 million in loans and the purchase of the timber harvest agreement. In exchange, it obtained rights to the timber on the property.
The deal was structured so that Hawai’i Forest Preservation, a limited liability company formed by Dong and his partner at the time, Michael Nekoba, would buy the timber from Metropolitan at $3 per board foot. The company would then resell the koa to Dong for $4.50 a board foot. (In court documents, Dubin, Dong’s attorney, has suggested that Nekoba was holding a “hidden interest” in Hawai’i Forest Preservation for Metropolitan president C. Paul Sandifur Jr.) Dong could then market the koa at wholesale prices ranging up to $25 a board foot.
That premium market price for koa, Dong told Metropolitan, left him “an ample cushion to cover costs and earn a profit,” according to Jones. Dong harvested more than 300,000 board feet of timber from the property before Metropolitan asked him to stop. Based on the wholesale price of koa ranging from $3 to $25 per board foot, Dong had obtained between $900,000 to $7 million from the timber, “while hardly making any of the payments required under the mortgages and only one payment under the timber harvesting agreement,” Jones wrote.
Dong testified that Metropolitan shut him down so that he couldn’t make the payments. Without koa, there was no income flowing into Koa Timber Inc. with which to pay back the debt. Jones said Metropolitan asked Dong to stop logging because he was depleting the company’s collateral while in default on his debt.
Sarsfield, the expert witness for Dong, noted that Metropolitan lacked a current appraisal on the property when it agreed to finance the koa project. No property inspection report was obtained and it appeared to Sarsfield as though there was no cutting feasibility report, no cash flow report, no assessment of the equipment needed to log and its cost and availability. In addition, the entire project was build upon the assumption that Dong would get a state permit to log in a Conservation District, something he has yet to obtain, three years into the process.
The absence of these documents and the permit to log the majority of the property “would be considered a reckless disregard of lending practice,” Sarsfield wrote.
Metropolitan maintains that it relied on Dong’s representations and expertise and that the financing terms were based on information he provided.
“Normally, Metropolitan would not provide 100 percent financing because, in the event of default, such transaction usually resulted in inadequate security. Dong indicated, however, that the sale price of $10.3 million was based on an appraisal that did not consider the value of the koa,” Jones wrote. “Dong has asserted in pleadings filed in this case that the value of the property exceeds $125 million.”
Regardless of whether a judge decides this is a case of reckless lending or a simple default situation, no logging can occur on the Conservation District portion of the South Hilo property without state approval. As the litigation moves toward trial next year, Dong is still trying to get his Conservation District Use Permit. In October, the Land Board granted Dong another time extension to submit the final environmental impact statement the document that’s key to winning state approval. He now has until Jan. 31, 2005.
Dong’s koa factory on O’ahu was quiet on a recent afternoon. Stacks of lumber and assorted wood products lay scattered throughout the mill but the machinery was silent and the place was devoid of workers. A secretary said Dong wasn’t there and she didn’t know when she would see him.
— Paula Dobbyn
Volume 14, Number 6 December 2003