Over the last year, Hu Honua Bioenergy, LLC, builder of the proposed biomass-fueled, 28-megawatt power plant on the Big Island coast a few miles north of Hilo, has faced multiple applications for mechanic’s and materialman’s liens filed by contractors and subcontractors. Now Hawaiian Dredging Construction Company, Inc., the largest of the lienholders, has brought a foreclosure action against the plant’s owners in an effort to force payment of bills in excess of $30 million.
Attorneys for Hawaiian Dredging, the former general contractor on the site, filed the foreclosure suit on October 27 in 3rd Circuit Court. The filing came just days after Judge Glenn Hara approved the company’s lien application, in the amount of $29,411,422.69.
John Sylvia, a principal of Hu Honua, has said that the company intends to pay off Hawaiian Dredging. He told the Hawai`i Tribune-Herald that the company “intends to clean all this mess up…. I understand some of [Hawaiian Dredging’s] irritation. Unfortunately, these things are complicated and they take time to clean up.”
Pressure to Subordinate
The events laid out in the lawsuit suggest that promises by Hu Honua to pay its debt to Hawaiian Dredging are nothing new. According to the complaint, in 2012, Hawaiian Dredging began work to refurbish the old power plant, which had burned bagasse, then coal, until shutting down in 2008. By the middle of 2013, Hu Honua had already fallen “significantly behind in paying [Hawaiian Dredging’s] and other contractors’ and subcontractors’ invoices for services and labor performed and materials purchased.”
A year ago, Hu Honua informed Hawaiian Dredging that it would be able to obtain funds from NIV, LLC (another defendant in the lawsuit) to pay off Hawaiian Dredging’s claims only if Hawaiian Dredging and other creditors agreed to subordinate their claims against Hu Honua to any claims of NIV. Of the $6.5 million to be loaned by NIV, the lawsuit states, just $4.5 million would be available to Hu Honua to pay down Hawaiian Dredging’s balance; the remaining $2 million would be retained by Island Bioenergy, LLC (IBE), the sole member of Hu Honua.
Hawaiian Dredging was not tempted, and on December 18, 2013, it informed Hu Honua that it was “unwilling to subordinate our $32 million mechanic’s lien.”
Hu Honua did not give up. On December 30, after another creditor had filed an application for a lien in the amount of $215, 174, Hu Honua pressed Hawaiian Dredging to enter into a “standstill agreement,” calling for Hawaiian Dredging to hold off on any legal action to collect its debt. When that didn’t work, Hu Honua asked for a “revised standstill agreement,” stating: “We have drafted this agreement in a manner that allows us to move forward with the bridge lenders, who need some assurance that the project contractors are not going to start exercising remedies before the next round of construction financing is secured…. It is in everyone’s interest to not have the subcontractors file lien notices or to start any lawsuits.”
Again, Hawaiian Dredging held firm. But Hu Honua continued efforts to induce the company to subordinate its claims to those of NIV, the “bridge lender.” “We would like to avoid a lien debacle,” Hu Honua wrote on January 10, 2014, “as it would only prolong [sic] complicate the financing process which is in neither of our interests.”
Not waiting for Hawaiian Dredging to reply, that same day Hu Honua mortgaged to Island Bioenergy all its personal property as well as its leasehold interest in the land and its interest in any of the improvements on it. Island Bioenergy (IBE) then turned around and assigned the mortgage to NIV. In return, the Hawaiian Dredging complaint states, NIV agreed to loan IBE up to $35 million, and IBE in turn agreed to loan a like amount to Hu Honua. Before the month was over, Hawaiian Dredging filed its lien application with the 3rd Circuit Court.
Over the next several months, Hawaiian Dredging perfected its claims against Hu Honua. In April, both companies entered into a settlement agreement, later approved by the 1st Circuit Court, that called for Hu Honua to pay Hawaiian Dredging $30 million. In mid-October, Judge Glenn Hara of the 3rd Circuit Court approved the lien application filed last January.
‘Fraudulent Transfers’
But beginning last July, attorneys for NIV attempted to assert what they said was a superior claim to Hu Honua’s assets. In a letter dated July 16, the complaint states, NIV’s counsel informed Hu Honua that the mortgage “will be superior to any mechanics lien that may be filed by HDCC” and that “a trustee’s sale of HHB’s assets will result in a purchaser taking the assets free of any mechanic’s liens filed by” Hawaiian Dredging.
This, Hawaiian Dredging attorneys say, was basically an admission that HHB, Island Bioenergy, and NIV had planned “to hinder, delay, or deny [Hawaiian Dredging] the ability to be paid for its claim for unpaid invoices.” The back-to-back mortgages in January had been done without notice to Hawaiian Dredging. “HHB concealed from Plaintiff the existence and extent of its security interests and obligations to IBE that were created on January 10, 2014, and immediately transferred to NIV,” the complaint says – this despite HHB having “a duty to disclose … the facts that the Loan and Transfers would not be used to pay any portion of plaintiff’s claim and were instead undertaken with the intent to hinder, delay, or defraud Plaintiff from collecting on its claim against HHB.”
The effect of those mortgages became clear when, in early September, NIV sought to intervene in the special pleading in the 1st Circuit. Hawaiian Dredging had been pushing for a court order to force the sale of assets held by Hu Honua when NIV “applied to intervene … and demanded that HHB be provided full access to and use of its real and personal property.” NIV could make the demand, NIV’s attorneys stated, because “NIV has a first secured priority position in all improvements.” Any restriction on work at the site “has and will directly and immediately devalue NIV’s collateral.”
In any case, NIV continued, “[g]iven NIV’s prior secured interest on its $35,000,000 loan,” and its senior claim on liquidated assets, even if Hawaiian Dredging were able to force a sale of Hu Honua assets, Hawaiian Dredging probably would “receive negligible proceeds at best.”
The special pleading in 1st Circuit has been assigned to a mediator. In the meantime, Hawaiian Dredging has filed a lis pendesn on the real property leased by Hu Honua and owned by Maukaloa Farms, LLC.
Efforts to reach a spokesperson for Hu Honua were unsuccessful by press time. Keith Yamada, attorney for Hu Honua, declined to comment on pending litigation.
Volume 25, Number 6 December 2014