Hamakua’s List of Creditors Sheds Light on Operations
On August 14, 1992, Francis Morgan’s Hamakua Sugar Company filed for protection from creditors under Chapter 11 of the federal bankruptcy law. The action was as predictable as tomorrows sunrise. Even so, Governor John Waihe’e described it as a “sombering” event.
Accounts in the newspapers listed the major secured obligations: $80 million owed to the Western Farm Credit Bank; $28 million to the Hawaii Production Credit Association; $9 million to the state of Hawai’i. The papers reported as well that more than $1 million was owed by Hamakua to the law firm representing it.
Not given much attention was the fact that Hamakua listed as its chief unsecured creditor the federal Pension Benefit Guaranty Corporation. According to Hamakua’s petition, the PBGC is owed $6 million in connection with two pension plans. The nature of the debt is not further described.
The PBGC is a quasi-federal agency, analogous, for example, to the Federal Deposit Insurance Corporation. As its name suggests, it serves as an insurance fund for pension plans. Given that Hamakua’s indebtedness to the PBGC suggest that the company may not have been making regular premium payments to insure its private pension funds, the lack of public interest in this debt is surprising. One might have expected union leaders to have shown more curiosity, especially since staff at the PBGC in Washington informed Environment Hawai’i that one of the two affected pension funds covers union employees.
Taxpayers are affected as well, albeit indirectly. The PBGC is already running at a deficit because of companies going bankrupt. That leaves the PBGC and, ultimately, the taxpayer, to pick up pension payments to insured retirees. Unfortunately, at the bankruptcy court hearing on Hamakua’s petition held August 19, 1992, none of the 20 or so attorneys present was there to represent the interests of the PBGC.
Who was there? Well, lawyers for the WFCB and the HPCA. An attorney for Royal Coast Corporation, the company that backed out of an agreement to purchase Hamakua’s lands at Waipi’o. Two lawyers from the state Attorney General’s office – one ostensibly guarding the balance on the state’s $10 million loan to Hamakua, the other on behalf of the Department of Taxation.
One lawyer represented two clients – the Hawai’i Medical Service Association (with a claim of at least $480,000 against Hamakua), and Murray Air, Limited (which charters airplanes and is owed $171,183 by Hamakua).
The Internal Revenue Service had legal representation at the hearing. Its lawyer informed the court that the IRS was “unable to verify” that Hamakua had filed corporate returns for 1990 and 1991. There was some discussion as well as to whether it was current on employee payroll withholding taxes.
The County of Hawai’i was not represented. Its property tax claims against Hamakua could run into the millions, however, if Hamakua sells land under agricultural dedication before the dedication expires (in 1994).
Kualoa Ranch, which, like Hamakua Sugar, is owned by Morgan’s family, is listed as a creditor with claims of $729,503 against Hamakua. Whether the same lawyers that represent Morgan as debtor in the Hamakua filing can also represent Morgan as creditor, in his capacity as owner of Kualoa Ranch, remains to be seen.
People of the state, accustomed to hearing of the company’s woes, might be forgiven for thinking Morgan has been wearing hair shirts. Quite a different picture emerges from the list of creditors. Someone appears to have been living high on the hog at company expense. Among creditors are the Alii Kai Boat Builders, All Pool & Spa (of Kailua, O’ahu), the Antler Hotel (Colorado Springs) – and that is just the “A’s.” The complete list of creditors contains thousands of entries. Apart from the “Top 20” creditors, the amount owed each creditor is not provided.
….While, at the LUC, Hamakua Files for Houses
In Hamakua’s bankruptcy filing, it claimed its creditors were fully secured by its land and other assets. Land held in fee and required for ongoing sugar production was valued at $100 million; leasehold properties for sugar production were valued at $60 million. The value of the unharvested crop was placed at $80 million.
Lands not needed for sugar production were given even greater value in the bankruptcy petition. An appraisal made in 1990, Hamakua’s lawyers claimed, determined that those so-called surplus lands (about 9,500 acres worth) had a value of between $139 million and $171 million.
That appraisal is contingent upon Hamakua Sugar winning a number of zoning approvals. County approvals granted last year for the proposed development around the Waipi’o Valley rim were overturned by court action. Approvals for redistricting from the state Land Use Commission are also required.
In an action that was virtually simultaneous with the Chapter 11 petition, Hamakua Sugar’s lawyers deposited with the LUC two petitions for redistricting of three separate parcels in Honoka’a and Pa’auilo – part of the “surplus” lands upon whose up zoning the appraisal is premised.
Many of the claims made in the petitions have been made in the past – but this time, they seem to be taken to oxygen-deprived heights. In support of the redistricting, the claim is made that the economic difference between the “with-project” scenario and the “no-project” scenario comes to $2.45 billion over the next two decades.
Promises Fulfilled?
Hamakua states in its petitions that it is not intending to develop the 182 acres in Honoka’a or the 130 acres at Pa’auilo. Rather, it intends only to sell them as soon as the redistricting is accomplished. How – even whether – the area is used afterwards is not for Hamakua’s planners to say.
