Builder failed to deliver homes on dreams
By Andrew Gomes
Advertiser Staff Writer
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| A structure at 91-080 Hanua St. in Campbell Industrial Park offers a glimpse of the factory-built houses that Hawaiian Palisade Homes promised to provide. Its customers made payments, but only a handful received their homes.
Cory Lum • The Honolulu Advertiser |
But she says the company she contracted with in December to build the $86,000 house took about $81,000 of her family's money and never delivered the house.
"I'd like my money back," said Lozano of the inheritance from her grandmother's death. "But they've walked away."
Lozano's shattered dream is one that has beset about 20 other Hawai'i residents who paid for — but never received — factory-built houses from Hawaiian Palisade Homes nearly a year ago, losing thousands of dollars. Another 135 lost $500 deposits, according to Stephen Levins, acting executive director of the state Office of Consumer Protection, which charged yesterday in a civil lawsuit that the company engaged in "unfair or deceptive acts and practices."
The state said Hawaiian Palisade misrepresented the quality and certification of its work and its ability to complete and deliver the houses.
The federal Department of Housing and Urban Development and U.S. deputy attorney general's office also are looking into the company's actions.
The startup company, run by two Californians who marketed affordable homes to mainly low-income Hawaiians, last month was forced into bankruptcy by several creditors.
It has since shut down, leaving a string of lawsuits and bewildered would-be homeowners.
By most accounts, what happened to Hawaiian Palisade is the story of an undercapitalized company with a smart but poorly executed business plan. The company's former chief financial officer says the company had good intentions but was hurt by regulatory stumbling blocks and a failed effort to raise capital on Wall Street.
Others, however, say that over time the business devolved into one that continued to take money and material from consumers and suppliers when there was little chance of satisfying its obligations.
Ultimately, it is unclear just how much money Hawaiian Palisade took from would-be homeowners. In press releases issued in March and April, the company said it had about 175 signed contracts for homes worth $20 million.
On a 2001 company financial statement, Hawaiian Palisade reported $2.6 million in "funds received and receivables," and $84,000 in "deposits." Another $16 million was listed both as income and as receivables.
Dream homes, ready-made
Rose Royce, a Kihei office building owner, said she met the president and chief executive officer of Hawaiian Palisade, Art M. Smith, two years ago as he was looking for a place to open the company's first sales office in the Islands.
Smith, 51, had come to Hawai'i after running a motor home and real estate management business in Pismo Beach, Calif., with Stuart Furman, an attorney who came along as Smith's chief money man at Hawaiian Palisade.
Smith did not respond to repeated messages left at his business and personal wireless phone requesting comment for this story.
Royce said Smith told her about his plans to make factory-built homes in Hawai'i, saying that he could build structurally superior homes at two-thirds the usual cost.
While organizing the business, Royce said Smith paid $1,000 a month to rent a 600-square-foot office that was virtually empty for about six months. Smith returned in January 2001 to announce Hawaiian Palisade was finally moving full-speed ahead. He hung a big neon sign with the company's name out front.
Soon Maui residents were buzzing in and out of the office, according to Royce, who said Hawaiian Palisade was so busy that Smith needed extra space for the business and rented her adjacent management office.
In its first three months of marketing, the company reported signing roughly $15 million in contracts and obtained a $1.5 million loan from City Bank plus about $3 million in other loans from Smith and Furman to build a 55,000-square-foot factory on O'ahu.
The Kapolei factory used an assembly line to construct homes ranging from 500 square feet to more than 2,900 square feet at $60 a square foot. Houses typically were built at the factory in two halves, then transported to a buyer's property where they were joined and set on a foundation. Other "finishing" work included hooking up utilities and adding a garage, floor coverings and air conditioning.
With roughly 100 employees, the factory had the capability to turn out six unassembled homes per day, though complete construction and installation took up to 60 days.
Cash, legal roadblocks
The factory opened in March 2001 but immediately ran into problems. Because it did not have a sprinkler system, the city withheld a final building permit that delayed completion of many homes. The company also ran into trouble with the state Regulated Industries Complaints Office, which fined the company $25,000 in June 2001 saying it needed a contractor's license.
