US IRS vows to appeal favorable ruling on Solyndra bankruptcy plan

The plan has been hotly contested by the U.S. Internal Revenue Service (IRS), which will doubtless, as the judge commented, "head across the street" – referring to the inevitability of a challenge to the confirmation ruling before the U.S. District Court, which is located just steps away in Delaware.

Case history

After famously receiving a US$535 U.S. Department of Energy (DOE) loan guarantee, Fremont, California-based Solyndra LLC became a victim of pricing competition in the solar industry, and was forced to shut down operations and lay off about 1,000 workers on August 31, 2011. Since then, the solar-panel maker has reached a $3.5 million settlement with its ex-employees, who claimed that they did not receive adequate notice before they were terminated.

Earlier that year, in an effort to avoid collapse, Solyndra had agreed to a DOE restructuring plan that brought in a fresh infusion of $77 million from Argonaut Ventures I LLC and Madrone Partners LP. In return for the funding, the DOE offered to subordinate the government’s debt, enabling the private investors to recoup their capital before anyone else, if the company subsequently were to go under.

The DOE has argued that the subordination was a necessary move to create confidence and credibility, if the government were to request support from private capitalists in the future.

However, the subordination agreement incited a partisan debate during recent hearings on the Hill, as Republicans protested that the restructuring plan would: "put wealthy investors at the front of the line ahead of taxpayers;" and specifically, was a demonstration of the Administration’s preferential treatment to Argonaut, the investment arm of billionaire and Obama fundraising "bundler" George Kaiser.

On the Democratic side of the aisle, Rep. Diana DeGette of Colorado maintained, "The facts simply do not support the over-the-top allegations that there was anything wrong," based on the fact that, in the United States, subordination in bankruptcy restructuring is legal.

Lodging an objection

With the ruling this week by Judge Walrath, the picture has changed again: Under the approved bankruptcy plan, Solyndra’s parent, 360 Degree Solar Holdings Inc. – now owned by Argonaut and Madrone – would not only recoup much of the $77 million in funding, but would exit bankruptcy with as much as $975 million in net operating loss carry-forwards intact. Those carry-forwards could generate more than $300 million in tax breaks for the two private venture capital firms, thus denoting a red flag to the IRS.

The IRS has claimed that, as far back as December 2010, Argonaut was devising a way to preserve the carry-forwards, if Solyndra had to seek bankruptcy protection. In turn, the company’s lawyers said in the court filing that the object of the bankruptcy was not "to preserve NOLs [net operating losses] or to take advantage of some loophole in the Internal Revenue Code, but to wind down a highly technical business with large and complex assets and to address a multitude of creditor claims."

Still, the IRS has lodged a formal objection to Solyndra’s bankruptcy plan, asserting that it would allow 360 Degree investors Argonaut and Madrone to avoid taxes. That argument was rejected by Judge Walrath, on the grounds that tax avoidance "has to be the primary, most important part of the plan and I just don’t see that here." She also overruled the DOE’s objection that the plan failed to protect the agency’s interest in pre-bankruptcy collateral.

Winners and losers

If the bankruptcy plan goes forward, as currently approved, creditors will receive the following satisfaction, according to a report from Bloomberg:

  • Argonaut and Madrone are expected to recover about $71 million of their $77 million investment;
  • The U.S. government will receive nada on its half-billion loan;
  • Holders of $186.6 million in secured debt, which is subordinate to the government’s debt, will probably see no recovery, according to the disclosure statement;
  • Unsecured creditors of 360 Degree are projected to recoup 3 percent on $27 million in claims, according to court documents; and
  • Solyndra’s unsecured creditors, owed $90 million to $135 million, will get an estimated recovery of as much as 3.3 percent.

To date, Solyndra has sold most of its assets and is in the process of selling its plant, built partly with DOE funding, after failing to get any acceptable offers to buy the company as a whole and restart operations. The company has agreed to sell the building to a unit of Dublin-based Seagate Technology Plc for $90.3 million, subject to competing offers at a November 14 auction and court approval at a hearing the next day.

In addition, Solyndra has generated about $14.1 million from sales of other assets, such as solar-panel tubes, manufacturing equipment, appliances and memorabilia and apparel emblazoned with its logo.

And finally, in an interesting move that could satisfy more creditors, including the DOE, on October 11, Solyndra filed a $1.5 billion federal lawsuit against Chinese solar-panel makers Suntech Power Holdings Co ., Trina Solar Ltd . and Yingli Green Energy Holding Co. In the complaint, Solyndra claimed the Chinese manufacturers had conspired to fix prices and flood the U.S. market with solar panels at below-cost prices, forcing it out of business. The defendants have countered that the allegations are "baseless."

The DOE had no comment, when contacted by pv magazine on October 24. The case is In re Solyndra LLC, 11-12799, U.S. Bankruptcy Court, District of Delaware (Wilmington).