But say it they do, providing the LUC with “possible” build-out scenarios. At Honoka’a, the petition states, “there could be up to 497 residential lots available,” while at Pa’uilo, 488 residential lots could be created.
In July 1990, the Land Use Commission released Hamakua Sugar Company from the requirement that it develop housing for employees on certain lands that the LUC had redistricted in 1975. In return for this relief Hamakua Sugar agreed to “provide housing opportunities to the current employees and pensioners … by offering for sale or rent a minimum of 100 lots or units, or a combination thereof.”
In the petition for the Pa’auilo redistricting, Morgan’s lawyers state that the petitioner “intends that the lots in Pa’auilo set aside for affordable housing satisfy those … conditions” imposed by the LUC in that July 1990 action.
(For more on Hamakua Sugar, readers are advised to consult the April and May 1992 editions of Environment Hawai’i by scrolling to their listings in the [url=/members_archives/archives1992.php]1992 archive[/url].)
Chidiac Cuts Debt By Giving Up Resort Site
To anyone following the long story of Charles Chidiac’s efforts to develop a resort in Ka’u, on the Big Island, it will come as no surprise to learn that, like Morgan, he has not been able to pay off his massive debt. On July 17, Chidiac turned over title to the 3,127 acres in Ka’u on which he was intending to build the Hawaiian Riviera Resort to a company called Notepower Limited, based in London. In a letter giving notice to the Land Use Commission of the sale, Notepower was described as a wholly owned subsidiary of Den norske Bank, Chidiac’s chief creditor.
By palming off the land, Chidiac would appear to have unloaded the $24.4 million debt that he has attached to it. Notepower apparently assumes responsibility for the $24.4 million note given to Chidiac by Den norske Bank of Norway.
Chidiac told newspapers that he would be on holiday in Europe for a few weeks, after which time he was hoping to put together a group of investors and within a few months, buy the land back.
Left unanswered still are questions about Chidiac’s remaining indebtedness – primarily to his former partners in the resort development (the Hawai’i Ka’u Aina parties), who still retain an undivided interest in adjoining land principally owned by Chidiac. Also holding a mortgage secured in part by Chidiac’s land holdings is a law firm that at one time represented him.
(For more on Chidiac and his extensive debt, readers may wish to consult the July 1991 edition of Environment Hawai’i by scrolling to its listing in the [url=/members_archives/archives1991.php]1991 Archive[/url].)
Chapter Two: Stender Versus Pele Defense Fund
In a June article of Environment Hawai’i, we reported that students at Kamehameha Schools had been discouraged by Bishop Estate trustee Oz Stender from giving to the Pele Defense Fund money they had raised to support a worthy cause. Our account was based on a report in Hawai’i Monitor which, in turn, relied on a report in the Kamehameha Schools newspaper.
Hawai’i Monitor is an impeccable source, in our estimation, and its editor, Ian Lind, has provided us with a copy of the newspaper report on which he based his writing. Nonetheless, according to Stender himself, the account is mistaken in certain respects.
According to Stender, his meeting with the students “had nothing to do with environmental issues, the Pele Defense Fund, nor geothermal but had everything to do with dealing with a large sum of money. It appeared to me that of the many worthy Hawaiian charitable causes which could benefit from the contribution by the students, the Pele Defense Fund was the least beneficial.”
In a letter to Environment Hawai’i, Stender continues: “In the end the students, of their own volition, contributed the money to Miss Dawn Enfield who at that time was a student, a senior, who was undergoing cancer treatment. Prior to making their decision, the students were not aware of my offer to match their contribution. My offer was made to the dean of student activities in private and was made known to the students after they made their decision.”
The report in Ka Mo’i, the newspaper of Kamehameha Schools, on Friday, March 20, 1992, is somewhat at odds with Stender’s account. Both Stender and Palikapu Dedman, of the Pele Defense Fund, spoke at a March meeting of the Student Council Executive Board in March, according to the article by Sara Wilson.
Dedman “encouraged the students to become educated about Hawaiian issues… Dedman mentioned that our rain forests need to be protected; geothermal development will hurt the environment and cause health hazards; and it is sacrilegious to the worship of Pele.”
According to Wilson, “Stender spoke on behalf of KS/BE” Kamehameha Schools/Bishop Estate – – “as well as to present the pro-geothermal viewpoint.” Wilson wrote that points brought up by Stender included the fact that “KS/BE has land on the Big Island being used for geothermal development and has decided that it will take a pro-geothermal point of view.
“After hearing both speakers,” Wilson wrote, “the student council voted down the motion to donate the money to the Pele Defense Fund. It was at that time that Stender offered to match the $2,228 if the student council donated the money to any other charity besides the Pele Defense Fund.”
PICHTR Audit: Days Late, Dollars Short
Long-time readers of Environment Hawai’i may recall that in the 1991 legislative session, the Pacific International Center for High-Technology Research was instructed to have its books audited before any further state money would be released to the agency by the Department of Business, Economic Development and Tourism. Specifically, the audit was to run through the end of the 1991 fiscal year (June 30, 1991) and was to be presented to DBEDT by September 30, 1991.
