[co-author: Jordan Lipp]
On May 4, 2022, the U.S. Bankruptcy Court for the District of Hawaii avoided, as fraudulent transfers, debtors’ guarantee of an affiliate entity’s preexisting debts. 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 affiliates, Pacific Links U.S. Holdings and Hawaii MGCW LLC, guaranteed the loan by granting mortgages and security interests to the lender over their own unencumbered assets. The lender did not advance any of the $57 million to the guarantors, who represented that 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 granted summary judgment in favor of the guarantors, reasoning that they did not receive reasonably equivalent value for the guarantees. The court found that, because none of the loan proceeds went directly from the lender to the guarantors, the burden shifted to the lender to show that the guarantors received reasonably equivalent value in exchange for the guarantees. The lender attempted to meet that burden by arguing that the guarantors received an “indirect benefit” because (1) TKB transferred most of the funds from the earlier loan (the loan refinanced in 2019) to the guarantors and (2) the 2019 transaction led to TKB transferring $400,000 more of the loan funds to the debtors. The court rejected these arguments, holding that, even if the guarantors did get some indirect value, the lender offered no evidence that the indirect benefits approached $57 million in value.
The case is Pacific Links U.S. Holdings v. Tianjin Dinghui Hongjun Equity Investment Partnership (In re Pacific Links U.S. Holdings, Inc.), No. 21-ap-90009 (Bankr. D. Haw. May 4, 2022). The debtors are represented by Choi & Ito and Tsugawa Lau & Muzzi. The lender is represented by Case Lombardi & Pettit. The order is available here.
