The bank holding the mortgage on the Naniloa Volcanoes Resort is moving to foreclose on the beleaguered Hilo hotel.

A foreclosure action on the Banyan Drive landmark has been filed in Oahu’s First Circuit Court by North Carolina-based First Citizens Bank & Trust Co.

The filing said that as of June 12, the resort’s owner, Ken Fujiyama, and his company, Hawaii Outdoor Tours, Inc., owed the bank $9.9 million in principal and interest on what was originally a $10 million loan. The resort and associated golf course was used as collateral for the loan.

The venue for the foreclosure lawsuit has been changed to Third Circuit Court in Hilo. A hearing has been set for Nov. 20 before Judge Greg Nakamura on a motion to appoint a receiver to take control of and operate the resort.

The bank is seeking to have the property sold.

Big Island Now has learned that Fujiyama recently told his employees that the hotel was headed for receivership.

Fujiyama declined to discuss the matter when approached today in the Naniloa parking lot.

“I’m not ready to comment,” he said.

Ted Pettit, the bank’s Honolulu-based attorney, said the loan made in 2006 had a five-year term which came due in February 2011.

“It has been over 18 months since any payments have been made to the bank,” Pettit said.

Fujiyama acquired the hotel in 2006 when he was the top bidder in an auction for the lease for the state land on which the hotel is built. The property also includes a 9-hole golf course.

Fujiyama won the 65-year lease with a bid of $500,000 a year, outbidding two national hotel chains, including Starwood Hotels and Resorts, which had indicated it would spend up to $30 million on renovations.

The lease also required that Fujiyama pay $6.1 to the previous lessee, a Japanese company, for the buildings and other improvements.

Over the past six years Fujiyama has struggled to make the hotel presentable.

In a supplemental motion filed with the court on Monday, Pettit said that a receiver is needed because of continuing “improper mismanagement” of the hotel and golf course. The motion said Fujiyama has failed to pay “critical expenses” such as taxes and lease rent which is causing additional depreciation and loss to the property.

The motion also accuses the resort and Fujiyama of “diversion and misappropriation of hotel and golf course revenue” which is “wasting the value of the property.”

The original lawsuit was filed Aug. 6. Two weeks later, Fujiyama asked the court for a delay in appointing a receiver, saying that the resort had obtained a letter of intent for the formation of a joint venture with two other companies that would deposit $6 million in an escrow account by Sept. 15. The money would to be used to pay off part of the loan. It also said the bank would need to extend the loan’s term by two years.

According to Pettit, that hasn’t materialized.

“Defendants have failed to provide to Plaintiff a copy of this alleged letter of intent, or proffer any further evidence to support this purported joint venture,” his motion filed Monday said. It accused Fujiyama of attempting to delay the appointment of a receiver “so defendants can continue to siphon off revenue for their own use.”

According to documents filed with the motion, since the loan came due the resort has failed to pay the bank $946,000 in loan and other payments and the state $760,000 in lease payments, including $250,000 that was due Aug. 1. The filing said it has also failed to pay Hawaii County about $392,000 in real property taxes and owes the state about $100,000 in general excise taxes and $401,000 in transient accommodation taxes, also known as hotel room taxes.

Although the 2006 lease required that Fujiyama complete $5 million worth of improvements within three years, and that the leaseholder must maintain the property in good condition, the renovations still have not been completed.

After beginning renovations he was cited in 2007 for failing to first obtain county building permits for the work.

Only one of the hotel’s three towers has been redone, the Mauna Kea Tower. Parts of a second, the Mauna Loa Tower, remain closed while the third, the 60-room Kilauea tower, is missing windows and has been closed off entirely.

The resort’s website does not even acknowledge the existence of the Kilauea Tower.

The hotel’s current owner has struggled with renovation and maintenance. Photo by Dave Smith.

Of the hotel’s 385 rooms – which on paper makes it the biggest hotel in East Hawaii – only 266 are open for customers with 165 of those listed on its website as renovated.

For a period the hotel had no restaurant but recently began offering a breakfast buffet. Under “Other Dining Options,” the website notes “there are many restaurants just outside the hotel and within the city of Hilo …”

Fujiyama has struggled to make the $500,000 annual lease payments, defaulting numerous times.

According to the files of the state Department of Land and Natural Resources, whose Land Division is in charge of managing state leases, in 2010 Fujiyama asked if he could use the $1 million performance bond to cover overdue lease payments.

The appointed Board of Land and Natural Resources met him halfway in March 2011, allowing him to reduce the bond to $500,000 and use the remainder for lease payments.

Earlier this year the state took $259,000 out of the bond for another overdue semi-annual payment plus interest and penalties. First Citizens Bank recently paid the state $259,000 to bring the bond up to the $500,000 minimum.

According to the court documents, the payment was made to ensure that the state doesn’t terminate the lease, but Pettit said that is currently not likely.

Fujiyama’s Naniloa woes come on top of his sale in August of the Nani Mau Gardens. The property was the subject of a foreclosure action in March after Fujiyama was found in default of loans totaling $3 million.

Fujiyama’s company Hawaii Outdoor Tours also previously operated the Volcano House in Hawaii Volcanoes National Park.