In re Pac. Links U.S. Holdings, Inc.

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In re: PACIFIC LINKS U.S. HOLDINGS, INC., a Delaware corporation, Debtor. This Adversary Proceeding relates to: ALL CASES PACIFIC LINKS U.S. HOLDINGS, INC., et al. Plaintiffs, v. TIANJIN DINGHUI HONGJUN EQUITY INVESTMENT PARTNERSHIP (LIMITED PARTNERSHIP), Defendant.

No. 21-00094

Adv. Pro. No. 21-90009

United States Bankruptcy Court, D. Hawaii

August 8, 2022

Chapter 11

(Jointly Administered - Lead Case)

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON FRAUDULENT TRANSFER CLAIMS

Robert J. Faris, United States Bankruptcy Judge

The plaintiffs in this adversary proceeding - Pacific Links U.S Holdings, Inc. ("PLUSH"); Hawaii MVCC LLC ("MVCC"); Hawaii MGCW LLC ("MGCW"); MDRE LLC ("MDRE"); MDRE 2 LLC ("MDRE 2"); MDRE 3 LLC ("MDRE 3"); MDRE 4 LLC ("MDRE 4"); and MDRE 5 LLC ("MDRE 5") (collectively "Debtors") - are debtors in possession in jointly administered chapter 11 bankruptcy cases before this court. They initiated this adversary proceeding to avoid obligations and transfers in favor of the defendant Tianjin Dinghui Hongjun Equity Investment Partnership ("TDH"). The Debtors allege that the obligations and transfers are constructively fraudulent under the Bankruptcy Code and Hawaii state law.

The trial of this adversary proceeding took place on June 27 and 28, 2022. Christopher J. Muzzi and Alison A. Ito represented the Debtors, and Michelle J. Chapman, Mark G. Valencia, and Maria Amparo V. McCormick represented TDH.

Based on the following findings of fact and conclusions of law, I will enter judgment in favor of the Debtors.

I. Findings of Fact

A. Du Sha's Companies

An individual named Du Sha attempted to build an international network of golf courses and golf course residential communities. He formed, and is the ultimate owner of, a network of companies for this purpose. The Debtors are among Du Sha's companies. They own parcels of land totaling 644 acres in Makaha Valley, Oahu, Hawaii. They acquired the properties between 2011 and 2015 for a total purchase price of approximately $35 million. Between 2016 and 2019, they spent about $15 million in attempting to develop the properties.

Some of the Debtors incurred debts to acquire their properties. MDRE 3 and MDRE 4 executed promissory notes (the "Towne Notes") in the original principal amounts of $5,000,000.00 and $3,780,000.00 that were secured by first mortgages on their properties.

One of the Debtors, PLUSH, is a holding company that is the member of the other Debtors. PLUSH has no other significant assets and no source of income other than any surplus net income generated by the other Debtors.

MVCC operates the Makaha Valley Country Club and golf course on its parcels. The golf course has produced some income, but not enough to cover its ordinary operating expenses. (For example, in 2019, MVCC earned $1,095,744 of income but incurred expenses of $1,332,977, for a loss of $237,233.) A second golf course exists on MGCW's property, but that course has not been open for play since 2011 and does not generate any income. The land owned by the other Debtors is largely unimproved and does not generate any income. By 2019, the Debtors were suffering annual cash shortages of more than $5 million.

The Debtors covered their operating and development expenses by obtaining equity infusions from their affiliates (other members of Du Sha's network of companies).

Tianjin Kapolei Business Information Consultancy Co., Ltd. ("TKB") is another company owned by Du Sha. The Debtors are affiliates, but not direct or indirect owners, of TKB.

B. The TDH Loans

TKB borrowed RMB 240 million from TDH in 2017 and an additional RMB 160 million in 2018. Initially, the Debtors were not liable for repayment of either loan and did not pledge any of their properties as security for the loan.

The Debtors did not directly receive any proceeds of the TDH loans. The affiliates who did receive loan proceeds made equity contributions (directly or indirectly) to the Debtors. The affiliates also received some cash deposits for golf club memberships, and the record does not make clear whether the affiliates used TDH loan proceeds or their other cash to infuse money into the Debtors.

C. The 2019 Transaction

In 2019, around the time that the TDH loans were set to mature, Du Sha told TDH that TKB did not have enough cash to repay the loans. He painted a rosy picture of his companies' prospects and requested an extension.

