Permitting Missteps Threaten to Unravel Commercial Boating Regime in Ka`anapali

posted in: February 2012 | 0

Whatever the outcome, someone is going to end up heartbroken, pissed off, or both.

Since mid-November, the luxury catamaran Queen’s Treasure has been taking passengers on snorkel and whale-watch tours off West Maui’s Ka`anapali Beach under a temporary agreement with the state Department of Land and Natural Resources (DLNR).

A competing catamaran operator, Kapalua Kai, which has spent more than a decade on the state’s waiting list for a Ka`anapali ocean recreation management area (ORMA) catamaran permit, has threatened to sue if the DLNR allows Ka`anapali Tours, LLC (KTL), which owns Queen’s Treasure, to continue to operate without waiting its turn. (KTL owner Janice Nolan is herself number five on the list.)

Attorneys for KTL, on the other hand, claim its current, one-of-a-kind permit to operate either a monohull or a catamaran in Ka`anapali is valid, despite a host of procedural missteps surrounding its issuance and the fact that DLNR’s boating rules do not seem to allow for it.

In September, after the DLNR’s Division of Boating and Ocean Recreation (DOBOR) blocked KTL from using Queen’s Treasure at Ka`anapali, KTL sued the DLNR, the Board of Land and Natural Resources, its chair William Aila, Jr., DOBOR administrator Edward Underwood and Maui DOBOR chief Nicholas Giaconi in their official and individual capacities.

KTL argues in its pleadings that the DLNR/DOBOR unlawfully refused to allow the company to change its vessel of record from a 14-foot monohull Zodiac to the 65-foot Queen’s Treasure, which KTL had ordered custom-built more than a year ago. KTL claims the cost of designing, building and delivering the catamaran exceeds $1 million. KTL is seeking a permanent injuneciton preventing the DLNR/DOBOR from interfering with the operation of Queen’s Treasure.

On April 5, U.S. District Magistrate Richard Puglisi will hold a settlement conference if the state and KTL fail to reach an agreement before then. Should negotiations fail, the court would have to decide whether or not to allow Queen’s Treasure to continue to operate pending the outcome of a jury trial, tentatively set to begin January 8, 2013.

Kapalua Kai, for one, does not support a settlement, at least according to its attorney, Bryan Ho.

“I don’t see where a permanent settlement is possible unless the Ka`anapali Tour operators quit or put another boat [a monohull]” on the permit, he says. In either case, Queen’s Treasure would be put out of business.

A Desperate Plea

In the 1980s, DOBOR created special rules to control the glut of ocean-related activities occurring in the tourist centers of Waikiki and Ka`anapali. In Ka`anapali, those rules cap the number of commercial catamaran vessels at ten and limit monohull vessels to five. Should any of those permits become available, DOBOR is required to select a new permittee from a waiting list. Prospective permittees must pay to maintain their position on the list.

In the past, the Land Board issued and renewed the commercial use permits for Ka`anapali. On May 9, 2008, the board approved DOBOR’s recommendation to renew all ten catamaran (C-01 through C-10) and all five monohull (M-01 through M-05) vessel permits for Ka`anapali. All but one of the monohull permits, M-05, were for charter fishing vessels. M-05 was for a shuttle. Although the permit itself was held by Kellam Brothers, Inc., which had operated under that permit since the 1970s, the boat itself was owned by W. Kyle Bebee, a real estate investor based in Dallas, Texas.

A few months after the Land Board approval, it voted to delegate its authority to grant permits for commercial activities and uses on and off Ka`anapali Beach to the DOBOR administrator.

When it came time to renew permits in mid-2009, DOBOR declined to reissue M-05 to Kellam Brothers, which had reportedly failed to pay its monthly permit fees to DOBOR (the higher of $200 or 3 percent of gross receipts).

Bebee was distraught by the action and appealed to DOBOR to reinstate the permit. In a letter he sent September 30, 2009, to DOBOR, Bebee said brothers Terry and Don Kellam let his boat, Big Kahuna, sit for months at a time, without maintenance, while they appropriated money he had provided for DOBOR fees.

“I was furious when I recently heard that the Kellams, for a number of months, had not been using these funds to keep the permit in good standing, nor had they been filing required gross receipts statements and other necessary paperwork,” he wrote.

