Hoku Bankruptcies Consolidated, Fraudulent Transfer Claims Preserved

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By Deborah Swann

Sept. 28 —Vendors seeking to side-step fraudulent transfer suits by consolidating two related bankruptcies were able to get the court to consolidate the bankruptcies. However, the court refused to rule on the transfer ( In re Hoku Materials, Inc. , Bankr. D. Idaho, No. 13-40837-JDP, 13-40838-JDP, 9/27/16 ).

Reading his decision for five hours from the bench Sept. 27, Judge Jim D. Pappas of the U.S. Bankruptcy Court for the District of Idaho concluded that Hoku Corporation, a Chinese-owned solar energy equipment manufacturer, and its wholly owned subsidiary, Hoku Materials, operated as a single economic unit. The court also found that their creditors didn’t rely on the companies’ separate identities in extending credit.

The court concluded that all assets and liabilities of the subsidiary were substantially the same as those of the parent corporation and ordered the complete and unconditional substantive consolidation of the bankruptcy estates.

Substantive consolidation essentially combines the assets and liabilities of separate entities into a single pool and treats them as belonging to a single entity. The bankruptcy court’s authority to issue such an order derives from its general equity powers, the court said.

Here, the Hoku bankruptcies arose from a failed attempt to construct a polysilicon factory in Pocatello, Idaho, amid oversupply and plunging prices. Polysilicon is a raw material used in the manufacture of solar cells. In July 2013, the companies filed separate Chapter 7 liquidation cases.

Judge Pappas’ consolidation order came on the heels of approximately 100 lawsuits, called adversary proceedings, filed by Hoku Corporation’s bankruptcy trustee against various contractors and suppliers involved in Hoku Material’s construction of the polysilicon plant. The contractors and suppliers had received full or partial payment for goods and services they had delivered, but the trustee, targeting the recovery of more than $500 million, contended these payments constituted fraudulent transfers.

The lawsuits assert that the contractors had been paid by Hoku Corporation, but they performed work for Hoku Materials. According to the trustee, Hoku Corporation never had any legal or equitable title in the polysilicon plant and, thus, no liability for Hoku Materials’ plant construction costs or debts.

The contractors sought substantive consolidation of the bankruptcy cases to make the assets and liabilities of Hoku Materials the same assets and liabilities of Hoku Corporation, thereby eliminating the basis for the adversary proceedings. The bankruptcy court, however, issued no order on this score.

The court wasn’t convinced that the adversary proceedings would necessarily result in large recoveries, or that the goods and services rendered weren’t of reasonably equivalent value to the payments made. It did note that by preserving the adversary proceedings at this time, all creditors through the substantive consolidation would be able to share in benefits and losses resulting from the fraudulent transfer litigation.

To contact the reporter on this story: Deborah Swann in Washington at dswann@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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