The state Department of Hawaiian Home Lands yesterday sued an O'ahu construction bonding company responsible for completing about 79 homes for Native Hawaiians on three islands, alleging bonding company Hardware Hawaii has done "virtually nothing" to finish construction of the homes.

The suit alleges that Hardware Hawaii repeatedly promised to finish the homes, but on Feb. 22 "finally acknowledged to DHHL that it did not have the financial ability to perform their obligations" under the bonds.

In the meantime, the condition of the partly built homes in Pana'ewa and Kaumana on the Big Island, Kekaha on Kaua'i and in Lana'i City has "deteriorated significantly" since developer Fredco Inc. notified Hardware Hawaii on Nov. 30 that it would not be able to complete the project, according to the suit.

Half-built homes on the Big Island have been standing without roofs throughout the winter rainy season in Hilo, and lessees said that exposure did considerable damage to some of the unfinished structures. Lessees have complained of mold, rust, deteriorating flooring and damage to drywall as well as thefts from the unfinished structures, according to the suit.

Big Island resident Fred Yamashiro, who is president and owner of Fredco and Menehune Development Co., filed for personal bankruptcy earlier this year, listing $19.9 million in liabilities and less than $650,000 in assets. The largest debt listed by Yamashiro was a $13 million unsecured guarantee he made to Hardware Hawaii for the bond.

Both Fredco and Menehune filed for bankruptcy last year.

The lawsuit alleges Hardware Hawaii pledged in the bond to take over the project and resume construction within 20 days of Fredco's default, but failed to do so despite assurances by company President David R. Lundquist that Hardware Hawaii would complete the homes.

The suit also alleges Hardware Hawaii "negligently and improperly made disbursements of funds" to Fredco.

Puna resident Iwalani Harris, an elementary school teacher who was awarded a Kaumana lot in 2005, said the long delays have been a financial strain. She is a single parent with two children in college on the Mainland, and a third child in preschool.

Harris was supposed to move into the new home last October, but all construction stopped when Fredco collapsed, and her house still needs at least two more months of work, she said.

Harris and other lessees say they asked Hawaiian Homes for permission to select their own contractors, but were told they would have to use Fredco to build their homes. To the lessees, that means Hawaiian Homes shares responsibility for the problems that followed.

"It's a mess that they have to clean up now," Harris said of Hawaiian Homes. When asked about the lawsuit, she replied, "I'm not sure how it's supposed to benefit us. Is it going to make Hardware Hawaii complete our homes faster?"

Hawaiian Homes Commission Chairman Micah Kane has said the agency will do whatever is necessary to see that the homes are completed, including providing lessees with help with their loans, and making small grants to help with expenses.

Now DHHL also has pledged to complete construction of the homes under the original contract price, but the lawsuit alleges Hardware Hawaii and Lundquist are responsible for the costs to DHHL as the agency completes the work.

Hardware Hawaii officials and a lawyer who represented them in an earlier lawsuit over the construction delays caused by the Fredco bankruptcy were unavailable for comment last night.

Reach Kevin Dayton at kdayton@honoluluadvertiser.com.