Summit loans questioned
Money loaned to the bankrupt
firm's CEO resulted in improper
payments, a new lawsuit contends
CORRECTION
Friday, May 16, 2003» Honolulu businessman Harold Johnston did not deny making a loan to the company Summit Communications Inc. A story on Page C1 Wednesday said incorrectly that Johnston denied making a loan.
The Honolulu Star-Bulletin strives to make its news report fair and accurate. If you have a question or comment about news coverage, call Editor Frank Bridgewater at 529-4791 or email him at corrections@starbulletin.com.A politically adept telecommunications company financed primarily by the federal government has several connections to troubled firm Summit Communications Inc., including a $456,793 loan that is being questioned by a bankruptcy trustee.
Sandwich Isles Communications Inc., headed by Al Hee, loaned the money in March 1998 to Summit through Summit's then-chief executive and part-owner, Harold C. Johnston, according to a lawsuit. In 2001, Harold Johnston received $8,400 in interest payments from Summit for the loan.
Harold Johnston denied loaning the money to Summit.
Summit filed Chapter 11 reorganization bankruptcy in February 2002, owing more than $1 million in federal and state taxes, including penalties and interest.
Because of revelations over Summit's tax problem, the company's management was removed by the U.S. Bankruptcy Court. Now, the trustee in Summit's Chapter 11 bankruptcy case says Summit's dependency upon Sandwich Isles was not disclosed to the company's board of directors.
The trustee, Derek J. Sakaguchi, filed a lawsuit April 30 in U.S. Bankruptcy Court against Harold Johnston and his sons Grant Johnston and Chad C. Johnston, who were all officers of Summit.
The five-count suit said Harold Johnston misled some of Summit's directors, investors and creditors about the relationship with Sandwich Isles, which allowed the company to continue to operate under the status quo when it was in trouble.
The lawsuit also accuses the Johnstons of receiving excessive compensation and benefits.
Harold Johnston denied the allegations, and accused the trustee of throwing out "the kitchen sink" in hopes of recovering any funds in Summit's bankruptcy case.
Harold Johnston said the suit was based on erroneous information provided in part by a dissident Summit shareholder and company co-founder, Richard Ichikawa.
Hee, president of Sandwich Isles, and Harold Johnston confirmed that Sandwich Isles made a loan to Johnston. "Whatever happened between me and Sandwich Isles is a private and personal matter," Johnston said.
They declined to answer any questions about the loan, including its status or its purpose.
However, the lawsuit said: "A loan for $456,793 to SCI made in March of 1998 was shown on SCI's financial statements as a loan made by Harold Johnston. In fact the $456,793 was loaned and funded by Sandwich Isles."
The loan was secured by a pledge of Harold Johnston's stake in Summit, the lawsuit said. Harold Johnston owned 37.7 percent of Summit as of January 2003, while Ichikawa owned 25.1 percent.
The Johnstons battled with the federal and state government over various allegations after the company filed bankruptcy. An examiner appointed by the U.S. Bankruptcy Court issued a blistering report last year that said questionable payments went to Johnston family members.
The Johnstons said the report was inaccurate. The lawsuit appears to delve beyond the examiner's report, although Harold Johnston took issue with the lawsuit as well.
Al Hee noted that Sandwich Isles has not been sued by the bankruptcy trustee.
"They can say whatever they want to say. Obviously, if we were germane to the filing ... we would have been named in the filing," Hee said.
Sandwich Isles is working on a $500 million fiber-optic cable telecommunications system that would link all Department of Hawaiian Home Lands residents who lack telephone service. Of that, $400 million will be paid through a loan from the U.S. Agriculture Department's Rural Utilities Service, which will be almost entirely repaid by the Federal Communications Commission.
The federal funds are meant to pay solely for the construction of the telecommunications network, a Sandwich Isles spokeswoman said.
Al Hee is brother to former Office of Hawaiian Affairs Chairman Clayton Hee. Robert Kihune, trustee of the Kamehameha Schools, is chief executive of Sandwich Isles.
Al Hee said the loan to Johnston did not involve any federal funds.
Claiborn Crain, spokesman for the Rural Utilities Services in Washington, D.C., said yesterday he was not aware of any problems with the Sandwich Isles' federal loan.
Sandwich Isles has another connection to Summit Communications. Summit, founded in 1996, began providing technical services to Sandwich Isles around April 1998, the lawsuit said. That was around the same time that Sandwich Isles loaned the money to Johnston.
Also around that time, Johnston stopped spending time with Summit and became general manager for Sandwich Isles.
Sandwich Isles soon provided nearly half of Summit's total annual revenue through the technical services arrangement, nearly $1 million a year, the lawsuit said.
But the money began decreasing "dramatically" in the fall of 2001, a few months before Summit filed for Chapter 11 reorganization bankruptcy, the lawsuit said.
Summit has other sources of revenue. Another large source was a contract to provide call-center services to the Hawaii Visitors & Convention Bureau, starting in May 2000, which brought $30,000 to $50,000 in revenue for Summit each month. The bureau said it is negotiating a new contract with Summit.
Clearly, the loss of income from Sandwich Isles was a blow to Summit. The contract expired in December 2002, according to previous statements by Summit.
When asked why Sandwich Isles cut back on its business with Summit, Hee said the decision was handled by his operations people. Hee declined to give their names.
After Harold Johnston began working for Sandwich Isles, Chad Johnston became responsible for day-to-day operations at Summit.
During this time, the company expanded too quickly, misused corporate funds, failed to pay bills and didn't keep the board informed, the lawsuit said.
In a letter to Summit shareholders, Harold Johnston said he was not aware until January 2001 that Summit was not paying its taxes.
Harold Johnston said an outside accountant had been handling those affairs, and was terminated. He declined to name the accountant.
The court-appointed examiner has described Summit's pre-bankruptcy books as worthless.
Today, Summit continues to operate as a company while in bankruptcy, and has about 23 employees. Summit provides local and long-distance telephone services as well as call-center services.
"We will have our day in court and the truth will come out," Harold Johnston said.
Johnston said he accepts some responsibility for Summit's financial problems, but he did not commit fraud or other misdeeds.
The lawsuit seeks repayment of the $8,400 in interest that Harold Johnston allegedly pocketed from the loan to Summit, as well as repayment of a $50,245 loan Summit allegedly made to Harold Johnston. The lawsuit also seeks actual damages and punitive damages.
