30-Year Kohala Business Looking at Bankruptcy After Local Bank Calls in PPP Loan

A North Hawai‘i business is on the verge of closing for good because it is being required to pay back a Payroll Protection Program loan.

Ken Hughes, owner of Kohala Coast Properties, said he never would have borrowed $200,000 through the federal program if he had known First Hawaiian Bank in Waimea, which administered the loan during the onset of the pandemic, would one day call in the note.

But the bank did.

Now, Hughes is looking at closing his real estate and property management business of 30 years because he can’t afford the payment schedule the bank outlined to recoup the costs. The bank wants Hughes to pay roughly $26,000 a month to pay off the debt, a financial demand Hughes called “absolutely ridiculous.”

“To me, it’s unbelievable that this is happening,” Hughes told Big Island Now. “I can’t figure out why they are doing this to businesses in their own community.”

According to letters sent from First Hawaiian Bank to Hughes, the bank denied Kohala Coast Properties’ appeal of the matter.

Hughes’ attorney, Sara Vargas, appealed the bank’s denial to the Small Business Administration, the federal agency through which the $800 billion in low-interest uncollateralized loans were directed nationwide.

The SBA-backed PPP loans were issued by Congress during the onset of the pandemic to help businesses keep their workforce employed during the COVID-19 crisis. The SBA delegated the administration of the relief funds to local banks to expatiate their issuance inside communities, which is how Hughes applied for his PPP loan, at the Waimea branch of the bank he’s done personal and professional business with for 30 years.

At issue for Hughes, who paid about 15 agents and workers with the money he eventually received, is the wording he used on the application he submitted — wording he said the bank instructed him to use.

Hughes said that at the direction of the bank’s branch manager, Anna Liu, who walked him through the application process, Hughes listed his agents as “employees” rather than “independent contractors,” even though his work force was solely independent contractors.

Hughes said he made it clear to the bank’s branch manager and loan officer that his workers were independent contractors. He even filled out his first application listing them as independent contractors originally, only to be told by Liu to change it to employees for sake of the application.

Hughes said he heeded Liu’s suggestion and redid his application.

In the end, that distinction — that they were listed as employees and not independent contractors — is why the loan amount wasn’t forgiven, according to Hughes, Vargas and letters from the bank.

That apparent about-face by the bank, Hughes said, feels like “a stab in the back,” and unethical.

“I’m real disappointed,” he said.

The alleged direction from Liu to switch the wording to list Hughes’ workers as employees wasn’t done in writing. It was done verbally while the two sat down at the bank to fill out the application, according to Hughes.

Hughes does still have the original application he filled out that says independent contractor, and that was part of the documents he submitted to the bank as part of his appeal.

Liu referred questions to First Hawaiian Bank administration, which declined to comment for this story, citing client confidentiality.

“First Hawaiian Bank policy prohibits public comments that apply to a particular customer’s transactions,” Lindsay Chambers, a spokeswoman for the bank, told Big Island Now. “It is of utmost importance that we maintain the confidentiality of our client’s financial interests.” 

In a letter from the bank to Hughes dated June 11, the bank outlines its decision not to forgive the loan based on the business using employees in the application instead of independent contractors as the reason. It states that the business owes $212,000.

“Our decision is based on the fact that your entire PPP loan amount was calculated using payments to independent contractors and owners who are not owner-employees,” the letter reads. “Those payments are not eligible to be used when calculating the amount of a PPP loan. Because the amount of eligible payroll costs was $0, you were not eligible for a PPP loan. Ineligible borrowers are not entitled to forgiveness, so we are required to issue a forgiveness decision of $0.”

The letter goes on to state that the bank will submit its finding to the SBA, which is free to modify the bank’s decision.

“Subject to the SBA modifying our decision about your forgiveness amount, you will be responsible for paying the full amount of your PPP loan, including interest, in accordance with the promissory note for your PPP loan,” the letter reads.

Then, in a June 23 follow-up notice sent from the bank to Kohala Coast Properties, the bank notifies that the business is past due on making a payment and now owes the bank $215,278.61.

The higher amount is because interest is accruing.

Vargas said the onus of the loan process should lay with the bank, regardless of the particulars. Even if the bank didn’t direct Hughes to fill out the application in the incorrect fashion and he did it on his own accord, as the fiduciary entity in charge of approving loan, the banking team should have caught Hughes’ error during its application review and rectified it. Or in the very least, explain to Hughes what was at stake with the different wordings.

There are a number of ways the bank could have prevented what has happened, Vargas added.

“It just seems like such a burden for the borrower,” Vargas told Big Island Now about the bank putting the onus of the loan process on Hughes. “It really blows my mind, that this is the outcome.”

Nationally, not all PPP loans were forgiven.

According to SBA data, about 94% of PPP loans approved in 2020 had been forgiven as of December 2021, pointed out a Forbes April 4 article about the program.

“Overall, around $28 billion of all PPP loans remain unforgiven as of February 2022,” the article states.

Mark Stevens, broker-in-charge for Kohala Coast Properties who has worked along side Hughes for 23 years, echoed Hughes’ sentiment that the company would never have even considered taking the loan if it knew there existed the possibility of having to pay it back.

“We thought this was supposed to be a Band-Aid,” Stevens told Big Island Now.

“We don’t have the money to pay them back,” he added. “We’re kind of at a loss on what to do.”

Vargas said they have appealed the bank’s decision to the SBA but hasn’t heard back regarding their decision, although the bank has moved forward with trying to collect the loan.

Valerie Kubota, an SBA outreach and marketing specialist, didn’t respond to questions this week for this story about the loan administration and appeal process, but told Big Island Now that the SBA generally can’t speak about individual cases.

For Hughes, facing the possibility of closing down because of a misunderstanding on a loan that he thinks should have been forgiven seems surreal.

He can’t fathom why the bank would come after the money — money that didn’t belong to the bank in the first place, as it was given to it by the federal government. If the bank didn’t recoup it, it wouldn’t be the bank’s loss. The only other thing he can guess that the bank could gain would be the interest off the loan that Hughes would have to pay.

That seems like a small gain to take from a 30-year customer at the cost of forcing him to declare bankruptcy and close shop, Hughes opined.

“I’m a strong guy,” he said. “I’m going to come through this. I don’t know how, but I will. I’ve come through worse.”