[co-author: Jordan Lipp]
On May 4, 2022, the United States Bankruptcy Court for the District of Hawaii avoided, as fraudulent transfers, the debtor’s guarantee of pre-existing debts of an affiliated entity. In 2019, Tianjin Dinghui Hongjun Equity Investment Partnership loaned $57 million to Tianjin Kapolei Business Information Consultancy Co. (“TKB”) to refinance existing debt. TKB’s subsidiaries, Pacific Links US Holdings and Hawaii MGCW LLC, secured the loan by granting mortgages and security to the lender on their own unencumbered assets. The lender did not advance any of the $57 million to the guarantors, who said they expected to “receive substantial benefits from the 2019 transaction.” Later, after filing for bankruptcy, the guarantors sued the lender seeking to avoid the guarantees as constructive fraudulent transfers.
The court entered summary judgment in favor of the guarantors, finding that they had not received reasonably equivalent value for the guarantees. The court found that since no loan proceeds went directly from the lender to the guarantors, the onus was on the lender to prove that the guarantors received reasonably equivalent value in exchange for the guarantees. The lender attempted to discharge this charge by arguing that the guarantors received an “indirect benefit” because (1) TKB transferred most of the funds from the previous loan (the loan refinanced in 2019) to the guarantors and (2 ) the 2019 transaction resulted in TKB transferring another $400,000 of the loan funds to debtors. The court rejected these arguments, finding that while the guarantors had obtained some collateral value, the lender had provided no evidence that the collateral benefits approached $57 million.
The deal is Pacific Links US Holdings vs. Tianjin Dinghui Hongjun Equity Investment Partnership (In re Pacific Links US Holdings, Inc.), No. 21-ap-90009 (Bankr. D. Haw. May 4, 2022). Debtors are represented by Choi & Ito and Tsugawa Lau & Muzzi. The lender is represented by Case Lombardi & Pettit. Order is available here.