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The Honolulu Advertiser
Posted on: Saturday, May 1, 2010

Hawaii County sues Hokulia developers, claims breach of contract

By Nancy Cook Lauer
West Hawaii Today

HILO, Hawaii -- Hawaii County has filed suit against Hokulia developers and called in the bonds securing the $35 million Mamalahoa Bypass.

The breach of contract lawsuit filed late Thursday is an attempt to forestall a likely sale by developer 1250 Oceanside Partners and its backer, the Bank of Scotland, of all or part of their interest in the $1 billion, 730-lot golf course community makai of Kealakekua.

"We regret that we must take these legal actions against the owners of Hokulia, but these court filings were absolutely essential to protect the interests of the taxpayers in the County of Hawaii," Mayor Billy Kenoi said Friday. "The developer and owners of Hokulia have an absolute, irrevocable obligation to complete the Mamalahoa Bypass highway, and we intend to enforce that obligation."

At issue in the county's lawsuit is a 1998 development agreement signed by then-Mayor Stephen Yamashiro. In exchange for the right to develop, Oceanside agreed to complete the much-needed bypass from Alii Drive in Keauhou to Napoopoo Road in South Kona within five years and make other improvements to roads, drainage structures, sewer and potable water systems and other infrastructure.

Oceanside CEO John De Fries said the development agreement gives Oceanside 180 days to "cure" any breach of contract without resorting to court. The county sent a notice of breach along with the court complaint.

"We look forward to the opportunity to rebut these allegations and will work diligently with the county to find a remedy within the 180-day timeframe mandated by the development agreement," De Fries said. "The development agreement has been in effect for 12 years and has the sustaining ability to hold both Oceanside and the county accountable for the benefit of Kona and Hawaii Island."

The lawsuit is the latest twist in a 12-year saga marked by controversy and litigation.

The developer, the county and the state were named in a raft of lawsuits. Environmental and cultural activists sued over improper land use classifications and destruction of artifacts. People who bought lots in the luxury subdivision sued the developer, Hawaii County and the state over development delays during litigation.

Landowners along the road right of way sued the developer and county, saying they weren't fairly compensated for their property. Even the state Legislature weighed in. Some lawsuits are still ongoing.

Lot sales were halted by the court while the litigation progressed; once developers got clearance to begin selling again, the economy took a nosedive and investment capital dried up, forcing the development to suspend sales during financial restructuring. Other than resales of current lots, sales can't begin again until Oceanside can file required federal disclosures showing financing is in place.

County officials say they don't know exactly who is selling what, but they don't want to jeopardize the road project during the transition. There is no specific requirement in the 27-page development agreement that successor owners inherit Oceanside's development obligations, but the agreement does allow Oceanside to sell or transfer its rights and obligations and encumber any of its property without county approval.

The county filed suit after attempting to take possession of some of the land as collateral. Instead, the county learned the developer was arranging a "private auction" of some of its land.

"It is unclear at this time if Oceanside is selling their property interest, or if the Bank of Scotland/Lloyds Banking Group or another entity who purchased the mortgage against 1250 Oceanside Partners property is selling off its notes/security interest in the property," said Corporation Counsel Lincoln Ashida in the 18-page complaint filed in Third Circuit Court in Kona. "Oceanside has refused and continues to refuse to provide the county with material information regarding the nature of this sale, whether the buyer will honor Oceanside's obligations to the county, or whether the county's interests will be protected."

De Fries said confidentiality agreements prevented further disclosure.

"To move forward in fulfilling its obligations to the county, its lot owners, employees and its lenders, Oceanside needs an infusion of major capital to complete Hokulia, and there is a business team working diligently on achieving that goal," De Fries told West Hawaii Today.

The projects were secured with bonds. A completion bond is basically a promise to perform the specified work. If the developer defaults, the bonding company, in this case Illinois-based Kemper Insurance Co., is required to hire a contractor to complete the work, up to the amount of the bond.

The amount of the bond -- $26 million in the case of the Mamalahoa Bypass -- could be a sticking point. The county late last year hired an outside law firm specializing in bond work to consult with the county on the bonds. The contract with Honolulu-based McCorriston Miller Mukai MacKinnon was for $25,000.

Ashida said in the court complaint there have been discussion with Hokulia that the bonds were "tenuous," but in an interview with West Hawaii Today he disputed the observations by some County Council members that the bonds were insufficient to get the project completed.

"The county is of the information and belief that it may not be able to reap the full benefits of the security in the nature of the bonds that Oceanside put forth to secure its obligations under all of the agreements mentioned above, due to the financial strength of the sureties, the Bank of Scotland and Oceanside," Ashida said in the court filing.