Hilo Hattie, the St. Francis sisters, and the rules of bankruptcy

We had developments in two Hawaii bankruptcy cases Monday, both misreported by people who don't understand the complexities of receivership. Affected: ownership of Hilo Hattie and two hospitals. Hilo Hattie was reported as being sold. It's actually too soon to say that the new "owner" will be the permanent owner. He has a shot at it, though. Watch for more at a later court hearing. I'll explain in a minute how there is still a second bidder for the company. Hawaii Medical Center, successor to the St. Francis hospitals, announced that "the U.S. Bankruptcy Court today approved Hawaii Medical Center's disclosure statement for its plan of reorganization," and some people thought that meant a reorganization plan was all but done. It isn't. In both cases, it helps to remember that these companies are both in Chapter 11 bankruptcy. They are "Debtors in Possession," under control of the bankruptcy court, which works for the creditors, not for shareholders, and has broad powers to do things that indebted owners don't want. Hilo Hattie first. The well-known retailer expanded too fast, ran up lots of debt, then slowly imploded, closing mainland stores until it was left with seven Hawaii locations. Ted Nelson, owner of the Hawaii franchise of Fantastic Sam's, led a Los Angeles hui in buying Hilo Hattie last summer and almost immediately took it into Chapter 11, intending to restructure debt, open a new store in Royal Hawaiian Shopping Center, close the Nimitz Hwy. mothership and sell the trolleys. Instead, global credit dried up, he missed a payment to Royal Hawaiian Shopping Center, and the mall cut him cold. Hilo Hattie owes $23 million, adding about $1 million in fresh debt every two months. Among Hilo Hattie's biggest creditors are its biggest vendors, including Maui Divers Jewelry, which is owed $1.25 million, and Royal Hawaiian Creations, an apparel company owed $800,000. Vendors want Hilo Hattie to survive and keep selling their wares. They wouldn't mind being paid for past sales, but they'd like it even better if a healthy reorganized Hilo Hattie brought them future profits. Maui Divers offered to acquire Hilo Hattie in a reorganization that would leave the current owners out of the picture, common in bankruptcies. It is also part of a cabal of creditors that has formally requested the ouster of Ted Nelson as CEO. That is less common but not unusual. You'll recall that in the last Hawaiian Airlines receivership the biggest creditor, GE Capital, persuaded a bankruptcy judge to eject CEO John Adams and name a trustee. On Monday, a surprise. Ted Nelson negotiated the sale of the current owners' interest in Hilo Hattie to Royal Hawaiian Creations. He even stepped down to let them run the company. It is misleading to treat this as an outright and permanent sale, because in a matter of weeks or months the bankruptcy judge will approve a reorganization plan for Hilo Hattie, and if the acquiring party at that time is not Royal Hawaiian Creations, it won't mean diddly that Royal Hawaiian Creations got to run the company now. You'll recall the Liberty House bankruptcy, in which the debt was "bought" and then cancelled out in return for ownership, leaving the old ownership shares valueless. Maui Divers is still in the running, at least for now, having announced late in the day that it will keep its offer on the table at least until the next time the bankruptcy court meets on the matter. Maui Divers would have been a good fit for Hilo Hattie: unlike Ted Nelson, the management of Maui Divers still embraces the business model of trolleys taking visitors to a store outside Waikiki, and does very well doing things this way. They have competence at running the sort of company that Hilo Hattie currently is. But Royal Hawaiian Creations might be a good fit, too, and certainly it knows the inventory, having made much of it. For the bankruptcy judge, it's all about the creditors. He will support a reorganization plan that pays off the most debt. He also has the leeway to support a plan that offers fresh revenue to creditors who are getting only cents on the dollar for what they were supposed to be paid before. Since both Royal Hawaiian Creations and Maui Divers Jewelry are vendors that supply good merchandise to Hilo Hattie, whichever one gets the company will need to help the other one make a good living from the reorganized firm. Now Hawaii Medical Center. What the bankruptcy court accepted Monday was not a formal reorganization plan but a disclosure statement that is a necessary precursor to a reorganization plan. If Hawaii Medical Center was ready with a reorganization plan that was acceptable to all sides, it wouldn't be waiting six weeks until August 3 for a hearing on one. The company, a subsidiary of a Kansas City hospitals-for-profit outfit that took in more than 100 local doctors as minority partners, won the hearts of the St. Francis sisters by agreeing to keep the current staff and the mission of the hospitals. But within months of taking over and repeating its new layoffs promises to anyone who would listen, including me, they did a round of layoffs so large that it is hard to imagine how they could have failed to realize the eventual necessity of doing it while saying they wouldn't. They also reneged on their payments to the St. Francis sisters, and even accused the sisters of overvaluing the hospitals. This is a puzzling assertion. When you buy something as big as a pair of hospitals, you are supposed to be very careful indeed with your "due diligence," poring over the books and contracts to doublecheck all the financials. Caveat emptor and all that. After all, it wasn't a secret that the hospitals were losing money. It was in all the papers. Could it be that the buyers simply assumed that the sisters didn't know what they were doing, and that smart managers would breeze in and make a couple of adjustments and then rake in the profits? It seems a little strange for a grown-up to say he's in trouble because he was conned by nuns. The sisters, meanwhile, finally took off their halos long enough to suggest that perhaps it was just a wee bit unseemingly for the hospital administrator and his owners to blame the sisters for their own failures. Regardless of which side deserves the most blame for the financial state of these hospitals, and keeping in mind that it's not the sweetest economic environment for any enterprise these days, one hopes the two sides can reconcile their differences so that the hospitals can reorganize on a stable financial footing. It is a consummate irony that to mend these hospitals there will have to be some healing in the relationship between the old and new owners.

Comments

[j.k.]

Great information! I love reading your blog. You explain things very well. I hope, in both cases, things do get resolved. I don't want to hear another round of local families losing their jobs.