A mainland bank is suing Honolulu-based Sandwich Isles Communications and an affiliated company to recover a $4.3 million insurance claim the bank says it is owed in a case stemming from Sandwich Isles’ financial difficulties.
Deutsche Bank Trust Co. Americas helped Sandwich Isles’ affiliate Paniolo Cable Co. LLC raise more than $180 million in debt financing in 2007 to pay part of the construction costs for an interstate cable that provides telephone and broadband service on Hawaiian homelands.
Sandwich Isles leases the cable from Paniolo and makes lease payments using government subsidies it receives as part of a federal program created to provide telecommunications service to "high cost" areas. The Federal Communications Commission in 2011 began reducing the subsidies under the Universal Service Fund, which some critics said was being abused by the recipients. Sandwich Isles’ subsidy, which amounted to $858 per month for each of its roughly 3,000 customers in 2011, is now capped at $250 per customer.
Because of the subsidy reduction, Sandwich Isles in February 2012 began falling behind on its lease payments to Paniolo, which in turn was not able to keep up on its debt payments to Deutsche Bank Trust and its investors, according to the lawsuit. Sandwich Isles is about $20 million behind on its lease payments, according to the suit.
As part of the financing arrangement, Deutsche Bank Trust had required Sandwich Isles to purchase a $4.3 million insurance policy that would cover Deutsche Bank Trust in the event Sandwich Isles was not able to make its lease payments due to a reduction in government subsidies, according to the lawsuit. The insurance policy was provided by Hoopaa Insurance Corp., an affiliate of Sandwich Isles. Hawaii’s captive insurance law allows companies to create their own insurance subsidiaries to insure themselves against certain risks. Albert Hee is the president of both Sandwich Isles and Hoopaa Insurance. Hee is the brother of state Sen. Clayton Hee.
Deutsche Bank Trust’s lawyers said they filed the suit against Sandwich Isles and Hoopaa after the insurer declined to honor the insurance claim. They said Sandwich Isles’ failure to make full lease payments constituted a default under terms of the lease. Paniolo also is in default on its debt to Deutsche Bank, they added. And, according to the lawsuit, the defaults should have triggered a payout on the insurance claim.
"Nevertheless, HIC has not made payment under the policy to DBTCA," according to the suit.
Hee said he had not seen the suit, but added he had indicated to Deutsche Bank Trust officials in earlier discussions that he disagreed with their conclusions.
"We disagree. We believe the insurance policy does not cover this circumstance. It is going to come down to a coverage issue," Hee said in an email.
"We, along with the entire rural telephone industry, continue to provide uninterrupted service while we work on a solution to the problems caused by the FCC changes. We are encouraged by the comments made by the current FCC Chairman (Tom) Wheeler recognizing the problems and committing to provide some measure of relief through rule changes," Hee wrote.