Bebee claimed he had invested more than $1 million in buying, rebuilding, and transporting Big Kahuna from North Carolina to Maui. He reclaimed the boat in November 2008, but failed get the Kellam brothers to transfer permit M-05 to him.

“These problems are certainly none of the state’s concern and I apologize for wasting time with the history, but I felt the need to paint the picture of the very fractured business relationship. … Should the state decide to re-[in]state the permit, its affairs will be handled in a prompt and professional manner in every regard,” he wrote.

Mutant Permit

After negotiating with boat captain Jeffrey Kirschner, who was Bebee’s representative on Maui, Bebee’s newly created company, Ka`anapali Tours, LLC, received a new M-05 permit. But the permit, issued on December 21, 2009, was rife with anomalies.

For one thing, the permit had become something never envisioned by DOBOR for Ka`anapali and not described in any of its rules. Permit M-05 was now a “MONOHULL/MULTIHULL” permit. And despite the cap on catamaran vessel registrations, the vessel of record for M-05 was not Big Kahuna, but the catamaran Ali`i Nui.

Had M-05 been strictly a monohull permit, it should have been offered to the two applicants on the Ka`anapali monohull permit waiting list, the first of which, LH Water Taxi, has been waiting since December 1996.

With seven applicants as of 2008, the line for a catamaran permit is even longer with the top two having waited since the early 1990s.

For another, DOBOR boating regulations officer Douglas Smith signed the permit, despite the Land Board’s decision designating the DOBOR administrator as its authorized representative to sign permits.

The permit was to expire on December 20, 2010.

No sooner did Bebee get his permit back than he turned around and sold it to Janice Nolan and Amy Sutherland. Nolan, former director of operations for Ka`anapali Kai Charters, one of the more successful catamaran operators in West Maui, had herself been on the catamaran permit waiting list since February 17, 2009. (KTL’s attorney, Robert Frame, declined to comment on how Nolan and Sutherland came to buy the permit without consulting them first.)

In a March 12, 2010 letter, DOBOR’s Smith spelled out exactly what kind of permit they had bought. Addressed “To Whom it May Concern” and copied to the DLNR’s Lahaina office, the letter stated that DOBOR had approved the permit transfer and that all permit terms would remain intact, including “the ability of permittee to utilize either a Monohull or Multihull vessel, as well as passenger carriage for up to 115.”

He added, “It is understood that the vessel ‘Alii Nui’ … will remain as the vessel of record until which time permittee will change the vessel of record to the operating vessel, such that this change of vessel shall take place no later than 6 months after closing. This approval is subject to the payment of transfer fees in the amount of $XX (49 passenger) to be paid at the Lahaina office of the DLNR.”

Why Ali`i Nui was the vessel covered by the permit is unclear, since, according to Bebee, permit M-05 was for Big Kahuna. In any case, after Nolan paid DOBOR a transfer fee of $15,000 on March 30, DOBOR issued a revised M-05 permit to KTL naming Big Kahuna as the vessel attached to the permit. DOBOR also reduced the passenger carriage limit to 49 and changed the expiration date to March 31, 2011. Again, the permit was not signed by Underwood, the DOBOR administrator. Instead, it appears to have been signed by DOBOR’s Maui branch staff and by Smith.

Before that permit expired, a contractor for KTL, Gold Coast Yachts, had begun building the catamaran that KTL named Queen’s Treasure. But when DOBOR renewed the permit on March 22, 2011, the “QT” vessel listed was not the 65-foot catamaran, but a 14-foot Zodiac.

Even so, KTL argues it was no secret to DOBOR that the vessel the company intended to operate was a catamaran. DOBOR’s Underwood signed the permit on April 14.

Foul!

“QT WILL RULE WEST MAUI,” wrote one commenter on Queen’s Treasure’s Facebook page on May 20. That same day, DLNR director Aila received a letter from Carlsmith Ball LLP attorney Dean Robb. Robb, who did not name a client, asked Aila to investigate the circumstances and background of permit M-05.

After reviewing DOBOR’s permit records, Robb had found several problems with the permit.

“The basic and most fundamental problem associated with Permit M-05 … is that it is issued for a ‘monohull/multihull’ vessel,” he wrote. “Somehow or other this has been translated by DBOR as constituting State approval to operate a catamaran at Ka`anapali, Maui,” despite regulations capping catamarans at 10 and requiring DOBOR to offer available slots to those on the waiting list first.

