Hawaiian Legacy Hardwoods, its principal, and a host of related businesses are being sued in federal court in Honolulu. The plaintiff, Streamline Consulting Group (SCG), alleges that the companies, all owned by or controlled by Jeffrey A. Dunster, owe around $30,000 for work performed by SCG but, more significantly, also owe SCG in the neighborhood of $300,000 in the wake of Hawaiian Legacy Hardwoods having obtained carbon-sequestration certification last year.
Hawaiian Legacy Hardwoods, LLC – which in 2014 changed its name to Legacy Hardwoods – is attempting to replant much of Kukaiau Ranch, on the windward slopes of Mauna Kea, with koa and other native tree species. It does this by selling investors blocks of 100 seedlings, which it then agrees to cultivate up through the point where the trees are harvested and milled. Investors get proceeds from the sale, minus costs for services provided by HLH. In recent filings with the Securities and Exchange Commission, the company puts the price of a block of seedlings at $11,880. In addition, a nonprofit set up by Dunster, called Hawaiian Legacy Reforestation Initiative (also a defendant), plants so-called legacy trees, at $60 each ($20 of which is donated to a charity of the buyer’s choice, $1 donated to The Nature Conservancy of Hawai`i, and the remainder used to offset cultivation costs).
The principal of SCG is Tiffany Potter, and if that name sounds familiar, it is probably because for several years, Potter was listed by Hawaiian Legacy Hardwoods as its “carbon and environmental assets analyst” (in a 2010 newsletter), as one of its “executive officers” (in SEC filings), and as a “senior consultant” (in a 2010 press release).
But whatever goodwill existed between Dunster and Potter in the past has almost certainly been extinguished with recent legal filings. In an affidavit filed with the court, Potter suggests that the various business entities associated with HLH operations “are all part of the same business enterprise … under the common control of Dunster and have no independent operations.”
“To the best of my knowledge,” says Potter, who worked with Dunster for more than three years, “Dunster commingled the funds of his entities and treated them as his own.”
One of the most cutting statements Potter makes concerns Dunster’s financial position. Although HLH has reported sales of blocks of trees to investors totaling more than $4 million over the last three and a half years, Potter suggests the operation rests on a precarious footing: “Dunster’s entities appeared inadequately capitalized or undercapitalized as evidenced by the fact that without receipt of a subsidy payment check from the U.S. Department of Agriculture, Natural Resources Conservation Service, they were not able to pay any of their obligations.” (According to the website of the Environmental Working Group, which tracks USDA payments, from 2010 through 2012, Hawaiian Legacy Hardwoods received $636,731 in Conservation Reserve funds.)
For their part, Dunster and the businesses that are co-defendants claim that the agreement for services, one of two agreements that Potter alleges have been breached, requires that disputes go to binding arbitration – and not be litigated in court.
They also challenge Potter’s claim that all the companies she is suing are effectively Dunster’s alter ego: “Other than the conclusory allegations of partial common ownership and control, Plaintiff has failed to allege any factual allegations that would plausibly suggest or support an alter-ego theory as to Hawaiian Legacy Reforestation Initiative and Legacy Holdings.” Legacy Holdings, formerly known as Hawaiian Legacy Holdings, is a limited liability corporation whose members are Dunster and his business partner, Darrell Fox.
At the heart of SCG and Potter’s complaint is a seminal event in the development of HLH’s business: the determination last June by The Gold Standard, a Swiss-based standard and certification organization, that HLH could sell an average of 10,000 carbon credits a year. A credit represents one metric ton of sequestered carbon dioxide or carbon-dioxide equivalent (CO2e).
An agreement for services between SCG and Hawaiian Legacy Carbon (another defendant, whose name has since been changed to Legacy Carbon) calls for SCG to make “strategic introductions for HLC affiliates for the purposes of raising capital or selling product (e.g. carbon offsets),” among other things. It details conditions for payment of an “achievement fee” of 3.5 percent in the event that HLH or HLC receives product funding as a result of a “strategic introduction or referral” from SCG.