TDH agreed to enter into a transaction (the "2019 Transaction") that was documented as a new loan. But the amount of the new loan was equal to the amount of the existing loan, and the documents required the borrowers to repay the old loan with the proceeds of the new loan. Thus, the 2019 Transaction was in substance only an extension of the maturity date of the old loans.

TDH was willing to grant the extension only if each of the Debtors, as well as Du Sha, his wife Du Ran, and one other affiliate, Pacific Links International Company, became obligated to repay the loans and the Debtors granted security interests in all of their real estate to secure the loans. This was an essential inducement for, and a precondition of, TDH's willingness to enter into the 2019 Transaction.

At the time of the 2019 Transaction, TDH knew, or at the very least should have known, that the Debtors were in financial distress and that the obligations the Debtors undertook and the transfers they made would make their financial difficulties substantially worse. TDH also knew, or at the very least should have known, that the Debtors had no realistic hope of repaying the obligations they undertook in the 2019 Transaction without selling all of their assets.

To reflect the 2019 Transaction, the Debtors executed the following documents, dated December 11, 2019 (the "2019 Transaction Documents"):

1. Framework Agreement (Exhibit P-31);

2. Secured Guaranty (Exhibit P-29);

3. Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, made be MVCC and filed in the Office of the Assistant Registrar of the Land Court of the State of Hawaii (the "Land Court") as Document No. T11048182 and noted on Certificate of Title No. 1040426 (Exhibit P-32);

4. Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, made by MGCW and filed in the Land Court as Document No. T11070209 and noted on Certificate of Title 1073853 and 1073854 (Exhibit P-33);

5. Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, made by MDRE and filed in the Land Court as Document No. T11070208 and noted on Certificate of Title No. 11070208 (Exhibit P-34);

6. Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, made by MDRE 2 and filed in the Land Court as Document No. T11049137 and noted on Certificate of Title No. 1098168 (Exhibit P-35);

7. Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, made by MDRE 4 and filed in the Land Court as Document No. T11046279 and noted on Certificate of Title No. 1100715 (Exhibit P-36);

8. Mortgage Assignment of Leases and Rents, Security Agreement, and Fixture Filing, made by MDRE 5 and filed in the Land Court as Document No. T11048283 and noted on Certificate of Title No. 1102363 (Exhibit P-37); and

9. Membership Interest Pledge Agreement, made by PLUSH (Exhibit P-38).

The titles of some of the 2019 Transaction Documents (such as the "Secured Guaranty") give the impression that the Debtors are guarantors of the loan who would only have to pay if TKB, as the primary obligor, did not. But the operative provisions of the documents make clear that the Debtors are not mere guarantors. Rather, they are primarily and directly liable to TDH as co-obligors with all other obligated parties.

In short, under the 2019 Transaction, the Debtors became liable, for the first time, for a debt of RMB 400 million (equivalent at that time to approximately $57,000,000) and pledged all of their assets to secure that debt.

D. Reasonably Equivalent Value

I have entered a partial summary judgment holding that the Debtors did not receive reasonably equivalent value in return for the obligations incurred and the transfers they made in connection with the 2019 Transaction. Nevertheless, TDH offered evidence at trial related to that issue and the Debtors did not object, so I will evaluate that issue in light of the evidence admitted at trial.

TDH did not make the 2017 and 2018 loans in exchange for the obligations and transfers that the Debtors undertook in the 2019 Transaction Documents. At the time of the 2017 and 2018 loans, there was no understanding that the Debtors would later become obligated on the loans or provide security.

TDH contends that the Debtors received over $80 million of benefits as a result of the 2019 Transaction. I find that this is not correct and that, to the contrary, the Debtors received no benefit from the 2019 Transaction that was anywhere close to equivalent to the value of what they gave up.

The Debtors received no loan proceeds from the 2019 Transaction because there were no such loan proceeds. TDH did not advance any new money to any party as part of that transaction.

Almost $74 million of the benefits that TDH contends the Debtors received consists of the total projected sales of golf club memberships and the total projected net proceeds of house lots within the Makaha development. This is an unrealistic measure of any benefit to the Debtors from the 2019 transaction because the extension TDH provided was to expire in only a few years. At most, the 2019 Transaction gave the Debtors a short-duration opportunity to attempt to complete the development and sale of the project and obtain additional equity infusions from affiliates. But both...