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Summarizing by Shane Ramsey

Tianjin Dinghui Hongjun Equity Inv. P'ship (L.P.) v. Pac. Links U.S. Holdings, Inc. (In re Pac. Links U.S. Holdings, Inc.)

Case Type:
Case Status:
BAP No. HI-22-1191-BCL (9th Circuit, Jul 18,2023) Not Published
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit held a bankruptcy court did not clearly err in finding a creditor received constructively fraudulent transfers from debtors related to their affiliate's loan transaction. The debtors received no funds from the affiliate's loan yet became co-obligors on its debt and pledged their property to secure the debt. The record supported the lower court's conclusions that (a) the debtors were insolvent at the time of the transfers under two different tests, and (b) the creditor did not prove it was a good faith transferee.
Procedural context:
The creditor/appellant appealed aspects of the bankruptcy court's holding that it received constructively fraudulent transfers from the debtors/appellees. The Bankruptcy Appellate Panel framed the issues on appeal as follows: 1. Did the bankruptcy court clearly err in finding that [the debtors] were insolvent under both the adequate capital test and the cash flow test? 2. Did the bankruptcy court clearly err in finding that [the creditor] failed to meet its burden to prove that it took the transfers in good faith?
Du Sha sought to build an international network of golf courses and related residential communities. He formed a web of companies, which he owned directly or indirectly, to accomplish his goal. Several of his entities owned parcels of land in Makaha Valley, Oahu, Hawaii, acquiring them between 2011 and 2015 for about $35M. The entities then spent about $15M to develop the properties between 2016 and 2019. Two of Sha's entities incurred multi-million dollar debts to acquire their properties, secured by first mortgages. One of Sha's entities ran an unprofitable golf course, and others owned largely undeveloped land. By 2019, the entities collectively experienced annual cash shortages exceeding $5M, which other affiliates in Du Sha's network covered via equity infusions. Still another Du Sha entity, Tianjin Kapolei Business Information Consultancy Co., Ltd. ("TKB"), borrowed a total of RMB 400M from Defendant/Appellant Tianjin Dinghui Hongjun Equity Investment Partnership (LP) ("TDH") in 2017 and 2018. When TKB took these loans, the entities that owned the Makaha Valley real estate received no funds directly from the loans, had no liability for the loans, and pledged no assets to secure the loans. In 2019, when the TDH loans neared maturity, Du Sha told TDH that TKB lacked the cash to repay the debts, but represented his network of companies was poised for success and asked to extend the repayment deadlines. TDH granted the request--but did so via a new loan transaction in which the new loan amount (about $57M) was used to repay the old loan; i.e., the new loan essentially extended the maturity date of the old loans. But TDH also required the entities holding the Makaha Valley real estate to become co-obligors on the new loan and to grant security interests in their real estate to secure the debt. After TKB failed to make the first three monthly payments on the new loan in 2020, TDH accelerated the debt and demanded immediate repayment. After they were unable to pay real property tax obligations and make mortgage payments, leading to foreclosure judgments entered in November 2020, the entities that owned the Makaha Valley real estate filed chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the District of Hawaii in February 2011. The debtors then filed an adversary proceeding against TDH under § 548(a)(1)(B) and state law, contending TDH received constructively fraudulent transfers from the debtors in connection with the new loan to TKB. The debtors obtained a partial summary judgment that they did not receive reasonably equivalent value in exchange for the obligations they incurred and the transfers they made related to the new debt. The bankruptcy court held a trial on the remaining elements of the debtors' claims and ultimately entered a judgment in their favor avoiding the obligations and transfers to TDH as constructively fraudulent. TDH timely appealed.

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