Furman said the company spent $20,000 in attorneys' fees arguing that because Hawaiian Palisade was a federally regulated manufacturer, its factory work was exempt from state contractor licensing laws, though he agreed that some work at the homesite would require licensed contractors.
Despite the problems, Hawaiian Palisade managed to complete and deliver 13 homes.
Royce said she noticed in November that Smith, who had always been punctual in paying monthly office rent, began paying late. She also said it appeared that not everyone visiting Hawaiian Palisade's sales office was happy.
Eventually, some of the customers began complaining to the state consumer protection office that they received homes with defects, unfinished parts or no certification. Hawaiian Palisade, which had designed its homes to comply with Department of Housing and Urban Development standards in place of local building codes, told customers the problem was an inspection contractor that was failing to certify the company's completed homes as built to federal code. Without HUD certification, Hawaiian Palisade couldn't deliver homes to customers.
But that issue, too, turned into a legal controversy. In January, the inspection firm RADCO filed a lawsuit against Hawaiian Palisade saying it did not certify the homes because Hawaiian Palisade owed the company $80,000. Hawaiian Palisade responded in the suit that RADCO recommended a consultant to create a design manual that was rejected by HUD. Furman said the company had relied on that manual to build $2 million in homes it could not deliver, creating "a serious cash-flow crunch."
RADCO maintained that it had nothing to do with the design manual contract. But the net effect of the disputes with RADCO, the state and city agencies was tens of thousands of dollars in wasted operating capital and damage to the company's reputation, Furman said.
Several people who did business with Hawaiian Palisade said the company's own disorganization contributed to its downfall.
"They didn't do any of their homework," said Frances Kama-Silva, who is still waiting for two Hawaiian Palisade buildings she ordered for her construction business in Wai'anae.
Steven Myers, a local truss manufacturer who supplied Hawaiian Palisade, said he saw a generally disorganized office. "I think they tried their best," he said. "But I think they went way over their head with it."
In a series of interviews conducted earlier this month, Furman admitted that mistakes were made but said they did not lead to the company's failure.
"Like every business — and given that we were pioneers in Hawai'i regarding manufactured housing — miscalculations were made," Furman said. "Did this contribute (to the company's failure)? In the global picture ... no."
By Christmas, many vendors had cut off credit to the company, creating a materials shortage and a halt in production, according to a former employee who asked not to be named for fear of legal retaliation. Over the next few months, at least eight suppliers would sue Hawaiian Palisade for unpaid debts.
Yet Hawaiian Palisade, as it scrambled for new investors, continued lining up deals to build more houses.
In April, Hawaiian Palisade announced it had signed 15 contracts at an average price of $80,500. Also that month, the company signed a letter of intent to supply Big Island contractor Menehune Development Co. with another 30 homes that would be part of the state Department of Hawaiian Home Lands project to provide housing for low-income Native Hawaiians.
Lozano said in April she began worrying about her home order. It was supposed to have been finished in March.
Furman said customers were not misled about the progress of their homes. He also says the company always expected to build all of the homes that customers had ordered — up until creditors surprised the company by forcing it into bankruptcy.
Lozano said Hawaiian Palisade representatives told her in April that everything would be fine because the company had just listed its stock on Wall Street.
The public stock sale, however, did not go well. Hawaiian Palisade on March 22 merged with a "shell" company, a corporation with public stock but no assets or liabilities. The idea was to sell investors $4 million in Hawaiian Palisade stock.
Furman said a Florida financial services firm that brokered the merger, WSR Financial Services Inc., agreed to raise the badly needed capital for Hawaiian Palisade, but never did and has since ceased operations.
"Not having the funds promised has destroyed our company," Furman said.
Masking the difficulties
Amid the trouble, Hawaiian Palisade officials maintained an appearance of good financial health.
In mid-April, Smith appeared on HotStockChat.com, a Web site that offers interviews to executives of companies needing exposure, and talked about Hawaiian Palisade's HUD approvals, delivery of 13 houses in the prior two weeks, and plans to double production shifts within six months. He noted that the company was worth $8 million based on outstanding shares.
