By Craig Miller
Partner, Davis Wright Tremaine LLP
Co-Chair, DWT Pacific
Phone: +61 2 9267 7344
Email:
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On May 30, 2009, the Hawaii Superferry venture sank in the deep waters of a liquidating Chapter 11 bankruptcy. (1)
Across the Pacific Islands, there are sadly few examples of efficient,
safe inter-island ferryboat services. The recent Tongan ferry disaster
serves as a particularly tragic reminder of the widespread inadequacies
of inter-island marine passenger services in many places throughout the
Pacific Islands. (1)
Hawaii Superferry had the promise of being a shining example of how to
get it right. Its two ferries were brand new and state of the art. But
it was not to be. Already foundering from volatile fuel costs and
disappointing revenues, Hawaii Superferry finally when down after
hitting legal rocks.
The Hawaii Superferry venture was formed in 2002, with the plan of
providing high speed, daily passenger and vehicle service between the
four principal Hawaiian islands of Oahu, Maui, Hawaii and Kauai. The
company contracted with Austal Ships to design and build two large
aluminum hull catamarans. Austal Ships, based in Perth, Australia, is
a leader in catamaran design and manufacture, and its vessels are in
service throughout the world. (2) The two catamarans, the Alakai and
the Huakai, were constructed by Austal’s US subsidiary at its shipyard
in Mobile, Alabama. Hawaii Superferry took delivery of the Alakai in
2007; and of the Huakai in April 2009.
Financing for the Hawaii Superferry venture was sophisticated. Hawaii
Superferry, Inc., the operating company and ship owner, borrowed some
$135 million (3) for vessel construction under bonds guarantied by an
agency of the US Government; with additional junior financing of $21
million provided by Austal. Those loans are secured, in that order, by
ship mortgages on the vessels. Hawaii Superferry’s parent company, HSF
Holding, borrowed $51 million from an investor called Guggenheim
Funding. Guggenheim’s loan was secured by HSF’s shares in its wholly
owned subsidiary, Hawaii Superferry. Behind the secured vessel loans
was $92 million in equity, the majority of which came from the
investment firm of J. F. Lehman & Co (“JFL”).
(4) JFL also provided consultancy services to Hawaii Superferry and
HSF, and was to receive substantial fees for those services.
Hawaii Superferry entered a 22 year agreement for harbor and dock use with the Hawaii Department of Transportation (“HDOT”).
Under that agreement, the State of Hawaii provided some US$40 million
in capital improvements and new equipment for the superferry dock
facilities.
At the outset, HDOT decided that no State of Hawaii environmental assessment (“EA”)
was necessary for permits for ferry operations or the State’s dock
improvements. Environmental opposition quickly formed, and focused
especially on Kahului harbor on Maui. For superferry use, the Kahului
dock required a specially designed barge to serve as a bridge between
shore ramps and the superferry in certain tide conditions.
Environmental plaintiffs, including the Sierra Club, filed suit, and in
2007 the Hawaii Supreme Court decided in favor of the plaintiffs,
holding that an EA indeed was necessary. (5) The ruling was announced
only days before ferry operations were set to begin. Acting on the
Supreme Court’s ruling, a lower court enjoined ferry operations.
Hawaii’s Governor Linda Lingle immediately called the Hawaii
Legislature into special session. At the Governor’s request, the
Legislature passed so-called Act 2, which allowed Hawaii Superferry to
continue to operate (and to perform its obligations due to HDOT under
the 22 year agreement), and allowed HDOT’s dock improvements to be
completed, all while an EA was prepared and approved. With Act 2 signed
into law on November 2, 2007, the lower court then lifted its
injunction, and Hawaii Superferry began operations between the islands
of Oahu and Maui.
The environmental plaintiffs then challenged Act 2 as unconstitutional,
on multiple grounds, chief among them that Act 2 was a special purpose
law that thus offended the Hawaii Constitution’s provision requiring
that any law affecting state lands (such as the Kahului dock) must be
only “general” (6) in application, i.e., not a law favoring a specific
person or class.