“Therefore, the first question is how and why was a permit issued for a monohull/multihull which morphed into a catamaran permit when there were already nine outstanding catamaran permits issued, and no one on the waiting list was contacted or had an opportunity to obtain a catamaran permit. Permit M-05 apparently circumvents the catamaran limits and regulations,” he wrote.

If M-05 is allowed to remain as is, DOBOR’s management system for Ka`anapali “has no integrity and will be perceived as such,” he wrote. “Permits to operate catamarans at Ka`anapali are quite valued and sought after.” Gross receipt records provided by DOBOR bear out his claim: several Ka`anapali catamarans brought in revenues between $1 million and $1.7 million last year.

Robb noted that DOBOR rules state that a commercial permit holder may transfer its permit only after operating continuously for one full year. The ownership of KTL was transferred only five months after it had been formed, he wrote.

“This is absolutely in violation of HAR [Hawai`i Administrative Rules] 13-231-62(b)(i) and should not have been permitted, and the permit should be revoked for no other reason than this one,” he argued.”

Robb added that Ali`I Nui was not owned or leased by KTL when DOBOR issued the initial permit to KTL and that it renewed the permit in violation of HAR 13-231-61, which requires a minimum of $85,000 in annual gross receipts as a condition of renewal.

“In fact, [KTL] reported NO gross income for the period in question. … Moreover, THE BIG KAHUNA was located in Honolulu and did not generate the required minimum annual gross receipts,” he wrote.

Regarding the current permit, Ross pointed out that although the QT was a 14-foot Zodiac, M-05 showed up on DOBOR records as a catamaran permit.

“So, in sum: Ka`anapali Tours first obtained a monohull/multihull permit for a vessel it had no legal interest in; that permit expired; a new permit was obtained for a vessel that never operated in Ka`anapali and, last, a permit is obtained for a 14-foot Zodiac. None of the permits are expressly for catamarans, but rather for monohull/multihull, but permit M-05 now magically shows up on the record as being a catamaran permit held by Ka`anapali Tours. … None of the renewals of permits were supported by the required minimum gross receipts, and the transfer of ownership was illegal. And for over two and a half years, Ka`anapali Tours has been allowed to sit on a permit to operate a commercial vessel, but NO vessel has been operated by Ka`anapali Tours to date,” he wrote. (Robb would not discuss the case with Environment Hawai`i, stating that he is no longer involved.)

DOBOR responded within a week, with its Maui branch chief, Nicholas Giaconi, informing KTL that the permit had been forged, KTL’s court filings state.

A May 25 email from Giaconi to Bebee, however, suggests that Giaconi had only just begun to grasp what had transpired. Nolan, Giaconi said, had told him that Smith had agreed to reissue permit M-05 to Bebee after fees and penalties had been paid to the department.

“I am seeking to demonstrate that Douglas Smith responded to your request,” Giaconi told Bebee and asked for any letters, memos, emails or cancelled checks showing any communication with Smith that “indicates an arrangement was discussed or agreed upon for the re-issuance of the commercial permit for Terry Kellam.” Giaconi stated that he had been unable to locate any such material on Maui. (Smith no longer works for DOBOR.)

A day later, without waiting for Bebee’s response, DOBOR chief Underwood informed KTL attorney Robert Frame that based on a preliminary investigation, DOBOR would be asking the Land Board to cancel KTL’s permit. Underwood raised some of the same concerns Robb had listed in his letter to the DLNR, i.e., KTL’s failure to attain minimum gross receipts and the business transfer made before continuous commercial operation of one year. He also cited KTL’s failure to submit evidence regarding its not having attained minimum gross receipts.

“[W]e believe that at the time Ka`anapali Tours LLC was purchased by your client the company did not possess a valid commercial use permit. Under [HAR], the commercial use permit currently held by your client should have been issued to the next qualified applicant on the waitlist. During our investigation we have also noted other irregularities with the permit when it was issued to [KTL] on March 22, 2010, and renewed on March 22, 2011,” Underwood wrote.

On May 31, Bebee finally responded to the DLNR, but his explanation did not change DOBOR’s decision to cancel the permit.

