“What the Debtor Surrendered and What the Debtor Received” Is the Focus of Fraudulent Transfers Analysis; Holds Hawaii Bankruptcy Court
May 3, 2022, West Virginia – Pacific Links U.S. Holdings, Inc., et al. in this adversary proceeding sought to avoid, as “constructively fraudulent”, certain guaranties and mortgages that they granted to defendant Tianjin Dinghui Hongjun Equity Investment Partnership (Limited Partnership) (“TDH”). Plaintiffs sought partial summary judgment determining that they did not receive reasonably equivalent value in exchange for those obligations and transfers.
TDH contended that it made loan to Tianjin Kapolei Business Information Consultancy Co., Ltd. (“TKB”) which was not a subsidiary but an associate of the plaintiffs. Both, the plaintiffs and TKB were part of a global network or interdependent companies known as the Pacific Links Group that “should be treated as single enterprise”. TDH argued that the plaintiffs received reasonably equivalent value in the amount of $57 million from the loans and the subject transactions in this case in several ways including an indirect benefit they received in the form of “cash infusions that they would not have received if TDH had not made the loans to TKB.” TDH further argued that plaintiffs also received indirect benefit in the form of TKB’s ability to provide services such as sales and business development which helped in developing plaintiffs’ business and from defendant’s agreement to forbear from collecting its loans from TKB.
The court noted that the TDH did not provide any direct value to the plaintiffs as none of the loan proceeds were disbursed directly to any of the plaintiffs and the plaintiffs did not owe anything to TDH until they signed the guaranties. They owed no antecedent debt to TDH. However, value could be provided either directly or indirectly.
In determining whether the plaintiffs received indirect benefits, the court noted that in a fraudulent transfer case, “the analysis is directed at what the debtor surrendered and what the debtor received irrespective of what any third party may have gained or lost.” The court held that transactions left the plaintiffs’ creditors worse off. The transaction greatly diminished the plaintiffs’ financial condition, by “increasing their debt and decreasing their unencumbered assets, while provided no offsetting benefits of similar value.” The court decided in favor of the plaintiffs holding that TDH did not provide value to the plaintiffs. Plaintiffs motion for summary judgment was granted.