Sun, surf, sand and serenity. These are qualities that could help creditors in the Metropolitan Mortgage & Securities bankruptcy get more money back from their failed investments. During the next few months Metropolitan plans to auction more of its Hawaiian property — beachfront parcels that were once part of a grand estate called the Dillingham Ranch.
Already the acreage, with its sandy beaches and ocean views, has enticed offers of more than $18 million.
The lots on the North Shore of Oahu — about a 45-minute drive from Honolulu — are among the most valuable properties Met has left, and money from their sale will be returned to the thousands of creditors in Metropolitan’s bankruptcy case.
In a worst-case scenario, Metropolitan CEO Maggie Lyons believes the company should clear a $12 million profit on those sales, even after satisfying notes and other contingencies.
Getting to this point, however, has not been easy — meanwhile, valuable assets have sat untapped while, in the view of many, one of Hawaii’s hottest real estate markets in decades may be passing Metropolitan by.
Hawaii businessman Benjamin Dillingham helped open Oahu’s North Shore at the turn of the century with a steam railroad. Farmers were able to ship their sugar cane crops, which infused income into an area that had been a rural outpost.
The Dillingham family built a gentleman’s ranch and opened a polo grounds in the 1920s near the beach. It served as fixture on the rugged North Shore for years — at least until the start of World War II.
In the 1960s, Mike Dailey’s father moved his family to the area with a dream to restart a polo club. The Dillingham family sold him land and gave him a lease to revive and manage the polo field.
Dailey took over the club in the 1980s. But by then the land had been sold to Northwestern Mutual, a company that wanted to develop the agricultural lands.
The development plans were met by stiff resistance from a community that was wary of schemes to turn the North Shore into another golfers’ getaway.
So Northwestern sold the property to a Japanese company that also tried to push through a condominium and golf course development. Dailey said it, too, “crashed on the rocks of community opposition.”
The Japanese company faltered during the Asian financial crisis and the ranch deteriorated. Dailey lost his polo field lease.
Numerous attempts by Dailey and financial partner Bernard Bays to hammer out an alternative financing deal to develop the ranch into estates with an equestrian center, rustic inn and polo grounds couldn’t gain traction.
Less than eight miles down the road from the ranch, however, Metropolitan was busy preparing other Oahu North Shore properties for sale.
Soon, Metropolitan, with a long and successful history in Hawaii, became interested in the Dillingham estate and a match was made.
Metropolitan acquired the Dillingham properties for about $17 million. Dailey and Bays would partner with the Spokane company as developer.
The plan was this: Metropolitan would own and sell the beachfront parcels and collect the profits. The ranch part of the estate — that is, the lands running away from the beach and up into nearby mountain foothills — would be owned by Western United Life Assurance Co., Metropolitan’s insurance subsidiary.
Dailey recalls Metropolitan as a seemingly perfect buyer.
“Here we had a company that would work with us on a plan that the community could support,” he said. “(C. Paul Sandifur Jr.) handled most of this personally and was really excited about this project.”
Dailey said an exceptionally complicated set of contracts set the deal up.
The Dillingham deal, however, had the hallmarks of the sort of questionable accounting deals that came to characterize Metropolitan.
According to a special bankruptcy examination of Metropolitan’s business dealings, the company sold the ranch lands to Western United for $14.4 million, even though just months earlier it had paid about $10.7 million for the same property.
Examiner Sam Maizel’s report said shortly after the $14.4 million sale to Western, Metropolitan contributed the same amount of money to the insurance company.
This cash transfer from one hand to the other was apparently done to ensure Western complied with state insurance laws.
“The timing, and that funds were merely circulated in a complete loop, raise questions regarding the propriety of the related sale of (ranch properties) from Metropolitan to Western United and whether this transaction was done to facilitate a possible illusory capital contribution to Western United,” Maizel wrote.
Metropolitan’s accounting methods and some executives have been under investigation by the U.S. Securities and Exchange Commission for more than a year.
Maizel, who was appointed by U.S. Bankruptcy Judge Patricia Williams, also found that Metropolitan may have manipulated its Dillingham appraisals, basically overvaluing the ranch lands and undervaluing the ocean lots.
Doing so would show fantastic gains on the sale of its oceanfront lots and help the company achieve profits.
Ultimately, Metropolitan’s financial troubles caught up with the company before it could complete a sale of those oceanfront lots.
Investors aren’t the only ones who lost with Metropolitan.
Similar problems afflicted the ranchlands owned by Western United, which also remain undeveloped.
Dailey spent more than two decades attempting to develop the prestigious North Shore property and revive the polo club his father ran.
He wanted to develop the ranch into 71 high-end housing lots. Most owners would be afforded views of the ocean, be part of an equestrian center, have a stake in a refurbished historical inn used by the Dillinghams, and have private access to the polo field and private beach club.
It was a development idea that complied with existing zoning regulations, Dailey said, and one that passed muster with the North Shore community.
“People have been trying to change things out here for years. They want to build condos and golf courses and hotels,” Dailey said, “but that’s not the nature of this place. It is an agricultural area and so it has to comply.”
Dailey and Western United were moving right along on the project until Metropolitan’s troubles deepened last year.
Suddenly, money from Spokane quit arriving as Western United was put into receivership by the Washington State Insurance Commissioner.
Under the direction of Deputy Receiver Wayne Metcalf, Western United was severed from Metropolitan in an effort to clean up the insurer’s books and rehabilitate the company.
Dailey was told to cease all activity at Dillingham. He wasn’t even allowed to pay employees, he said. Coincidentally, Metcalf once worked as Hawaii’s insurance commissioner.
“That was unconscionable,” Dailey said of the pay freeze. “I live here, and that doesn’t work. It may be something that somebody in corporate legal in Spokane may think is OK, but not here, not in this community.”
Bill Ripple, a spokesman for the insurance commissioner and Western United, said Western has been trying to untangle the accounting and ownership problems with the Dillingham ranch lands.
“We just had to figure out the relationships,” he said, “The problem is this is a fairly significant piece of real estate on the North Shore of Oahu, and the property and the ownership is convoluted. We had to get a handle on this.”
Ripple declined to speak specifically about Western United’s dealings with Dailey.
“This isn’t the kind of asset that we want to see in the company,” Ripple said. Western United has worked to reduce its commercial property development investments and mortgages.
In fact, Ripple said the insurance company would sell the property now for the right price if it could.
Such an offer hasn’t materialized and Western itself is now likely to be sold sometime in June.
Metropolitan had been investing in Hawaii since the 1960s when C. Paul Sandifur Sr. became intrigued by the idea of buying beachfront property for development.
Though Metropolitan’s founder was shocked by land prices in the Honolulu area, he broadened his search, and eventually found property to buy on the northernmost island of Kauai, according to his autobiography.
Remote and undeveloped, Metropolitan sat on its $62,000 purchase for several years before building one of the first hotels in that area. Sandifur called it the Lawai Beach Resort.
It had been a big risk for Sandifur and his little Spokane company, and one that didn’t immediately pay off. It took several years for the vacancy rate at the hotel to climb above 5 percent.
Eventually the resort and restaurant became a destination, as did the entire area. Grand hotels now dot the area and Metropolitan’s interest in Hawaii has earned it millions.
Today, a big part of the company’s plan to recover money for creditors still rests in the wallets of people willing to pay for a sliver of Hawaiian paradise.
“We’re going to do right for these creditors,” said Lyons, Metropolitan’s acting CEO. “That’s why this has taken so long.”