Two hundred years ago, the trade in sandalwood was a tragic chapter in Hawaiian history. It devastated upland forests across the archipelago and forced native people into involuntary servitude.
In the last few months, the sandalwood trade has been rejuvenated on a large scale, in one of the last areas of the islands where old-growth trees remain in some abundance: the mauka lands of Kona, on the slopes of Mauna Loa high above Kealakekua Bay.
According to the loggers, they have received orders for nearly $15 million in sandalwood from companies in Sri Lanka, Dubai, and China. Their orders for koa from within the state pale in comparison – about $25,000 worth, as reported in documents submitted to the U.S. Bankruptcy Court. Most of the wood to fill those orders is being taken from about 2,900 acres of what used to be Hokukano Ranch. Tom Pace, who sold the land to the loggers, is now trying to foreclose on the property after the loggers defaulted on their mortgage in June.
Pace’s efforts to stop the logging through a foreclosure action, filed in state court July 19, are on hold for the time being. On July 21, less than two hours before a request for a temporary restraining order was scheduled to be heard in a Kona courtroom, the loggers filed for bankruptcy in Honolulu. Two days later, U.S. Bankruptcy Judge Robert J. Faris denied Pace’s motion for a restraining order preventing further logging. Although attorneys for Pace and his company, Hokukano Ranch, argued that the value of the land secured by the mortgage was diminished by the logging, attorneys for the logging company, called Jawmin, won over the court by noting that nothing in the deed that Pace gave to Jawmin prevents Jawmin from conducting any legal activity and, further, that Pace and Hokukano Ranch had no secured interest in the trees.
And so the logging continues. Documents submitted by Jawmin in the bankruptcy filing indicate that the actual removal of timber from the property is expected to last from 18 months to two years.
The Pace family owns Hokukano Ranch and Kealakekua Ranch, two adjoining properties that have been subject to logging and cattle grazing for much of the last 200 years. Since the Paces took over ownership – Hokukano was acquired 23 years ago, and Kealakekua six – they have made much of their commitment to conserving the land. A planned subdivision and golf course in the lower part of Hokukano Ranch was dubbed “Hokukano Preserve,” while some 9,000 acres of Kealakekua Ranch were proposed by the state Department of Land and Natural Resources for inclusion in the federal Forest Legacy Program, with Congress appropriating $4 million for acquisition of a permanent easement on the lands.
Both the Hokukano subdivision and the Kealakekua Ranch conservation easement appear to be on hold for the moment. The Hawai`i County Planning Department has twice extended the deadline for submittal of a final plat map for Hokukano Preserve subdivision. Though originally due August 25, 2009, Pace now has until August 25, 2011, to deliver it. Records supplied by the U.S. Forest Service suggest that the Kealakekua conservation easement is held up by encumbrances on the land. Tom Pace, ranch manager, wrote in an email toEnvironment Hawai`i that he anticipates “completing the easement once all state requirements have been fulfilled. We hope this occurs shortly.”
The Pace family fortune was made by John H. Pace Jr., who developed Pace Island, a gated community near Jacksonville, Florida, and founded Cardinal Investment Company. His son Tom, a 1972 St. Louis High graduate, has been active in Hawai`i since the 1980s in real estate and logging. In 1988, a year after acquiring Hokukano Ranch, Tom Pace came under fire for logging up to 1,700 logs of sandalwood from the mauka areas, shipping as much as 300 tons of the wood to China – the sale of which, Pace later claimed, netted him just $40,000.
For the last few years, John Pace and his wife, Gussie, made their home in South Kona. When the state announced approval of the Kealakekua conservation easement, the elder Paces were featured prominently in the press release of the Department of Land and Natural Resources, which portrayed them as avid conservationists. John Pace, age 91, died in July, making official Tom’s de facto role as sole manager of the family’s interests in Kona.
Jawmin was registered as a limited liability company with the state last October. Principals are Wade Lee, his brother Arthur J. “Jeff” Lee, Matthew Charbonneau, and Allen J. Gourley. (The name derives from the first-name initials of the parties, with an “in” suffix for ease in pronunciation, according to Wade Lee.) Three have backgrounds in logging and timber going back several years. Jeff Lee is a Kona businessman and owner of The Club, a fitness center in Kailua-Kona, among other things. In a resume filed with the bankruptcy court, he lists interests in “highland game/habitat management” and hunting, and he claims “affiliations” with several Big Island ranches, including Hokukano and Kealakekua. Wade Lee has a history of involvement with several logging operations on the Big Island. He and Charbonneau are principals of Hamakua Framing and Structure, which, under an agreement with Jawmin, is carrying out the logging and warehousing activities associated with the Hokukano Ranch operation. Gourley, whose principal address is in Pennsylvania, has logging interests in Hawai`i and elsewhere. His company Ohana Sanctuary owns 3,137 acres of Conservation District land north of Hilo that at one time Kyle Dong proposed to log as part of Dong’s Hawai`i Forest Preservation operation. (Gourley’s land was withdrawn before Dong’s application came before the Board of Land and Natural Resources – where it ultimately failed to win approval.)
