Court Rules that Molokai Ranch Responsible for Utilities

By Catherine Cluett

In a recent decision in the First Circuit Court, Molokai Ranch was ruled legally responsible for the action of its water utilities. The Ranch had argued that it was merely a stockholder in its subsidiary utility companies, but the decision ruled that, by ignoring various corporate formalities, The Ranch and its utilities operate as one entity. The decision was based on a legal doctrine known as “piercing the corporate veil” – exposing a corporation’s inner workings.

"By hiding behind the legal fiction that MPL and its wholly-owned utilities were separate corporations, MPL was trying to free itself from the utilities’ liabilities while keeping all of its valuable assets,” said Mayor Charmaine Tavares.

“This is just round one but I think it’s a pretty important principal that’s been established,” said Jane Lovell, Corporation Counsel for the County of Maui. “This was pretty important to pierce corporate veil and prove that they are separate companies because they weren’t legally operating as separate companies.”

A History of Finger-pointing
On May 8, 2008, Molokai Ranch, also known as Molokai Properties, Ltd. (MPL) notified the Department of Health (DOH) that it planned to discontinue water utility services to approximately 1200 Molokai customers after August. In response, DOH initiated proceedings against MPL and its utilities, hoping to avoid a health crisis that would have resulted from the termination of water services.

MPL claimed that the three utilities Wai`ola O Molokai (Wai`ola), Molokai Public Utilities (MPU) and Mosco, were subsidiary companies and MPL could not be held legally responsible for their actions. The DOH, in turn, attempted to put liability for operation of water utilities on the County of Maui.

On July 21, 2008, the DOH issued several court orders requiring that MPL and its utilities continue water services to the community, and ordering the County of Maui take over operation of those utilities if necessary.

The county fought the DOH orders, arguing it was not the county’s duty to operate the utilities. They also initiated a law suit of their own against MPL, citing years of written agreements with the county which bound MPL to continue providing water services to Molokai residents. That suit is still in progress.

The Corporate Veil
In addition, the county pursued the argument that MPL and its utilities are, in fact, one entity. On multiple occasions, MPL legally claimed to be merely a stockholder in the utilities, claiming no corporate liability.

Lovell said that normally, corporate law states that stockholders cannot be held liable for debts and other liabilities of the corporation. But in a hearing that took place on August 14, 2008 to settle the DOH’s case with MPL, in which the County of Maui participated as an intervener, the DOH’s hearing officer ruled that MPL was more than just a stockholder in the utility companies.

The decision was based on theory known as “alter ego” or “piercing the corporate veil” which exposes a corporation’s inner workings. Even though MPL and the water utility companies had been set up as separate corporations, necessary corporate formality was not being observed and in effect, the companies were operating as one entity.

MPL appealed the hearing decision, and the case went to the First Circuit Court in Honolulu. On July 15, 2009, Judge Eden Hifo ruled against MPL and confirmed the previous decision. She issued a written statement on August 10, 2009. She cites such factors as mingling of funds and assets, sharing the same officers and director, use of the same office space, sharing of employees, and disregard of legal and corporate formalities. She also cited “use of a corporate entity as a mere shell” in her decision to apply the alter ego doctrine.

While the State of Hawaii and the County of Maui had been at odds when the case began last year, Lovell said they had joined forces by the time the case came to the First Circuit Court.

“We were on same page by end,” explained Lovell. “We shared victory despite [our earlier] differences and we agreed that this was a great result. I think it goes to show that when county and state do get together, they can achieve excellent results.”

Future Consequences
Lovell said this was also a landmark decision because of a legal doctrine called “collateral estoppel.” Collateral estoppel holds that if you litigate an issue in one case, the results can be used in another case that involves the same parties and issues. This means that Judge Hifo’s decision that MPL is legally responsible for the utility companies could affect the decisions of future cases involving MPL.

“Other courts addressing the same issue and same parties will be guided by Judge Hifo’s decision,” said Lovell.

Lisa Kim, an attorney for the Public Utilities Commission, said she cannot foresee how the decision will affect the upcoming PUC proceeding whether or not to approve MPL’s application for the second water rate hike in two years. But Lovell said she thinks it might.

Lovell said that because MPL used the same argument of corporate disconnect from the utility companies with the PUC, it might cause documents such as MPL’s financial statements to be examined more closely.

"I’m pleased that the court has placed the legal responsibility for this crisis on Molokai Properties, Ltd, where it rightly belongs," said Tavares. “The Department of Health’s hearings officer saw through this scheme, and his ruling has now been upheld by the First Circuit Court."

“The Molokai community has had to endure so much when the utilities walked away from their responsibility,” said Council Chair Danny Mateo who also holds the Molokai seat on the County Council. “I appreciate the hard work and determination of our legal team to pierce the corporate veil of Molokai Properties.”  

Attorneys for MPL and the DOH could not be reached for comment.

Molokai resident and ratepayer Tim Brunnert said he believes the county should take over the utilities or assist in finding a successor to the Ranch. He said the court decision takes pressure off the county and puts it back on the Ranch. To him, that means nothing will change.

Residents are taking matters into their own hands and organizing a “stand for water” to raise awareness about the upcoming PUC hearing on MPL’s proposed water rate increases and to make their voices heard. The Stand for Water will take place on Aug. 29, with sign-holding across the island. Brunnert said residents have already donated $3000 to the effort.

The PUC hearing has been set on Molokai for Sept. 3, 2009 to obtain public comment on MPL’s second proposed water rate increase in two years. The hearing will be held at Mitchell Pauole Center at 5 p.m.