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The local candy company Hawaiian Host Group, which also owns the  macadamia nut brand, is engaged in a bitter lawsuit with its longtime banker, First Hawaiian Bank, in a matter stemming from the darkest days of the pandemic, when Hawaiian Host was on the verge of bankruptcy.

In court documents, Hawaiian Host alleges that First Hawaiian improperly tried to help engineer what amounted to a hostile takeover by a Philippine businessman, Jose Richard “Ricky” Delgado, even though Delgado wouldn’t promise to keep operations in Hawaii or honor union contracts. 

Hawaiian Host won a first round in arbitration, which resulted in a $13 million award for the company and allowed it to raise money from an investor who has vowed to keep operations in Hawaii. But the candy maker is pressing forward with a separate lawsuit against the bank in state court.

Hawaiian Host’s attorney, Joachim Cox, said the company’s position was laid out in extensive court documents and declined further comment. First Hawaiian lawyers  and  did not return calls seeking comment.

Takeover Attempt

The legal battle is unfolding against a major turn-around effort by Hawaiian Host management. Founded in 1960 by Mamoru and Aiko Takitani, the company known for its chocolate-covered mac nuts and has been struggling for years because of massive debt it took on to  from The Hershey Co. in 2015. The pandemic only made things worse.

In an interview, Hawaiian Host’s chief executive, Ed Schultz, declined to discuss the lawsuit but acknowledged the early stages of the pandemic marked a particularly hard time for the company, as tourists to the islands disappeared at a time when Hawaiian Host was looking to make big investments to upgrade facilities on Oahu and the Big Island.

“Obviously the company went through some very difficult challenges,” Schultz said. “The company needed a ton of reinvestment. A lot of that was on the infrastructure side.”

Court documents show that instead of being able to focus on such reinvestments, Hawaiian Host got bogged down fighting Delgado’s takeover attempt, which was supported by First Hawaiian.

Although some key documents in the ongoing state court litigation are hidden under seal or protective orders, detailed narratives are laid out in the federal court matter that led to the $13 million arbitration award for Hawaiian Host. In addition, some of First Hawaiian’s court filings are public. Its defense comes down to a simple argument: the bank had the right to sell Hawaiian Host’s debt to anyone it wanted.

The lawsuit pits some of Hawaii’s oldest and most prestigious companies against each other. First Hawaiian is the state’s oldest bank, founded by Charles Reed Bishop, whose name is synonymous with Honolulu’s business district and the Bishop Estate, which funds Kamehameha Schools. and run previously by two of Hawaii’s original Big Five conglomerates: Castle & Cooke and C. Brewer & Co.

One of the few things not in dispute amid the legal wrangling is that, as the pandemic hit, Hawaiian Host was swimming in debt controlled by First Hawaiian. By 2020, court documents show, First Hawaiian Bank held some $75 million in Hawaiian Host debt, including about $15 million held as an agent for Central Pacific Bank.

Schultz managed to restructure Hawaiian Host’s finances and reduce its debt to less than $35 million, according to court documents filed by Hawaiian Host. But with revenue wiped out by the pandemic, servicing even that smaller sum of debt was proving untenable, and, teetering toward bankruptcy, Hawaiian Host began seeking investors.

According to documents filed in state and federal court, First Hawaiian introduced Hawaiian Host to Delgado and his investment firm Citadel, which started discussions about essentially acquiring Hawaiian Host by buying the company’s debt from First Hawaiian. The deal also required what the parties called a “cooperation agreement” between Hawaiian Host and Citadel.

Initially, under a contemplated cooperation agreement, Citadel said it would promise to keep the company’s operations in Hawaii, honor union contracts and continue to support a charitable trust set up by the Takitanis, court documents assert. But over time, those promises dissolved to mere possibilities, documents say. So Hawaiian Host began looking for a different investor who would promise to keep operations in Hawaii. 

The company found Jonathan Eilian, chief executive of Atrium Holding Co. in New York, which has interests in numerous hotels in the U.S., including Hawaii.

