Hawaii Superferry filed for bankruptcy protection yesterday, telling a Delaware court that a Hawai'i Supreme Court ruling caused the Alakai to cease operations in March and has sapped the company's revenues.

Superferry and its parent company, HSF Holding Inc., filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in Delaware. Superferry listed between $1 million and $10 million in assets and $50 million to $100 million in debts.

Superferry has just $1 million in cash and was facing a $2.9 million principal and interest payment on one of the ferry construction loans yesterday. The company listed fewer than 50 creditors, including the state of Hawai'i, and maintained it should not have to make payments on $40 million worth of state harbor improvements because the operating agreement with the state was voided by a Maui court.

Superferry told the bankruptcy court that it plans to liquidate assets and "wind up their business." While sources close to Superferry say it is possible for a "white knight" investor to show interest in the Alakai and a sister catamaran, the Huakai, it would likely be for charter operations and not an immediate return to passenger, cargo and vehicle service in Hawai'i.

The two catamarans are docked in a Mobile, Ala., shipyard owned by J.F. Lehman & Co., the project's main investor.

"As a direct result of the Hawai'i Supreme Court decision last March, Hawaii Superferry had to shut down operations. There has been no relief from that decision," Superferry said in a statement. "With no ability to operate, the company has had no revenues, only ongoing expenses to maintain the vessels Alakai and Huakai, our second ship.

"Our recent objective was to charter the ships outside of Hawai'i, which would keep Hawaii Superferry operating at some capacity. Although there are potential charter opportunities around the world, they take time and haven't materialized in time for the company to meet its required financial obligations. Our efforts to refinance and restructure the company for this interim period with additional investment have not been successful, as yet. Accordingly, a filing of Chapter 11 was an unavoidable next step."

ROUGH GOING

The bankruptcy filing could mark an end to Superferry's stormy history in Hawai'i.

While the state Supreme Court ruling in March was cited as the final blow, the company's court filing shows that several factors undermined the ambitious plans for high-speed catamarans to connect the Islands.

Just as Superferry was planning its debut in August 2007, the state Supreme Court ruled that the Lingle administration was in error when it exempted the state harbor improvements for the project from environmental review.

Environmentalists, who had challenged the exemption, moved to block ferry service through a Maui court while protesters halted the catamaran on Kaua'i.

The state Legislature in a special session passed a law, signed by Gov. Linda Lingle, that allowed Superferry to operate while an environmental review was completed. But barge problems on Maui delayed the ferry's immediate return to service.

Superferry argues that the court rulings and delay eroded public confidence in its reliability. Damage to the Alakai in dry dock in February 2008 led to another suspension of service.

Superferry maintains that it demonstrated "outstanding reliability," with service between Honolulu and Maui between April 2008 and the second Supreme Court ruling in March. The court found that the law which allowed Superferry to operate during the environmental review was an unconstitutional special law written for a single company.

"However, by then, the damage to the debtors' reputation had already been inflicted," according to the filing.

Superferry also cited challenging economic conditions last year and in the first quarter of this year that led to lower-than-expected revenues. The recession reduced demand for ferry service among both tourists and local residents.

In addition, Superferry cited an "unprecedented spike" in fuel prices last summer that significantly raised operating expenses. The company said it could not pass the higher fuel prices on to customers because it was competing with airlines for interisland fares.

STATE CAUGHT SHORT

Mike Formby, the deputy director of the state Department of Transportation's harbors' division, said he was disappointed to hear Superferry is liquidating assets and going out of business. The state is in the process of completing an environmental impact statement under Hawai'i's primary environmental review law, and officials had hoped Superferry would be leased for charter for a year or so and then return to Hawai'i.

The Lingle administration, he said, will now have to evaluate how to proceed.

Formby also said the state has taken the position that the operating agreement with Superferry is still in effect. Environmentalists did not move to restore the Maui court order voiding the operating agreement after the Supreme Court ruling in March because Superferry voluntarily ceased operations.

Formby also said the state believes that the operating agreement was only voided for Maui, not the other harbors Superferry planned to serve. He said the state will likely try to recoup the $40 million in harbor improvement costs from Superferry. Otherwise, he said, the costs of the unique vehicle ramps and barges will have to be shared over time by other harbor users.

"My position is that, at this time, the operating agreement is enforceable and it was never unenforceable statewide," he said.

Along with the state, Superferry's major creditors with unsecured claims include MTU, for engine maintenance; Monarch Insurance Services, for workers' compensation insurance; Sodexo Inc., for food, beverage and gift shop services; Laird Chistianson Advertising, for media; Entrix Inc., for consulting; and Hornblower Marine Services, for management. Superferry has also been sued for not paying rent on its leased headquarters at One Waterfront Plaza.

In its bankruptcy filing, Superferry lists the payments to the state and a litigation award to the Sierra Club, Maui Tomorrow and the Kahului Harbor Coalition — the environmental groups that blocked the project in court — as in dispute.

Far bigger financial stakes in Superferry are held by the federal Maritime Administration, which guaranteed construction loans for the two catamarans; and Austal USA, the Mobile, Ala., shipbuilder, which also provided two loans to help with construction.

The principal outstanding on the Maritime Administration-backed construction loans is $135.7 million, while the company has $22.9 million outstanding on the Austal USA loans.

The Maritime Administration and Austal USA have first and second mortgages on the Superferry vessels, while the state has a third mortgage.

Superferry is also in default to Guggenheim Funding LLC for $51.7 million related to a secured note in August 2007.

J.F. Lehman & Co., the largest private investor in the project, put up $85.2 million of the $92.9 million issued in preferred stock. The firm's founder, John F. Lehman, is a former Navy secretary who served on the commission that investigated the Sept. 11, 2001, terrorist attacks.

According to the filing, J.F. Lehman holds a 69 percent majority equity stake in Superferry, Guggenheim could control about 7 percent, and about 80 other investors hold 24 percent. J.F. Lehman also controls seven of 10 seats on the company's board of directors. Thomas Fargo, a retired Navy admiral and Superferry's president and chief executive officer, is a managing director of J.F. Lehman.

'UNFORTUNATE'

State Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), called the Superferry bankruptcy a "tremendous tragedy for Hawai'i."

Slom said he believes opponents of the project were in the minority and that the Supreme Court's decisions were wrong. He said the ferry had the potential to unite the Islands economically and to create more business opportunities on the Neighbor Islands.

"I think we made a great mistake and I think it's going to be a long, long time before anybody wants to take a risk and invest in Hawai'i again," he said. "And that's a real loss to all of us."

State Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau), who was among those who called for an environmental review of the project before the court rulings, described the Superferry bankruptcy as unfortunate.

"I think it's just another unfortunate chapter in the long saga of the Superferry," he said. "It really is unfortunate that we've come to this point, and we have to figure out a way to move forward from here."