A state agency is asking a federal judge to invalidate nearly all of a $1.6 million arbitration award won earlier this year by a Texas developer whose $300 million plan for piers 5 and 6 near Aloha Tower was scuttled two years ago.

Arguments for and against the motion were made yesterday before U.S. District Judge David Ezra, extending the dispute over the failed effort by Ken Hughes to develop 300 residential and vacation condominiums, restaurants and retail on public land offered by the state Aloha Tower Development Corp.

Jeffrey Portnoy, a local attorney who is representing Hughes, said the ATDC is attempting to retry a case already decided by an independent arbitrator whose decision is binding.

"It's an outrage," he told the judge. "The real intent is to keep this game from ending fair and square."

The agency contends that the arbitration decision issued in May was unjust and improper because it compensated Hughes for time spent on the project dubbed "Pacific Quay," and included interest and attorney's fees that aren't allowed in judgments under state law.

The award to Hughes included $162,000 in out-of-pocket expenses, about $700,000 in time expended, about $300,000 in interest and more than $300,000 in attorney's fees.

Portnoy said the state law that protects the state from paying attorney's fees and interest applies only to court judgments, not arbitration awards. He also said the arbitrator was free to compensate Hughes for time spent working on the project.

Judge Ezra said he expects to issue a decision by the end of the week.

If the arbitration award is upheld, Portnoy said, interest will continue to accrue at a rate of $300 a day until the award is paid.

The state also has expended considerable costs to defend the arbitration with private attorneys, though the ATDC has declined to disclose its legal costs.

Sandy Pfund, ATDC executive director, said the agency is exploring what do to with the prime piece of Honolulu Harbor waterfront presently used as a parking lot for Aloha Tower Marketplace.

Hughes began his saga in 2002 by responding to a request for proposals issued by ATDC.

A tentative plan was approved in July 2006 for a 130-foot-high complex with 300 condos for residential, hotel and time-share use, plus retail and restaurant space, 850 parking stalls and a public pedestrian promenade around the water's edge.

However, the developer and the agency couldn't agree on how much rent Hughes would pay the state for a 65-year ground lease and whether Hughes had to find a solution to a parking shortage at Aloha Tower Marketplace left by another developer that failed to complete a prior plan for piers 5 to 14.

Hughes said the agency's slow pace and unreasonable lease conditions killed the project, and in October 2007 he exercised a right in his development agreement to have the matter arbitrated.

The developer sought $23 million in damages, including projected profits and $6 million in time and effort spent on the project over five years.

The agency, in a counterclaim that was denied, sought repayment of $271,868 that it paid Hughes to reimburse him for some of his expenses.

Arbitrator Keith Hunter, of Dispute Prevention & Resolution Inc., concluded that the ATDC's pace and manner of negotiations breached its duty to negotiate fairly in good faith.

Hunter's decision stopped short of saying the agency negotiated in bad faith, but said certain actions — such as not clearly stating what was expected in terms of ground rent and improvements to parking for Aloha Tower Marketplace — made negotiations unreasonably difficult.