According to the complaint, “Streamline introduced the Dunster entities and their principals to the key personnel at the Gold Standard’s Cambridge office and worked as an intermediary between the Dunster entities and the Gold Standard in order to facilitate the certification” of the carbon offset credits. By August 2014, however, “the Dunster entities, through their principals, began communicating and negotiating, orally and in writing, directly with the Gold Standard in an attempt to circumvent Streamline’s involvement.” That, SCG claims, amounts to a “direct violation” of another agreement Potter signed with Hawaiian Legacy Hardwoods, the Non-Circumvention Agreement.
That agreement contains a “non-contravention” clause that prohibits HLH, for a period of ten years, from negotiating directly with a party to whom it has been introduced by Potter without Potter’s prior consent. In the event of a violation, then the agreement calls for Potter to receive a fee equal to 20 percent of the total value of the benefit HLH receives.
“Based upon the Gold Standard’s certification” of 10,000 tons of sequestered carbon-dioxide per year, the complaint states, “Streamline is entitled to 20,000 tons, calculated as 20 percent of 10 years of the product.” At the estimated market value of $15 per carbon credit, the complaint says, Streamline is owed $300,000. (As of mid-January, the going price for a carbon credit on the world market was around $13 per metric ton.)
In 2012, when Environment Hawai`i first reported on HLH, Richard Lindberg, who has worked for the company practically since its inception, said that the company made no money on its legacy trees and little on the investment trees. The real profit center, he told Environment Hawai`i, would come from the sale of credits for carbon sequestration.
But by the next year, things had apparently changed. In an email to Potter on October 30, 2013, Dunster downplayed the role of carbon-credit sales. Legacy Carbon (LC), he wrote “is only one component of a much larger program. As great as all of this is, LC won’t generate anywhere near enough income to cover the cost of planting a tree. That cost is covered by HLH through the Legacy Tree and sustainable harvest models.”
“I think,” he continued, “the LC component should be viewed as a very good source of residual income (just like Legacy Tours) that will be shared with the land owner as part of an income stream that would justify the land owner taking their lands out of production and not doing cattle, tobacco, or whatever else they might do to earn a living.”
A ‘Corporate Veil’
Dunster’s attorneys argue that SCG has lumped all the Dunster-affiliated companies into the lawsuit without providing any reason for doing so. SCG “not only sued the counterparties to the two contracts and their principal, but also indiscriminately named as defendants various affiliates and/or related companies which entities had no involvement whatsoever in the alleged claims,” they state in their motion to dismiss. SCG, they claim, “alleges no factual basis for piercing the corporate veil.”
Furthermore, claims against Dunster himself must fail, they argue, since Dunster is not alleged to have signed either agreement on his own behalf, but rather on behalf of the LLCs. Thus, they go on to say, “In addition to there being no factual allegations to support the claims against Dunster, such claims fail as a matter of law. … That is, Hawai`i limited liability company law provides that members are not liable for the debts, obligations, and liabilities of an LLC (except under certain circumstances not alleged in the complaint).”
Dunster’s attorneys also objected strenuously to the contents of Potter’s declaration and moved the court to have it ruled as inadmissible.
Judge Susan Oki Mollway heard arguments January 20 on Dunster’s motion to dismiss and said she planned to issue a ruling by the end of January or shortly thereafter. While Potter’s attorney, John Winnicki, supported Mollway’s initial inclination to have all matters raised in the case decided in arbitration, Dunster’s attorney, Christopher Muzzi, argued that Mollway should at least decide which of the defendants must participate in that arbitration.
Mollway had stated the day before the hearing that she was inclined to deny the motion to dismiss and stay the case pending the outcome of arbitration. After hearing oral arguments, she did not immediately indicate whether she would convene an evidentiary hearing to determine which parties would be required to participate in arbitration.
Both Potter and Dunster were asked for comments. Neither responded by press time.
— Patricia Tummons