Bebee explained that to recoup his losses, he had asked his local operator, Jeff Kirshner, to seek an agreement with DOBOR “whereby a similar permit (don’t know if it was a ‘replacement,’ ‘reissuance,’ or a ‘new’ permit in the eyes of the DLNR) would be issued to my entity Ka`anapali Tours.”

The only fee DOBOR requested was the transfer fee at the closing of KTL’s sale to Nolan and Sutherland, he wrote. Regarding DOBOR’s request for records of communication with Smith, Bebee stated that all communication went through Kischner, who stopped operating his vessel in April 2010.

“I am not in communication with him. I understand he lives on the mainland today. I’ve never met in person, spoken with or corresponded w/ Mr. Smith,” Bebee wrote.

He stated that he, Nolan and Sutherland had taken as proof that the DLNR was satisfied with the legality of the situation “(such that we could close on the sale to Jan with confidence that she was getting what she thought she was getting) was the actual issuance of the mooring permit and commercial permit under the signature of an authorized permit on behalf of DLNR, and subsequent delivery of those permits to the permittee,” Bebee wrote.

He added that the Lahaina harbormaster, Hal Silva, had also been involved in the process.

Kirschner did not respond by press time to Environment Hawai`i’s questions about his negotiations with Smith.

Lead-up to a Lawsuit

Queen’s Treasure began its sail to Maui from the Caribbean with a storm over the validity of its intended permit well underway. On June 3, Frame asked Underwood to reconsider seeking cancellation from the Land Board. Frame also argued that the administrative rules regarding minimum gross receipts and permit transfers do not apply to permit M-05.

“I am sure you are aware this was a unique situation and was resolved between the prior owner of [KTL] and DLNR before the initial permit was issued in December 2009,” Frame wrote.

Although Underwood maintained that the permit should never have been issued, he held off taking the matter to the Land Board. However, in a July 7 email to KTL, he restricted the company’s use of its permit to the 14-foot Zodiac. Around this time, Queen’s Treasurer arrived on Maui.

Desperate, Frame emailed Underwood again, arguing that the DLNR knew the Queen’s Treasure was the intended operating vessel when it renewed permit M-05 in March 2010. He added that the loss of the catamaran Kiele V meant there was room for another one. He also pointed out that only six catamarans were actually operating at Ka`anapali.

Should Queen’s Treasure not be allowed to start operating on July 27, he wrote, KTL would suffer losses, he wrote. Days later, in yet another email, he accused DOBOR of treating his client in an arbitrary, capricious, and discriminatory manner.

DOBOR didn’t budge. In an August 3 letter to KTL, Underwood wrote that the DLNR and his division consider M-type permits to be monohull permits and would not sanction the use of such a permit for a catamaran.

On September 12, KTL sued the DLNR, the Land Board, Aila, Underwood, and Giaconi in U.S. District Court.

What a Mess

Relying on M-05’s conditions, KTL commissioned Queen’s Treasure, the company’s attorneys stated in their motion for a jury trial. DOBOR’s refusal to allow the catamaran to operate at Ka`anapali has caused and will cause KTL to suffer substantial damages, with the full amount to be determined at trial, they stated.

Two weeks after filing its motion, KTL filed another, for a preliminary injunction forcing DOBOR to allow Queen’s Treasure to operate pending a decision on the permanent injunction.

The parties attempted to settle the case, but came to only a temporary agreement: In exchange for KTL waiving claims to monetary damages, the DLNR and DOBOR would allow the vessel to operate until January 3, when U.S. District Judge Leslie E. Kobayashi was expected to hear KTL’s injunction motion. On November 17, Queen’s Treasure began operating.

To Ka`anapali catamaran operators ignorant of the temporary settlement, the sight of the elegant, new catamaran ferrying tourists around Ka`anapali must have been a shock. For Kapalua Kai Sailing, Inc., which owns a catamaran permit and is also second in line on the waiting list, it was enough to hire a lawyer.

In a December 2 letter to the DLNR, attorney Ho, representing Kapalua Kai and its principals, objected to Queen’s Treasure operating without securing a commercial use permit. Ho argued that the vessel’s continued operation was likely to financially harm Kapalua Kai because it was competing for the same market. (Kapalua Kai brought in $1.4 million last year; DOBOR did not disclose gross receipts reported by KTL for November and December, citing the pending litigation.) Ho urged DOBOR to take immediate action.

