State sues The state is suing the operators of duty-free stores to obtain $49 million in back rent owed to the airport system, state Attorney General Mark Bennett said yesterday.
DFS for $49 mil
in back rent
The downturn in the economy
is no excuse for not paying,
says the attorney generalBy Russ Lynch
rlynch@starbulletin.comIf the money is not paid, the state promises legal moves to make DFS Group LP forfeit a $45 million performance bond the tax-free shopping business posted when it won a statewide contract almost two years ago.
"Duty Free is paying some of the rent, and they have been unilaterally determining what they wanted to pay," Bennett. But "their obligation is to pay what they owe."
Friday, the state demanded payment of the money and filed suit in state Circuit Court alleging DFS Hawaii's parent, DFS Group, "fraudulently" transferred $100 million to corporate owner LVMH Moet Hennessy Louis Vuitton Inc. At the same time, rent was being withheld from the state.
The company became "legally insolvent" when it stopped paying its debts last year, but DFS Group still paid the money to its parent while not paying its debt to the state, Bennett said.
Bennett said the state asked DFS Hawaii to pay at least $25 million for airport-lease rent through Dec. 31, 2002, but the company refused to acknowledge that debt. Gov. Linda Lingle made it clear that she would be willing to listen to new lease proposals if DFS would pay what it owed, said Bennett.
DFS is paying 5 percent to 10 percent of the state's claim. Negotiations broke down, Bennett said.
Sharon Weiner, group vice president of DFS Pacific Group, said the business does not agree that amounts claimed by the state "are due and owing."
Concession revenues at the airports have been "decimated" by the aftermath of Sept. 11, 2001, and now by the Iraq war, she said.
"These sorts of events were never contemplated or even dreamed of by the parties at the time we signed these concession leases," Weiner said. The lease terms are "onerous" under current circumstances, Weiner said. Duty-free sales in April are expected to be 50 percent below what they were in the April 2001.
In a five-year contract, which started June 1, 2001, DFS is supposed to pay the state at least $60 million a year.
"We are hopeful that discussions will still be possible," she said. DFS officials expect to meet with the governor this week.
In 40 years of doing business, DFS "has never been held in default on an airport concession anywhere in the world," she said. The Hawaii duty-free concession has contributed nearly $2.5 billion to the Hawaii airport system over the past four decades, Weiner said.
DFS said the $100 million payment to its parent did not come from Hawaii and was a loan payment made for the San Francisco-based group to stay in business.
To pay the amount the state is asking, DFS has to borrow the money, Weiner said. Neither LVMH nor any outside lender would loan money when it is apparent business is so bad, DFS officials in Hawaii told hearings at the state Legislature.
Bennett said DFS recently settled with Los Angeles International Airport, where it had made a $35 million minimum-rent guarantee, so DFS should also be able to pay its Hawaii bills.
The state sympathizes with DFS -- which has been hit hard by a downturn in Japanese tourism -- but the slowdown does not "excuse nonpayment of bills that are due," Bennett said.
"Airport revenue bonds were issued in reliance on DFS honoring its contractual obligations," he said. "By refusing to even acknowledge a debt to the state, DFS creates costly problems for the state, especially at times like these, when existing debt is being refinanced."
Eviction or cancellation of the DFS lease are options but are not being considered at this time, he said.
The airports system, which historically has relied on concessions for 60 percent of its revenues, had a $43 million operating loss in fiscal 2002.
DFS Group LP
Attorney General