Court ousts Summit management

A trustee will reorganize the finances
of the Honolulu telecommunications firm

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By Tim Ruel
truel@starbulletin.com

A U.S. Bankruptcy Court judge has ordered the management of Honolulu telecommunications firm Summit Communications Inc. to be replaced by an appointed trustee who will attempt to reorganize Summit's finances while it remains in bankruptcy.

In a hearing yesterday, U.S. Bankruptcy Judge Robert Faris rejected an assertion by management that Summit's immediate ability to do business would suffer under a trustee. Faris said there were big risks in not appointing a trustee.

The decision brings to an end to a growing dispute between Summit's management, some of its shareholders and its largest creditors - the state of Hawaii and the U.S. government - over the appointment of a trustee.

The argument goes back to revelations that the company once owed more than $1 million in back taxes, including penalties and interest. Taxes receive a high priority for repayment in bankruptcy. Since Summit's assets would yield little in a liquidation, the only way to pay the taxes and other creditors is for the firm to stay in business.

The government has long sought the appointment of a trustee, alleging that Summit's management is made up of essentially the same people that led the company to such a major tax problem.

Summit, which provides call-center and telephone services, was founded in 1996 by Harry Johnston, a former executive of Hawaiian Telephone, and Richard Ichikawa, a former engineer of Hawaiian Telephone. The firm's tax problems started in late 1997 and worsened over the next several years, though Summit's board of directors was not told about the tax liability until late 2001, according to sworn court declarations by Ichikawa and Alan Brown, who were board members at the time.

Harold Johnston resigned as president and was replaced by his son, Grant Johnston.

Ichikawa left Summit's board shortly before the company filed Chapter 11 reorganization bankruptcy a year ago, though Ichikawa still owns one-quarter of Summit. Ichikawa initially opposed the appointment of a trustee, because he was afraid the firm would be liquidated, but eventually changed his mind.

The government's call for a trustee was backed by an examiner's scathing report of Summit in December. The report said the company had kept poor track of its finances, even in bankruptcy and that several questionable thousand-dollar payments had been received by Grant and Harry Johnston, which should be investigated by a trustee.

Following disclosure of the examiner's report, Summit convened a board meeting and discussed several options, including liquidation, though that was ruled out, Grant Johnston said.

In a court document, Summit said the examiner, Mark Yee, focused on matters that happened before Harold Johnston stepped down, which provided an inaccurate picture of Summit's situation.

Summit said Yee's report was based on a superficial review of records, in which the company was not given a chance to give its side of the story. Summit later deposed Yee. In court yesterday, Summit attorney Steven Guttman said there was no major problem with how Summit presented its finances after filing for bankruptcy.

Judge Faris noted that the examiner did his job as spelled out in an agreement last year between Summit and the government.

In court, Summit conceded that it needs investment badly to stay in business, but said it had found an investor who was willing to put in $500,000.

Judge Faris pointed out that $500,000 would not likely cover the outstanding amount of the tax claims.

After yesterday's court ruling against the company, Grant Johnston said, "Obviously we're disappointed because I felt that our argument was compelling."

The U.S. Trustee's Office will appoint a trustee to Summit shortly, after talking with all sides in the dispute.