Hawaiian Palisade also issued press releases in March and April saying it was selected as an authorized builder of three state Department of Education classrooms, and enjoyed the support of the governor's office.
The company, on its Internet site, had also suggested it was profitable, reporting net income of $7.9 million last year.
But Lozano tasted dread when she saw that Hawaiian Palisade had left its Maui office. She had given Hawaiian Palisade $24,000 in cash, she said. The remaining payment for the home, $62,000, was in an escrow account with Honolulu-based Title Guaranty.
When Lozano called the escrow firm, she said a representative told her only $5,000 remained in the account — and that Hawaiian Palisade had received the rest.
Lorrin Hirano, an attorney with Title Guaranty, said the company provided escrow services for 10 Hawaiian Palisade customers who never received homes. Hirano said the company followed escrow instructions signed by both buyers and the seller.
Maui attorney Mary Blaine Johnston, who is representing several Hawaiian Palisade buyers, two of whom have filed lawsuits, said the contracts were misleading.
Furman says the company followed its contracts that allowed withdrawal of all escrow money if substituted with a bond. "Release of funds was pursuant to signed escrow instructions which the customer(s) signed," he said.
The validity of the company's bonds also is in dispute. Helen Langlois of 'Aiea-based Contractors Surety Insurance, wrote $1.3 million in bonds for Hawaiian Palisade last year to guarantee the company's work in case of problems. Furman said Langlois told him the bonds would be written on behalf of New Jersey Insurance firm International Fidelity.
According to the state's Office of Consumer Protection's civil complaint, Langlois' bonds were "invalid and unauthorized" and proceeds of loans and customer's payments were disbursed to Hawaiian Palisade before the company completed or delivered its homes. Claims on the bonds by people who bought houses and lost their money have been denied, the state said in its lawsuit.
In-house counsel for International Fidelity said Langlois had approached the company about issuing bonds but was never authorized to issue them and that she did so without International Fidelity's knowledge.
Furman said no one at Hawaiian Palisade knew Langlois was not authorized to issue the bonds, and he noted that none of the banks or escrow companies involved in the transactions questioned the bonds.
Langlois, a former member of the Hawaii Building Association, has disconnected her business and home phones and left no forwarding information.
Hirano of Title Guaranty, which is being sued by Johnston's clients, said his firm is demanding International Fidelity honor the bonds. "Hopefully, we can help all these people," he said.
Some customers are angry that their money wasn't spent completing their homes, and question where their deposits were spent.
Furman maintains that customer money was not improperly spent.
"There are a lot of people claiming that we are con men," he said. "The bottom line is that we were squeezed and ran out of money. We were doing everything we could do to save this company. We have millions invested and wanted it to survive."
Forced into bankruptcy
According to a Hawaiian Palisade accounts payable document obtained by The Advertiser, the company ran up $750,000 in bills with vendors in January including $24,000 with Home Depot, $22,000 with local hardware company G.W. Killebrew and $51,000 with Matson Navigation Co.
About 20 lawsuits were pending against Hawaiian Palisade in local courts until last month when three Hawai'i creditors who claim they are owed a total of $280,000 filed a petition to force the homebuilder into bankruptcy liquidation.
Hawaiian Palisade did not contest the petition, but Furman said it "may have destroyed the unsecured creditors' chances of getting any money from a liquidation" because City Bank has a lien on Hawaiian Palisade's factory, inventory and materials.
Furman added that the petition puts the company under a "very short time frame to get investors" who might be willing to pay off debts and revive the company. He said he has "several deals working that could save the company."
Customers like Kama-Silva find all the lawsuits and talk about reviving Hawaiian Palisade of little comfort. Of her $150,000 payment for two buildings, she said only $38,000 and an apparently worthless bond remain in escrow. "I just want my buildings," she said.
The promises and explanations also don't console Lozano, who now doesn't know if her family will be reunited on Maui the way she had envisioned, much less ever see their money.
"It's just really sad," she said. "You feel gullible, you know, when you trust."
