State sues funeral services firm

By Andrew Gomes
Advertiser Staff Writer

The state attorney general is suing Hawai'i's largest funeral services business, RightStar Hawaii, to ensure it doesn't mismanage millions of dollars held in trust for thousands of customers.

Landowners of Diamond Head Memorial Park have said RightStar paid its back rent after the landowners filed a lawsuit in September. Jeff Widener • The Honolulu Advertiser

RightStar held about $38 million in trust as of September, according state figures.

In 2002, RightStar withdrew $23.5 million from trust accounts without having a clear picture of what it needs for future obligations, according to the state. Only $10 million of that was used for delivering funeral services.

"We need to get somebody in there and work with (trustees and RightStar) and figure out what's going on," said Deputy Attorney General James Paige.

The state's suit, which is one of several filed against the company, seeks to prevent RightStar from making withdrawals beyond delivering services or making customer refunds, and to install a master to oversee disbursements and accounting.

RightStar, headed by John Dooley and Kathy Hoover, says when it bought the business in 2001 it was in accounting shambles, and for two years the company has been trying to rebuild a mountain of inaccurate and incomplete records — some 60,000 dating back as far as 20 years.

The company acknowledged that it has had difficulties, but stressed that it has not improperly handled customer deposits or contracts, and has been open with the state about its efforts to put records in order.

Jim Wagner, a local attorney representing RightStar, said the company does not oppose appointment of a state master. "We actually think it would be helpful," he said. "The owners are hopeful that they can resolve all the issues. I think the state got a little tired waiting for us, and filed their action.

"None of this is going to impact consumers," Wagner added. "These are internal problems."

Among the withdrawals RightStar made in 2002 was $4.5 million in earnings from investing trust money when RightStar didn't have accurate data to separate principal from income, the state said.

Another $2.8 million, according to the state suit, represented deposits from customers whose contracts were cancelled.

KMH LLP, the Honolulu-based auditor of the RightStar trusts, acknowledged that inadequate records raised concerns, but that RightStar and outside trustees believed discrepancies would not have a material adverse effect on the trusts.

Deputy Attorney General Paige said part of the reason the state sued was because RightStar had not filed its 2003 audited financial statements, which were due in March.

Another factor in the state's suit is a dispute between RightStar and its longtime trustees — former Gov. John Waihee, Stephen E. Harris, M. Tyler Pottenger and Reed B. Rohrer — whom the state named as defendants in the suit.

Bill McCorriston, an attorney representing the trustees, said RightStar dismissed the trustees in June after they refused to authorize withdrawals RightStar requested last year.

McCorriston said trustees were concerned that RightStar was paying bills with money

that should have been put into trust accounts, and that RightStar used successor trustees in recent months to withdraw almost $2 million that the Waihee group had opposed.

Wagner said the trustees were replaced because an insurance company bond covering the trustees expired. A new bond required cash collateral that the trustees and RightStar could not provide.

RightStar replaced the Waihee group with Comerica Bank & Trust, a Detroit-based financial institution with assets and professional trustee services that don't require a bond.

Wagner said Loewen's Hawai'i operations had 140 sales representatives when RightStar agreed to the purchase in January 2001. By the time the deal closed in November 2001, Wagner said RightStar assumed a sales staff of 30.

The effect, Wagner said, was that revenue was drastically less than RightStar expected, and that created immediate cash-flow problems.

"They were almost dead in the water when RightStar took it over," he said.

Earlier this year, RightStar sued Alderwoods for not maintaining the business while the purchase was pending.

Another drain on RightStar's cash has been high interest on a $34 million loan RightStar used to buy the company. The lenders, led by Vestin Mortgage Inc. of Nevada, last month sued to foreclose on Rightstar's assets after the loan matured in March.

The cash shortage and accounting problems created intense stress at RightStar, with vendors regularly complaining of late payments, according to former employees who said the business was losing close to $1 million a month in 2002.

The landowner of former RightStar cemetery and mortuary Nuuanu Memorial Park moved to evict the operator in March after RightStar stopped paying rent in October 2002.

A RightStar spokesman in May said the Nuuanu Memorial problem was caused by an overly expensive lease entered into by the previous RightStar owner, but that RightStar's other businesses were financially stable.

The company also said at the time that it planned to open a funeral home near the downtown Honolulu area to replace the lost Nuuanu business, but has not done so.

RightStar freed up cash in June by selling some of its accounts receivable for $1.2 million, but difficulties persist.

In September, the owner of Diamond Head Memorial Park said in a lawsuit that RightStar failed to make a $9,900 monthly rent payment, and asked that RightStar's lease be terminated.

A representative for the land-owner said back rent has since been paid.

Wagner said RightStar's problems built up like a snowball, but that the company hopes it can resolve its accounting issues, satisfy the state that trust accounts are being treated properly, and refinance its debt to avoid foreclosure.

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.