Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred S.B. No. 3204 entitled:

begs leave to report as follows:

The purpose of this bill is to eliminate both irrevocable letters of credit and bonds, as options which may be used by activity desks to protect the activity providers whose services they market. The third of the current alternatives, a client trust account, would become the mandatory mechanism for the protection of activity providers from insolvent and dishonest activity desks.

Your Committee heard testimony in support of this bill from The Legislative Center, the Activities & Attractions Association of Hawaii, Safari Aviation Inc., and Atlantis Adventures.

Testimony in opposition was received from the Activity Desk Program (ADP) of the Department of Commerce and Consumer Affairs (DCCA), American Resort Development Association's Hawaii chapter, Paradise Cruise, Ltd., Kapalua Land Company Ltd., and Cendant/Fairfield.

PAHIO Resorts provided comments.

Your Committee finds that a common theme in the testimony supporting this bill was the need to reevaluate the statute in light of the bankruptcy of American Hawaii Cruises (AHC). At the time of its bankruptcy, AHC allegedly held $3,000,000 of activity provider funds and had a bond of $100,000. Atlantis Adventures testified that it, alone, lost $65,000. Had the $3,000,000 been held in client trust accounts, it would not have become part of the assets of the debtor in bankruptcy.

The activity providers who lost money in the bankruptcy of AHC acknowledge that they were aware, for several months, that AHC was paying its bills late. They made a calculated business judgment, or gamble, that AHC would not file bankruptcy.

The bill's proponents suggest that there be random audits of the client trust accounts. There is apparently widespread skepticism about the degree to which activity desks are actually complying with the requirements for client trust accounts.

ADP testified that they contacted the nine or ten activity desks that use the bond option and the one that uses an irrevocable letter of credit, to see if they were agreeable to the elimination of the bond and irrevocable letter of credit alternatives. All of these activity desks were not agreeable to using a client trust account. In addition, the sole activity desk using an irrevocable letter of credit was agreeable to using a bond.

Your Committee finds that the activity desks that prefer the bond appear to be the larger operations and are not exclusively activity desks. They incorporate activity desk accounting into the accounting for their overall operations, and perceive that it would be an accounting nightmare to establish a separate system for their activity desks, which would then establish the client trust accounts.

Your Committee finds that a properly maintained client trust account offers the best protection when a business goes bankrupt. However, a bond offers better protection against an unscrupulous activity desk operator who merely purports to have a client trust account or decides to loot the account. Full protection for activity providers would require both a client trust account and a large bond, but would seriously impact the ability of many activity desks to provide services to and generate sales for activity providers. It is a solution with unacceptable costs.

Your Committee has amended this bill by:

As affirmed by the record of votes of the members of your Committee on Consumer Protection and Commerce that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 3204, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 3204, H.D. 1, and be placed on the calendar for Third Reading.