In the Conservation District

Speculation? So It Would Seem: The Case of the Rearden Permit

The Board of Land and Natural Resources has long been aware of the often incalculable value that a Conservation District Use Permit adds to land in this district of supposedly restricted activity. To discourage speculation, it tries always to make certain that the party applying for a permit is going to build only for his own use – that is, the applicant has no intention to sell the property once the permit is obtained.

In the case of a permit granted in 1987 to one Michael Rearden, however, the Board seems to have played an unwitting role in increasing the value of the land. From the $285,000 purchase price paid by Rearden in 1985, by 1991, Rearden had accepted an offer of $2.8 million for the parcel.

An Uninformed Board

In June 1993, the Board of Land and Natural Resources, still in the dark about the way in which the Conservation District permit had been used to leverage the value of the land, approved a two-year time extension (until March 30, 1995) for completion of work related to Permit HA-1948, first granted to Michael Rearden in 1987. The ostensible purpose of the permit is to allow Rearden to build a 3900-square-foot house on a parcel along the North Kohala coast, just south of Lapakahi State Park.

The extension was the fourth for Rearden (who is also known as Roark McGonigle, Charles McGonigle, and Michael Reardon). Under the initial permit, construction of the house was to have been completed by February 1990. A year later, the deadline was extended to August 13, 1991 (first extension, attributed to processing time constraints involved in acquiring a state access easement) – and in June of 1991, Rearden was given another extension of time to complete work, this time to September 30, 1991 (second extension, due ostensibly to a complicated divorce). In November 1991, the Board approved extending the completion deadline to March 30, 1993 (third extension – the result of a “glitch” in divorce proceedings, Rearden told the Board).

In February 1993, with no end of construction in sight (or beginning, for that matter) Rearden requested another time extension, noting that his legal entanglements had kept him occupied until just the month previous.

The request drew criticism from Citizens for Protection of the North Kohala Coastline. In a letter from the group’s steering committee chairman, Toni Withington, dated March 30, 1993, CPNKC requested that the extension be denied. “Too much time has passed since approval of the permit,” Withington wrote. “The applicants have changed and progress on the project appears no further along than it was in 1988.”

Withington cited also concerns about lateral shoreline access along the Ala Kahakai, the ancient Hawaiian coastal trail; inconsistencies in the county and state files with respect the property; and how the proposed development conflicts with more recent efforts to protect open space along the Kohala coast.

The staff report to the Board at its June 25, 1993, meeting included as an exhibit what was described as a “response” to CPNKC’s concerns – which, in fact, verified virtually every point raised by Withington.

In the submittal recapping the permit history, the staff reported: “The applicant has been unable to commence work on the subject home due to an encumbrance imposed by the Court.” Now, however, the litigation that had held things up was completed, and, staff informed the Land Board, “Presently [June 1993], the Reardens are free to develop the subject property subject to payment of the lien (undisclosed amount) to the John and Josephine Selak 1981 Revocable Trust.”

No Curiosity

Therein hangs a tale, although one that has escaped the attention of the OCEA staff to date. The staff report was the first occasion Withington had seen mention of any encumbrance on the property. Given past Board concerns about the use of permits as a means of speculators enhancing the value of land they had no intention of developing, Withington asked staff what the amount of the encumbrance was. In a letter to Board Chairman Keith Ahue dated August 30, 1993, Withington wrote: “We did not learn that the shoreline property was subject to a lien until we read the staff report at the June 25 meeting. At that meeting, we expressed concern about the possible speculative nature of the CDUA and the applicants’ ability to build a home for their family’s use. I asked the OCEA planner assigned to the case if he knew the size of the lien. He did not. Nor had he asked the Reardens. I walked down the hall and paid $1 to the Bureau of Conveyances to get copies of the … court-ordered lien against the subject property.” The lien is the result of a judgment against Rearden made in a California court in 1987 and on record at the Hawai’i Bureau of Conveyances since 1989.