“How can DOBOR hold lawful permit holders to one standard of conduct and Ka`anapali Tours another? … My clients are committed and prepared to take legal [action] as necessary to ensure their rights are protected and DOBOR fulfills its duty to the general public to implement, execute and enforce the relevant administrative rules in a fair and impartial manner,” he wrote.

In its December 13 court filing, the deputy attorneys general representing the state defendants made clear that they agree that KTL is not entitled to a catamaran permit. However, they admitted that the history of permit M-05 “is convoluted and full of anomalies which reflect poorly on both KTL and DLNR.”

Still, they noted that KTL’s Nolan is number 5 on the Ka`anapali catamaran permit waiting list, that KTL failed to use its permits for any commercial activity despite DOBOR’s “use it or lose it” rules, and that the term Monohull/Multihull does not appear in other commercial use permits.

“KTL contends this term entitles KTL to switch [from monohull to catamaran]. … [T]hat interpretation of KTL’s commercial use permit for … Ka`anapali … is contrary to DLNR rules and makes no sense,” they wrote.

They argued that the transfer was illegal and that because the reinstated 2009 permit was not signed by the DOBOR administrator and was instead signed by a low-level planning officer, the permit was also illegal. (Notwithstanding this, DOBOR has accepted monthly permit fees in addition to the $15,000 transfer fee from KTL.)

The state’s attorneys also suggested that the current M-05 permit might be illegal since it was issued three months after the December 2009 permit expired.

“[T]he public wants and expects an orderly management of commercial boating rights,” they wrote.

To these arguments, KTL’s attorneys had this to say: “A 14-foot inflatable is obviously not multihulled and cannot carry 49 passengers; thus, the substitution of a vessel that could carry 49 passengers was clearly expected. No reasonable person could have issued the Permit believing QT would remain the Primary Vessel given the purpose of the Permit was to serve 49 passengers. Moreover, DLNR had repeatedly allowed and affirmed the substitution of vessels in Permit after Permit.”

Regarding the state’s argument that Smith lacked the authority to issue permits, KTL’s attorneys argue that his acts “may be subsequently ratified by those with authority if the ratifying officials have actual or constructive knowledge of the unauthorized acts.” And, they added, DLNR ratified the agreement with subsequent renewals, including the most recent renewal by Underwood.

“Defendants want the court to ignore the plain meaning of the terms and conditions of the permit and restrict plaintiff to the use of a 14-foot inflatable. Such an interpretation is ridiculous. Defendants cannot charge and accept a $15,000.00 transfer fee from plaintiff that permits plaintiff’s vessel to carry 49 passengers, and then restrict plaintiff to a vessel that could not carry 49 passengers without sinking. Defendants cannot admit the permit contains language allowing the use of multihulled vessels and then seek to restrict use of the permit to a monohulled one. Finally, Defendants cannot deny Plaintiff its right to substitute QUEENS TREASURE as the ‘Primary’ vessel when all the permit requires is notification of changes in inventory and Coast Guard documentation if requested,” they wrote.

KTL’s attorneys argued that the state defendants “intentionally and recklessly disregarded Plaintiff’s constitutional and civil rights,” and that the company would be forced into bankruptcy and lose its vessel if Queen’s Treasure is not allowed to operate.

“Plaintiff’s owners will lose years of hard work and planning, the goodwill established through their efforts, and this once in a lifetime opportunity to make their dream a reality,” they wrote.

On January 3, Judge Kobayashi heard the motion for a preliminary injunction, but did not issue a ruling. The next day, Magistrate Puglisi ordered the parties to appear at a settlement conference on April 5. He ordered the parties to try to settle the case on their own in the meantime. Should they fail, each party must provide a statement of evidence likely to be presented at trial at least seven days before the settlement conference.

As of mid-January, Queen’s Treasure was still operating. Ho says whether or not his client, Kapalua Kai, takes any legal action will depend on the court’s ruling regarding the preliminary injunction.

Based on DOBOR’s gross receipt records, three of the ten official Ka`anapali catamaran permits could be made available to those on the waiting list this year, including Kapalua Kai. Catamaran permittee Fun Charters Inc., earned less than $9,000 last year, Maui Navigation Co. earned nothing, and Maui Boat Co. failed to submit any gross receipts.

Teresa Dawson

Volume 22, Number 8 — February 2012

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