Solyndra Judge’s Approval of Bankruptcy Plan Appealed
The Internal Revenue Service appealed a bankruptcy judge’s approval of Solyndra LLC’s plan to exit court protection and requested an immediate stay to keep the plan from being implemented.
The agency notified U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, of its appeal to the U.S. District Court of Delaware in a court filing yesterday. U.S. District Judge Gregory M. Sleet set a hearing to be held by telephone on the government’s appeal for Nov. 5.
The IRS asked for an immediate stay to be placed in effect to fill the void until the court considers its request to hold up the plan approval during its appeal. The U.S. can only get an extension of the stay from the federal court.
The government said in court papers “irreparable harm will result from denial of the stay” because Solyndra could take actions to implement the plan which would essentially make its appeal moot. The IRS is “well aware that an equitable mootness argument can be fatal by mooting the appeal before the issues are even heard.”
Walrath approved the plan last month over the government’s objection that it couldn’t be approved because the principle purpose of the plan was to allow Argonaut Ventures I LLC and Madrone Partners LP, Solyndra’s plan sponsors and indirect owners, to avoid taxes.
Walrath rejected the IRS’s challenge, saying at an Oct. 22 hearing that tax avoidance “has to be the primary, most important part of the plan, and I just don’t see that here.”
Under the plan, Solyndra, the failed solar-panel maker that received a $535 million U.S. Energy Department loan guarantee before going bankrupt, will be liquidated. Its parent, 360 Degree Solar Holdings Inc., will exit court protection with so- called net operating loss carryforwards of as much as $975 million, which it may use against future income, according to court papers. The potential tax breaks may be as much as $341 million for 360 Degree investors Argonaut and Madrone.
There are “multiple errors” in the Bankruptcy Court’s ruling, the IRS said in papers supporting its appeal. The errors include its finding that “the plan has legitimate purposes, instead of determining whether the principal purpose is tax avoidance.”
The court also failed to ascribe any weight to each purpose of the plan to see if tax avoidance is the primary one. The U.S. said much of what the plan accomplishes could be achieved under a chapter 7 liquidation and thus the court also erred in finding the plan doesn’t enhance the value of the tax breaks because they would be lost under such a scenario.
The IRS, which says its appeal has a “strong likelihood of success on the merits,” argues the stay should be granted because Solyndra, Argonaut and Madrone won’t be harmed if it is put in place.
Solyndra has agreed to extend the 10-day stay that Walrath put in effect, which ended yesterday, two business days to Nov. 5, due to Hurricane Sandy, according to court documents.
“An interim stay is not warranted in light of the fact that the government waited to file its appeal,” and whatever impact Sandy may have had “does not excuse the government from sitting on its hands last week and then filing its notice of appeal and motion for stay pending appeal on the last day” of the original stay put in place by Walrath, Solyndra lawyers said in an objection to the IRS’s request to hold up the plan.
Solyndra, based in Fremont, California, was forced to shut down operations and fire most of its 1,100 workers on Aug. 31, 2011. The solar-panel maker reached a $3.5 million settlement, which was integrated into the plan, with ex-workers who claimed they didn’t get adequate notice before being fired.
The company’s listed $854.1 million in assets and $867.1 million in debt in court papers filed Oct. 31, 2011.
Solyndra’s collapse prompted congressional scrutiny of President Barack Obama, who praised the company during a May 2010 tour of its facilities. It was the first company to receive a loan guarantee under Obama’s stimulus program.
Under Solyndra’s plan, the government will probably get nothing for its $528 million claim from the loan guarantee because creditors ranking ahead of the U.S. won’t be fully repaid.
Argonaut and Madrone, whose $75 million loan in a February 2011 restructuring supplanted the U.S. as the top priority of repayment, won’t receive a full recovery on their claims, according to testimony from financial adviser Eric Carlson at an Oct. 17 hearing.
The case is In re Solyndra LLC, 11-12799, U.S. Bankruptcy Court, District of Delaware (Wilmington). The appeal is In re USA v. Solyndra LLC, 12-cv-01380, U.S. District Court, District of Delaware (Wilmington).