State suing DFS, Vuitton
By Andrew Gomes
Advertiser Staff Writer
The state has launched a three-pronged effort to recover $49 million in debts from duty-free retailing contractor DFS Group LP, including suing the San Francisco company and its majority owner, Paris-based LVMH Moet Hennesy Louis Vuitton.
State Attorney General Mark Bennett yesterday announced the state's plan, which also calls for collecting a $45 million performance bond and demanding DFS immediately pay $25 million to the state if the company wants to retain its contracts and suspend the lawsuit.
The suit, filed late Friday in state Circuit Court, argues that it is illegal under the state Uniform Fraudulent Transfer Act for DFS to transfer money to LVMH while it claimed to be unable to pay other debts.
DFS last month acknowledged that it repaid $100 million in loans to LVMH last year, during which time DFS failed to pay $25 million in rent for operating 40 duty-free and regular retail stores at airports statewide. The company employs roughly 1,200 workers.
Bennett gave DFS an unspecified period of time to suspend the lawsuit and start to negotiate new contract terms, but only if the company agrees to pay $25 million owed through the end of 2002.
DFS said in a written response that the company has offered to pay the $25 million in 2002 unpaid rent but only if the state assures DFS adequate rent relief for the remaining 3 1/2 years of its contract, which requires minimum annual rent payments of $60 million.
DFS also said it believes its payment to LVMH was legal, but declined to comment further on the lawsuit.
Bennett said his office filed the suit reluctantly, but added that state attorneys are "ready and up to the task" for what he expects will be a vigorous legal battle put up by DFS and LVMH, the world's largest luxury retailer.
LVMH, which owns 61 percent of DFS, reported net income of $611 million last year. DFS recently said it was insolvent with $500 million in debts, including $350 million it still owed LVMH.
Bennett said Gov. Linda Lingle was not going to allow the state to be "treated as a second-class citizen" over repayment of debts.
"We certainly sympathize with the fact that tourism is down," Bennett said. "It's cost a lot of businesses — in Hawai'i and throughout the country — a lot of money. It's cost the state lots of money. It's cost the federal government lots of money. But these events don't excuse contract performance."
Bennett acknowledged DFS has contributed significantly to Hawai'i's economy. But he said it would be irresponsible not to take collection action, noting that DFS' refusal to acknowledge obligations creates a costly problem for state officials trying to refinance debt.
While the state claims DFS owes it $49 million, including interest and penalties, DFS said it does not agree with the amount.
Bennett said he will ask the state insurance commissioner to redeem DFS's bond guaranteeing contract payment. The bond, Bennett said, is held by a wholly owned insurance subsidiary of DFS.
Earlier this month DFS warned that without rent concessions it would have no choice but to close its Hawai'i operations or seek court relief from creditors. Options include bankruptcy, litigation or other legal remedies.
Bankruptcy would stall the state's lawsuit and other debt-collection efforts. A bill in the Legislature that would grant airport concessionaires retroactive reduced rent also could hamper the Attorney General's plans.
Senate Bill 44 is scheduled to be heard this afternoon by the House Finance Committee. Bennett said he plans to meet with legislative leaders before the end of the legislative session to advocate against the bill.
"Certainly it is our hope that there isn't a bill passed that impedes our ability to proceed with our lawsuit," he said.
DFS has been trying to obtain relief from its minimum rent obligation since early last year after an emergency legislative session in 2001 provided eight months of rent relief that saved airport businesses $26 million, including $16 million for DFS.
A bill that would have extended relief for DFS and an estimated 25 to 30 other airport concessionaires was vetoed last June by then-Gov. Ben Cayetano, who said the measure would force the state to guarantee that airport concessions stay in business at the expense of the public.
The two sides had been trying to negotiate a new minimum rent formula, but efforts never resumed after late November when the previous transportation director under Cayetano left the issue to the Lingle administration.
DFS said yesterday that because of the war in Iraq, company sales are projected to be down more than 50 percent compared with pre-9/11 levels. Just before the war, sales were down about 17 percent compared with early 2001.
"DFS and other concessionaires should not be required to pay the pre-9/11 and pre-Iraq War rent levels at this time," Sharon Weiner, DFS Group vice president, said in the statement.
Weiner said that Ed Brennan, company chairman and chief executive and a former executive with the company in Hawai'i, has asked to meet with Lingle this week.
Bennett said DFS will have to pay the $25 million in 2002 rent delinquency before any negotiation can take place.
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
Correction: DFS Group LP acknowledged last month that it repaid $100 million in loans last year to its majority owner, LVMH Moet Hennesy Louis Vuitton. A previous version of this story gave a different month.
