Dane Field, the trustee in the Maui Industrial Finance Co. bankruptcy, is suing 25 investors in the company to recover money they received as interest over and above their original investment or deposit, claiming the money was not really interest but the fruits of a Ponzi scheme.
Field's attorney, Bradley Tamm, said Maui Industrial's owner, Lloyd Kimura, acknowledged during depositions earlier this year that he had used money from late investors to pay off early investors, without really generating income from operations.
This is the definition of a Ponzi scheme, said Tamm. The supposed business - in this case, a loan company also known as Maui Finance - does little or no real business but simply takes money from new investors (or depositors) and uses it to pay interest or dividends to previous investors (or depositors).
At Maui Finance, people turned over cash to Kimura - in one case, $2 million - expecting to receive interest well above what commercial banks were paying on certificates of deposit.
In the creditors' meetings after the bankruptcy, some people said they thought they were making deposits in a banklike institution. In 2009, the state Division of Financial Institutions ordered Maui Finance to stop taking deposits, and the business collapsed.
Tamm said that in depositions, Kimura admitted that he had been operating a Ponzi scheme almost from the day he became sole owner of the company around 1985. Before that, he had been a part-owner since 1974.
Kimura, a certified public accountant, operated Maui Finance out of the same offices as his certified public accountant business in a building he owned at 140 N. Market St.
He was the sole officer and director and made all the decisions. Maui Finance had just one employee, an office manager.
Kimura declared Chapter 7 bankruptcy for Maui Finance in February at the same time he entered Chapter 11 bankruptcy personally. Lloyd Y. Kimura CPA has not declared bankruptcy but is inactive. His daughter and son-in-law, who had been working for him, set up their own CPA firm in the same offices, and some of Kimura's old clients apparently transferred their business to them.
But, in depositions, Kimura told Tamm that he expected about half his clients to leave. He estimated that 85 percent of the people who invested or deposited money in Maui Finance were clients of his CPA business, and many were also friends.
The creditor lists in the two bankruptcies are almost the same and the liabilities total nearly $23 million. It is not clear how much money went into Maui Finance over the years.
The legal status of the people who put money in is uncertain. Some thought they were depositors in a "bank," others may have understood they were more like speculative lenders; at least one - who put in $1 million - received stock, a 40 percent ownership of Maui Finance.
However, it is alleged that 100 percent of the firm's stock had already been pledged to a bank for a loan, so it is not clear whether there really was a stock transfer.
What is clear, in Tamm's theory of the case, is that since Maui Finance wasn't making loans, it couldn't have earned interest. Therefore, its payouts of interest were really distributions of new capital from new investors or depositors, or whatever they were.
Under the state Uniform Fraudulent Transfer Act, in a bankruptcy, money that should belong to the estate in bankruptcy (which includes whatever assets are still on hand or can be recovered by the trustee) can be reclaimed from whoever it was paid to, if it was paid during the period just before the failure.
In a Ponzi scheme, depositors who get in early can take out more money than they put in, while depositors who came in late tend to get out little or nothing.
Tamm gave as an example someone who put in $10,000 and over a period of years was paid $14,000 in "interest." The trustee can go after the $4,000 because it was not really interest, but Field would not try, in that case, to get the $10,000 original principal.
Tamm said some of the 25 people being sued may have been legitimate borrowers, not depositors, but the trustee had to sue all of them to protect the estate's interests because the statute of limitations term expired Tuesday. Records are incomplete and confusing, and payouts that look to Field like returns to depositors in some cases may have been real loans.
That might appear to contradict the view that Maui Finance was not making real loans, but Tamm said that in a Ponzi scheme, there are always some actual transactions.
Real borrowers who can prove they paid back their loans will likely have the suits against them dropped.
Kimura explained to his depositor/investors that he could pay high interest - between 8 percent and 15 percent, but typically 12 percent - when certificates of deposit paid only 1 percent or 2 percent.
He said that was because he was re-lending the money at very high rates of interest - up to 30 percent - to Filipinos who wanted fast loans for very short terms for special occasions - graduations, first birthdays and "novena" (nine-day) loans.
Tamm said, however, that in examining Maui Finance loan documents, he found that Kimura was usually charging only 12 percent, and that at least during the last several years of the business, its income was barely enough to cover operating expenses, with almost no profit.
Thus, when RNI-NV, the company that supposedly bought a 40 percent stake in 1999 for $1 million, wanted to sell its interest back to Kimura about seven years later, its owners, the Iwamoto (Roberts Hawaii) family, demanded $2.5 million.
Kimura told Tamm that they had calculated that was the interest they would have earned at 12 percent. He agreed to buy back their interest, in installments, but did not have the money and stopped paying after giving them about $1 million.
RNI sued and got a judgment of nearly $2 million ($1.5 million plus interest), and Kimura said that was what put the company in crisis.
However, it was the state order against taking deposits that set off a kind of "run on the bank."
Some depositors had put in a principal amount and then left the supposed interest to accumulate for years, so that the balance of around $16 million on the books at the end looks substantially larger than the amounts of cash taken in over the years.
At depositions, Tamm asked Kimura: "And is it your testimony that you also made payments to the investors from money you borrowed from other four investors?"
Kimura replied: "Yes, and myself. I would put money in from my various companies. If the - if the need - the need for funds was there I would put money in."
Tamm then asked: "And do you know about when - was this always that way?"
Kimura said: "Yes, from the beginning."
Kimura and his businesses are being investigated by the state attorney general and the Federal Bureau of Investigation, but he has not been charged with any criminal violations.
His civil attorney, James Wagner, said Kimura had no comment about the latest developments, and his criminal attorney, Phil Lowenthal, said he was watching developments.
* Harry Eagar can be reached at firstname.lastname@example.org.