Well, the audit finally arrived on June 24, 1992. During that time, PICHTR has seen its chief executive officer, Admiral Ron Hays (retired) depart and new leadership assumed by “Hub” Hubbard, formerly of the Solar Energy Research Institute (which oversaw much of PICHTR’s work on behalf of the Department of Energy) and Dennis Goda, formerly of the state Department of Budget and Finance.
The audit is actually a series of reports, all prepared by Coopers & Lybrand, determining compliance with standards of accounting used by several different agencies, including the Defense Contract Audit Agency. The report documents spiraling expenses in 1990 and 1991. By the end of fiscal 1991, in fact, PICHTR was more deep in red ink. Its negative balance of $717,039 represented a loss of more than a million dollars from its position at the start of the fiscal year, when it had a balance on hand of $319,032.
According to the audit report, “recurring losses have adversely affected the liquidity of the company and resulted in a deficiency in working capital of $873,287 at June 30, 1991.” But, the auditors noted, “Management begins a new fiscal year with the following events to assist the company:
“1. In August 1991, the company received $1 million in cash from a grant from the Japan Ministry of Foreign Affairs.
“2. In September 1991, the company signed a three-year, $9.2 million cooperative agreement with the Department of Energy and the state of Hawai’i to design, engineer, construct and operate a thermal biomass gasification scale-up facility…
“3. The U.S. Congress has appropriated an additional $2 million for PICHTR’s OTEC [Ocean Thermal Energy Conversion] project for fiscal 1992…
“4. The company has taken action to reduce its 1992 administrative expenses to an estimated $1,688,000 compared to 1991 actual of $1,900,000.
“5. In November 1991 the company received an interest-free loan from the First Hawaiian Foundation of $350,000, payable in annual installments of $35,000 over ten years.
“6. In January 1992, the company executed a two-year research and development contract with DBEDT… The contract provides for research funding of $1,769,040 for fiscal 1992 and $1,857,492 for fiscal 1993. DBEDT has the right to terminate the fiscal 1993 funding if PICHTR’s administrative expenses exceed $1,688,000 in fiscal 1992.
“7. In April 1992 the state of Hawai’i approved a $500,000 working capital grant to be awarded to PICHTR in July 1992.”
The long delay between the audit’s due date and its actual submittal appears to have its roots in problems that the auditors discovered with some of PICHTR’s accounts. The auditors reportedly insisted that corrections be made before releasing the audit without qualification.
‘Reportable Conditions’
The auditors stopped short of saying that PICHTR’s operations were not managed well enough to meet general accounting standards. They did, however, take note of what are called “reportable conditions,” or circumstances “relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the organizations ability to administer federal award programs in accordance with applicable laws and regulations.”
Among the deficiencies noted were: a check made out to “cash” to be used as payment to several vendors; “numerous billing errors” that led to $88,000 worth of credit memos being issued at the end of the fiscal year; charging costs related to one project against the account of another project without obtaining the approval of the sponsoring agencies; duplicate payments of invoices; “numerous errors” in the allocation of indirect costs, including “incorrect use of head counts,” “inclusion of unallowable costs,” “charging indirect rent expense as a direct charge to a non-federal grant.”
Altogether, PICHTR received federal grants totaling more than a million dollars in fiscal 1991.The grants ranged from the sublime (three large Department of Energy grants passed through the Solar Energy Research Institute, totaling $946,635) to the ridiculous (a “NASA-PAC Space Center” award for $1,332).
The auditors noted that the Office of Management and Budget (OMB) Circular A-133 “calls for institutions receiving federal monies to submit timely and accurate financial reports as required per the contract/agreement. We noted that quarterly and monthly cash management status reports were not submitted to various federal agencies on a timely basis.” Nor has PICHTR “provided periodic reports to federal agencies related to its equipment purchase,” as required by OMB Circular A-133.
Short-Changing Days Short-Changes Public
One of the most important provisions in Hawai’i’s so-called Sunshine Law is the requirement that the public be given six calendar days’ notice of agency meetings.
According to a recent opinion by the state Attorney General, however, a day is not necessarily a full 24-hour cycle. Instead, five calendar days plus any fraction of another day, however small, is sufficient to satisfy the six-day notification requirement.
The opinion was intended to address a dispute arising from the Office of Hawaiian Affairs’ Board of Trustees. However, it has wide implications for all public agencies whose operations are guided by the Sunshine Law.
This was brought to the attention of Attorney General Warren Price in a letter from John Broussard of Kawaihae, a plaintiff in a case against the County of Hawai’i, alleging (among other things) that the County Council did not satisfy Sunshine Law requirements when it held a meeting granting certain permits, and that therefore the permits should be avoided. As Broussard wrote:
“Let us assume that only one calendar day were required for the notice. Then it would be perfectly all right to give notice at 5 p.m. on any day to have a meeting at 7a.m. the next day (or even with notice at 11:59 p.m. on any day, with the meeting to occur two minutes later).”
Broussard is too generous. A two-minute notice period is many times longer than the merest fraction of an instant that is required to post notice on the last second of Day 1 before convening a meeting at the stroke of midnight on Day 2.
The Attorney General’s opinion is number 92-06.
Volume 3, Number 3 September 1992