In a decision entered March 16, 2009, the Hawaii Supreme Court once
again ruled for the environmental plaintiffs. (7) The Court held that
Act 2 was designed to benefit only Hawaii Superferry, an “illusory
‘class of one’… and enacted with the specific purpose of allowing
Superferry, and Superferry alone, to operate without satisfying the
requirements…of Hawai’i statutes.” (8)
Immediately after the Court’s ruling, Hawaii Superferry ceased
operations. Governor Lingle expressed her disappointment, and said the
ruling was “devastating” to the Hawaiian citizens who were depending on
superferry service (not to mention to HDOT who was depending on a 22
year stream of payments from Hawaii Superferry to cover the costs of
dock improvements). The Sierra Club representative said that the
ruling “sent a message.” (9)
In late May 2009, Hawaii Superferry and its parent HSF Holding filed
for Chapter 11 (reorganization) bankruptcy protection in the District
of Delaware. Wilmington, Delaware is just shy of 5,000 miles away from
Honolulu, Hawaii. However, HSF Holding is a Delaware company, and
therefore is entitled to file in the venue of its incorporation. And
the HSF bankruptcy case provides a venue basis for the case of
subsidiary Hawaii Superferry. But despite the distance, a Delaware
venue does make sense. The offices of the major secured creditors of
HSF and Hawaii Superferry are on the US East Coast; as are the offices
of J. F. Lehman, the major equity owner; and there are few unsecured
creditors remaining in Hawaii. Moreover, the vessels are not in
Hawaii. The Alakai has returned to the Austal shipyard in Mobile; and
the Huakai never left there, since it had just been completed when the
Hawaii Supreme Court ruled.
As stated in the Debtors’ “first day” pleadings, the Debtors’ intention
is not to resume operations, but rather to use the flexible provisions
of a Chapter 11 reorganization proceeding to windup affairs and
liquidate. The Debtors blamed the demise of the venture on the
“special interest plaintiffs,” but did allow that Hawaii Superferry had
been beset with business difficulties unrelated to the environmental
litigation, including high and volatile fuel prices, disappointing
traffic and certain service reliability failures. (10)
The Debtors have abandoned all interest in the Alakai and the Huakai,
and the Court has entered an order lifting the automatic stay thus
allowing the ship mortgagees to proceed with foreclosures. With that,
the Hawaii Superferry venture is well and truly over.
Among other parties licking their wounds, Austal has announced a $23 million write off of its subordinated loans. (11)
And the final sting in the environmental plaintiffs’ tail was their
recent motion seeking bankruptcy court permission to collect on a state
court award of attorneys fees in the amount of US$147,000 against a
cash supercedeas bond posted by Hawaii Superferry in 2008.
Different interests will draw different morals from the Hawaii
Superferry saga. Certainly the failure of the venture cannot be taken
as an optimistic sign for Pacific inter-island ferry service. Although
the environmental legal problems of Hawaii Superferry perhaps can be
seen as peculiarly American, or even peculiarly Hawaiian, nevertheless,
it is clear that the ferry business is vulnerable to perils of the
courtroom as well as perils of the sea.
September 2009
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Footnotes
(1) In re HSF Holding, Inc., US Bkrpt, Ct., D. Del., No. 09-11901 ("HSF Bankruptcy")
(2) See www.austal.com. Austal's website is excellent, and features videos of many of its in-service vessels.
(3) All monetary amounts are expressed in US dollars.
(4) J.F. Lehman & Co. is unrelated to the well known Lehman Brothers investment house, which collapsed in 2008.
(5) Sierra Club v. Dep't of Transportation of State of Hawai'i, 115 Hawai'i 299, 167 P.3d 292 (2007).
(6) State of Hawaii Constitution, Art. XI, §5. Such a "general law"
provision is closely related to Equal Protection provisions in U.S.
jurisprudence.
(7) Sierra Club v Dep't of Transportation of State of Hawai'i, 120 Hawai'i 181, 202 P.3d 1226 (2009)
(8) Id., 120 Hawai'i at 231.
(9) G. Kubota, "High Court ruling prompts Superferry to suspend operations," Honolulu Star-Bulletin, March 16, 2009.
(10) See, Decl. of C. Alexander Harman, filed in HSF Bankruptcy May 30, 2009.
(11) Austal Ltd., 2009 Concise Annual Report
This article has been prepared
for the general information of clients and contacts of PLN Lawyers Sydney and
the affiliated firms of the Pacific Legal Network. While it deals with and
comments on the law in specific areas it is not intended nor should it be used,
as a substitute for specific legal advice as legal counsel may only be given in
response to inquiries regarding particular situations.
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