“Please note that the enclosed judgment in the sum of $577,151 is attached to the land… According to the Tax Office the 10 acres of land was sold by Signal Hawai’i, Inc., to a company owned by Rearden in 1985 for $290,000.

“If the Board has a stated goal of discouraging speculation on Conservation District land, would not the information about the existence of a lien on the land more than two times the original sale price elicit questions by Board members to Mr. Rearden about his ability to build a home for his family, as stated in the application?”

Whose Lot Is It Anyway?

For years, Rearden had battled in court efforts to file the lien against the North Kohala property. Court records give rise to a number of additional questions about Rearden’s motives in filing for the Conservation District permit and about other representations he made to the land Board and Office of Conservation and Environmental Affairs.

Rearden’s main defense against efforts to lodge the lien was that it wasn’t his property at all, but belonged rather to a trust the Foundation Epsil, based in Vaduz, Liechtenstein – that he had set up for his son’s benefit. (That foundation is now the owner of record for the parcel.)

The lien itself is based on a Judgment rendered against Rearden in a California civil case. (At the heart of that lawsuit were the actions of Rearden – who at the time was using the name Roark McGonigle – in managing a trust fund established by the grandparents of his then-wife. A court determined that McGonigle/Rearden had diverted several hundred thousand dollars of the trust’s resources to his personal profit.)

For several years, the trust was unable to track down McGonigle, who had assumed the name Michael Reardon or Rearden on his arrival in Hawai’i. When the trust learned that he might have substantial assets in Hawai’i that is, the 10-acre shoreline parcel – it began court action to have the lien imposed and, following litigation that spanned several years and a number of separate court cases, finally prevailed in February of this year.

An Unauthorized Agent?

If the land belonged to the Foundation Epsil, one would not have known it from the statements Rearden had been making all along to the DLNR. The original application for the Conservation District Use Permit indicated the land was owned by J & J SRT, a company wholly owned by Rearden. When Rearden failed to file annual corporate reports, J &J SRT was involuntarily dissolved by the Department of Commerce and Consumer Affairs. After that, Rearden represented in his dealings with the DLNR that he was the owner.

To Judge Shunichi Kimura, of the Circuit Court of the Third Circuit in Hilo, Rearden had a different account of his relation to the land. Not only did he not own the property; he told the court, he had no authority to act in any way on the foundation’s behalf.

In testimony taken July 25, 1991, Judge Kimura asked the foundation’s attorney, James Sogi, what legal basis there was for believing Rearden was the foundation’s agent. Sogi responded: “I’ve seen the letters and the correspondence with the Planning Department [actually the DLNR] in which he [Rearden] has purported to take actions on behalf of the property which is owned by the foundation. But I am unaware that there is any authority, specific authority granted to him by the foundation to do that… And I’m not familiar with any document or specific authority granted to Mr. Rearden by the foundation that would authorize him to take these actions other than as an unauthorized apparent agent.

Legal Strangers

Kimura then quizzed Rearden along these same lines, noting that in a memo to the court, Rearden had indicated that he was “an absolute stranger to… Foundation Epsil. You have nothing to do with it. You’re not the agent. You have no authority to accept service or do anything, and you have no more right to that than I or any other stranger to that. Is that your research and understanding?”

Rearden: “Yes, it is, your Honor.”

Kimura: “What is your response… that you have dealt with that land as if it was your own in dealing with government agencies? What is your response to that?”

At this point, Rearden explained that since he had set up the trust, he understood he could continue to make additional deposits into it. “And,” he went on, “I construed that to mean also that if I enhanced an asset that the trust had by putting money into that, that that would also be an acceptable provision of the original trust.

“So, basically, all I was doing was enhancing property that was owned by the trust. And I felt that that was a further benefit of- of- you know, even though it was a service rather than money, that that would be something that was provided for under the original trust agreement.”

Kimura asked whether, in “enhancing the value of the property”, Rearden “made representations in the application [to the DLNR] that you had the authority to act for the Foundation?”

