Withdrawn Delaware Lawsuit Sheds Light on Complex Ownership of Hu Honua Plant

posted in: December 2013, Energy, Forests | 0
When the Hu Honua plant was proposed in 2008, the owners were Ethanol Research Hawai`i, a company owned by Hawai`i alternate energy entrepreneur Daniel KenKnight, which held around 10 percent of the equity, and MMARV Bioenergy, a subsidiary of Municipal Mortgage & Equity, or Muni Mae, a large mortgage company.
After the mortgage market collapse of 2008, Muni Mae sold off most of its renewable energy holdings. Its sale of the Hu Honua interest was the last to go, in 2010.

Last September, however, MMARV Bioenergy sued several entities having an equity interest in Hu Honua. At the heart of the complaint was the allegation that the defendants had sought to defraud MMARV from $5.5 million that it was entitled to when the Public Utilities Commission approved the power purchase agreement between HELCO and Hu Honua. Little more than a month later, the complaint was withdrawn without prejudice – meaning it could be refiled at some future date.

At the time that MMARV Bioenergy sold its interest in Hu Honua, Muni Mae had already taken out a $2.5 million loan from C Change Pacific, which, according to the later purchase agreement between the two entities, was to cover MMARV Bioenergy’s “required capital contributions to [Hu Honua]” and which would be used “to fund the operations of Hu Honua Bioenergy.” C Change Pacific was itself a subsidiary of a company called Transformative Energy & Materials Capital, Inc. (TEM), owned by John Sylvia, Roger Berry, Virginia Foote, and Roger Preston.

Under the purchase agreement executed on April 1, 2010, the price was $5.5 million at closing, plus an additional equity contribution to Hu Honua of $2 million. Also, C Change was to bear all “transaction expenses,” an amount that was estimated to be less than $1.25 million, and was to forgive any outstanding balance on the 2009 loan. In addition, the agreement called for a “deferred cash payment” of $5.5 million to be paid to MMARV Bioenergy “upon the Final PUC Approval Date (if and when such Final PUC Approval Date occurs).”

The purchase agreement did specify certain conditions under which the deferred payment could be avoided by C Change. If, to take one example, C Change sold its interest in Hu Honua and was unable to recover its investment, it would not have to make the deferred payment to MMARV Bioenergy. On the other hand, if C Change contemplated selling off Hu Honua, it was supposed to provide timely notice to MMARV Bioenergy, allowing it not less than 30 days in which to make its own bid for the assets. (In later filings with the SEC, MMARV Bioenergy’s parent company indicated it had taken a $5.3 million loss in the sale.)

In the three years following the sale, C Change Pacific changed its name to HIPP, LLC, and took out several loans from what seem to be closely related companies. The chief executive officer of HIPP, for example, Sylvia, also is a partner in a company called Grandis Ventures I, LLC, one of several entities that extended substantial loans to HIPP and Island Bioenergy. (Island Bioenergy is the sole member of Hu Honua Bioenergy, LLC; the two members of Island Bioenergy in 2013 were, according to filings with the state Department of Commerce and Consumer Affairs, HIPP and Grandis Ventures I.)

Two other companies linked to the four original C Change partners involved in the Hu Honua purchase were set up as well: PHXPARBLK and Vanterra TEM.

In June, the Wall Street Journal published a notice that Grandis, Vanterra, and PHXPARBLK would be foreclosing on HIPP and Island Bioenergy. “The collateral being sold,” the announcement stated, “consists in large part of membership interests in IBE and Hu Honua Bioenergy, LLC.” Excluded from the sale, however, were claims on HIPP by Trilateral Energy, LLC, a Nevada company that, on its website, now says it is one of the owners of the Hu Honua plant.

On June 24, Sylvia informed Michael Falcone, the president of MMARV Bioenergy, that Grandis had purchased at the foreclosure sale all of the ownership interest that Falcone’s company had conveyed to C Change/HIPP in the 2010 sale. “[D]ue to the time constraints imposed by a pending foreclosure sale …. HIPP was unable to provide 30 days prior notice to MMARV….” The purchase price was $49,626,444 – an amount equal to HIPP’s indebtedness to Grandis, Vanterra, and PHXPARBLK, Sylvia stated. If MMARV Bioenergy desired, Grandis would agree to sell the company back to MMARV Bioenergy for that same amount within 30 days, Sylvia said.

Since the purchase price – a huge loss for HIPP, technically – did not result in HIPP recovering its investment or making a profit, HIPP avoided any obligation to pay MMARV Bioenergy the $5.5 million at the time of PUC approval of the power purchase agreement. Or, as Sylvia put it in his letter to Falcone, “in no event is any portion of the Disposition Proceeds … or any other sum payable to MMARV…”

MMARV Bioenergy did not elect to repurchase its interest in Hu Honua and instead, on September 9, sued HIPP and all its related companies and individuals in the Delaware Court of Chancery.

Among other things, the lawsuit alleged that approval of the power purchase contract would increase the value of Hu Honua by as much as $200 million. Thus, the lawsuit continued, “the $50 million equivalent sale price of the transfer of HIPP’s interest in Island Bioenergy … was far below fair-market value. Upon PUC approval of the power purchase agreement, the power plant will be entitled to over $800 million of electricity purchases over the life of the agreement along with valuable tax credits.”

According to the lawsuit, HIPP agreed to the “secret sale only because, following the sale, the individual defendants retained their economic interest in the project. Through the transaction, the individual defendants attempted to enhance the value of this asset by eliminating the obligation to make the payment to MMA.”

On October 24, the lawsuit was withdrawn.

Leave a Reply