At the start of 2009, Wade Lee says, the Jawmin principals saw an article in West Hawai`i Today that Tom Pace was wanting to sell off the lands in Hokukano and Kealakekua that remained in his ownership. By fall, they had narrowed down their interest to some 2,800 acres in three separate but contiguous parcels at the top of Hokukano Ranch, nearly eight miles above the Hawai`i Belt Road. Eventually, they agreed on terms of a sale. Jawmin would pay $9 million for the property, with Pace accepting a purchase money mortgage, $1 million down, and a promissory note for $8 million. Terms of the note called for payment of no interest, but $3.5 million would be due by June 13 and the remainder by August 12.
On February 18, the North Hawai`i Community Federal Credit Union, which appears to have been the source of the down payment, filed a financing statement with the state Bureau of Conveyances, claiming as security “all timber, timber byproducts, and proceeds from the sale of timber” taken from the land Jawmin intended to purchase. After documents conveying the property were signed later that month and finally filed with the bureau on March 15, the credit union’s so-called UCC (Uniform Commercial Code) secured claim on the timber expired. Hokukano Ranch could have – and, in hindsight, probably should have – filed a similar claim to the timber, but it did not do so. Instead, concurrent with the filing of the deed transfer and mortgage, it assigned the mortgage over to two other parties – Pacific Rim Bank and Entrust Hawai`i, Inc. – as security for other debts the ranch had incurred in recent years.
No sooner did Jawmin take title to the Hokukano land than it began to log the property. Or, rather, employees of Hamakua Framing and Structure began clearing what Wade Lee has described as “dead, dying, and diseased trees.” On the internet, another company, Keala Ke Aloha (owned by Wade Lee) began advertising 15 million board feet of Hawaiian hardwoods for sale and “100 tons of Hawaiian sandalwood,” including logs, heartwood, root balls and chips, at prices ranging from $4,000 to $35,000 a metric ton (minimum order: 10 metric tons).
From March to June, Jawmin carried out its logging operations, apparently without protest from Pace – although Pace did say in a deposition he did not know of Jawmin’s plans to log; instead, he said the principals indicated they were going to conduct hunts there and restore the forest through large-scale replantings.
Orders for millions of dollars worth of sandalwood came in almost immediately, from three processors: in Dubai, Sri Lanka, and China.
While getting orders was easy, getting financing was not. Wade Lee told Environment Hawai`i that Jawmin had intended to obtain refinancing of the loan before the first payment came due. However, he said, because of changes in the financial regulatory picture, it became difficult to get a loan for raw land. As a result, Jawmin was not able to make the first mortgage payment of $3.5 million when it came due.
After the deadline passed, the ranch presented Jawmin with a forbearance agreement, which would have: set a new schedule for payment (delaying final payment until November); called for an additional one-time payment of $300,000; provided for a $10,000-a-day penalty if deadlines were missed; and allowed Hokukano Ranch to record a security interest “in and to all timber and timber byproducts located on or from the property, together with a security interest in the proceeds from the disposition of such collateral.” No ban on logging was proposed.
Jawmin rejected the agreement and continued to log.
On July 14, Duane R. Miyashiro, attorney for the ranch, sent a demand letter for immediate payment of the total loan amount, as provided for in the promissory note.
Jawmin did not reply.
Five days later, the two Lee brothers and Charbonneau went to Hokukano Ranch headquarters for what they thought would be a discussion of a rescheduled payment plan with Pace. Pace was not there, but Gregory Hendrickson, one of the attorneys for the ranch, was – and he promptly served them with the foreclosure complaint and the motion for the temporary restraining order.
Two days later, and less than two hours before a hearing on a temporary restraining order to stop the logging, Jawmin trumped the state court by filing its Chapter 11 petition in federal bankruptcy court.
The logging continues.
Tom Pace has stated that Jawmin violated an oral agreement that it would not log the land. In a deposition taken the morning of the scheduled (but forestalled) TRO hearing, Pace was asked whether Gourley had indicated any interest in the timber. “Our discussions were futuristic, for his family’s trust in the future,” Pace said. “[T]hey were going to reforest, and his children’s children would be able to harvest timber from the reforestation efforts.”
Wade Lee, Pace said, had told him that “the area, land they were working on in Hilo, they had already lost two bulldozers in, that the cost of restoration of conservation land over there was six to seven thousand or something in that range per acre to cut the waiawi that was taking over.” (According to Lee, this is a reference to the efforts he undertook to restore 13 acres of Conservation District land that had been illegally logged by Kyle Dong. The money available for the project — $22,000, Lee says – ran out after just seven acres had been restored.)
Pace said in his deposition that he was under the impression that Jawmin wanted the land for long-term forest restoration and that “they needed the top cabin area because they were starting immediately with reforestation efforts and setting up a nursery and staff to manage the nursery.” Pace told Environment Hawai`i that he had been informed “that the area was going to be used as a mitigation bank and we understood that a pre-existing restriction would make the property ineligible.” In other words, Pace went on to explain, if the seller places a restriction on the property, such as a ban on logging, then the new owner will not have the ability to negotiate the conservation or preservation status or tax deductions, as then the new owner is not giving up anything towards conservation” that has not already been given away.