Rearden: “I -I never – never made any such representation… I did not ever make that representation to them.”

Kimura: “And you wrote to them simply as a person who wanted to enhance the value of the Foundation Epsil’s property.”

Rearden: “To – to build a residence on that property; your Honor, which I’ve always considered to be somewhat distinct. And I always make a – a – I was always in the process of making an application to construct a residence… It was always my representation to them that I was asking for a permit to build the residence.”

Kimura: “And, normally, the person who asks for a permit to build a residence must be the person with legal authority to affect the property that you’re seeking the permit for. Every government agency has that as a foundational requirement that either you or you’re the agent for someone [who owns the property]. Did you make any such representation to these governmental agencies in seeking the permit to build…”

Rearden: “Your Honor, I would have to look back through every document in that case to know if I did…”

‘Very Careful Strategy’

Rearden’s original application to the DLNR, as stated earlier, showed the owner to be J&J SRT. To establish the relation between the corporation and the foundation, Rearden produced for the court a copy of a letter purportedly written May 1, 1985, from Charles McGonigle (another name he uses) to Fedes Fiduciare, a bank in Lausanne, Switzerland that, Rearden/McGonigle claims, was managing the foundation he had established for his son. The property discussed in the letter is not described, but presumably is the 10-acre parcel purchased from Signal Oil Co. in 1985.

“It is my very strong belief that the property we discussed can be developed with a substantial effort and very careful strategy;” McGonigle wrote. “In that event, the property will take on a very substantial increase in value for the trust. I am willing to take on the responsibility for the actual work with the understanding that you will cover the expenses.

“It is my understand [sic] that I would take title to the property as your nominee and hold it in trust until the permits are accomplished at which time I will transfer the property back to the trust without consideration.

“I would like to make one change, however in that I would like my corporation to take title as your agent rather than taking it in my name personally.” Rearden did not provide the court with a copy of a response to the letter, if any.

Payoff?

The “careful strategy” appears to have worked, according to the affidavit, provided to the court by Rearden, of Stephen Hurwitz, a Kamuela real estate agent. In his affidavit, dated July 17, 1991, Hurwitz stated he could attest to the approximate current market value of the North Kohala land. In considering the value, he noted:

“3. The subject property is zoned Conservation/Agriculture and is covered with extensive remains of early Hawaiian historic sites.

“4. A permit has been obtained from the Department of Land and Natural Resources for a single family residence, and an easement has been approved by the Land Management Board [sic] for access across state property, for access to the subject property.

“5. It is my belief that obtaining permits in Conservation areas is becoming more difficult with the passing of time. In any event, more difficult than permits applied for in 1985. It is also my belief that properties with multiple historic Hawaiian sites are becoming increasingly more sensitive in regard to development.

“6. On information and belief the existing permits and easement expire in September of 1991, if construction is not under way by that time.

“7. The value of the property without the ability to obtain a permit and the easement would be virtually worthless.

“8. Based on my information and belief if the subject property were to loose [sic] its permits for access and to build, and those permits could not be renewed, the owners of the property would sustain losses of approximately Three Million Dollars based on today’s real estate market.”

Less than two weeks later, on August 2, 1991, Hurwitz’s company, C & H Properties, Inc., had found a buyer for the land: Paul Mickelsen, who was offering $2.8 million, “less only customary closing costs and C & H Properties, Inc.’s five percent commission.”

At the Land Board meeting of November 22, 1991, Rearden begged the Board’s indulgence in getting an 18-month extension of the deadline for completing the house. No mention was made to the Board of the Mickelson offer. Instead, Rearden told the Board he needed six months to get “legal clearance” and another year to get the construction finished.

From mid-1991 through most of 1992, negotiations involving Rearden and the California trust seeking a lien on the property continued, since one of the terms of the Deposit Receipt Offer and Acceptance of August 2, 1991, was that the property be free of all liens and encumbrances.