Managing Debt

While Hawaiian Host was pursuing the deal with Eilian, First Hawaiian eventually sold its debt to Citadel without Hawaiian Host’s consent. Hawaiian Host preferred the Eilian/Atrium deal, which leadership thought was better for the company and Hawaii. Perhaps more important, there was no cooperation agreement between Hawaiian Host and Citadel.

An arbitrator later found that First Hawaiian and Delgado’s actions violated a “two-step approach to reaching an agreement” that had been contemplated. Step one was for Delgado and Citadel to obtain a preliminary agreement with First Hawaiian, and step two was to enter a cooperation agreement with Hawaiian Host.

In an order confirming the arbitrator’s $13 million award to Hawaiian Host, U.S. District Court Judge J. Michael Seabright explained, “Hawaiian Host’s theory — accepted by the Arbitrator — was that it was prevented from fundamental recapitalization of the sort that led to the Citadel/First Hawaiian/Hawaiian Host negotiations in the first place.”

Essentially, the arbitrator found, the improper deal between Citadel and First Hawaiian caused Hawaiian Host to lose millions of dollars due to unnecessary interest costs and lost sales.

“But for Citadel’s illegal purchase of the FHB/CBP loans, Hawaiian Host would have been able to obtain an infusion of working capital to prevent losses in missed or short shipments,” Seabright wrote, quoting the arbitrator. “As a result of the inability to recapitalize, Hawaiian Host was unable to maintain proper levels of finished goods, raw chocolate and packaging, and as a result lost out (on) profits.”

In the end, the arbitrator ordered Citadel to sell the debt it had acquired from First Hawaiian to Hawaiian Host, which had received an infusion of equity from Eilian.

With Hawaiian Host recapitalized and its future in Hawaii apparently secure, and with Citadel out of the picture, the last chapter of the litigation focuses on alleged misdeeds committed by First Hawaiian. Among other claims, Hawaiian Host alleges First Hawaiian tortiously interfered with a confidentiality agreement Hawaiian Host had with Citadel by inducing Citadel to violate the agreement. Hawaiian Host also alleges First Hawaiian illegally interfered with Hawaiian Host’s efforts to enter a deal with Eilian.

Rebutting Hawaiian Host’s claims, First Hawaiian says it and co-lender Central Pacific Bank had the right to sell Hawaiian Host’s debt, which it refers to as “Facilities,” to anyone the banks wanted. Accordingly, First Hawaiian argues, the bank did nothing to interfere with any confidentiality agreement Hawaiian Host had with Citadel or any prospective business deal Hawaiian Host had with Eilian.

“FHB and CPB had the right to sell the Facilities to the party of their choosing, or to not sell the Facilities to any particular party, and nothing gave Plaintiff the right to dictate or control the sale of the Facilities (i.e. require that Plaintiff and CPB obtain Plaintiff’s consent),” First Hawaiian Bank said.

A trial is scheduled for November.

Local Growth Eyed

Meanwhile, Schultz is looking ahead. Plans for infrastructure investment include modernizing a chocolate facility in Iwilei and a processing facility outside of Hilo, he said. 

The processing facility is particularly important for the company and its relationship with Big Island macadamia nut growers. Last year, the company informed Big Island macadamia nut farmers that it was temporarily shutting down its processing facility, “for at least a year or two,” due to costly problems involving a 50-year-old boiler that burns mac nut shells for fuel.

That meant the company wouldn’t buy its usual supply of unprocessed Big Island nuts but instead would have to import much of what it would sell. Hawaiian Host’s goal is to modernize the Big Island facility, which Schultz described as an antiquated operation that needs large amounts of water and electricity.

“There are way better ways to do this, which we desperately need on Hawaii,” he said. “We have got to reinvest if we want to be successful for the long term in Hawaii.”

In addition, the company has launched new products, including , which uses only Hawaii-grown mac nuts and chocolate grown on Oahu. The company also has launched an ice cream made with macadamia nut milk, which Schultz said is available at 5,000 grocery stores on the mainland.

“It’s creating products like this that that are the future of the macadamia nut industry when you talk about competing globally,” he said. “We really take pride in creating local jobs, and we want things made in the islands.”