Jawmin’s principals describe an altogether different scenario. In the same deposition of Pace, they note in a filing with the bankruptcy court, Pace acknowledged that although in other sales of Hokukano Ranch parcels he had included “preservation clauses,” no such clause existed in the sales agreement with Jawmin because the ranch “needed the purchase price to pay its other creditors.” Pace told Environment Hawai`i, however, that “we have had great success selling land to conservation-minded people…and have not restricted the land we sold to them.”
Furthermore, in a declaration filed with the bankruptcy court, Wade Lee depicted a forest that had been badly managed for years: “At the time that Jawmin took possession … many of the Debtor’s [i.e., Jawmin’s] sandalwood trees had already been weakened by fire, fires which either injured the sandalwood trees directly, or indirectly, because sandalwood trees being a parasitic species, require healthy host trees. The property in the spring of 2010 had an extremely high fire fuel load. Many decades of tree cutting and leaving the slash and scrap wood in the forest, accentuated by the dry kikuyu grass, had left the entire South Kona slopes of Mauna Loa vulnerable to fire. Hokukano Ranch in 2010 has lost over 2,000 acres to fire and the forest and trees that were present there a year ago have all but disappeared.”
Tom Pace said in an email, “We have removed dead trees from the fire area on the ranch. We have also continued our practice of removing downed trees elsewhere on the ranch.”
Wade Lee described the logging done by the ranch when it was owned by the Greenwell family: There were “huge harvests. The canopy that once existed is gone. The slash pile of koa has gotta be a half mile long. Five saws were set up at one time on rail tracks, for the big koa logs. After that, all the trees were cut down, cut up in chunks and burned. They planted kikuyu grass. Up till the time that we bought it, the land was used for pasture. There are still several cattle up there,” which Lee is trying to get out.
In addition, he said, Hokukano Ranch has done nothing to control the rats that eat sandalwood seeds. When Jawmin took possession of the property, it “was inundated with rodents and the seed bank for sandalwood was nonexistent,” he said in the bankruptcy court declaration, adding that grazing livestock belonging to the ranch and feral sheep “have been consuming all of the native juvenile trees and seedlings on the property.”
What sandalwood trees remained, he continued, “were infected with fungus, which destroys the sandalwood tree, by rotting the tree from the inside out. Many of Jawmin’s trees face a serious fungus issue, more than 60 percent of all adult trees show signs of fungus, causing severe rot in the pith and heartwood.”
“Jawmin has concluded that over time, healthy sandalwood trees will be more valuable than the current inventory of dead and diseased sandalwood trees,” Lee went on to say in the declaration. The company’s “forest management plan” calls for removal of the diseased or weakened trees first, leaving the healthy, more valuable trees for “future Timber Stand Improvement decisions.”
To that end, Jawmin has brought in as a consultant Randy Senock. From 1999 to 2004, Senock was an assistant professor in the College of Agriculture, Forestry and Natural Resource Management at the University of Hawai`i-Hilo. Senock is now an associate professor of environmental science at California State University-Chico. He is working for Jawmin in his capacity as owner of a private consulting firm, On Solid Ground. As of early September, Jawmin had paid him $11,000 of a $24,000 contract for his work. The bankruptcy court has approved payment of the full amount.
According to “Preliminary Check Cruise Resource Inventory Results,” dated September 6, Senock wrote that his mean estimate of the “total property sandlewood” [sic] weight came to 3,579 metric tons (7.9 million pounds), though it could be as high as 4,437 metric tons or as low as 2,720 mt. Based on that, the estimated value of the timber was put at $23 million.
Wade Lee told Environment Hawai`i that eventually, Jawmin hopes to obtain certification through the Forest Stewardship Council – but that this depends on whether it is even possible at this point to restore the forest. He anticipates having a forest management plan developed later this month.
When Jawmin filed for bankruptcy, it did so seeking protection from creditors under Chapter 11, which allows for reorganization instead of dissolution. Basically, Jawmin claims that whatever short-term credit problems it may have can be resolved if it is allowed to continue logging, fulfill the orders for sandalwood it has already received, and thus have millions of dollars in accounts receivable that it can use to pay off Hokukano Ranch.
Hokukano Ranch, however, wants to have the bankruptcy judge appoint a disinterested trustee to oversee Jawmin’s operations, arguing that this is the only way in which the ranch’s interests can be protected.
On September 13, a hearing was held on the bankruptcy petition before Judge Faris. Court minutes state that the judge was “not ready to appoint a trustee nor dismiss the case” – remedies sought by Hokukano Ranch. “Instead, there are concerns regarding heavy insider involvement [and] the need for updated reports.” The next hearing is set for October 18.
Editor’s Note: Selected records from the bankruptcy court are available in the EH-Xtra column on our website: www.environment-hawaii.org
For more background on Kealakekua and Hokukano ranches, see the October and November 2007 editions of Environment Hawai`i. These are available online in the Archives section of our website.