The initial $2.8 million offer expired in April 1992, although in June of 1992 it was replaced by a DROA for $2.4 million. Once again, the parties could not come to an agreement to settle the judgment against Rearden and the offer expired.

In February 1993, the litigation was brought to a close with a stipulated judgment, allowing the California trust to maintain its lien against the property and specifying that the agent for Foundation Epsil in matters pertaining to the North Kohala property henceforth would be Janice Williams-Rearden, Rearden’s present wife.

And Besides…

The potential speculative aspect of Rearden’s use of the Conservation District permit was just one – albeit perhaps the most complex – that Citizens for Protection of the North Kohala Coastline brought to the Board’s attention last June. Other issues were:

Access: “In a letter to the Board on September in, 1991, Reardon said he had obtained an easement” for access to his property across state land. “However,” Withington continued, “according to the Land Management Division the easement has not been finalized. One condition of the access easement as proposed by Land Management is that there be no gates on state land. There is a locked pipe gate on the access road above the Reardon property on state land.” The Division of Land Management had actually prepared an agreement giving Rearden the required access in 1988. Rearden refused to accept it at this time.

Building permits: “Reardon told the Board in his September 1991 letter that he has “completed and obtained approval for his building plans. The county Building Department has no application for permits on this property.”

Water supply: “The CDU permit does not mention the need for proof of water supply, but a building permit would require this. No county water commitment has been issued for this property and it is unlikely that the applicant could get one, as there is no county water available in this area.”

Land Board Sidesteps CDUA Extension Issue

As the Rearden case illustrates, public participation in the granting of time extensions can provide an opportunity for the Land Board to be apprised of issues that its staff has been unable or unwilling to investigate.

Yet Roger Evans, administrator of the Office of Conservation and Environmental Affairs, recently proposed to the Board that it delegate authority to grant time extensions to the chairman. (This was discussed in the [url=/members_archives/archives_more.php?id=1214_0_31_0_C]September Island Watch column[/url] of Environment Hawai`i.)

At its September 10 meeting in Honolulu, the Board of land and Natural Resources took up Evans’ recommendation. Evans’ request was first placed on a Board agenda for its previous meeting on Maui, but the matter was deferred, given concerns of the public of insufficient time to comment on the submittal.

Testimony in opposition to the recommendation was submitted by a variety of environmental organizations. Marjorie Ziegler, a member of the recently appointed Conservation District Project Advisory Committee, told the Board that the proposal was “quite unexpected,” with no advance notice given to that panel.

Approval of the recommendation, Ziegler wrote, “would limit opportunities for public participation and appeal…. There are good reasons for placing time limits on CDUPs. Conditions on the land, public values, management objectives, and laws change over time. Deliberation by the Board gives everyone – the Board, applicant, and public – an opportunity to consider those changes and the appropriateness of any given CDUP time extension… Allowing the chairperson to grant or deny requests creates an appearance of impropriety, even if none exists, because decision-making occurs ‘behind closed doors.”‘

Perhaps the most damning testimony came from Toni Withington, a member of the Advisory Committee and also steering committee chairman of Citizens for Protection of the North Kohala Coastline. Using the example of that group’s comments on the request for a time extension made by Rearden, Withington pointed out how staff investigations of permittee actions tend to be cursory, relying solely on information supplied by the permittee.

“To us,” Withington wrote, “the OCEA staff has not shown the ability to carry out the rudimentary investigations needed to protect the public’s rights in the issuance of administrative time extensions. Therefore, it is up to public interest groups and neighbors to stay alert to possibilities of land speculation in the Conservation District. Your agenda is one of the few ways the public has of knowing what is going on in the DLNR. To remove these notices is to put decision-making back in the closet.

“Don’t lock us out.”

The Board did not act on the recommendation, but referred it to the Advisory Committee. At the committee’s next meeting, however, no mention was made of the matter.

Volume 4, Number 4 October 1993