644 B.R. 197
Bankr. D. Haw.2022Background
- Debtors: PLUSH and seven affiliated Hawaii entities owned 644 acres in Makaha Valley; purchased 2011–2015 and spent ~$15M on development; operations produced insufficient cash and by 2019 faced annual cash shortfalls > $5M.
- TKB (an affiliate) borrowed RMB 240M (2017) and RMB 160M (2018) from TDH; Debtors were not original obligors and did not directly receive TDH loan proceeds.
- In December 2019 TDH agreed to an apparent ‘‘new loan’’ that in substance extended existing debt; condition of the extension: Debtors (and other affiliates) became co‑obligors and granted mortgages/pledges on all real estate (2019 Transaction Documents).
- No new cash was advanced by TDH in the 2019 Transaction; Debtors received no direct loan proceeds and only about $800,000 in post‑transaction affiliate infusions.
- The court found the Debtors did not receive reasonably equivalent value for the obligations/transfers, were left with unreasonably small capital, and believed they would incur debts beyond their ability to pay; Debtors filed Chapter 11 on Feb 1, 2021 and later sold the property for $20.7M.
- Court entered judgment avoiding the obligations and transfers under 11 U.S.C. § 548(a)(1)(B) and HUFTA (Haw. Rev. Stat. ch. 651C); TDH failed to prove a good‑faith defense.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Debtors received reasonably equivalent value for obligations/transfers | Debtors: no direct proceeds; no equivalent value — extension only; indirect/illusory benefits unrealistic | TDH: transaction conferred >$80M in benefits (projected sales, memberships, affiliate capital) | Held: No; Debtors received far less than value given; no reasonably equivalent value |
| Whether Debtors were insolvent at the time of the 2019 Transaction (balance‑sheet) | Debtors: likely rendered insolvent because $57M secured debt eliminated equity | TDH: liability should be apportioned (e.g., per obligor) so Debtors not necessarily insolvent | Held: Debtors failed to meet burden on insolvency — insufficient evidence to fix post‑transaction liabilities of non‑Debtor obligors |
| Whether Debtors had unreasonably small capital (adequate‑capital test) | Debtors: had only a small chance to obtain needed capital pre‑transaction; 2019 Transaction destroyed that chance | TDH: relied on projected sales and anticipated affiliate infusions | Held: Met — Debtors engaged in business for which remaining assets were unreasonably small capital |
| Whether Debtors intended or believed they would incur debts beyond ability to pay (cash‑flow test) | Debtors: management knew cash flows and infusions insufficient and expected inability to pay future debts | TDH: relied on optimistic projections supplied by Du Sha | Held: Met — facts permit inference Debtors intended/believed they would incur debts they could not pay |
| Whether TDH is protected by a good‑faith / value defense | Debtors: TDH knew or should have known Debtors’ distress; cannot claim good faith | TDH: relied on Du Sha’s representations and asserted it provided value | Held: TDH failed to prove good‑faith/value defense — objective inquiry shows notice of Debtors’ distress |
Key Cases Cited
- In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318 (Bankr. N.D. Cal. 2009) (discussing indirect value burden once no direct benefit is shown)
- Frontier Bank v. Brown (In re N. Merch., Inc.), 371 F.3d 1056 (9th Cir. 2004) (defining "value" under §548)
- Hasse v. Rainsdon (In re Pringle), 495 B.R. 447 (B.A.P. 9th Cir. 2013) (articulating three‑part inquiry for reasonably equivalent value)
- Moody v. Security Pacific Business Credit, 971 F.2d 1056 (3d Cir. 1992) (unreasonably small capital / adequate‑capital test analysis)
- MFS/Sun Life Tr.-High Yield Series v. Van Dusen Airport Servs. Co., 910 F. Supp. 913 (S.D.N.Y. 1995) (adequate‑capital test and transfers that doom a debtor)
- In re Agricultural Research & Tech. Grp., Inc., 916 F.2d 528 (9th Cir. 1990) (good‑faith defense burden and inquiry notice standard)
- SEC v. Bernard L. Madoff Inv. Sec. LLC, 12 F.4th 171 (2d Cir. 2021) (objective inquiry re: whether transferee had notice of debtor’s insolvency)